Some bets are safer than others, and those backing a responsible lending class action against Westpac are onto a sure thing, or about as close as you can hope to get.
Australian law firm Maurice Blackburn is partnering with London-based litigation funder Harbour to sue Westpac for failing to properly check whether borrowers could afford the home loans they were granted.
At the moment, the Tate family is the face of the case, but the litigators are hoping thousands of others will join.
The Tates are claiming more than $400,000 in losses from their failed property investments, funded by Westpac loans they say they should never have been granted.
If Maurice Blackburn and Harbour can attract 5,000 others like them to join the action, even if their losses averaged half that amount, Westpac would be facing a billion-dollar lawsuit.
And we know there could easily be another 5,000 claimants out there, because Westpac admitted as much in its failed settlement attempt with the corporate regulator ASIC.
Although banking analysts point out that few people have managed to lose quite as much on property as the Tates, given that prices are higher in most places than they were when the responsible lending laws took effect in 2011, so many may not have damages to claim.
You see, the case Maurice Blackburn filed today is nothing new, it mirrors the case ASIC is currently bringing against Westpac in the Federal Court.
An illustration of how generous this cut can be is that the Australian Law Reform Commission is considering a cap so that class action lawyers and funders can’t between them take more than half of the compensation awarded.
So, for a minimal upfront outlay to lodge the case, the two companies have staked their claim to a potential payday worth hundreds of millions of dollars.
In the end, if the class action succeeds, the only unambiguous winners are likely to be the lawyers and litigation funder — the aggrieved customers get back only what is not soaked up in legal costs (although this is better than nothing), while current borrowers may see higher interest rates and Westpac shareholders lower dividends as the bank tries to recoup its losses.
Class actions often lean on ASIC investigations
As with many of these class actions following hot on the heels of ASIC court cases, Maurice Blackburn’s statement of claim relies heavily on material unearthed by the corporate regulator at taxpayer expense.
If it wasn’t for ASIC’s inquiries, and its coercive powers, Maurice Blackburn would have to seek “discovery” of the relevant documents from Westpac, a lengthy and expensive legal process that doesn’t always turn up what you hope for.
The law firm’s staff would then have to sift through those documents to find the relevant ones and build a case from scratch — again a costly process.
Ian Ramsay, a professor of corporate law at the University of Melbourne, says that’s why class actions often follow regulatory action.
“The regulator expends resources obtaining information, which then facilitates private litigation.”
Maurice Blackburn’s principal lawyer Ben Slade acknowledges that the public availability of key documents through the ASIC v Westpac case was essential to forming its own statement of claim.
In fact, it is the current lack of information about the other major banks in this area that is a key reason why this class action is targeted at Westpac, with Maurice Blackburn seriously considering lawsuits against other banks as and when documents become available.
ASIC tests the waters
But not only does ASIC’s case provide much of the material for the class action, the regulator will also probably foot the bulk of the legal bill. Here’s how.
As ASIC v Westpac is already underway in the Federal Court, the class action won’t be heard until after that case is concluded.
Ben Slade acknowledges that a win for ASIC would be “very helpful” in prosecuting his clients’ case against the bank.
If the Federal Court adopts a hardline view on the requirements in the responsible lending laws to check borrowers’ capacity to make their repayments, and rejects the use of spending benchmarks like the controversial household expenditure measure (HEM), then it is hard to see what defence Westpac has left against the class action.
The best the bank can hope for is the difficulty many claimants may have in quantifying the level of financial damages they’ve suffered, because they got home loans they shouldn’t have. While property prices were rising such people were rare, now prices are falling in major markets they are becoming much more common.
If ASIC wins, odds are that Westpac would rapidly seek to settle the class action.
On the other hand, if ASIC loses there is a high chance that Maurice Blackburn would drop the class action, depending what reasons the judge gives.
While Ben Slade told reporters at the press conference that the class action “doesn’t descend into the finer detail of the ASIC case”, he admitted to me that it’s conceivable that an ASIC loss “may be a dampener on our claims”.
The most risky outcome for Maurice Blackburn, its clients and Harbour is one where ASIC and Westpac agree on a revised settlement that contains very limited admissions by the bank, meaning that both the substance of the case and the meaning of the law remain largely untested.
That is the outcome Ian Ramsay thinks is still most likely.
“Westpac will still have the same motivation not to agree to anything in a settlement with ASIC that would make it easier for a class action to succeed.”
And it could leave Maurice Blackburn and its clients diving in to murky waters littered with unseen obstacles.
If ASIC and Westpac can reach a settlement that is acceptable to the court — one that doesn’t get rejected for applying “admirable ingenuity” to “gloss over the the very real differences which exist between them” — that would reflect the pattern of the past.
ASIC has traditionally tended towards doing deals with alleged corporate wrongdoers, accepting “enforceable undertakings” and court settlements to avoid lengthy, and costly, legal battles that it often loses.
In some cases, including one discussed in detail at the royal commission, the regulator was asking companies whether the terms of the agreements were acceptable, and even allowing them to see the draft press releases announcing the penalties.
That’s meant that, at least until now, class action lawsuits supported by litigation funders were often essential to enforcing corporate law in Australia — given that ASIC’s penalties were so light, companies, their managers and directors were much more likely to fear Maurice Blackburn or one of the other class action firms than they were the regulator.
Appearing before the commission in November, new ASIC boss James Shipton said the regulator was going to take a tougher approach, including a lot more court action.
But ASIC’s willingness to settle the Westpac case for $35 million — which was demonstrably less than the profit the bank made from the allegedly irresponsible loans — highlights there is still some way to go in achieving penalties that truly strike fear into corporate Australia.
First mover advantage
So why don’t Maurice Blackburn and Harbour wait until after the ASIC v Westpac case was resolved before launching their class action, you ask?
It’s a simple case of first mover advantage.
The class action and litigation funding field is a crowded space these days, and you can bet there is a flock of law firms and their financial backers circling over Kenneth Hayne’s final report and related ASIC actions looking for carcases to pick apart.
By filing its case, Maurice Blackburn has staked its claim over this limb of Westpac’s wounded body.
Not only is the firm likely to attract the bulk of prospective litigants, being first also gives it some precedence over other firms that may file later when a court wants to whittle it down to a single suit.
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