Australian Securities and Investments Commission v Westpac Banking Corporation

1. The appeal be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 The primary issue in this appeal is whether the respondent ('Westpac') contravened s 128 of the National Consumer Credit Protection Act 2009 (Cth) (the 'Act') in respect of certain home loans: more particularly, whether Westpac undertook the assessment of unsuitability required by s 128, specifically s 128(c) of the Act. The appellant ('ASIC') contends that the primary judge erred in failing to find that Westpac did contravene s 128 by not making an assessment in accordance with s 128(c). 2 That primary issue raises two questions. First, ASIC contends that to comply with s 128(c), a credit provider must undertake an assessment of whether the particular credit contract proposed to be entered into will be unsuitable for the particular consumer in question, and necessarily must consider and evaluate all the expenses of that consumer as part of assessing a consumer's financial situation. The second question arises because ASIC contends that with home loans with an initial interest only period, Westpac contravened s 128 because Westpac's assessments were done not by reference to the terms of such interest only loans and the actual repayments to be made thereunder. 3 Before going to the relevant legislative provisions, it is to be noted that ASIC did not contend that any of the home loans entered into by Westpac were in fact unsuitable nor that Westpac was not attempting to assess whether the consumers could likely comply with their financial obligations under the home loans or that they could only do so with substantial hardship. In fact, it is quite apparent that Westpac's system and multiple rules were extensive and well documented. However, the question remains whether Westpac, in the circumstances relating to its assessment of the relevant home loans, made the assessment necessarily directed to be made under the Act by reference to the particular consumer and all their expenses, including their general living expenses, and by reference to the terms of the home loan entered into between the consumer and the credit provider. 4 I should observe that just because in any given case a particular home loan is not unsuitable, does not mean that there may not have been a breach of s 128. Nor does it matter whether Westpac should have made further inquiries of one of the consumers who entered into a home loan. These are not matters in contention. The main complaint in this appeal and before the primary judge was that Westpac failed to make the required assessment by a consideration of the particular consumer and their particular circumstances. This is a question of process (making an assessment) leading to the entering into of a credit contract, irrespective of whether that credit contract turns out to be unsuitable or not. This is in fact a proceeding (as observed by the primary judge at [10] of his reasons) about the operation of responsible lending laws without any allegation of irresponsible lending (that is, entering into an unsuitable credit contract). However, the fact there is no allegation of irresponsible lending is a matter of no significance in this appeal if there was in fact a breach of s 128 by Westpac. 5 Section 128 is found in Div 3, which is contained in Pt 3-2 which is entitled "Licensees that are credit providers under credit contracts: general rules". Part 3-2 begins with Div 1 which is headed "Introduction" and which contains one section, s 125: 125 Guide to this Part This Part has rules that apply to licensees that are credit providers. These rules are aimed at better informing consumers and preventing them from being in unsuitable credit contracts. Division 2 requires a licensee to give its credit guide to a consumer. The credit guide has information about the licensee and some of the licensee's obligations under this Act. Division 3 requires a licensee, before doing particular things (such as entering a credit contract), to make an assessment as to whether the contract will be unsuitable. To do this, the licensee must make inquiries and verifications about the consumer's requirements, objectives and financial situation. The licensee must give the consumer a copy of the assessment if requested. Division 4 prohibits a licensee from entering or increasing the credit limit of a credit contract that is unsuitable for a consumer. 6 One immediate matter to observe is that Div 3 of the Act looks not only to the consumer's financial situation, but also to the consumer's requirements and objectives. The consumer's requirements and objectives are necessarily personal to each consumer, and reasonable inquiries of the consumer must be made about them by the credit provider. The focus on the consumer's financial situation should similarly be upon the individual consumer and their own circumstances. Undoubtedly, as the assessment of unsuitability is made prior to the credit contract being entered into, and involves an assessment of future compliance with the consumer's obligations under the credit contract, the assessment involves making a prediction. The assessment is about the likelihood of a consumer being unable to comply with the consumer's financial obligations under the credit contract, or being only able to comply under substantial hardship. 7 However, to be a reliable prediction it should be based on all information currently available or reasonably available to a credit provider. This information can then be considered (and tested) by the credit provider, and some of that information may be disregarded as not impacting on the particular consumer's ability to comply with future financial obligations. In this instance, Westpac in making its assessment did proceed (as is to be expected) by looking at income and expenses. If expenses are relevant at all to an assessment of unsuitability, there is no reason to turn a blind eye to one aspect of those expenses, which (depending on an individual consumer's circumstances and predisposition) may be of significance. 8 It is also important to observe at the outset that one significant aim of the legislation is to have an assessment process so as to prevent consumers from entering into unsuitable credit contracts in the first place. The assessment procedure set out in the Act is introduced to facilitate this aim. Whilst coming to the content of the legislative provisions later, it is worth observing now that s 128 (and s 130) cast standalone obligations and create civil penalty provisions on the credit provider, quite apart from ss 131 and 133. If a consumer does enter into an unsuitable credit contract then part of the damage the legislation is seeking to address has already occurred, even though a credit provider may be liable pursuant to s 131 or s 133. 9 The primary judge failed to approach the legislation by reference to its focus on the individual consumer, and failed to appreciate the importance of the assessment requirements in the Act so as to prevent, in the first place, the entry into of a home loan that was unsuitable. The primary judge's approach can be seen at [82] of the primary judge's reasons: 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. 10 As far as legislative context is concerned, the relevant civil penalty provisions of the Act are contained in Ch 3, which is headed "responsible lending conduct". They impose specific obligations on credit providers beyond the general conduct obligations imposed on licence holders by s 47 of the Act. 11 Chapter 3 as a whole has a specific purpose to create and enforce a new norm of conduct for credit providers (and brokers) when entering into credit contracts. This context explains the very specific and detailed requirements of the provisions of Pt 3-2, and the very significant penalties to which those contravening those requirements may be subjected. Each of the requirements is a critical part of a sequence leading up to the credit provider making an assessment of unsuitability, by reference to the consumer's financial situation and requirements and objectives. 12 The relevant civil penalty provisions in the Act are a key aspect of a regulatory regime imposing prescriptive procedural obligations on the credit provider. This makes it evident that Parliament intended for the credit providers themselves to follow, in a step-by-step way, the responsible lending obligations in Ch 3 of the Act. 13 It is also to be observed by way of preliminary comment that the double negative "not unsuitable" has an important significance. The "not unsuitable" test is directed to avoiding harm to the consumer. The focus is not on whether there is benefit to the consumer. The inquiries and verification required by the Act (to be made prior to the assessment) put the credit provider in a position where it can assess whether making the loan is unsuitable, because it is likely that the consumer will be unable to comply with the consumer's financial obligations under the loan or could only comply with them by enduring substantial hardship. Those inquiries and verification are not suited to assessing what, if any, benefit the consumer will gain by borrowing. The assessment process in s 128 is there to protect the consumer from entering into an unsuitable credit contract.