The respondent's objection to the admissibility of the entirety of the expert report of Mr Michael Hartman dated 19 December 2023 is rejected.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MCELWAINE J:
The Australian Securities and Investments Commission (ASIC) brings this proceeding for declaratory relief, injunctions, compliance orders and the imposition of pecuniary penalties against Money3 Loans Pty Ltd (Money3) for contravention of various provisions of the National Consumer Credit Protection Act 2009 (Cth) (Credit Act). The asserted contraventions relate to six consumers and five consumer loans for the purpose of purchasing second-hand motor vehicles between 8 May 2019 and 18 February 2021.
ASIC's case commenced on 5 February 2025. A witness from whom ASIC seeks to adduce evidence is Mr Michael Hartman (Mr Hartman) who is the author of an extensive report dated 19 December 2023 (Expert Report). At this stage, I am required to determine the objection of Money3 to the admissibility of the entirety of the Expert Report. The objection is not put on the alternative basis that parts of it should be rejected.
Conveniently, the parties have settled a list of issues for determination. In summary the issues are whether Money3:
failed to make an assessment, for each of the six consumers in issue, as required by ss 128 and 129 of the Credit Act;
made reasonable inquiries about each consumer's requirements and objectives, their financial situation and took reasonable steps to verify the financial situation as required by ss 128 and 130 of the Credit Act;
was required by s 130(1)(a) of the Credit Act to inquire as to whether each consumer wished to obtain finance for the "add-ons" in each contract and whether in addition s 130(1)(b) required Money3 to obtain a signed and completed statement from each consumer that set out their financial situation, including their likely expenses;
failed to assess each credit contract as unsuitable for each consumer because of the unlikelihood that they would be able to comply with their financial obligations without substantial hardship and/or whether each credit contract met the consumers' requirements or objectives;
contravened s 133 (1) of the Credit Act by entering into each credit contract with each consumer in circumstances where the contracts were unsuitable;
had representatives who were adequately trained and competent as required by s 47 of the Credit Act; and
took reasonable steps to ensure that its representatives complied with each relevant obligation of the Credit Act.
On 10 November 2023, ASIC provided a letter of instruction and brief to Mr Hartman to provide expert opinion evidence. Four questions were formulated for his consideration. They are lengthy and provide as follows:
Question 1: Based on the information provided in Annexure C only, please provide
your opinion as to the following matters, for each of the credit contracts entered
into by each of the consumers:
Having regard to the consumer's financial situation for the preceding 90-day period before the credit contract with Money3 was entered in to, whether it was likely that the consumer would be unable to comply with their financial obligations under the contract with Money3, or could only comply with substantial hardship;
If you rely on some or all of the consumers' estimated living expenses (as set out in the table), or expenses in the bank statements in reaching your opinion regarding question 1(a) - why it is reasonable to rely on those amounts in determining that these were the minimum necessary amounts that would mean the consumer would be unlikely to fall into substantial hardship;
If you rely on the Household Expenditure Measure Benchmark (HEM Benchmark), Henderson Poverty Index (HPI) or any other benchmark in reaching your opinion regarding question 1(a) and/or 1(b) above, why that benchmark is a reasonable proxy for the consumer.
For Questions 2 to 4, please base your opinion on all of the information and documentation in the brief and your expert opinion in relation to Question 1. The Relevant Period is 8 May 2019 to 18 February 2021.
Question 2: Please provide your opinion as to the following matters:
Whether it was reasonable for Money3 to rely on the amounts in its relevant financial assessments for consumers 1 to 6, including the notional expense amounts derived from Money3's Product Guides;
If your opinion in responding to question 2(a) relies wholly or in part on a comparison of the expense metrics in Money3's Product Guides as against the HEM Benchmark, HPI or any other benchmark, please explain how that benchmark is derived, and prepare a comparative analysis of the composition of the metrics relied upon by Money3.
Question 3: Please provide your opinion on the reasonable steps that a credit licensee in the position of Money3 should have taken during the Relevant Period, to ensure compliance by its representatives with the credit legislation, and whether Money3 did in fact take such steps.
Question 4: Please provide your opinion on the reasonable steps that a credit licensee in the position of Money3 should have taken during the Relevant Period to ensure that its representatives were adequately trained and competent to engage in the credit activities authorised by the licence, and whether Money3 did in fact take such steps.
Pausing there, what is remarkable about the formulation of these questions is that Mr Hartman was not asked the very straightforward question: Were there commonly adopted industry practices and procedures, regarded as good practice, by licensees to ensure compliance with their Credit Act obligations in the relevant period, and if so, what were they?
In any event, in response to his brief, Mr Hartman authored the Expert Report comprising 232 pages and 963 paragraphs, not including the annexures. The consumer loans in issue were four very modest amounts: as described in the evidence, micro loans for a principal of $8000 plus various "add-ons" for fees, charges and extended warranty insurance. Each of the consumers during the relevant period (indeed for a very considerable time before it) were in receipt of various forms of Centrelink benefits and unemployed. The consumers were not persons with good credit ratings and the obvious inference that is open, from the evidence received thus far, is that none had any prospect of borrowing money from a recognised financial institution because of their precarious financial circumstances.
The evidence of Mr Hartman is potentially relevant to the following issues. A licensee is required to make an assessment about whether the credit contract will be unsuitable for the consumer if the contract is entered into: s 129 of the Credit Act. The content of that obligation is informed by the provisions of s 128 which, relevantly for present purposes, prohibits a licensee from entering into a credit contract with a consumer unless the licensee has, within the period of 90 days before the credit day, made an assessment in accordance with s 129. In turn, s 129 requires a licensee to make an assessment which specifies its period and whether the credit contract "will be unsuitable for the consumer if the contract is entered".
A licensee for the purposes of undertaking the assessment is required by s 128 (d) to make each of the reasonable inquiries specified at s 130, which relevantly for present purposes provides:
Reasonable inquiries etc. about the consumer
Requirement to make inquiries and take steps to verify
For the purposes of paragraph 128(d), the licensee must, before making the assessment:
(a) make reasonable inquiries about the consumer's requirements and objectives in relation to the credit contract; and
(b) make reasonable inquiries about the consumer's financial situation; and
(c) take reasonable steps to verify the consumer's financial situation; and
(d) make any inquiries prescribed by the regulations about any matter prescribed by the regulations; and
(e) take any steps prescribed by the regulations to verify any matter prescribed by the regulations.
Civil penalty: 5,000 penalty units.
Further, s 131 (1) prescriptively states that a licensee "must assess that the credit contract will be unsuitable for the consumer" where subsection (2) applies:
(2) The contract will be unsuitable for the consumer if, at the time of the assessment, it is likely that:
(a) the consumer will be unable to comply with the consumer's financial obligations under the contract, or could only comply with substantial hardship, if the contract is entered or the credit limit is increased in the period covered by the assessment; or
(b) the contract will not meet the consumer's requirements or objectives if the contract is entered or the credit limit is increased in the period covered by the assessment; or
(c) if the regulations prescribe circumstances in which a credit contract is unsuitable--those circumstances will apply to the contract if the contract is entered or the credit limit is increased in the period covered by the assessment.
(3) For the purposes of paragraph (2)(a), it is presumed that, if the consumer could only comply with the consumer's financial obligations under the contract by selling the consumer's principal place of residence, the consumer could only comply with those obligations with substantial hardship, unless the contrary is proved.
(3AA) For the purposes of paragraph (2)(a), a consumer is taken to be able to comply with the consumer's financial obligations under a contract only with substantial hardship if:
(a) the contract is a credit card contract; and
(b) the consumer could not comply with an obligation to repay an amount equal to the credit limit of the contract within the period determined by ASIC under section 160F.
Information to be used to determine if contract will be unsuitable
(4) For the purposes of determining under subsection (2) whether the contract will be unsuitable, only information that satisfies both of the following paragraphs is to be taken into account:
(a) the information is about the consumer's financial situation, requirements or objectives, or any other matter prescribed by the regulations under paragraph 130(1)(d) or (e);
(b) at the time of the assessment:
(i) the licensee had reason to believe that the information was true; or
(ii) the licensee would have had reason to believe that the information was true if the licensee had made the inquiries or verification under section 130.
The content of the statutory obligations was considered by the Full Court in Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111; 277 FCR 343 (Middleton, Gleeson and Lee JJ). The primary issue in that case concerned the ability of Westpac to discharge its statutory obligations by relying on an Automated Decision System (ADS) which in turn applied a number of predetermined rules for declared living expenses, including estimates of the consumers living expenses based on the statistical analysis known as the Household Expenditure Measure (HEM). The majority (Gleeson and Lee JJ) concluded that the use of the ADS was sufficient to undertake the unsuitability assessment.
For present purposes, Lee J at [170] crisply summarised the three stage inquiry required by the Credit Act:
When viewed in context, Pt 3-2, Divs 3 and 4, identify three stages: making inquiries and verification; conducting a suitability assessment; and entering into (or increasing the credit limit of) a contract. As to the first stage, s 130 imposes an initial duty to undertake inquiries and investigations into the consumer's requirements and objectives, and financial situation (obligations directed to "knowing the customer"); as to the second, in conducting the assessment, s 131 provides that the licensee must assess that the credit contract will be unsuitable for the consumer if the conditions in s 131(2) apply, and that a contract must be assessed as unsuitable if it is likely that the consumer will be unable to comply with the consumer's financial obligations under the contract, or could only comply with substantial hardship; as to the third, it relevantly provides that a licensee must not enter into the contract unless it has made the inquiries "in accordance with section 130" (s 128(d)), and made an assessment "in accordance with section 129" (that is, an assessment that specifies the period the assessment covers, and assesses whether the credit contract will be unsuitable for the consumer if the contract is entered into in that period), and the day the contract is entered into is within the period covered by the assessment (s 128(c)).
As explained by Gleeson J at [141], the Credit Act does not prescribe the inquiries a licensee must undertake:
The language of the Act does not support the degree of prescription contended for by ASIC. Rather, the Act leaves it open to the licensee to decide:
what inquiries it will make under s 130(1)(a) and (b), provided that those inquiries are reasonable;
what steps it will take to verify the consumer's financial situation under s 130(1)(c), provided that those inquiries are reasonable; and
how it will use the results of its inquiries and verification to make the unsuitability assessment, provided that it in fact assesses whether the contract will be relevantly unsuitable for the particular consumer and noting that the licensee is otherwise motivated by the Act to refrain from entering into an unsuitable contract.
None of the consumers dealt directly with Money3 for the purpose of making their loan applications. The consumers would visit a car dealer, express interest in a particular second-hand vehicle and be advised by the dealership that finance may be available. Applications for finance were prepared either by the car dealer or a finance broker. Information in the form of a Centrelink income statement and details about living expenses would be obtained from the consumers. The assessment of living expenses was invariably undertaken by reference to information that the consumer disclosed, but primarily by reference to the provision of bank statements.
Understood broadly, ASIC's case is that Money3 failed to comply with the statutory obligations for each of the consumer credit contracts in issue because:
Money3 relied on an internal Product Guide with specified minimum living expense amounts which were then applied by credit analysts as a tool to calculate the capacity of the consumer to service the loan. If the disclosed living expenses in the application documents were less than the comparable amounts in the Product Guide, the Product Guide amount would be used. ASIC contends that certain expenses set out in the Product Guide were arbitrary and insufficient;
in each of the consumer loans, the serviceability assessment that Money3 undertook materially understated the living expenses of the consumers with the consequence that there was no reasonable prospect that the loans could be serviced;
the consumers were not asked to and did not provide further information regarding their requirements and objectives or their financial situation to Money3 before entering into the credit contracts;
Money3 failed to make assessments that specified the period of the assessment, to identify any key aspects of the credit contracts including the total amount to be borrowed, the term and the interest rate and failed to undertake the unsuitability assessment by reference to the requirements and objectives of the particular consumers;
Money3 failed to make reasonable inquiries and to take reasonable steps to verify before assessing the suitability of the credit contracts, particularly by failing to inquire whether the consumers wanted finance for the additional add-on fees; and
in consequence Money3 failed to undertake the statutory task of assessing whether the credit contracts were unsuitable because it was likely that each consumer would be unable to comply with their financial obligations, or could only do so with substantial hardship and or the whether the contract would meet the consumers requirements or objectives because of the inclusion of the add-on fees.
Separately, ASIC's case is that Money3 failed to comply with the obligation to ensure that its representatives were adequately trained and competent as required by ss 47 (1)(e) and (g) of the Credit Act. At a high level of analysis that case contends that Money3 failed to have in place systems and procedures equivalent to the standards of reasonable and prudent lenders at the relevant time. Prescriptive deficiencies are identified in the training manuals, policies and procedures of Money3.
In brief written submissions, Mr Caleo KC for Money3 contended that the Expert Report is entirely inadmissible for two reasons. One, Mr Hartman expresses various opinions about industry practice and standards, coupled with his assessment of "Minimum Expectations" and the practices of "Reasonable and Prudent Lenders", none of which is based on or supported by relevant experience and specialised knowledge as a precondition to the admissibility of the Expert Report pursuant to s 79 of the Evidence Act 1995 (Cth). The other is that his various opinions about industry practice, procedures and standards are not supported by disclosure of any relevant factual bases, and therefore cannot be tested by cross-examination.
In oral submissions, as I explain, Mr Caleo's submissions were more nuanced, drawing heavily on the reasons of Gordon and Edelman JJ in Lang v The Queen [2023] HCA 29; 97 ALJR 758 at [221]-[228].
To the contrary, Mr Senathirajah KC for ASIC submits that the Expert Report is admissible when considered as a whole, in that one is able to discern the factual basis for the expression of each opinion even though there is no particularisation of what practices, procedures, methods or policies Mr Hartman was aware of during the relevant period, either because he undertook them or acquired general knowledge from his experience in the industry. Alternatively, he submits that if I am uncertain about the admissibility of the Expert Report, that I should receive it provisionally, Mr Hartman may then be cross-examined and I should defer my determination until after the completion of the case. That submission was framed as one that is "procedurally fair" to ASIC.
At the outset I should state that I cannot accept the alternative submission of Mr Senathirajah. The procedural unfairness of expecting Mr Caleo to cross-examine on the very extensive content of the Expert Report, not knowing whether all or part of it may be received is self-evident; particularly where Money3 does not rely on competing expert evidence. The submission also fails to grapple with the criticism of that procedure in Dasreef Pty Ltd v Hawchar [2011] HCA 21;243 CLR 588 at [18]-[20].
I also record matters that are not in issue for the purposes of determining the objection. Money3 accepts that it is permissible for ASIC to lead evidence about industry practice and procedure at the relevant time concerning compliance with the statutory obligations in issue. Relatedly, Money3 accepts that the provision of finance to applicants in poor economic circumstances is a subject matter on which a person who has specialised knowledge of the finance industry may give expert evidence, provided the knowledge is wholly or substantially based on the expert's training, study or experience. These concessions were properly made, even though the finance industry may not have the level of professional training, engagement and supervision as, say, surgeons or solicitors. As such the parties accept, at least as a starting point, the well-known observations of Young J in Permanent Trustee Australia Ltd v Boulton (1994) 33 NSWLR 735 at 738 that, in the context of a negligence action against a solicitor, expert evidence may be admitted of "industry-wide good practice" and, "subject to relevance, evidence as to what is common practice amongst solicitors of good repute". The objection did not enter the territory of debate as to whether expert evidence may be given as to what a prudent and competent professional in the relevant industry would have done in like circumstances: cf MB v Protective Commissioner [2000] NSWSC 717;217 ALR 631, Hodgson CJ in Eq.
It is not in issue, for the purpose of determining the objection, that Mr Hartman lacks the necessary training, study or experience to give expert evidence as to the practices, procedures and therefore good industry practice of lenders at the relevant time and in circumstances that are the same or similar to the assessment of the consumer loans in issue.
In oral submissions, Mr Caleo sharpened the focus of the objection. First on the need for an expert to identify the factual basis or foundation for the opinion and, second, the report itself must reveal how the expertise of the witness is the basis that connects the exposed facts to the opinion, each as pre-requisites to the admission of the evidence pursuant to s 79 of the Evidence Act. Mr Caleo accepts that these requirements may often overlap, and in this case submits that I cannot be satisfied from the entirety of the Expert Report that Mr Hartman is qualified to give the evidence that is set out in it.
In elaboration, Mr Caleo submits that Mr Hartman has delved into a "black box" of undisclosed facts as the purported basis for the central formulations of his "Execution Framework", comprising eight integrated elements that "together provide a holistic means of consistently delivering" the outcome of compliance with the Credit Act obligations. That submission continues by reference to the "Minimum Expectations" of reasonable participants in the finance industry that were "relevantly common" and therefore "reasonable" and which ultimately is the foundation for Mr Hartman's formulation of the standard of "Reasonable and Prudent" practices and procedures of lenders.
The central criticism of the Expert Report is that Mr Hartman does not expose which lenders engaged in what practices and procedures, whether some lenders applied higher or lower standards than others (and with what results), what (if any) practices and procedures Mr Hartman was personally engaged in formulating and implementing during the relevant period and whether there were commonly adopted industry policies or procedures that recorded good practice by example.
Lang was a Queensland murder case, where the equivalent of s 79 of the Evidence Act did not apply. Lang was convicted of murdering his life partner, by stabbing her whilst she lay in bed in their apartment. The only hypothesis consistent with innocence was that she committed suicide. The prosecution led evidence from a well-qualified forensic pathologist, Dr Ong. His evidence was given orally. He did not author a written report. Objection was taken to the admission of his evidence on the ground that his opinion (to the effect that it was more likely that the death was caused by another person) was not demonstrated to be based on his expert knowledge as a forensic pathologist. The Queensland Court of Appeal dismissed the appeal, as did the High Court by majority on this question. The majority comprised Kiefel CJ and Gagler J in joint reasons and Jagot J. Justices Gordon and Edelman dissented. Mr Caleo submits that the difference was not at the level of principle; rather, the outcome reflects a difference in the assessment of the evidence.
Despite that the case did not involve a statutory equivalent to s 79 of the Evidence Act, Kiefel CJ and Gageler J at [11] recorded that the parties proceeded "on the common understanding" that the relevant principles stated in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; 52 NSWLR 705 at [85] and in Dasreef "apply equally to the determination of the admissibility of an expert opinion at common law".
I deal first with the passages emphasised by Mr Caleo in the joint reasons of Gordon and Edelman JJ. Their Honour's commenced at [222] by setting out the relevant passage from the reasons of Heydon JA in Makita, which they described as "the strict requirements for the admission of expert opinion evidence":
"[I]f evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of 'specialised knowledge'; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be 'wholly or substantially based on the witness's expert knowledge'; so far as the opinion is based on facts 'observed' by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on 'assumed' or 'accepted' facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded."
From this, their Honours distilled "three fundamental requirements" before opinion evidence is admissible at [223]:
The first is that the expert witness must identify an accepted field of expertise that they have which can be applied to the facts. The second is that the expert witness must identify a factual basis or foundation for the opinion in the admissible evidence or matters that are, or can be taken to be, before the court. The third is that the expert witness must expose how their expertise is the substantial basis connecting the factual foundation to the opinion given.
The first requirement is not in issue in this proceeding.
As to the second and third, their Honours reasoned at [225]-[228]:
As to the second requirement, the need for an expert to identify the factual basis or foundation for the opinion in the admissible evidence or matters that are, or can be taken to be, before the court is essential in order for the strength of the opinion to be assessed and for the opinion to be tested in cross-examination. Without exposure of the factual basis or foundation for the opinion, the opinion becomes a "black box" which is "insusceptible to a 'full and fair opportunity to test ... in cross-examination'".
As to the third requirement, there are two reasons for it. First, without demonstration that the expertise has sufficiently connected the exposed factual foundation to the opinion given by reference to expertise, then there is no basis to conclude that the opinion is "expert": if "on the proven facts a judge or jury can form their own conclusions without help, then the opinion of an expert is unnecessary". Furthermore, evidence of a sufficient connection based on expertise, between the exposed factual foundation and the opinion, is necessary to expose whether the expert has ventured beyond the area of their expertise. As Brennan J expressed the point, it is necessary to show the "link in the chain of admissibility".
The second reason for this requirement of sufficient connection, as Sir Owen Dixon said, is that "courts cannot be expected to act upon opinions the basis of which is unexplained". Fundamentally, the task of choosing whether to accept the evidence of an expert, or of choosing between competing experts, is one that will depend upon "impressiveness and cogency of reasoning". That task of assessing reliability cannot be undertaken without sufficient explanation of the connection in expertise between the factual foundation identified and the opinion of the expert.
"Sufficiency" is, however, an elastic concept. The extent of required explanation of how the opinion expressed is based upon expertise can vary and will involve issues of judgment. In some cases where expert evidence is given on a matter which is not in real dispute, the expert may not be required to expose in great detail the basis upon which the opinion is based on their expertise. But the more critical the opinion is to the matters in issue, and the more contested the opinion, the more necessary it will be that the opinion expose the expertise upon which it is based
The "black box" reference at [225] is to Chin, Cullen and Clarke, "The Prejudices of Expert Evidence" (2022) 48(2) Monash University Law Review 59 at 85. In that section of the article the authors are concerned with forensic experts who give comparison evidence, such as fingerprint experts. The criticism is that unconscious and subjective bias may lead to unfair prejudice where the evidence does not reveal how the opinion has been reached and therefore is inscrutable to a cross-examining party.
I do not read [225] as requiring, as a condition of admissibility, that s 79 incorporates the basis rule: that is the assumed or accepted facts must be established. The plurality in Dasreef settled that question at [41] by holding that it is "directed to the facts of the particular case" and whether the opinion is ultimately of assistance.
I accept that Mr Caleo is correct in his submission that there is no difference at the level of principle between the majority and minority reasons in Lang. At [12]-[17], Kiefel CJ and Gageler J emphasised the distinction between the requirement to demonstrate that opinion evidence is wholly or substantially based on the specialised expertise of the witness, which requires exposure of the reasoning process, and "the extent to which a process of reasoning engaged in by an expert through the application of specialised knowledge is clear and convincing" [15]; and where the cogency of the opinion "involving the application of specialised knowledge - can also go to the admissibility of a resultant opinion": [17].
Justice Jagot at [433]-[434] reasoned in a manner that exposes the essential difference between the submissions of Mr Caleo and Mr Senathirajah. In part her Honour said;
Another reality is that the requirement expressed in Makita that the expert's evidence must "fully" expose the expert's reasoning process does not involve an absolute standard, even in a case where admissibility is governed by the terms of s 79 of the uniform evidence legislation. Much will depend on the field of expertise and the nature of the opinion given…..
The point being made in Dasreef is that, while satisfaction of the requirement that an expert opinion must be based on the expert's expertise determines the admissibility and not just the weight of the evidence, it is not necessarily the case that, if all matters underlying the opinion expressed are not "made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge". Depending on the field of expertise and the expert opinion given, some matters may be properly assumed or inferred as forming part of the foundation of the expert's opinion…
Thus, as I raised with counsel in the course of the arguments, the interrelationship between the need to identify the factual basis for the opinions of Mr Hartman (Lang at [225]) and his demonstration that his expertise is connected with "the exposed factual foundation" (Lang at [226]) comes down to whether he has sufficiently identified what lies behind his various statements of what was good industry practice at the time. Mr Caleo's submission is that the Expert Report fails at that threshold. There is no evidence of any practice or procedure of any identified lender which forms the basis of Mr Hartman's opinions (which are really assertions) of what were the practices and procedures of reasonable and prudent lenders during the relevant period.
In contrast, Mr Senathirajah spent much time identifying many passages in the Expert Report as disclosing individual practices and procedures which in his submission is sufficient for Mr Hartman to state, without giving supporting examples.
Resolving the admissibility objection requires a fairly detailed analysis of the Expert Report. Before embarking on that task, there is one submission of Mr Senathirajah that may be quickly dealt with. Mr Hartman in the covering affidavit to his report makes the familiar declaration that each of the opinions expressed therein "are wholly or substantially based on the specialised knowledge arising from my training, study and experience" as set out in the Expert Report. The question for me is whether I can determine that from the Expert Report. The assertion of the author is of little assistance: Fonterra Brands (Australia) Pty Ltd v Viropoulos (No 2) [2015] FCA 974 at [20], Robertson J.
Mr Hartman's curriculum vitae relevantly states that he commenced employment with the National Australia Bank in 1997 as Head of Credit Risk Management (credit cards). He remained in that position until 2001 when he became the Head of Credit Policy and Decision Infrastructure (credit cards) until 2002 when he moved to ME Bank as National Credit Risk Manager, which position he held until 2005. From then until 2016 he was self-employed as a consultant in the area of risk management and compliance, and he nominates his clients as including GE Money, ANZ, Goodyear and ME bank. Between October 2016 and August 2018 he was employed by BMW Financial Services as Remediation Program Leader. Between September 2018 in September 2019, he was employed by Toyota Financial Services as Compliance Operations Consultant. From September 2019 until June 2022 he was employed by Insync as Principal Consultant Risk & Compliance and since September 2022 he has acted as a consultant in risk and compliance at Kadre, listing as his key responsibilities analysis and assessment of the effectiveness and compliance with, amongst other things, responsible lending requirements.
Between October 2016 and August 2018, whilst engaged by BMW Financial Services, he was responsible for ensuring compliance with an ASIC enforceable undertaking concerned with a responsible lending remediation program. While self-employed between 2005 and 2016, he lists his achievements as consulting on the implementation of the National Consumer Credit Protection regime, in particular responsible lending, privacy and anti-money laundering obligations.
It takes a good deal of persistence to read the Expert Report, which obviously I have. There is a detailed glossary that commences in Part 2. The following terms are defined:
Execution framework
An Execution Framework consists of a set of eight integrated elements that together provide a holistic means of consistently delivering an outcome - in this case, compliance with the NCCPA obligations:
Whilst not stipulated in regulations, as a matter of practicality, documentation and implementation of all eight elements are considered a Minimum Expectation of Reasonable and Prudent lender practices - essential to consistently deliver compliant lending operations.
The Framework elements are explained in greater detail in Section 3.1 (The eight Elements of an Execution Framework).
This structure is used as a basis for comparison to Money3's approach and practices.
Minimum Expectations are listed for each element as a means of illustrating what constitutes an effective element.
IMPORTANT NOTE:
The Minimum Expectations are not to be taken as the only means by which an element can effectively be delivered. However, for an alternative means to be reasonable it would need to deliver the same (or very similar) result relative to the detection of credit that would be unsuitable
Minimum Expectations
The NCCPA is generally principle based, rather than prescriptive in how the obligations are to be met by lenders.
Part of what I have been asked to assess in this report is whether or not the outcomes and practices of Money3 were reasonable.
To do so I have used as means of illustrating what is reasonable, descriptions of practices (Minimum Expectations) I know to have been relatively common (Reasonable) and, in my view, compliant (Prudent) during the Relevant Period. I have included in the descriptions some explanation of what the practice achieves as part of the description.
Throughout this report there are tables that compare the Minimum Expectations to the observed practices of Money3 as well as commentary regarding any gaps, and what I see as the likely consequence of those gaps on the intended outcome of avoiding granting credit that is unsuitable.
To be clear:
The Minimum Expectations listed are not exhaustive (they are not a list of everything that Reasonable and Prudent lenders do). Nor are the Minimum Expectations list exclusive (they are not the only approach used by Reasonable and Prudent lenders).
The Minimum Expectations listed are not industry best practices or a description of what is necessary to achieve a 'perfect' result.
To the extent that Money3 utilised a different approach to that listed as a Minimum Expectation, I have considered the likely result of Money3's alternative practices relative to the result of the Minimum Expectation practice on the basis of its ability to identify instances of unsuitable credit, including identifying reasonable values to use in the financial assessments - part of the assessment of unsuitability.
To the extent that the result was the same (or very similar), to the extent there is an objective means of outcome comparison I assess Money3's practice as meeting the Minimum Expectation.
Alternatively, to the extent that I find no objective means of comparison, I have noted that and applied my judgement as an expert in the area to form a view about the likely consequence of the difference between the Minimum Expectation practice and Money3's practice on the ability to identify and prevent the granting of credit that is unsuitable, as defined under the NCCPA.
Reasonable and Prudent
This refers to my experience with and knowledge of the practices of lenders (including those providing new and used vehicle loans) that I knew to be at least relatively common (Reasonable) and, in my view, compliant (Prudent) at the time - i.e. during the Relevant Period.
Where Money3 took an alternative approach; i.e. where the means of how Money3 operationalised, a regulatory requirement differs to those I have listed as Minimum Expectations, I have assessed that alternative based on the likelihood of the alternative achieving the same (or very similar) outcome to the practices in terms of its ability to prevent unsuitable loans from being granted. This includes developing values that are reasonable and appropriate for use in the financial assessments involved in the assessment of Unsuitability.
This term is important to the understanding of what I have described as Minimum Expectations for Money3, as the Minimum Expectations listed, reflect the practices of Reasonable and Prudent lenders
Scalability
An undefined term used in ASIC's Regulatory Guidance RG 209, understood to mean that the extent of inquiries and degree of Verification undertaken can vary based on the risk of the harm the proposed credit may cause the applicant.
The risk to the applicant is considered to comprise both the likelihood of their inability to repay the debt under the terms of the contract and the severity of such a situation relative to their financial situation.
Whilst not stipulated in regulation, the finance industry (including those who provide new and used vehicle finance) has widely adopted this concept, as a means of meeting the stipulated requirement of reasonableness. As a result, it is considered as part of what constitutes the Minimum Expected practices of a Reasonable and Prudent lender.
This concept and its operationalisation are explained further in Section 11 (Approach to Scalability).
Mr Caleo is highly critical of these definitions as central to the entirety of Mr Hartman's opinions, as lacking any meaningful detail and thus as failing to expose for analysis whether the opinions are wholly or substantially based on Mr Hartman's specialised knowledge. The Expert Report in his submission is foundationally incomplete. Mr Hartman does not, for example, reveal how it is that the Minimum Expectations of a Reasonable and Prudent lender required implementation of the eight step Execution Framework in order to be compliant with the Credit Act obligations in issue. Notably, Mr Hartman expressly states that the Minimum Expectations "are not to be taken as the only means" for satisfying one or more of the eight elements by effective delivery, but makes no attempt to reveal what other measures may have been commonly adopted or implemented within the relevant period.
Mr Caleo further submits that the Minimum Expectations and Reasonable and Prudent lender are constructs of Mr Hartman, that he repeatedly employs throughout the Expert Report, upon which he has erected the Execution Framework which he then contends is "all but essential" to comply with the provisions of the Credit Act. Nowhere in the report does Mr Hartman disclose "what these minimum expectations are, and who are these reasonable and prudent lenders". This is despite the fact that each becomes the touchstone for his analysis.
Mr Caleo further submits Mr Hartman does not give identifiable evidence of what practices and procedures he observed or was personally engaged in. It would have been open to ASIC to lead evidence from other lenders as to what was actually done in order to assess loan suitability, of similar classes of applicants, within the relevant period. The vice of the Expert Report is that nowhere does Mr Hartman reveal what his particular experience was; that is what he did when he was employed in the industry. Rather, his opinion is repeatedly expressed by reference to his construct of Minimum Expectations and Reasonable and Prudent Lenders. Viewed as a whole, the report is of the "black box" type described by Gordon and Edelman JJ in Lang at [225]. It is not sufficient, so the submission goes, for Mr Hartman to assert that there were particular practices, procedures or standards of Reasonable and Prudent Lenders at the time.
An example of the latter is the central definition of Reasonable and Prudent where Mr Hartman states that it refers "to my experience with and knowledge of the practice of lenders (including those providing new and used vehicle loans) that I knew to be at least relatively common". The criticism is the failure to identify the lenders Mr Hartman has in mind, the types of loans that he refers to and the particular practices in issue.
Part 3 of the Expert Report sets out the key context for the eight elements of the Execution Framework. Paragraph [28] states:
It has been my experience over more than 30 years that Reasonable and Prudent Lenders utilise and maintain a well-documented execution framework in some form to achieve consistency in performance including compliance.
To this there is added at [31]:
In my experience, material reliance on informal decision-making and communication without an effective structure, i.e. an Execution Framework, is an extremely common characteristic of lenders that do not achieve consistent performance including compliance with regulation. On that basis, I do not consider such an approach to be consistent with the practice of Reasonable and Prudent Lenders.
Mr Hartman then sets out a table of eight elements of the Execution Framework with the description of each together with its purpose and importance. Each is expressed at a high level of generality. For example, the first "accountability" is described as:
Clear articulation of both who was responsible for performing what functions and who owns (is accountable for) the outcome.
Moving from the Executive Summary, Mr Caleo then exampled several parts of the Expert Report as demonstrating that one cannot discern any factual basis for the opinions expressed. One that he emphasised is the answer to the third question; in summary, what reasonable steps a licensee in the position of Money3 would have taken to ensure compliance by its representatives with the Credit Act. The analysis begins at [779]. There is a detailed table commencing at [783] comprising three columns. The first is titled: Minimum Expectation (practices of Reasonable and Prudent Lenders), the second comprises Mr Hartman's observations of what Money3 did or did not do (by reference to the documents provided to him) and the third is his assessment of compliance by reference to whether Money3 met his Minimum Expectation requirement by answering "yes" or "no". Despite the detailed set out in that table the "real vice" that Mr Caleo relies on is the failure to identify the factual basis for the assertion that, at the relevant time, other comparable lenders had implemented the Execution Framework that Mr Hartman has constructed.
Another complaint of Mr Caleo is that Mr Hartman disavows any attempt to set out comparable practices adopted by industry participants at the relevant time. In a part of the Expert Report dealing with verification, at [206] Mr Hartman states:
There is no regulatory prescribed or industry agreed and approved standard as to how to identify what is reasonable under the circumstances. This creates a challenge for lenders who, as a matter of operational practicality, must create practices that are internally consistent and effectively controllable.
And then, when dealing with Scalability at [208]-[212], Mr Hartman explains that although the regulatory provisions do not set minimum thresholds for inquiries or verification, nonetheless he employs Scalability (as defined by him) as providing relevant guidance, which he then qualifies at [213]-[214] with:
It would be impractical for this report to assess the practices of Money3 against every permutation of industry practice that is used. On that basis, I have chosen those practices of Reasonable and Prudent Lenders that I consider most common, as the appropriate means of comparison.
To be clear, the practices I have chosen are not what might be classified as best practice, or the most efficient or effective practices, but rather the practices represent those taken by Reasonable and Prudent Lenders. Put simply they are practices that are commonly used and considered sufficient to achieve a consistently compliant outcomes. They are not those are necessarily considered to be the best or what should be done in theory ( i.e. could be applied but are not commonly applied).
Once again, Mr Caleo's criticism is the failure of Mr Hartman to reveal what he is relying on, coupled with his failure to reveal what choices he has made and why.
Mr Caleo identified many more examples of paragraphs in the Expert Report as supporting his submissions. It is not necessary to essay more as they all, on his submissions, expose the same two fundamental errors: one cannot discern from the Expert Report whether the opinions are substantially based on Mr Hartman's specialised knowledge and the consistent failure to expose the factual foundation as the basis for the opinions.
To the contrary, Mr Senathirajah spent some time identifying many paragraphs in the latter part of the Expert Report that, in his submission, do expose the factual foundation for the constructs of Execution Framework, Minimum Expectations and Reasonable and Prudent Lenders. His submissions commenced by emphasising that when defining Reasonable and Prudent, Mr Hartman expressly states that it refers to his experience with and knowledge of the practices of lenders, including within the relevant financing sector, that he knew to be "at least relatively common" and in his view compliant in the relevant period. In answer to the criticism that Mr Hartman fails to reveal the source of that knowledge and experience, the matters were addressed by categories.
The first category concerns the inquiry and verification obligations of a licensee. In examining the affordability element at [496] Mr Hartman sets out a table of calculation inputs. The first item is income, the Minimum Expectation is "collected" and his conclusion is that Money3 complied with this obligation. The second item is "less debts", the Minimum Expectation is "collected" and his conclusion is that Money3 complied. The third item is:
Financial Situation Element Minimum Expectation (practices of Reasonable and Prudent Lenders) Money3 Observed M3= Min. Exp. Yes/No?
Money3 collected information about expenses via an application form.
Less Comparable Expenses Data collected needs to be sufficient in breadth and granularity to enable an apples-to-apples comparison to the HEM Benchmark (or an alternative - which includes only selected living expenses likely to be ongoing for the population upon which it was developed) or other benchmarks such as for Rent for expected ongoing expenses associated with the purchase of a new vehicle. The granularity of general living expenses collected by Money3 does not facilitate effective comparison to those included in the HEM benchmark (or an appropriately derived alterative). No
Refer to Section 25 for a more detailed explanation of what constitutes effective benchmarks, including who it needs to be specific in terms of what categories of expenses it represents and which it specifically excludes that should be collected separately. As is explained in greater detail later in Section 25, the lack of a detailed description of the derivation of Money3's internal GLE benchmark does not meet Minimum Expectations and as a consequence is unreasonable.
As is explained in greater detail later in Section 25 the values collected also do not facilitate effective comparison to those used to validate expected ongoing expenses associated with the purchase of a new vehicle, as the values collected about that type of expense are not separately discernible.
[2]
The submission continues that this is an example of where Mr Hartman explains what he has employed (either by observation or experience) to be the practice of Reasonable and Prudent Lenders. True it is that he does not identify which lender, which practice and the extent to which comparable practices were employed within the industry, but there is an identification of some facts as to what was done in order to assess comparable expenses.
A little further in the table, there is a similar identification the practice of Reasonable and Prudent Lenders in undertaking inquiries that "must be made separately for categories of expenses that are not included in benchmark values" when addressing the requirement of "non-comparable expenses". In that analysis, Mr Hartman concludes that Money3 failed to meet this standard of practice because, on the documents he analysed, there was no "effective description of the nature of expenses specifically excluded from each benchmark" and in consequence "it is not clear whether items that were excluded, were collected separately".
The same type of analysis is revealed for many other elements of the financial assessment such as estimated vehicle running costs [506], data collection for "like-for-like comparisons" to an adopted benchmark [507] and the assessment of a risk based surplus as a "buffer" [509].
The pattern of analysis is repeated in Mr Hartman's analysis of the requirements and objectives of the individual consumers [523]-[534], the risk of default [556], the use of benchmarks [600], compliance by representatives [783]-[795], accountability [808]-[817], effective policy [818]-[834], process [836]-[849], procedures [850]-[875], monitoring [877]-[895], reporting and analysis [897]-[911], governance [913]-[922] and finally the reasonableness of steps for training and competence [923]-[952].
In my view, the objection to admissibility of the entirety of the Expert Report is not made out.
It is important to commence by emphasising some matters I recorded at the outset of these reasons. It is accepted by Money3 that financial compliance with the obligations of a licensee under the Credit Act is a field that is one of some specialisation about which expert evidence may be adduced as to the practices and procedures of comparable lenders in comparable circumstances: of "industry-wide" good practice. That evidence is relevant in this proceeding because one of the issues I must decide is whether Money3 made reasonable inquiries to undertake the verification requirements. The Credit Act does not prescriptively set out what must be done- that is left to the licensee acting reasonably. This requires findings of what was done and what was known and then an assessment, necessarily prospective, as to what a reasonable licensee would have done in the circumstances before a conclusion may be reached about whether Money3 met its obligations. The analysis involves judgments about the diligence of Money3.
In an analogous case, Austin J determined an objection to the admissibility of various opinions where the issue in a civil penalty proceeding concerned whether officers of a company acted honestly and discharged their duties with the degree of care and diligence of a reasonable person in a like position contrary to s 232 (2) of the Corporations Law: Australian Securities And Investments Commission v Vines [2003] NSWSC 1095;48 ACSR 291. One point that his Honour made, in ruling the evidence admissible, concerned specialised knowledge from observation. It will be recalled that Mr Hartman states in his glossary when explaining his definition of Reasonable and Prudent that this refers to is "experience and knowledge of the practices of lenders" that he "knew to be at least relatively common" during the relevant period. He was not that evidence a person who has made observations as "a nonparticipating onlooker' of the type identified by Austin J at [12].
On the face of his curriculum vitae, Mr Hartman is a person with considerable industry experience and knowledge of the practices and procedures that were implemented (either personally or at his direction) or which he observed within the relevant period, including the lenders concerned with loans for new and used vehicles. There may be some criticism of a lack of clarity which flows from the absence of particularisation in the Expert Report, but in my view that goes to the utility of the opinions.
Although not addressed in submissions before me, Mr Hartman's evidence as to his industry observations may be more accurately described as "expert factual evidence as opposed to expert opinion evidence": Lang at [232]; Kennedy v Cordia (Services) LLP [2016] UKSC 6 at [44]. However, for present purposes that distinction matters not as the threshold requirements for admissibility do not differ. What is important is that Mr Hartman in the balance of the Expert Report in considerable detail sets out what he says were the steps taken by his category of Reasonable and Prudent Lenders in making each of the required statutory assessments.
Thus, in the affordability analysis that I have extracted, Mr Hartman is specific in setting out the Reasonable and Prudent Lender practice for data collection in order to assess comparable expenses. When that is tied back to his definition, he has exposed for analysis that the identified steps are based on his experience in the industry and his knowledge derived from observing the practices of lenders. I am concerned only at this juncture with the admissibility question and not with an assessment of the cogency of this evidence and ultimately whether and to what extent weight is afforded to it in my fact-finding: Lang at [434], Jagot J. The inference that is open from considering the whole of the Expert Report is that the particular practices and procedures that Mr Hartman sets out when interrogating each of the separate elements is that they are founded in his experience in and knowledge of the finance industry and the need to comply with the statutory obligations of lenders. That is the further point made by Jagot J in Lang at [434] (by reference to Honeysett v The Queen [2014] HCA 29; 253 CLR 122) that "based on" requires:
[N]ot so much that every foundation for the opinion is to be "fully expose[d]" or "made explicit", but that the expert evidence "must be presented in a way that makes it possible for a court to determine that it is [substantially] based" on the person's training, study, or experience].
The criticised absence of identification of which lenders, in respect of what categories of loan finance and by reference to examples of practices and procedures in the Expert Report are not so substantial as to cause me to doubt that Mr Hartman's evidence is substantially based on his specialised knowledge as a person with long involvement in the finance industry in Australia. The critical question for me at this stage is whether I am satisfied that the Expert Report on its face and read as a whole exposes how the accepted expertise of Mr Hartman is the substantial basis for his evidence as to what was regarded by comparable lenders as reasonably accepted good practice during the relevant period. It does in my view when one interrogates down to the detail of the analysis in each section of the Expert Report. I have given one example, concerned with the affordability analysis. It is not necessary for me to set out each of the paragraphs which were emphasised by Mr Senathirajah. However, there is another that clearly demonstrates the point.
It concerns the answer to question 2 (b) about the use of benchmarks from [590]. Within the material provided to Mr Hartman there were three internal benchmark values that he assumed were used by Money3. They were the General Living Expense (GLE), Minimum Rent and Vehicle Running Cost benchmarks. In addressing the first from [594] to [607], Mr Hartman states:
The most common approach used in financial services (and based on my experience and substantial historical dialog with industry, including colleagues involved in processing vehicle loans) is comparing select categories of GLEs to those represented in the HEM for a similar family structure, number of dependents, income band and geographic location (where they live).
It is important to note that the HEM includes only some types of living expenses and specifically excludes others - the detail of which is clearly articulated in the underlying methodology that is published along with each quarterly update of the HEM values E.g. Household Expenditure Measure - June Quarter 2019 - Version 3.05 Drop in Tables [DOC ID MLO.0003.0007.0071].
NOTE:
Viable alternative benchmarks would also need to be based on a specified set of expense types so as to enable comparison information collected so that it represents the same types of expenses. Any excluded types of expenses would need to be dealt with separately in the assessment of affordability.
Using the HEM as an example, in order to support a useful comparison to the HEM, it is necessary to capture declared living expenses in categories that enable a like-for-like comparison to those included in the HEM.27 The same logic applies for the use of any expenses benchmark value i.e., a comparison would only be reasonable if the value/s collected and being compared represent the same and only the same categories of expenses included the benchmark.
The use of HEM (as a benchmark) was a topic of the Royal Commission into Financial Services. In that review, it was identified that some lenders were simply adopting the HEM level of expenses in their assessments, either as an alternative to collecting such data or as a substitute for the collective data.
Whilst how the HEM was used, based on what it represents, was the subject of the concerns raised in the Royal Commission, the construct of the metric was not called into question. Put another way it seen as reliably representing what it purported to represent. Largely, as a consequence of the findings of the Royal Commission and the decisions of the ASIC v Westpac FCA case, lenders changed the way they used HEM during the Relevant Period.
HEM was commonly used by Reasonable and Prudent lenders as a Validation tool to test whether the value of a specified set of expenses was at least as much as the HEM for an applicant of a comparable profile.
This test is then used as part of the credit assessment to indicate the extent to which the values collected are 'likely' to be sustainable over the duration of a loan, based on being at least equal to the HEM value. They also used the outcome of that comparison to determine the extent of due diligence (Verification) necessary (i.e., reasonable).
In instances where the level of Vulnerability is low, it was still considered appropriate to substitute in the HEM values in instances where the comparable disclosed expense category value was lower than the corresponding HEM value - and do no more in terms of Verification of that information given the low level of Vulnerability.
In such instances, assuming there are no other issues identified that suggest that HEM would be inappropriate (E.g., carer responsibilities or adult dependent children living at home) this was considered a reasonable approach given this would be ensuring that the applicant had at least the level of contingency inherent in the HEM value given that value is based on the 25th percentile of expenses - i.e., ¼ of those surveyed spend less.
NOTE:
If an alternative benchmark was used, consideration would need to be given, based on what the benchmark represented, as to whether it included any element of contingency.
The above are contextual comments relevant to the construct of the internally derived GLE benchmark used by Money3 and their use of it.
Expectations about where a benchmark is to be relied upon is the subject of the decision of Greenwood J noted in paragraph 49 of the Letter of Instruction which refers to the case of Australian Securities and Investment Commission v Channic Pty Ltd (No 4) (2016) FCA 1774. The expectations listed require evidence about:
The formulation of the benchmark;
The factors that information the determination of the numbers derived from the model; and
The relevance and application of the model to consumers in the relevant cohort of consumers.
I did not find documentation detailing the above three aspects in the provided materials by Money3.
In that component of the Expert Report, Mr Hartman demonstrably identifies the source of his industry-wide practices, the impact of the Royal Commission into Financial Services and the common use of the HEM benchmark. Mr Hartman next sets out from [608] to [630], partly in tabular form, a comparison of the HEM benchmark with the observed practices and procedures (based on the documentation supplied to him) of Money3. It is plainly the case that Mr Hartman has identified the industry practice, has named the most commonly used benchmark and has described its content, contrary to the general criticisms of Mr Caleo.
I am not satisfied that the Export Report read as a whole is a mere ipse dixit: Lang at [14], Makita at [87]. Although in some sections, the explanations set out do not in detail explain how unidentified practices of unidentified industry participants were selected which then informed Mr Hartman's reasonable and prudent opinion, those deficiencies in my view bear upon the cogency and ultimate weight that may be attached to the views expressed. The Expert Report in my view generally exposes the practices and procedures that Mr Hartman says, based substantially on his specialised knowledge in the industry, were engaged in during the relevant period.
To that extent his opinions are not "unexplained" (Lang at [13], [227]). However, whether they are sufficiently explained is another matter. I emphasise that I am not concerned at this stage to determine whether the opinions of Mr Hartman are correct, or whether he has sufficiently exposed his reasoning process in order to satisfy me that findings of fact may be made in accordance with his evidence.
Accordingly, I order that the respondent's objection to the admissibility of the expert evidence of Mr Hartman be rejected.
I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McElwaine.