An elderly pensioner was conned by a dishonest financial adviser into borrowing to invest in his fraudulent scheme. The mortgage originator/manager was not aware of the dishonesty of the sub-introducer and approved the loan without interviewing the borrower in accordance with its guidelines or making enquiries following the discrepancies between the income of the borrower on the original and two subsequently amended application forms and the borrower’s failure to provide an ABN as requested. The adviser/introducer had fraudulently misstated the borrower’s occupation and earnings and the borrower had signed the form without reading it.
Unconscionable conduct under the ASIC Act or the TPA must be irreconcilable with what is right or reasonable. It must demonstrate moral fault or obloquy (disgrace). The range of conduct is wide and not constrained by established cases. The conduct must be more than negligent but can be less than intentional – recklessness in the form of wilful blindness may suffice.
The court held that the mortgage manager was guilty of unconscionable conduct because it failed to make further enquiries after having been put on notice that there may be irregulatories with the loan application.
The appeal court said that:
The discrepancy in the figures in the loan application and income declaration, not just once, but twice and the absence of an ABN, which was requested but never provided, ought to have raised the suspicion that something may be amiss with the application. In circumstances where three different figures were given for income, the mortgage manager, ought to have delved further. There was only one question that had to be asked — a question about the different levels of income stated in the various forms. Whether one classifies the lending as asset based lending or not, to make no inquiry is, in the absence of an explanation, entirely unacceptable. As his Honour held, had the inquiry been made, the truth as to the borrower’s income and his status as a pensioner would ‘inevitably’ have emerged. Whilst a failure to conduct an interview and thus comply with the guidelines may not of itself constitute unconscionable conduct in the generality of cases, in the circumstances of this case, that failure strongly supports the proposition that the conduct was unconscionable.
The appeal court noted the failure to call the central figure in approving the loan, who knew of the discrepancies but chose to make no further inquiry, was unsatisfactory given the witness could have been called. The appeal court found that the mortgage manager had turned a blind eye to the irregulatories and its conduct was unconscionable within the meaning of section 12CB(1) of the ASIC Act. The appeal court affirmed the decision of the trial judge. The appeal court declined to decide whether the conduct was also unconscionable at general law only noting that the equitable concept is no doubt narrower than that of ‘statutory unconscionability’.
Section 12CB of the ASIC Act prohibits unconscionable conduct in the supply of financial services to a consumer ‘ordinarily acquired for personal, domestic or household use’. The court held that the mortgage here qualified because the characteristics of the product being a “LoDoc” loan was that ordinarily such loans are used for the personal use of investment saving or saving for one’s retirement. It did not matter that the credit was to be used for a business or investment purpose because investments can be personal. The court noted that the type of ‘low doc loan’ obtained was only available if the security property was residential with a loan to value ratio of 80 per cent, which limited the borrowing to one used for personal investment rather than an investment business.
Although unnecessary to decide, the appeal court found that section 51AC of the TPA did not apply. The court found that the borrower did not acquire the services ‘for the purpose of trade or commerce’ because he was not engaged in the business of investing.