Two important consumer credit decisions have been released recently. The first from the Full Federal Court of Australia, and the second from the New Zealand Court of Appeal.
ASIC v Westpac Banking Corporation – latitude given to lenders in determining how to conduct suitability assessments
In a 2:1 majority, the Federal Court of Australia has dismissed the Australian Securities and Investments Commission's appeal against the decision of Justice Perram in the Federal Court in ASIC v Westpac Banking Corporation [2019] FCA 1244. In doing so it has confirmed – in Australia – that the credit provider has the flexibility to choose how to conduct its suitability assessments.
Justice Perram's first instance decision is memorable for its colourful observation that "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." The Full Federal Court's decision endorses the outcome of that decision, but in more modest language.
Australian law requires lenders to assess suitability of loans for consumers. ASIC alleged that Westpac breached this obligation by failing to have regard to living expenses declared on home loan applications between 12 December 2011 and March 2015. Instead, Westpac relied on a statistical estimate of the household expenditure required for a reasonable standard of living based on customer circumstances through using an automated decision system (the "HEM benchmark") which measures household expenditure and hardship across Australia.
Using that process, consumers would complete a form that collected estimated expenses, but the automated system did not take into account declared expenses beyond liabilities (such as rent and child maintenance) unless these expenses exceeded 70% of the verified monthly income.
A majority in the Federal Court held that credit providers do not have to take into account all information obtained from making reasonable inquiries about the consumer’s financial information. Creditors must meet the responsible lending principles, but how to do so is not expressly dictated by the legislation. It also found that Westpac did, in fact, take into account the declared living expenses as part of the 70% ratio rule.
Although not discussed in the judgment, amendments were made to ASIC's responsible lending guidance in December 2019, reflecting ASIC's belief that Justice Perram's decision left too much uncertainty around what steps are required of a lender. New guidance was introduced in relation to the use of benchmarks and, while the guidance remains principles-based, more detail has been provided as to how lenders might assess a borrower's living expenses. There are various references to Justice Perram's reasoning in the guidance and it will be interesting to observe the extent to which this most recent judgment is ultimately reflected in ASIC's guidance.
Implications for New Zealand?
Although New Zealand's consumer credit regime is conceptually similar to Australia's, lenders should not expect the same approach to suitability assessments to be adopted in New Zealand Courts. In particular, New Zealand's responsible lending regime is about to become much more prescriptive than Australia's. Among other obligations, the lender responsibility principles in section 9C of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) require lenders to make reasonable inquiries before entering into an agreement, so as to be satisfied that it is likely that:
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the credit or finance provided under the agreement will meet the borrower's requirements and objectives (commonly referred to as a "suitability" assessment); and
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the borrower will make the payments under the agreement without suffering substantial hardship (commonly referred to as an "affordability" assessment).
Like Australian law, while the CCCFA requires lenders to meet the lender responsibility principles, it does not currently prescribe how they must do so (although the Responsible Lending Code provides detailed, albeit non-binding, guidance as to how lenders may comply with the lender responsibility principles).
In a dissenting judgment in the Westpac decision, Justice Middleton noted that there were no relevant regulations prescribing the particular inquiries or steps to be made or taken by a lender under the suitability assessments required by the NCPP. This will shortly be a point of distinction for New Zealand. Prescriptive requirements for affordability and suitability assessments are set out in the Credit Contracts and Consumer Finance Amendment Regulations 2020 (currently in draft).
Among other requirements, the draft regulations specify the information that lenders must collect and assess for suitability assessments (including, for example, the maximum amount of credit or finance sought by the borrower, the purpose of the credit or finance and whether the borrower requires credit on an ongoing basis). There is also a set of obligations dedicated to the treatment of a borrower's likely relevant expenses. This requires lenders to (among other things) obtain a categorised statement of the borrower's current relevant expenses and verify those expenses with reference to at least 90 days' worth of transaction records. The commencement of the regulations was delayed due to COVID-19, but current indications are that they will come into effect no earlier than 1 October 2021.
The Westpac case demonstrates a judicial reluctance to impose prescriptive obligations on lenders. However, in light of the draft regulations and the detailed guidance provided by the Responsible Lending Code, the same approach cannot be expected in New Zealand, at least once the reforms are in force. A lender failing to obtain the information required, or disregarding information it has collected about a borrower's financial position, is unlikely to meet its obligations under the New Zealand regime.
Harmoney Ltd v Commerce Commission [2020] NZCA 275 – "Harmoney is no mere matchmaker"
The New Zealand Court of Appeal has, in its judgment on 8 July 2020, upheld the decision of the High Court that Harmoney, a web-based peer-to-peer lender connecting investors with borrowers, is a creditor (subject to the CCCFA) and that its "platform fee" is a credit fee, which is thereforesubject to the statutory constraints on credit fees.
On a platform compared by Justice Brown to Trade Me and Tinder, loans were provided to borrowers, using cash invested by third parties, via a Borrower Agreement, Loan Contract and Loan Disclosure. Harmoney contended that its role in the process was as a broker and agent only – not the creditor under the relevant consumer credit contracts.
The platform fee charged by Harmoney was provided for under the Borrower Agreement and was described as "the fee payable by the borrower to Harmoney for arranging any Loan which settles". As such, the payment of the fee was dependent on the existence of a loan.
The High Court held:
- the credit contract comprised not only the Loan Contract document but also the Loan Disclosure document;
- Harmoney, investors and HITL (the named creditor, as trustee for the investors) were all creditors for the purposes of the CCCFA; and
- the platform fee was a credit fee because:
- it was payable by a debtor under a credit contract; and
- it was payable to Harmoney (as a creditor) in connection with a credit contract.
Harmoney appealed against all of the above findings. The Commission cross-appealed the conclusion that the credit contract did not also include the borrower agreement.
The Court of Appeal agreed with the High Court on all fronts, except for two:
- it considered that the Borrower Agreement also formed part of the credit contract; and
- it determined that, although Harmoney and HITL were creditors, the investors were not.
Harmoney argued that each of the Loan Contract, Loan Disclosure and Borrower Agreement served a separate and specific purpose. The Court noted that Harmoney's objective in crafting the arrangement through three discrete documents was readily apparent.
However, the Court held that the use of discrete documents was ineffective in circumstances where the definitions of the credit terms resided in the Borrower Agreement and the specific details of individual loans was set out in the Loan Disclosure, stating:
The degree of inter-relationship among the three documents is of such a nature that, on an objective analysis, they would be read by a reasonable observer as operating together. The interpretation of what is in effect a mosaic of documents governing the loan arrangement does not involve a "brushing aside" of the documents in the sense described in Buckley & Young Ltd v Commissioner of Inland Revenue [in which the Court stated different documents should only be brushed aside if and to the extent they were shams].
The approach taken by the Court of Appeal shows a preference for substance over form, and sends a clear message that Courts should look to the overall effect of the arrangement between the parties when considering contractual credit arrangements. Although the facts of Harmoney are unique, businesses should be aware that there may be limits to their ability to avoid the application of the CCCFA and limit compliance costs through the deliberate structuring of credit arrangements.