Securitization Impair Bank Lending Relationship

Question: Discuss about the Securitization Impair Bank Lending Relationship. Answer: Introduction: It has been reported by abc news on 2nd mach 2017 that ASIC is set to conduct home loan investigation not only into the operations of Westpac but also 11 other banks who have allegedly provided loans to individuals who do not have the capacity to repay them. It has been provided by Michael Saadat the senior executive of Australian Securities and Investment Commissions they had already set up the inquiry since the last two years (ABC News, 2017). The Australian watch dog over the conduct of corporations stated that they have initiated actions against Westpac but are also in process of extending their actions over 11 more lenders over Australia associated with breach of their duties. The AISC main intention behind the course of action is to ensure that they are able to minimize risks for the shareholders and consumers in the financial market. The AISC seeks promt action towards their assessment as it does not want the problem to manifest itself in the future. AISC also seeks to set an example for other public financial institutions so that they change their policies towards strict ethical and legal compliance. According to the AISC chairman the main issue before them is not the conduct of Westpac or the other institution but it is to deter them and other from doing such actions in the future. AISC has also provided that anyone who breaches the lending provisions would be subjected to a minimum penalty of $ 1.7 for each contravention. AISC has already initiated a federal court action against Westpac who have been alleged to have made seven breaches of law. Westpac have changed its approach towards providing loans following the actions of AISC. The main legal issue which has been identified in the media article are in relation to the duties of directors. The corporation act through its Section 180-184 provides the responsibilities which the directors of company have towards the organization. The directors have a duty to work in the best interest of the company and to use their best skills and diligence towards the operations of the company (Keay, 2014). In case the management of the lending institutions fail to provide their skill and diligence towards the lending system and the loans are subjected to the risk of becoming bad debts than the corporation would incur losses. The directors have a fiduciary duty towards the corporation to act in its best interest and actions which would lead to loss are a clear breach of the duty (Gerner-Beuerle, Paech Schuster, 2013). In the case of The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] (2008) 39 WAR 1 the court ruled the board of directors are accountable for all their actions towards the operation of the organization and they must ensure that their actions are towards its best interest as the faith of the stakeholders are bestowed in them. The stakeholders of the organization invest their money in the company and leave the day to day functions of the company in the hands of the directors. The shareholders therefore place their trust in the board of directors and expect them to work towards the best interest of the company. Therefore the duty to work in good faith and towards the best interest is not only an ethical duty but has been incorporated in the corporation act as a legal obligation to safeguard the interest of the shareholders (David Ausserladscheider, 2016). In the case of Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 it was provided by the court that the directors of the company owe a duty of fiduciary loyalty towards the operations of the organization. In the present scenario Westpac and the other financial institution have set standard criteria to assess the repayment capability of the consumers without analyzing their extra expenditure and way of living. This criterion is evidently against the duty to act in best interest as it would only lead to financial as well as reputational loss. The National Consumer Credit Protection Act 2009 chapter 3 deals with the lending obligations of a credit licensee under the Act. According to the Act the licensee is not allowed to enter into credit contracts with consumers which are not suitable for the consumers. It is the duty of the credit licensee to decide how they are going to deal with the leading obligations but they must ensure legal compliance. According to RG 209 it is the duty of the licensee to make accurate inquiry about the financial position of the consumer to payback the loans, verify the results of the inquiry made in relation to the financial situation and finally make assessment about the contract which would not be suitable for them. It is also an additional duty of the licensee to provide the final or preliminary assessment to the consumers if it has been requested by them (Lin, Liu Wang, 2017). However thorough the findings of ASIC it has been provided that Westpac has been involved in proving a fixed assessment for its consumers which is not sufficient to identify the financial situation of the diversified consumer group. The issue which has been pointed out to the article is not only harmful for the corporations and its shareholders but also to the consumers who avail loans through the financial institution. the corporations face the risk of incurring losses whereas the consumer face the risk of suffering difficulties for non-payment of the loans. In order to ensure that the financial institutions are more dedicated and strict towards their lending obligations an example has to be set before the industry which make the management think twice before the obligations are breached. In addition the provisions in relation to the lending obligations provide powers to the bank to frame their own criteria for assessment of the consumers. This is one of the major short comings of the provisions as the leniency and power induces the management not to be strict towards their lending obligations. The provisions have to be framed in such a way that each consumer is assessed according to the circumstances. The issu e can also be addressed by increasing the amount and frequency of financial penalties in relation to the breach of lending obligations and directors duties. References ABC News. (2017). ABC News (Australian Broadcasting Corporation). [online] Available at: https://www.abc.net.au/news/ [Accessed 21 Mar. 2017]. David, B., Ausserladscheider, J. L. (2016). Proportionality, Fundamental Rights and the Duties of Directors. Gerner-Beuerle, C., Paech, P., Schuster, E. P. (2013). Study on directors duties and liability. Keay, A. R. (2014).Directors' duties. Lin, Y., Liu, X., Wang, Y. (2017). Does Securitization Impair Bank Lending Relationship?. Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 Quinn, J. (2013). Companies Bill 2012-Directors' Fiduciary Duties.Irish Bus. L. Rev.,1, 57. The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] (2008) 39 WAR 1