The Australian Securities and Investments Commission (ASIC) has announced that it will not appeal to the High Court against the decision of the full Federal Court in the Westpac ‘responsible lending’ matter. Background.

ASIC will review its updated regulatory guidance RG 209 (Credit licensing: responsible lending conduct) and will consider what implications the Federal Court appeal decision has for that guidance.

Current position
Nothing in the decision changes the key responsible lending obligation that credit licensees must not suggest, assist with, or provide a credit product that is unsuitable for a consumer.

The case was concerned with the meaning of Section 131(2)(a) of the National Credit Act which deals with when a credit contract must be assessed as unsuitable.

Section 131(2)(a) states that a contract will be unsuitable for the consumer if, at the time of the assessment, it is likely that the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship, if the contract is entered.

The effect of the original decision and the appeal can be summarised as follows:

• The lender must answer the section 131(2)(a) question to ensure the loan is not unsuitable.
• The assessment will involve taking into account the inquiries you have made about a consumer’s financial situation (but not necessarily all that information).
• The Act leaves it open to the credit licensee to decide:
  • what inquiries it will make under sections 130(1)(a) and (b), provided that those inquiries are reasonable;
  • what steps it will take to verify the consumer’s financial situation under section 130(1)(c), provided that those inquiries are reasonable; and
  • how it will use the results of its inquiries and verification to make the unsuitability assessment, provided that it in fact assesses whether the contract will be unsuitable for the particular consumer.

  Nothing in the decision affects the new design and distribution obligations for lenders, the best interests duty of mortgage brokers, the Banking Code, or APRA prudential standards.

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