13/05/2019
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Westpac’s landmark court gives us an insight into the future
Hi Bruce,
Westpac is back in court.
Oh no.
What have they done this time?
This is actually a really unusual case, and it’s going to have massive implications for the housing market.
Effectively Westpac are being sued by ASIC – the Australian Securities and Investment Commission.
ASIC is having a go at them for breaking their responsible lending obligations.
Think of it like a pub’s Responsible Service of Alcohol obligations.
Pubs can’t give people more booze than they can handle.
Banks can’t give people more credit than they can handle.
And how did Westpac do that?
Effectively they relied too heavily on the HEM – the Household Expenditure Measure.
This is a sort of statistical average of what a theoretical household might spend… ... if they were poor.
That is, if your household spending actually lined up with HEM, then you are probably living on the poverty line.
What ASIC is arguing is that the banks shouldn’t be using HEM to calculate serviceability and how much people can actually borrow.
For most people, it’s simply just unrealistic. And ASIC argues that because Westpac was over-using HEM, they were lending people more money than they should of.
They were lending irresponsibly.
But this is where it gets interesting.
Westpac isn’t disputing the fact.
In fact, ASIC and Westpac have been through all this before.
They went to court and Westpac admitted that it had breached the National Consumer Credit Protection Act and agreed to pay a $35 million fine. $35 million buckeroonies.
It was the largest civil penalty in history.
But then, in a move that shocked everybody, the Federal court refused to approve the settlement.
Nup. Not having it fellahs.
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At the time, Justice Nye Perram’s main criticism was that ASIC and Westpac did not actually agree on how the law had been broken.
Specifically, both sides were unable to agree on how many breaches Westpac had committed and failed to adequately explain why the $35 million penalty was appropriate.
“Admirable ingenuity has been applied by the parties’ advisers to the task of drafting the consent orders so as to gloss over the very real differences which exist between them…”
In the ultimately rejected settlement, Westpac had admitted that about 100,000 loans used the HEM in instances where customers’ living expenses were higher than the benchmark.
That’s a lot.
But returning to court, Westpac is now arguing that their approval systems are more ‘nuanced’ that ASIC appreciates.
Westpac’s lawyer said ASIC’s case was based on a “19th-century” notion of loan assessments being a simple formula of income minus expenses and argued that the bank’s “21st-century” assessment system was more complex.
That is, ASIC is about 200 years behind the game!
We’ll see how far they get with that one.
But this is potentially going to have a huge impact on the lending market and on the housing market more broadly. What’s really at question here is automated approvals processes, and how much time and energy borrowers and banks need to put into calculating serviceability.
The more time and energy required, the more expensive the loan process is going to be.
And if ASIC wins and demands that the banks use much tighter credit assessments, that’s going to cut back on credit too.
That will put a little hand-brakey on the market.
The boom of recent years was largely driven by a pretty easy credit environment.
It seems to be coming to an end.
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