62 This suggests that the information which is collected under s 130(1) is collected for a purpose, namely, the purpose of assessing the loan against the unsuitability criteria in s 131(2). But to say that information is collected for a purpose says nothing expressly about how that purpose is to be achieved. I do not think it can be said that the mandatory obligation that ASIC submits exists in s 129(b) could require the credit provider to carry out the assessment using all of the information gathered under s 130(1). The converse of ASIC's own argument on the revenue side shows that this must be so. A consumer might, for example, disclose several kinds of income including share dividend income. Is a credit provider bound to take this income into account by s 129(b) or may it lawfully say that income of that kind is not sufficiently stable or predictable to be relied upon in carrying out an assessment of whether the credit contract would be unsuitable?
63 There are related problems. The financial position of the borrower will very frequently include a statement of assets and liabilities. Some borrowers will have substantial equity in real property or capital reserves of some other kind. Does s 129(b) require a credit provider to assess the borrower's capacity to service the loan not only from the disclosed income sources but also from capital? Or, may a credit provider lawfully decide that it does not wish to include the ability of a borrower to service a loan out of capital in an assessment of unsuitability? It would be surprising if Div 3 were to be interpreted so as to require a credit provider to take account of these two matters in assessing the suitability of the loan when both would appear to be matters that one would hope in many cases ought not be included in a suitability analysis.
64 Observations of that kind demonstrate that it would be surprising if s 129(b) required every element of declared income or capital to be used in the process of assessing whether a loan was unsuitable. Of course, ASIC's case is not concerned with declared income or capital but instead with declared living expenses. But nothing in ASIC's argument is textually any less applicable to disclosed income and capital than it is to disclosed expenses.
65 It was for this reason that ASIC accepted during argument that it was not the case that there would be a failure to carry out an assessment of unsuitability under s 129(b) where a credit provider failed to take into account all of the information obtained under s 130(1). At T470 senior counsel for ASIC, Mr Clarke SC, submitted the following:
Further, it is not ASIC's case that the licensee has to use all or some of the information that is obtained, which is what they have put in their written submissions. There's no requirement to use in this way and ASIC's case does not plead or contend that there is such a requirement. It is not ASIC's case that the licensee cannot consider the consumer's asset position. The licensee can consider the consumer's asset position as part of the consumer's financial situation.
This has not been the battleground in the present case because the case concerns Westpac's ADS: excluding home loans that may be approved under manual assessment when a consumer's asset position might be considered as sufficient to override otherwise failing of the serviceability rule. Assets can be - can properly be considered but it's not - they're not relevant to the present case. Again, Mr Kirk's submission says - he now accepts you can use assets. So that's a - that's another gotcha moment. But that rests on the false premise that ASIC's case is that the suitability assessment must always and only consider income less expenses. It is not and has never been ASIC's case that the licensee must only conduct a simple income minus expenses calculation. Rather, it is ASIC's case that, in order to conduct an assessment under section 129 of the character we've referred to, the licensee must at least conduct an assessment of the consumer's financial situation with a sufficient understanding of the consumer's income and expenses.
It is - it is an assessment of the consumer's financial position as a whole as was stated in Silberman. It is not ASIC's case that the statute requires a one size fits all mechanistic approach to conducting the assessment. ASIC's construction does not require a lender to add up income, subtract expenses and decline the loan if there is a deficit. What it requires is for the lender to make an assessment of the consumer's financial situation. What process, rules, formula or approach the bank adopts to assessing capacity to repay, affordability, whichever label one puts on it, is legitimately up to the lender as long as it remains based on the consumer's financial situation. When it's not based on the consumer's financial situation, it's not an assessment of the consumer. It is a false premise that the decision in Silberman somehow undermines ASIC's section 128 case.
66 In my opinion, the position ultimately adopted by ASIC was inevitable. The contrary proposition would have been indefensible.
67 That being so, ASIC's case is not that the consumer's declared living expenses are themselves something which is directly required by Div 3 to be taken into account in assessing whether a loan will be unsuitable. Rather, the matter which must be taken into account is the much more amorphous concept of the financial situation of the borrower. For example, at T314.17 Mr Clarke submitted that 'when conducting the assessment of affordability, the licensee is required to take into account the consumer's financial position'.
68 On this view of Div 3, the mandatory matter which must be taken into account is the consumer's financial situation viewed overall and not any particular integer of which it consists. Whether that financial situation has been taken into account and how it has been taken into account will therefore be a question of fact and degree and, as ASIC accepted, this could in many cases be a difficult question.
69 Part of that difficulty emerges from the fact that ASIC's argument does not identify what a credit provider is to do with the financial information it has gathered under s 130(1)(b). Indeed, it was clear in Mr Clarke's submission that what the credit provider did with the information about the financial situation of the borrower was 'legitimately up to the lender'. There is an element of vagueness about this submission. This may, I think, be seen in Mr Clarke's submission (above at [65]) that the credit provider 'must at least conduct an assessment of the consumer's financial situation with a sufficient understanding of the consumer's income and expenses'. But, it might well be asked (again rhetorically), having obtained that 'sufficient understanding', what is it that the credit provider is actually meant to be doing with it?
70 The answer to that rhetorical question turns out to be of some significance. The only statutory purpose for which the information is collected is, in my opinion, to answer the s 131(2)(a) Questions (or, in a case where they were relevant, the s 131(2)(b) or (c) questions). They are precise questions: is it possible for the consumer to service the loan at all and, if it is, can it nevertheless only be serviced by the making of repayments which would put the consumer in circumstances of substantial hardship? I accept that, in principle, whatever must as a matter of necessity be considered to answer those two questions is a mandatory matter which a credit provider must take into account.
71 I do not, however, accept ASIC's contention that all of the financial circumstances of the consumer can be such a mandatory matter. Many of the consumer's financial circumstances are not relevant to either question. For example, the fact that a consumer had superannuation could have no relevance to the s 131(2)(a) Questions of whether the consumer could in absolute terms afford the repayments; so too, the fact that the consumer takes an annual first class holiday to the United States is not relevant to assessing whether the repayments will put the consumer into circumstances of substantial hardship. Thus, the mandatory matters flowing from the terms of the s 131(2)(a) Questions cannot include as a single mandatory matter all of the financial circumstances of the consumer. And, because they do not include all of those circumstances, it cannot be said that this argument has the consequence that the subset of all of the financial circumstances of the consumer comprising the consumer's declared living expenses must be a mandatory consideration either.
72 A weaker form of the argument is that some of the financial circumstances of the consumer are mandatory matters and that, in this case, this included at least the consumer's declared living expenses. The form of this weaker argument would be that the nature of the s 131(2)(a) Questions is such that they cannot be answered without knowing the consumer's declared living expenses.
73 However, I am unable to discern why, as a matter of principle, the consumer's declared living expenses must be considered in answering the s 131(2)(a) Questions. The first of those questions concerns the absolute ability of the consumer to make the repayments on the loan. This inquiry is only concerned with the consumer's ability to service the loan and not with any issues as to whether doing so will put the consumer in circumstances of substantial hardship. I am unable to perceive why, in answering that question, one must know what the declared living expenses of the consumer are. ASIC's submissions did not seek demonstrate why this might be so.
74 A worked example illustrates the problem. Let it be assumed artificially that a consumer with a monthly after-tax income of $4000 has three declared living expenses of food ($1200 per month), utilities and internet ($200 per month) and gym memberships ($200 per month). The declared living expenses are therefore $1600 per month and the consumer will have a surplus of $2400 per month. If the consumer proposes to take out a home loan which will require monthly repayments of $2500 the outgoings will then be $4100 per month as opposed to the after-tax income of $4000 per month. The consumer will therefore have a shortfall of $100 per month.
75 But this does not tell one that the consumer cannot afford to meet the repayments. One reason this is so is because the consumer may choose to discontinue their gym memberships and meet the repayments in that way. 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.
76 In fact, the only way that one or more declared living expenses can be shown to be necessarily relevant to the issue of whether the consumer can afford to make the repayments is by identifying some living expenses which simply cannot be foregone or reduced beyond a certain point. For example, everyone has to eat so there must be an amount for food which is the minimum which can conceivably be spent. But that minimum is an entirely different concept to the declared living expense of what the consumer actually spends on food. Indeed, knowing how much the consumer actually spends on food does not tell one anything about that conceptual minimum. 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. Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.
77 Without additional information, I do not consider that it is possible to accept that the consumer's declared living expenses tell one anything about their capacity to meet the repayments under the loan. I do accept that with additional information, it may be possible to do so. For example, if the monthly utilities expense disclosed by the consumer is known by the credit provider to be the minimum possible monthly utilities expense, then with that additional information one can deduce that the monthly utilities expense cannot be further reduced. Depending on what is known about the other declared living expenses, it may then be possible to conclude that the repayments cannot be met. But without additional information of that kind, it is not possible to say that any one or more of the declared expenses must be relevant to the first of the s 131(2)(a) Questions (i.e. whether the consumer can afford to make the repayments under the loan).
78 The situation is no better in relation to the second of the s 131(2)(a) Questions (i.e. whether the consumer, whilst able to afford the repayments, will not be able to do so without being placed in circumstances of substantial hardship). Largely the problem is the same as that described in the preceding paragraph although it is now more acute. Here the issue is not whether some or all of the declared living expenses can be done without but the even more complex question of whether, if done without, this would give rise to circumstances of substantial hardship. Again, one cannot say that as a matter of necessity this can be discerned from the declared living expenses by themselves. The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items. For that to be relevant to the hardship question posed by s 131(2)(a) one would need to know at least the following matters:
(a) that the loan repayments would require the consumer to cut their budget by a certain amount, say for the sake of argument, $200 per week;
(b) that the $200 would have to be cut from the amount the consumer spent on food (i.e. $500 per week); and
(c) if the consumer cut the amount spent on basic food from $500 per week to $300 per week then this would place the consumer in circumstances of substantial hardship.
79 With those additional facts, one may be able to say that the declared living expenses must necessarily be relevant to the second of the s 131(2)(a) Questions. I note that ASIC does not allege Westpac contravened s 130(1) by failing to make inquiries along these lines and these reasons do not deal with any such contention. Absent additional facts of that kind, however, one cannot be sure that the declared living expenses must be relevant to the s 131(2)(a) Questions. At best they might be relevant, but possible relevance is not sufficient for ASIC's argument.
80 It follows that as a matter of analysis, declared living expenses by themselves do not necessarily have to be relevant to the s 131(2)(a) Questions. If they do not necessarily have to be relevant to the answering of those questions, one cannot say that s 129 requires that the declared living expenses be taken into account in performing an assessment of unsuitability. I therefore reject the first step in ASIC's argument.
81 That conclusion is consistent with what seems to me a more likely operation for ss 128 and 129. To grasp this it is first necessary to know that Div 3 is very concerned to ensure that the assessment which the credit provider carries out is correct. The credit provider is obliged by s 129 to carry out an assessment of the suitability of the loan for the consumer (strictly, unsuitability) and is prohibited, on pain of civil penalty, by s 128 from entry into a credit contract unless it has performed such an assessment. ASIC's argument effectively telescopes substantial obligations into ss 128 and 129 relating to how a credit provider goes about this process. But this appears to me to be pointless because of ss 131 and 133. Section 131 requires certain credit contracts to be assessed as unsuitable and s 133 prohibits entry by a credit provider into a credit contract which is unsuitable.
82 The policy of the statute that unsuitable loans should not be made is explicitly and directly given force by ss 131 and 133. Given that statutory fact, what purpose can be served by prescribing how a credit provider goes about the assessment process? Sections 131 and 133 make that the problem of the credit provider. A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans. ASIC's argument creates a whole new range of implied rules which appear altogether unnecessary in light of ss 131 and 133.
83 For completeness, I should record that I have not disregarded ASIC's submission that the failure to take into account the declared living expenses involved a failure to comply with ss 131 and 133. Section 131(1) requires a credit provider to assess a credit contract as unsuitable if any of the s 131(2) Questions are answered affirmatively. Section 133(1) prohibits a credit provider from entering into a credit contract which is unsuitable as defined in s 133(2). The definitions in ss 131(2) and 133(2) are identical. A breach of ss 131(1) or 133(1) is a civil penalty contravention.
84 ASIC did not allege that Westpac had 'contravened' either provision so that it was liable to pay a civil penalty. Instead, it submitted that the provisions had not been complied with rather than contravened. That submission then engendered a lively debate about whether one could fail to comply with a provision without also contravening it. Perhaps disappointingly, it is not necessary to resolve that debate. I take ASIC's submission about this only to be that because Westpac had not (allegedly) taken any of the disclosed living expenses into account it could not have asked itself the s 131(2)(a) Questions (or the identical questions posed by s 133(2)(a)). This meant that it had not complied with either s 131 or s 133. However, that depiction of the provisions does not advance matters any further and does not alter the conclusion above.
85 Nor I have disregarded ASIC's submission that the responsible lending obligations involve new norms of conduct and represent matters of substance or its allied submission that the legislation should be seen as beneficial and therefore construed liberally. However, those matters cannot be used to bend Div 3 so that it is construed to say something which it does not say. It is not necessary, in that circumstance, to decide whether ASIC's case about declared living expenses would represent an outcome which could be described beneficial. For what it is worth, the proposition appears to me to be, at the very least, contestable. On one view, seeking to determine circumstances of objective hardship by reference to actual household expenditure may be quite misconceived. With knowledge of the consumer's declared living expenses, one may well be able to discern that a consumer will have to trim their sails if the loan proceeds. But there is arguably a conceptual gulf between a trimming of sails and poverty.