ASIC v Westpac judgment shows it's not always fair to blame the banks

It's being billed as Australia's "let them eat cake" moment: a federal court judge so "out of touch with the realities faced by most Australians" according Financial Rights Legal Centre chief executive Karen Cox that he suggested "borrowers ditch wagyu steaks and shiraz for cheaper food" to meet loan repayments.

Want to have your shiraz and drink it too? Picture: Louie Douvis

Want to have your shiraz and drink it too? Picture: Louie Douvis

Not only does this fundamentally misunderstand what Justice Nye Perram was saying - misrepresenting the substance of the case - it also ignores that the judgment holds the line on a very important point about personal responsibility and autonomy.

The case involved ASIC alleging that Westpac had breached responsible lending standards in every single loan it issued between December 12, 2011 and March 2015; some 261,987 times. Specifically ASIC claimed Westpac had to consider the declared living expenses of loan applicants, and that Westpac didn't.

Importantly, the judge found this was incorrect on the facts - Westpac did consider the declared living expenses of applicants - but also incorrect at law. Westpac did not need to consider whether the loan met some vague concept of "affordability" with respect to the applicant, only whether the applicant would be unable to meet the repayments, or "could only comply with substantial hardship".

It was in this context that the judge brought up extravagant food and drink options: not in the mistaken belief that this was standard fare for the average mortgagee, but to make the point that what someone had spent on luxuries prior to taking on a home loan is actually not that good an indicator of what they would have to spend on necessities once they have a large mortgage.

As any recent home purchaser can attest, seemingly small luxuries like takeaway dinners actually add up to substantial expenses over time.

It is up to the borrower to figure out if they can live with the repayments or not.

It would be possible to take this too far - there is a reasonable minimum below which it would be unreasonable to expect households to tighten their belt - fortunately, this too is recognised in the objective Household Expenditure Measure (HEM) standards.

The bank can't assume you'll live like an impoverished university student stretching a packet of noodles out into two meals.

But there is no good reason to impose a legal obligation on banks to delve into the personal habits of applicants to see what expenses could be reasonably trimmed and by how much.

Karen Cox suggested banks should have to get "applicants to demonstrate that they have reduced their expenditure - at least for a period - before applying a loan."

We know from this case that Westpac alone made more than 250,000 loans in three and a half years. Do they have to make these assessments every time or is it just marginal cases that get this paternalistic treatment? Given the likely racial, gender and age make-up of borrowers on the margins, won't this end up appearing horribly bigoted?

Specifically, imagine the outrage if Westpac had denied a middle-class Indigenous family a loan until they proved they could live up to Westpac's budget.

This is absurd. It is up to the borrower to figure out if they can live with the repayments or not. A bank should be entitled to assume that someone applying for a loan has already made that decision.

And if someone doesn't have the basic financial literacy to be able to calculate a budget for mortgage repayments, they shouldn't be applying for a loan in the first place.

But some, such as the ABC, have also criticised the judgment on other grounds, arguing it sets responsible lending standards so loose it could have adverse macroeconomic consequences, potentially even leading to a recession.

This is an odd construction. First, there is little or no evidence cited that marginal changes in lending practices by banks are big to enough to have a significant macroeconomic effect. Nor is it self-evident that tightening lending standards is the correct policy lever among all the various ones government could potentially pull to influence economic growth.

It's hard to even state with confidence the overall macroeconomic effect of tightening standards would be positive.

Beyond this is the simple point that it's far from clear it's a good idea for the government to prevent a willing borrower, and a willing lender, from entering into what they believe is a mutually beneficial transaction.

Requiring a lender to second guess a borrower's decision about their own financial circumstances and capacity - when the lender can never know the borrowers' position as well as the borrower does - simply must result in a less economically efficient outcome more often than not.

Remember, this is not about potentially subjective judgments about whether or not a borrower could handle unexpected job loss or a serious illness. What is being argued is that banks should have to make a call on whether the changes in living standards that would come about because of a loan are reasonable.

On what possible basis is this a good idea?

The last thing we want is for banks to be dictating to borrowers how much they can spend, and on what. Nor do we need another paternalistic apparatus cooked up by government designed to protect the minority of the population who are incapable of making rational decisions about their living situation.

We saw similar thinking arising from the banking royal commission: the idea that banks should somehow prevent borrowers from making bad decisions, and even that banks should be responsible for borrowers' bad luck.

And right on cue, we see claims that this decision means that royal commission has been ignored. But the purpose of the royal commission was to protect consumers from misconduct by banks: it was never about making banks protect consumers from themselves.

Though it may seem counter-intuitive in our over-protective modern society, pushing responsibility back onto individuals to exercise greater care when taking out financial products may result in better outcomes. Individuals will protect their own interests better than banks ever will. Allowing government to abdicate those decisions on their behalf would be a mistake.

Justice Perram's excellent judgment has done us all a favour and reminded us it's important to take responsibility for our own decisions.

  • Simon Cowan is research director at the Centre for Independent Studies.
This story It's not always fair to blame the big bad banks first appeared on The Canberra Times.