First thing this morning, the Australian Federal Court threw the cat amongst the pigeons when it told the Australian Securities and Investments Commission (ASIC) and major bank WestPac that it would not approve a deal under which WestPac admitted that it had failed to act in the interests of borrowers when approving home loans.

Essentially, WestPac used generic data relating to household expenditure instead of assessing the customer's actual expenditure when considering ability to repay. But the bank did take a statement of expenditure from applicants: it just didn't take it into account.

The case was centred around the fact that such generic data was used as part of an expedited lending process. The problem he was facing, said HH Nye Perram said, was that neither the bank nor ASIC could explain why that was done.

His Order (it is not a Judgment - the case has been adjourned not decided) was "Not knowing ... makes it very difficult to assess how serious its conduct is and hence how appropriate a civil penalty of $35 million might be," he said.

"The Court is asked to say that the proposed penalty is appropriate even though it knows nothing of the respondent's motives beyond a bland agreed fact that it acted in good faith. In the information vacuum in which the parties have left the Court, this is not possible. [It is] unworkable to assess the reasonableness of the penalty if it is not known what is to be penalised."

Lawyers for both sides argued in favour of the settlement: ASIC argued that the amount was appropriate - the case related to four percent of more than a quarter of a million loans, that a penalty of AUD35 million is not chump change when it hits the bank's bottom line and that WestPac is the smallest of the major banks in Australia. The bank took a different tack: it was, the bank said, not for the Court to second guess what was in the agreement, only to accept that both sides said the agreement was appropriate.

Fan, meet shit.

ASIC was in high spirits as it went to court: after all, it was only four days since it last pulled WestPac up before the bench. The Court, in the shape of Beach, J, was not best pleased with WestPac. That case related to rate-rigging in the Bank Bill Swap Rate market. The Judge was extremely critical of WestPac. He said "Westpac's misconduct was serious and unacceptable…Westpac has not shown the contrition of the other banks. Moreover, imposing the maximum penalty is the only step available to me to achieve specific and general deterrence. The message that should be sent is that if you manipulate or attempt to manipulate key benchmark rates you are likely to have the maximum penalty imposed, whatever that is from time to time." That, he was clear, was not a sufficient penalty "If I had been permitted to do so I would have imposed a penalty of at least one order of magnitude above AUD3.3 million in order to discharge [the objectives of specific and general deterrence]. But I am not free do so." One has to imagine that His Honour was using poetic licence and did not mean "order of magnitude" in its technical, mathematical sense. That would have brought the penalty (it is not a fine, no matter how many times the media says it is) up to AUD9.9 million. Then again, maybe he did. There was also what amounts to a monitoring and supervision Order.

WestPac, today, had admitted its culpability and was ready to pay the penalty and to say that the practice had been discontinued and would not be restored. All relevant cases would be referred to loan officers for human assessment. ASIC's arguments were reasonable - but the Judge wanted to know something more. Where, he asked, was the unlawful conduct that gives rise to the regulator's action? That apparently innocuous question opens an enormous can of worms. Only if ASIC can establish that there was a breach of principles of the relevant codes does it has a leg to stand on, or in legal terms, locus standi. The borrowers, on the other hand, may have individual claims against the bank for, for example, negligence in failing to take account of relevant information. Whether that claim would succeed, given that the borrowers actually asked for the loans, is doubtful.

WestPac, on the other hand, has nothing to gain by constantly appearing in one court after another: the reputational damage against all the banks has probably peaked but long, grinding mistrust takes a long time to repair.

That's not WestPac's biggest problem today, though.