The HEM and Hayne’s normative principles – credit data and the individual

Abstract

How has a method for calculating living expenses become a byword for distrust and confusion? The HEM encapsulates the mystery of calculation based on aggregated data and the dissolution of the individual into categories. It is at the centre of protracted litigation and legal interpretation of a relatively straightforward legislative provision designed to guide lenders and protect borrowers. It has featured in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The HEM or Household Expenditure Measure is a method to calculate indicative living expenses. It is described as “A measure of what families spend on different types of household items, calculated quarterly by the Melbourne Institute of Applied Economic and Social Research.” The HEMwas constructed at the request of the Risk Managers Roundtable, a group of lenders and others who met to discuss legislative and regulatory matters. The Melbourne Institute is the same body which devised the Henderson Poverty Line to measure poverty in Australia. The Commission of Inquiry into Poverty in Australia, first established in 1972, has been updated annually since that time. In about 2010 the Household Expenditure Measure was based initially on Australian Bureau of Statistics (ABS) information from the ABS Household Expenditure Survey 2009–2010 and is modified quarterly by the Consumer Price Index. This is then adjusted for the HEM by the intended geographic location of the loan applicant, marital status and number of dependents, but not income. In 2012, the Commonwealth Bank of Australia adopted the HEM as a method to calculate living expenses for the purpose of responsible lending obligations. Other lenders followed. It is used for home and car loans. The HEM is based on data to produce an indicative calculation of living expenses. It is not individual to any particular person. It is about categories of persons. The issue is, if a lender relies on the HEM as part of the calculation of whether a potential individual borrower has the capacity to repay a loan without substantial hardship, has that lender met his obligations under responsible lending laws? The regulator, the Australian Securities and Investments Commission (ASIC), says no. One bank, Westpac, admitted breaching the responsible lending laws and was prepared to submit to a penalty until the Federal Court rejected the application by both the regulator and the bank for the resolution. The problem as identified by the Court, was the parties did not agree why there was a contravention, nor how many loans were impacted and judged “not unsuitable” when they should have been assessed as unsuitable. 10 The next hearing is scheduled for six days following 6 May 2019. Into this mix enters the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Royal Commission canvassed various sectors of the financial services industry including financial advisers, insurance, and superannuation. The findings of the Royal Commission, unfolding each day as front page news and culminating in the Reports, outline the extent of misconduct. The Commission opened with hearings in 2018 on consumer credit, small business credit and later farm credit. Credit is at the heart of any financial system and has been of particular concern in Australia. In this country there are high levels of household debt, historically high levels of mortgage borrowing for home ownership, and recent coordinated steps by the conduct regulator, ASIC, and the prudential regulator, the Australian Prudential Regulation Authority (APRA) to wind back lending. There are two associated credit problems: some believe indebtedness is the result of the lender providing too much credit when they should not have; some believe they have been denied credit, and therefore business or housing opportunities, because the lender did not assess their applications correctly. Both overindebtedness and lack of access to credit bring into play questions of the normative values said to undergird Australia’s financial services system.