ASIC v Westpac Banking Corporation [2018] FCA 1733: Federal Court Rejects Settlement Offer

Friday 16 November 2018 @ 1.51 p.m. | Legal Research

In the recent case of ASIC v Westpac Banking Corporation [2018] FCA 1733 (13 November 2018), the Federal Court of Australia (“the Court”) refused to approve a $35 million penalty for Westpac Banking Corporation (“Westpac”), despite the bank admitting it broke responsible lending laws.

Justice Perram refused an agreed settlement between the parties on a technicality after finding the Australian Securities and Investments Commission (“ASIC”) and Westpac could not agree on exactly how, or how many times, Westpac broke the law.


Westpac’s use of the Household Expenditure Measure (“HEM”) came under scrutiny at the Royal Commission into Financial Misconduct after it emerged they were automating loan approvals using benchmarks rather than taking the time to properly assess a customer's expenses and income. Westpac admitted that its automated loan approval system used the HEM to calculate potential borrowers' living costs.

It is claimed that in some 5,041 instances the bank used the HEM instead of actually evaluating the customers' declared living expenses.  Westpac admitted that in certain circumstances , this practice breached the National Consumer Credit Protection Act 2009 (Cth) (the “Act”).

According to an article in the Sydney Morning Herald (“SMH”):

“… the HEM and other similar benchmarks are used by all the big banks to determine whether the expenses declared by a home borrower on their application are realistic. To do this, banks assume that all customers are in the bottom 25 per cent quartile for discretionary spending expenses  …”

The Judgment

In handing down his judgment, Justice Perram said “I do not propose to make the declaration sought” with his Honour also noting that in some 5,041 instances, Westpac had used the HEM benchmark in preference of declared living expenses, because they were higher than the benchmark.

His Honour said at [para 16]:

“In these cases, the declared expenses were more than the HEM benchmark and, if those expenses had been used instead of the HEM Benchmark, a flag would have been triggered and the customer’s application would not have been approved without referral to manual assessment … What would have happened after that manual assessment the parties have not told me. Nor have they told me whether any of these 5041 loans were, or were not, suitable for the borrowers.”

The Proposed Settlement Agreement

According to the SMH, his Honour also voiced concerns over the terms of ASIC’s settlement agreement with Westpac during the hearings, taking the unusual step of using an amicus curiae to argue the case on behalf of Westpac if it had not agreed to the settlement.

Former Solicitor-General Justin Gleeson SC, was hired by the court to perform the task of amicus curiae, and argued that ASIC had not told the court how Westpac had breached responsible lending laws, telling the court:

“… this was because the section of the National Consumer Credit Protection Act Westpac had agreed it had breached – section 128 – did not prevent the bank from using the HEM”.

ABC News reports Perram J said that "admirable ingenuity had been applied" by ASIC and Westpac's lawyers to "gloss over the very real differences which exist between them" on the interpretation of this part of the Act, noting at [para 11]:

"Because the parties do not actually agree on what section 128 [of the act] requires, they are unable to agree on how many of the respondent's loans were made in contravention of it … This also makes it very difficult to judge the appropriateness of the proposed penalty of $35 million."

Reaction to the Decision

Speaking to ABC News, corporate law expert Professor Ian Ramsay said it was rare for a court to reject a settlement reached by the consent of both parties and he considered it greatly reduces ASIC's bargaining power, and might "embolden Westpac to negotiate a lower penalty". Commenting further Professor Ramsay said:

"That of course would be understandable given what the court said today, which is 'I have not been given evidence of where there were clear contraventions of the law' … I suspect both parties have an interest in settling this to avoid a high profile and no doubt expensive court hearing".

Potential Implications for Borrowers

ABC News also reveals that former High Court Judge Kenneth Hayne appears to have a different view in hearings conducted during the banking Royal Commission.

Commissioner Hayne believes the HEM is completely inadequate, even as a floor when assessing expenses, let alone as a substitute for what customers have declared. Instead, he wants banks to actually check people's bank statements to find out how much they are really spending.

The Interim Report (Volume 1) into Misconduct in the Banking, Superannuation and Financial Services Industry, reveals at 2.2.3 (pages 24, 25)

“… And many of a consumer’s main outgoings will be recorded (or at least reflected) in the same bank statement. The evidence showed that, more often than not, each of ANZ, CBA, NAB and Westpac took some steps to verify the income of an applicant for a home loan. But the evidence also showed that much more often than not none of them took any step to verify the applicant’s outgoings …”

Where to Next?

An ASIC spokesperson said the regulator "is reviewing the judgment and will make no further comment at this stage", while a spokesman for the bank said “Westpac respects Justice Perram’s decision. We are carefully considering the judgment”.

Further proceedings have been set down for 27 November 2018.

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products. Nothing on this website should be construed as legal advice and does not substitute for the advice of competent legal counsel.


Related Articles: