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In recent parliamentary debate, the Federal Government has been considering whether the National Consumer Protection Act 2009 (the “Act”) is no longer fit for purpose.

Earlier this year, the Government had proposed the scrapping of responsible lending obligations under the Act with the aim to simplify Australia’s credit network, ensuring that consumers and small businesses can access timely credit as the economy recovers from the economic fallout caused by COVID-19.

The principle of responsible lending was at the forefront of the landmark case, Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244, otherwise known as the “Wagu and Shiraz Case”.

Namely, the Australian Securities and Investments Commission (“ASIC”) alleged that Westpac breached responsible lending obligations on more than 261,000 home loan applications between 2011 and 2015, by using a benchmark known as the Household Expenditure Measure (“HEM”) to assess and estimate a borrower’s expenses rather than reviewing their expenses individually to determine if they could service the loan.  Specifically, ASIC argued that the HEM benchmark was in breach of s. 131(2)(a) of the Act, in that each consumer’s actual living expenses were not taken into account. 

It follows, that s. 132(2)(a) of the Act requires that lenders consider two questions when assessing the suitability of a loan, namely:

  • whether it is likely that the consumer will be unable to comply with their financial obligations under the contract; and
  • whether it is likely that the consumer will only be able to comply with their financial obligations under the contract with substantial hardship.

The case was coined “Wagu and Shiraz” due to comments by Justice Nye Perram when dismissing ASIC’s case in the Federal Court on 13 August 2019, stating “The problem for ASIC’s argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.”  Justice Perram went on to use the example of everyone needing to eat, but that different consumers spend different amounts on food depending on their financial circumstances, stating

“I may eat wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”

In dismissing ASIC’s case, Justice Perram held that a lender may do what it wants in the assessment process and are not obliged under the Act to take into account a prospective borrower’s actual or declared expenses when assessing whether a loan will be unsuitable. 

ASIC appealed the decision, however by a 2:1 majority, the Full Federal Court dismissed the appeal and ordered ASIC to pay Westpac’s costs.  Furthermore, the Financial Services Royal Commission’s Final Report has not made any express recommendation to ban the use of HEM, and ASIC has shown no indication of wanting to push for law reform at present. 

It follows, that even though the case did not sway in ASIC’s favour, the mere pursuit of Westpac has caused banks to be more conservative in providing credit and as such, has fuelled the fire for reforms.

In September 2021, Treasurer Josh Frydenberg announced backing to regulators to crack down on high-debt home loans to reduce financial risks from record-low interest rates and the recent surging property prices.

He noted that more than one in five home buyers are now borrowing more than six times their incomes, a risk that could be felt if interest rates jump or people lose their jobs.

The proposed reforms would remove responsible lending requirements from all loans except high-risk products (which are short term personal loans and consumer leases like car loans). They would see a move away from a ‘lender responsibility principle’ and towards a ‘borrower responsibility principle’.

In theory, lenders would no longer need to investigate a borrower’s financial situation.  The ‘borrower responsibility principle’ means that the responsibility lies with the borrower to be truthful.

In October 2021 the banking regulator, the Australian Prudential Regulation Authority (“APRA”) 

announced tougher serviceability tests for home loans, which will make it harder for some borrowers to get a mortgage.

APRA increased the minimum interest rate buffer on home loan applications from 2.5% to 3%.

It estimated that the increase will reduce “maximum borrowing capacity for the typical borrower by around 5 per cent”.

It remains to be seen whether these reforms will achieve the Government’s objective.  That is, striking the right balance between allowing consumers and businesses to access credit due to the fallout of COVID-19 vs. preventing consumers and businesses from over-committing and ending up in financial trouble.

Nick Cooper
Nick Cooper Managing Partner
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