Consumer groups are demanding an overhaul of responsible lending laws, following the financial regulator's decision not to appeal its landmark "Wagyu and shiraz" case against Westpac.
The Australian Securities and Investments Commission says it won't go to the High Court after a Federal Court judge dismissed an initial appeal of the watchdog's lending test case.
ASIC had argued Westpac failed to have regard to the living expenses customers declared on their home loan application forms and instead relied solely on a widely-used expenditure benchmark.
Federal Court Justice Nye Perram did not accept lenders had to use consumers' declared living expenses in determining whether they could meet repayments or if they would face financial hardship.
He said living expenses didn't demonstrate a consumer's capacity to meet repayments, as they may choose to forgo discretionary expenses.
"I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," Judge Perram last year ruled.
ASIC appealed the decision in the Federal Court, but that was dismissed in June.
The regulator on Wednesday announced it would not seek special leave to appeal to the High Court.
"ASIC is mindful of the impact of the additional time required to resolve this matter in the current challenging economic circumstances," it said.
Consumer groups are disappointed by ASIC's decision not to take the case further.
The Financial Rights Legal Centre, Financial Counselling Australia, Consumer Action Law Centre and CHOICE say lending laws are in urgent need of an overhaul.
"The full Federal Court decision suggests that banks do not have to have regard to people's actual expenses when they lend," Financial Rights chief executive Karen Cox said.
"This degree of latitude has historically allowed lenders to make unsustainable loans which set people up to fail."
ASIC said any changes to lending laws were a matter for parliament.
Australian Associated Press