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BFCSA: 'Mr Dickens, what's your income and what are your expenses?'

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'Mr Dickens, what's your income and what are your expenses?'

Australian Financial Review May 14, 2019 5.14pm

Misa Han


Westpac has delivered a scathing attack on the corporate regulator, saying its "19th century approach" of fixating on the formula of income minus expenses does not stack up in the 21st century environment.

ASIC and Westpac are fighting in the Federal Court over whether the bank lent irresponsibly because it relied solely on a conservative benchmark in estimating household expenses.

In his closing submission on Tuesday, Westpac's barrister, Jeremy Kirk, SC, likened ASIC's approach to acting like "19th century accountants keeping a book" as the 19th century author Charles Dickens walks in.

Mr Kirk mockingly said: "Mr Dickens, what's your income and what are your expenses?"

Westpac's defence is that its automated decision making system applied more than 200 rules and if a home loan application failed any of the rules, it would be declined or referred for manual assessment.

It says one of the rules included the "70 per cent ratio rule". which meant customers were referred for manual assessment if their declared expenses exceeded 70 per cent of their after-tax income, or roughly 50 per cent of their before-tax income.

One of the controversies in this case is Westpac's reliance on the household expenditure measure (HEM) benchmark, which ASIC says is too conservative a measure that does not take into account customers' unique circumstances.

However, Mr Kirk said a benchmark could be more reliable when in fact customers are poor at estimating their expenditure and "in some instances, downplay it".

Westpac is also fighting the allegation it breached responsible lending laws 154,351 times by failing to assess customers' ability to meet the higher repayments when interest-only periods expired.

However, Mr Kirk said on average customers had interest-only home loans for five years and four months, not the life of the loan, because they generally crystallised the benefit of the increased property value and "move up", he said.

He said many first home buyers would also want to start a family and had additional expenses in later years, and it would be "most surprising" if in the 21st century banks were required to probe into their living expenses over the life of the loan.

"Do we have to say, 'Are you planning to have children and if so, when? How many children?' "

He said banks could not make a "complete prediction" of customers' income over the life of the loan, as income might go up or stop altogether over time.

In his reply, ASIC's barrister, Jeremy Clarke, SC, said Westpac was required by law to assess customers' home loan application not only from their own perspective, but from the perspective of consumers.

He said Westpac's 19th century analogy was a "great line if it was a year 12 debate, but it's not".

Mr Clarke said Westpac's 21st century system should have adapted to meet the requirements of the new law.

"In reality, Westpac wanted to continue with its existing system and tinker at the edges."

He said ASIC did not discourage the use of new technologies, systems and models but Westpac was required to also have a system that addressed the extra requirement introduced by the lending laws.

"Westpac failed to make this adjustment in line with the law," he said.

Justice Nye Perram will deliver his judgment at a later date. This decision will be important because Commissioner Kenneth Hayne in the banking royal commission final report refrained from making a recommendation on the issue because of this case.

He said if the court case revealed a deficiency in the law's requirements for banks to verify a customer's situation, then the government should move to amend the law "to fill in that gap ... as soon as reasonably practicable".


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