Judge dismisses ASIC case against Westpac. Will this create differentiation amongst the big banks?

This is big news - a judge has thrown out a fine ASIC imposed on Westpac for using a proxy for actual expenses when assessing mortgages: https://www.abc.net.au/news/2019-08-13/westpac-asic-responsible-home-lending-case-banking/11407742 . 

A lot of the house price slowdown in Australia last year was because the banks were going to extra lengths to validate expenses - with limited processes to do so and no validated model for assessing risk given a customers actual expense level.  

Before the action by ASIC, there was a lot of "grey" area around where responsibility lay for determining a borrowers ability to service a mortgage. Was it the banks responsibility to validate your actual expenses, or was it the responsibility of the borrower to give accurate information? The banks lived comfortably in this grey area and developed mature assessment models and frequently used proxies for this information, such as the Household Expenditure Measure.

When ASIC brought the case against Westpac, it was ASIC attempting to turn the "grey" into "black and white", clearly putting the responsibility onto the banks to prove serviceability. This was reemphasised during the Hayne Royal Commission. The issue, and where things have come unstuck for ASIC, is that it wanted the banks to use the current level of expenses to assess the serviceability of the loan.

The obvious challenge with that is that a mortgagee would likely, rationally, adjust their expenses to service their loan in the event of issues. Essentially, the judge agreed that this is likely the case - using extreme examples of wagyu steak and caviar.

The original fine on Westpac and the Hayne Royal Commission's subsequent significant criticisms of using HEM to assess serviceability has led to the banks making dramatic changes to their processes. These changes initially slowed mortgage approval processing times down dramatically, reduced the percentage of loans approved (or the amount a borrower could lend) and when combined with the enforcement of caps on the amount of investor loans the banks could issue, it caused house prices to drop in Australia by 2.4%, with Sydney dropping 7.8%.

I have direct experience with this process, as I bought and sold houses last year. It was clear that the banks hadn't established their processes and credit decisioning models for the new regulatory expectation. It meant long delays in people being able to make offers, creating nervous vendors and thus price reductions. On the buy side, I saved money, on the sell side I didn't get as much as I might have just 6 months earlier.

The judgement against ASIC provides the banks with very interesting choices and may lead to some differentiation amongst the banks. They could chose to revert back to defaulting to HEM which would be a less costly, more efficient approach. However, since they now have better processes and risk frameworks from the increase in data they are collecting, maybe they will continue to rely on real information from borrowers. Potentially, they could build on these foundations of better data and processes.

As open banking / consumer data rights rolls out, they will have even more information, faster in order to guide their credit decisioning processes. It is possible that they can price differently with the additional information they are gathering.

I am sure the strategy teams will now be hard at work to determine how they react to the judgement. It could lead to some really interesting competitive differentiation!

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