While the full impact of the court dismissing ASIC’s case against Westpac regarding irresponsible lending is still being debated, one legal specialist has welcomed the litigation and hopes to see more of the same moving forward to continue to “clarify the standards of behaviour.”
“As lawyers, we ask if ASIC lost on the facts of the case or if they lost on the law, meaning the way in which they interpreted the law,” said Jesse Vermiglio, partner for Holley Nethercote Commercial and Financial Services Lawyers.
“In this particular case, ASIC lost on both counts. They did not prove their case so they lost on the facts, and then Justice Perram found that the law did not operate in the way that ASIC had alleged. They had imposed additional applications that were not there in the law.”
While ASIC’s case initially seemed to centre around the usage of the household expenditure measure (HEM), Justice Perram rejected the regulator’s allegation that Westpac failed to take borrowers’ living standards into account. He distinguished that while the bank may not have done it the way the regulator wanted, it did indeed meet the standard of the law.
To Vermiglio, the case and its outcome are significant on several levels.
He explained, “This is principle-based legislation, which means that the law doesn’t really tell you in great specificity how to comply, but rather sets principles and expects those that are regulated to comply with those principles. One of the reasons this was a significant decision is it provides greater clarity around the interpretation of this area."
“Another reason is its broad, everyday application. A lot of people need to get loans, whether it be a mortgage, a car loan, a credit card. Whether it’s through a mortgage broker, direct through a bank, peer-to-peer, whatever. This decision has implications for all of those channels of responsible lending.
"The importance of the conversation around responsible lending is underscored by the public consultation ASIC is currently holding on the matter, as opposed to its normal submission process," Vermiglio added.
“If you’ve got the regulator going off and holding public hearings on a particular area of the law that it’s interpreting, it gives you a sense of how big an issue it is."
However, Vermiglio doesn’t expect any significant changes from ASIC to avoid future litigation, especially given that it would require law reform which is outside of the regulator’s scope of powers.
“Also, the judge didn’t say that the law is broken, it just works differently than ASIC had thought,” Vermiglio noted.
“They will need to change their guidance to reflect some of these principles that have been clarified by this case.”
To Vermiglio, court involvement of this sort serves a purpose and should therefore be welcomed as a mechanism to test the law.
“To see more of this type of litigation is important because we get more and more judge-made guidance which takes precedence over ASIC’s view. It sets the boundaries about what can or cannot be done, particularly when there isn’t detailed guidance to clarify the standards of behaviour,” he said.
The ruling carries implications for banks, borrowers and brokers.
“I think you’ll find the industry will welcome the decision because it makes things less onerous on them in terms of the steps they need to go through for assessing suitability,” said Vermiglio.
“It’s not just the lenders, it’s also intermediaries. Because they actually also have to do a preliminary assessment of suitability. And the basis from which they do it is exactly the same as the lender needs to do in their final assessment.”
“It’s a pretty big deal,” he concluded.
There will be more on this story in the next issue of Australian Broker magazine, out on 26 August