Small business lender Prospa has changed its loan terms in its standard form small business loan contract to address “problematic terms”.
Earlier this year, the SME lender announced that it was delaying its float on the Australian Securities Exchange as the company sought to “clarify queries” raised by ASIC.
Prospa was scheduled to start trading on the Australian Securities Exchange (ASX) at midday on Wednesday (6 June), with a market capitalisation of $576 million after raising $146.5 million through its initial public offering.
However, minutes before listing, the lender revealed in a disclosure to the ASX that there would be a 48-hour delay so that it could “clarify queries raised by ASIC [on Tuesday] in relation to Prospa’s small business loan terms”.
The listing was then delayed further as the lender sought to answer ASIC’s questions that formed part of an industry-wide review into lenders’ small business loan contracts to reduce the risk of unfair contract terms.
ASIC has now announced that, following its review, Prospa Advance Pty Limited (Prospa) has changed the loan terms in its standard form small business loan contract to “address terms being unfair under the unfair contract terms provisions of the ASIC Act”.
The changes, which include addressing “problematic terms” outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which “could have operated unfairly for borrowers and guarantors”, are expected to result “in improved terms for borrowers and guarantors”.
It is believed that Prospa is the first online small business lender to have undertaken a full review of its loan terms after consultation with ASIC.
Prospa loan changes
The details of the changes to Prospa’s standard form small business loan contract include:
Other changes include:
“We believe these changes are industry-leading”
ASIC continued: “Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended. The amount of interest is therefore part of the ‘upfront price’ of the loan and is excluded from review under the unfair contract term provisions.
“Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions.
“ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.”
Its statement continued: “Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC.”
Following the ASIC release, the SME lender said that the amendments agreed with ASIC do not have any material impact on the company financially or operationally, with Prospa COO Ben Lamb stating: “We’re always looking for ways to improve finance outcomes for small business owners. As the first non-bank lender to complete its review, we believe these changes are industry-leading.
“We specialise in lending to small businesses and we know any changes we can make to ensure access to finance is simple and easy to understand are going to help our customers save precious time so they can focus on growing their businesses.”
Prospa’s general counsel, Nicole Johnschwager, added: “These changes have been made as part of Prospa’s commitment to helping lift transparency across the industry.
“Prospa looks forward to continuing to improve financial inclusion for small business owners. This is an evolving area of regulation and we will work with industry peers and stakeholders to support this important and growing industry.”
The fintech highlighted that it was a founding signatory of the Online Small Business Lenders Code of Practice that aims help make SME loans more transparent and easy to understand, and called on other small business lenders to “engage with ASIC and complete their own reviews and to subscribe to the Code of Lending Practice if they haven’t already”.
Prospa will reportedly be communicating its changes to its small business customers, with the amended contract coming into effect in early October.
ASIC’s surveillance of small business loan contracts is ongoing, and the regulator has said that it will consider regulatory action where appropriate.
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