No mortgage relief in Hayne

The Hayne pain is here. The most important finding for the economy in the final report is the Commission’s view of the Household Expenditure Measure (HEM) on which its find is quite subtle:

1.2.1 The NCCP Act When dealing with particular case studies in the Interim Report, I concluded that there had been conduct that might amount to a contravention of the NCCP Act. Those conclusions recognise that the relevant provisions of the NCCP Act hinge on two distinct prohibitions:

• first, the requirement, by section 128, not to enter a credit contract unless the prescribed inquiries and verification have been made; and

• second, the requirement, by section 133, not to enter a credit contract or increase a credit limit if the contract is unsuitable.

The first requirement looks to what a credit licensee must do before entering a contract; the second looks to whether, according to the prescribed criteria, the contract that is made is unsuitable.

The conduct identified in the Commission’s hearings pointed towards banks tending to conflate the two requirements into a single inquiry about serviceability of the loan. This conflation was most apparent in connection with unsolicited offers made by banks of overdraft limits or credit card limit increases. Offers of these kinds were made according to the bank’s assessment, from the customer’s past history, of whether the customer was likely to be able to service the amount of credit being offered. But, as I pointed out in the Interim Report, and note further below, the NCCP Act obliges a licensee to make reasonable inquiries about a consumer’s objectives and requirements, to make reasonable inquiries about a consumer’s financial situation and to take reasonable steps to verify the consumer’s financial situation.

Both income and expenditure must be considered in first inquiring about, and then verifying, the customer’s financial situation. I said in the Interim Report that I consider that verification means doing more than taking the customer at his or her word. I do not consider this to be a novel proposition.

Since the first round of the Commission’s hearings, a number of banks have altered their lending processes and procedures by introducing additional inquiries about a borrower’s financial situation and by taking some further steps to verify that situation. These changes may in part be responses to concerns expressed by the Australian Prudential Regulation Authority (APRA) as a result of the targeted reviews undertaken in 2016 and 2017. Those reviews identified a number of deficiencies in the processes that banks used to verify borrower expenses, including insufficient controls to verify information and a significant rate of default to the Household Expenditure Measure (HEM), which I discuss further below.

By way of just three examples of such changes, CBA has now introduced mandatory expense breakdowns, it has updated standardised serviceability calculators and systems to identify customer commitments with other financial institutions, and it has increased the number of expense fields in its application forms. ANZ has introduced a more detailed breakdown of living expenses for home loan applications, and is moving towards using digital tools to capture and categorise data about a customer’s current expenditure. As I said in the Interim Report, since March 2018, Westpac has expanded the number of expense categories included in its home loan application process from six to 13, and made some categories mandatory.


In the Interim Report, I said that using a statistical measure of ‘the median spend on absolute basics’ plus the 25th percentile spend on discretionary basics as a default measure of household expenditure does not constitute verification of a borrower’s expenditure. I remain of that view.

It is necessary for me to say something about two developments relating to benchmarks that followed the Interim Report.

First, in November 2018, Perram J of the Federal Court refused to accept a proposal made jointly by ASIC and Westpac to resolve proceedings brought by ASIC alleging that Westpac had contravened section 128 of the NCCP Act. The parties proposed that the Court impose a civil penalty of $35 million on Westpac for contravening the NCCP Act in assessing the suitability of home loans for customers in the period between 12 December 2011 and March 2015. Westpac had used the HEM in its assessment of the loan applications.

In his reasons for refusing to make the orders the parties had proposed, Perram J said that the conduct expressed in a declaration proposed by the parties was not conduct that ‘could possibly be a contravention’ of section 128.

I observe that the Statement of Agreed Facts filed by the parties for the purposes of the application determined by Perram J said nothing at all about ‘verification in accordance with section 130’ (as mentioned in section 128(d)) and nothing about the operation of section 130(1)(c) requiring a licensee, for the purposes of section 128(d), to take ‘reasonable steps to verify the consumer’s financial situation’.

The proceedings remain undetermined and, absent some different agreement being reached and resulting in final orders disposing of the proceeding, await trial and judgment. That being so, it would not be right for me to offer any view about the conclusions reached by Perram J or to say anything at all about the reasons that have been published. At the time of writing, the proceedings between ASIC and Westpac remain on foot and may well go to trial. The court processes must play out without commentary from me. If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable.

The second development to notice is that banks are reducing their reliance on the HEM. During the seventh round of hearings, Mr Matthew Comyn, the CEO of CBA, told the Commission:

[W]e’re doing a better job of discovering what a customer’s declared living expenses figure actually is, and, therefore, HEM as the prudent floor is being relied on less and less. I would certainly like to see it in the 50s very soon. I’m very confident it’s going to be at that level very soon. As it gets towards 50 per cent, given the nature of the way the HEM benchmark is designed … just mathematically, somewhere around 40 or 50 per cent should be largely reflective of the underlying expenditure.

In this comment, Mr Comyn rightly acknowledged that, by improving processes for inquiries and verification, banks’ reliance upon the HEM or other benchmarks is likely to reduce. This is unsurprising, but important. It is important because it underscores the point that while the HEM can have some utility when assessing serviceability – that is to say, in assessing whether a particular consumer is likely to experience substantial hardship as a result of meeting their obligation to repay a line of credit – the measure should not, and cannot, be used as a substitute for inquiries or verification. As ASIC rightly indicates in its Regulatory Guide relating to responsible lending conduct:

[u]se of benchmarks is not a replacement for making inquiries about a particular consumer’s current income and expenses, nor a replacement for an assessment based on that consumer’s verified income and expenses.

I consider that the steps that I have referred to above – steps taken by banks to strengthen their home lending practices and to reduce their reliance on the HEM – are being taken with a view to improving compliance with the responsible lending provisions of the NCCP Act. If this results in a ‘tightening’ of credit, it is the consequence of complying with the law as it has stood since the NCCP Act came into operation.

In saying this, I think it important to refer to a number of aspects of Treasury’s submissions in response to the Commission’s Interim Report. Treasury indicated that ‘[t]here is little evidence to suggest that the recent tightening in credit standards, including through APRA’s prudential measures or the actions taken by ASIC in respect of [responsible lending obligations], has materially affected the overall availability of credit’. Rather, Treasury considered that ‘to the extent that firms are correcting lax credit assessment practices, there has likely been an improvement in the credit quality of marginal borrowers’. As Treasury also said, finding that ‘some lenders have not consistently undertaken reasonable inquiries to verify the financial position of potential borrowers, suggests that not all possible information (including quality of information) relevant for differentiating between the quality of borrowers has been fully utilised across the industry’. But, taken together, Treasury said that the considerations it took into account (including the Reserve Bank’s analysis indicating that most borrowers in the home mortgage market comfortably meet existing serviceability criteria) ‘suggest that the housing market has the capacity to absorb some adjustment in the application of lending standards necessary to meet the requirements of existing [responsible lending obligations] without imposing unwarranted risks to macroeconomic outcomes’. Put another way, if ‘appropriately managed, ensuring the industry consistently meets the requirements of existing laws will likely enhance rather than detract from macroeconomic performance’. To my mind, these are important observations.

In short, then, Hayne has been rather clever:

  • he has not outlawed the use of HEM owing the pending WBC vs ASIC case;
  • but he has clearly staked out the moral territory that it should not be used and implied that the move away from use of the HEM must continue;
  • moreover, he has used the corrupt RBA and Treasury analysis against their own monstrous campaign to return banks to overly loose standards.

For lending standards from here, then, the outcome of WBC versus ASIC is going to have some bearing on the legality of benchmarks. That said, Hayne clearly makes the value judgement that HEM does not comply with the spirit of the NCCP if not the law. That certainly does not rule out, and may encourage, the private class actions underway that in part attack the use of HEM as predatory.

Can we see the influence of the corrupt RBA and Treasury on not ruling HEM illegal? Perhaps but the referral to ASIC versus WBC is credible so maybe not.

Second, the moral moat that Hayne has established around the use of HEM makes the bank’s use of detailed credit assessments the new normal and a regime that will be very difficult to reverse by captured regulators.

Third, the ill-defined legality of benchmarks at this point opens some possibility of political input. That is going to be most important vis Labor given it will likely be the government.

In conclusion, I can’t see why the current credit squeeze, which is nothing more than the use of expense and income assessments that are the basis of banking, will ease. The risk to bankers of future prosecution is simply too high to go back to the bad old days of benchmarks.

A final note on NAB and its management, the only bank to have not reformed the use of HEM:

NAB also stands apart from the other three major banks. Having heard from both the CEO, Mr Thorburn, and the Chair, Dr Henry, I am not as confident as I would wish to be that the lessons of the past have been learned. More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly. I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the board had dealt with some issues. I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and NULIS on this account is likely to be more than $100 million. I thought it telling that in the very week that NAB’s CEO and Chair were to give evidence before the Commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas. Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains.

That is surely the ignominious end of both as Australian bankers and the death knell of HEM at NAB as well.

My best guess is that we see little change in lending standards before Labor wins mid-year. Even afterwards it’s going to remain very difficult. If a few things fall the banks way we may end up with something like what ASIC has been working on, previously at the AFR:

The corporate regulator is set to clarify how lenders should be meeting their responsible lending obligations, in a move that may entrench a modified version of the controversial Household Expenditure Measure and allow for technology to help banks make faster decisions.

With the final report of the banking royal commission, to be released on Monday, expected to provide a verdict on whether banks are doing enough to check customers’ living expenses before they lend, banks want more guidance from the Australian Securities and Investment Commission to avoid prosecutions.

…ASIC’s existing regulatory guide does not specifically mention the HEM but the revised document could suggest HEM has a role, although stipulate that banks use an income-adjusted version of the index to make living expense requirements more accurate for higher income borrowers.

That would not be as bad as it sounds given the HEM is a poverty index fine for people who are actually low income and expenses. It gets more distorting as it moves up the income scale, via Endeavour:

Thankfully, the RBA appears to have failed to corrupt the Hayne process and will have to do what it should have done all along instead: cut the cash rate.


  1. Mr SquiggleMEMBER

    All this, PLUS a recommendation to ban commission payments from lenders to mortgage brokers….sounds like a busted business model to me…how can you make ends meet in a broking job without regular commission from all those housing loans

    • Mortgage brokers are fvcking useless parasites anyway. They’re only required and relied upon by fools and suckers. Good riddance to the mortgage broker gig.

      • The whole industry needs to be cleaned up so it’s easy for the mug punter to understand the difference between each mortgage package. It’s made super confusing and full of jargon anyway so it’s almost impossible to determine what is the best deal.

  2. A perfect storm of epic proportions – as many here have suggested for years.

    Today we saw accelerating property price falls crash into HMAS Haynes. I doubt any banker is thinking about poking his/her head over the parapet and relaxing lending standards. Keeping a low profile, getting the house in order, and avoiding jail are the only things bankers will be thinking about.

    Australia looks increasingly likely to enter a recession, with retail and infrastructure struggling.
    Concern about the standard of high rise apartments.
    China slowing
    Election uncertainty – x 2 in NSW
    And the ALP determined to kick another leg out from under the housing market with investment property reform. Its a good idea, but they may blink as things will be so bad in another few months.

    To anyone thinking of buying…… This isn’t a falling knife anymore. Its a falling industrial strength cutting laser that will take your hand clean-off.

    PS Maybe JF reads MB. The village idiot grin has gone.

    • proofreadersMEMBER

      Nah – nothing has really changed with JF. He was on 7.30 last night, trotting out all the usual crap and defending the indefensible.

  3. The comments about the findings in the Westpac case were bordering on the churlish given that the Westpac case was heard after the Interim Report.

    • I think it wa actually quite well measured. Possibly too well measured and restrained.

      Remember that Hayne’s report, as Commissioner is not delivered in a judicial capacity, nor in the confines of the existing law. So he could’ve just said that Perram’s decision in Westpac demonstrated that the law was deficient and too loose, if Westpac’s conduct had not contravened ss. 128/130 and so the law needs to be changed and tightened to outright forbid the sort of conduct that Westpac engages in. And the government would’ve done it.

      But he didn’t write that. Instead what he wrote acknowledged his continued (albeit informal) influenence as a former member of the bench of the high court and offered an interpretative view of the Act… ultimately trying to softly guide (educate), while claiming to be trying not to ‘judge’.

      • That’s pretty much how I read it Peachy. To me Hayne seemed to be saying Westpac deserves to go down. And if it doesn’t go down then there’s something wrong with the law that needs to be fixed.

      • As its currently before the courts, there wasnt much he could say – sub judice rules. So either the banks are going to be found guilty by the courts, and suffer the appropriate punishments, or if there is a loophole that gets them off, he is suggesting that it should be closed.

    • Not sure I understand, the settlement was rejected and will now go to trial; one hopes that after ASIC was slammed for its corrupt handling of the case to date, they will have actually locked down particular instances of breach in time for the trial. It is a critically important case, as it specifically addresses the legality of using HEM as a default measure. ASIC is under immense pressure, both to clean up it’s act… and to maintain the status quo. Men of integrity and honour seem an increasingly rare breed.


    20 years broking | 04 Feb 2019, 04:48 PM
    This is the worst news for the Australian Economy. Sell your houses. Sell everything. The credit crunch hasn’t even started as yet

    RIP Broker | 04 Feb 2019, 05:46 PM
    Thanks Mr Hayne, you have just placed 10,000 Brokers in the unemployment queue plus all the 2nd tier lenders with no Branch presence and their support staff. There goes any competition in our industry.

    Former Third Party Exec | 04 Feb 2019, 05:15 PM
    The apocalypse is here!

    JG | 04 Feb 2019, 05:03 PM
    Broking is now dead and buried .

    • The focus on brokers and their commission is a red herring. The RC was meant to be about banking misconduct. The banks were ultimately responsible for approving whatever a broker put to them.

      This is all part of the game of mates, now the banks don’t have to pay brokers and can keep the commission to themselves.

      Given the majority of savvy aussies are financially illiterate, without brokers shopping the business around the big 4 will be able to gouge people even more.

      • Not necessarily. Banks have outsourced a lot of manpower to mortgage brokers, and if brought back in house, its going to cost them a lot to re-establish the branch networks and back office support needed. Plus direct marketing costs to get customers to come to them in the first place, as practically nobody is going to go approach 5-6 lenders to go through the mortgage hoops in order to shop them around. I imagine it will be more difficult to get market share off competitors so banks will need to sharpen their other banking offers to acquire customers prior to them wanting a mortgage, and offer bigger headline discounts to get mortgage customers to change banks.

    • Holy fool this is amazing.
      Turns out if you let your industry get full of unscrupulous individuals it can get shut down.
      Serves em right.

    • So how about we pay brokers what they are worth?
      All they are doing is helping someone navigate the complexities of a financial transaction, a bit like a tax agent. So $70 an hour should cover it.

    • On the other hand if the broking industry could somehow harvest all these tears there could well be a new product offering.

      ‘Vials of mortgage brokers tears’ could sell well! Add it to your favourite drink!

    • Mortgages still need to be written, assessed and verified. Those 10,000 brokers can become the new bank lending managers. Instead of working for commission, they will now work for salary.

  5. ceteris paribus

    There are two levels to all of this. A retail level of shabby transactional ethics bordering on the criminal, with customers, the general public- e.g. money taken without service, misrepresentation and deception of the customer, shady products, fee gouging etc. This level focuses on the service agencies- banks, other financial institutions, advisors and other intermediaries. This level has been the primary focus of the Commission’ work and relevant fingerprints have been taken.

    Then there is a higher level- the economic political, policy and regulatory level, which not only has been characterised as casual and permissive but which may also have contributed to, or at least reinforced, aspects of unwanted culture and behaviours at the agency level over a long period of time. Lots of murmurings of self-interested influence and collaborative understandings here. But where do you start to look for and find finger prints? A free pass for positional power?

  6. proofreadersMEMBER

    “That is surely the ignominious end of both as Australian bankers”

    Nah – Straya doesn’t do common sense, accountability or humility. Straya’s different.

    • Don’t think so.
      The very first recommendation is “Recommendation 1.1 — The NCCP Act The NCCP Act should not be amended to alter the obligation to assess unsuitability.”
      And the govt response is “The Government agrees to this recommendation and the Commissioner’s findings that ‘not unsuitable’ remains the appropriate standard for responsible lending obligations within the National Consumer Credit Protection Act 2009 (NCCP Act)”, pp 7
      I think they put that question to bed early. And I really don’t think they could be clearer than that.

  7. So…. it’s been a couple of hours and there has still been no post by the usual suspects about the “No Hayne Relief” headline. I am disappoint.

  8. Stewie GriffinMEMBER

    The Haynes report is little more than a damp squib. Yeah, if you are in mortgage sales then yes it has some impact, there’s some fiddling around the edges in regards to Superannuation and Life Insurance, but by and large the RC recommendations are a complete non-event.

    The supra-regulator to reside about APRA and ASIC is a total joke – it is to operate in secret. None of the findings address the lack of openness and transparency between the Banks and their regulators. Zero structural reform – reserves, vertical integration, horizontal intergration, nada. Little more than a Neoliberal show trial, that at most will set up a couple Executives to face the courts for a few years to come…. they’ll drag on and on, be pleaded down and most likely result in few if any actual convictions.

    IMHO the Govts narrow terms of reference have resulted in an aborted mess. The only good thing to come out of this RC is the public hearings and the destruction of public trust.

    If there weren’t any other factors impacting the economy, the results of this RC would have banks as a raging buy.

      • Stewie GriffinMEMBER

        Yeah – but even then Haynes didn’t have the guts to kill it directly, only obliquely, just like the reforms in regards to mortgage brokers.

        It’s fcuking ridiculous that there is even such a thing – Banks should be the credit specialists. They own the credit, it is THEIR responsibility to source their customers.

  9. I told you this would be a flop, but MB wants you to believe something significant will happen, it wont ! As for negative gearing changes you are dreaming, you simply do not understand how this corrupt country functions if you think the government will go down the path of hurting investors and big business. Especially when most politicians own multiple properties themselves. Vote for Labor and you will regret the massive deficit we will be plunged into once that circus takes hold. Mb just wants your subscription money suckers and Van Onselen has been harping the same BS for years now !!

    • Property specufestor with GFC as his name, babbles on about how they’ll never let it crash. Classic.

      • No hope bum waiting for the world to crash, because it owes you something. Mb loves tossers like you, its their bread and butter.
        The world is too difficult and your jealously so strong that you hope everything crashes so you can have a laugh. Nobody waits for people like you, sorry princess.

      • Don’t get your knickers in a knot sweetheart, merely pointing out the obvious. Thanks for confirming my suspicions though. Just remember, it wasn’t your wife’s fault you ended up divorced, it was yours. You should’ve sold lol.

      • You can not be more than 10 years old. How did you even pay for your membership ? Mummy’s credit card ?

      • Don’t get your knickers in a knot sweetheart, merely pointing out the obvious. Thanks for confirming my suspicions though. Just remember, it wasn’t your Mums fault you ended up a moron, it was yours. You should’ve bought when you had your Mummy’s credit card lol.

  10. ASIC picked up another $170m in funding, but no heads rolled. Same regulators who’s mates all reside in the banks. Only in Australia

    • That’s exactly right but people can not see it. There is no law for the establishment and there is no hurting big business they run the show and the rest are insignificant. Once you understand that. then you can see where things are headed. Its political theater for the naive masses and that’s it. Bank stocks rose at the open yesterday why ? How did the market know the report would be a fizz well before its release ? All they need now is a rate cut and your little Royal Commission is a complete waste of tax payer cash. Bankers and Lawyers win every time

    • I think you’ll find that some of the new ASIC commissioners are actually fair dinkum about their jobs. And don’t give a toss about offending anyone. And don’t actually have any mates.

      • We’ll let’s see how it plays out. Do those honest guys in ASIC get a say, and if they do does it get acted on. The head of ASIC would need to be the hard head that will prosecute no matter what, and as far as I know it remains the same. I’ll give them a fair go, but seriously I’ve lost all faith in our system. We’re the heavy lifters in the economy tax wise and I think the overlords just see us as slaves. I worked briefly in FS, and all I saw was corruption.