The financial services regulator has commenced proceedings against Bank of Queensland Ltd and Bendigo and Adelaide Bank Ltd over allegations that certain small-business contracts included “unfair contract terms”.
BOQ has confirmed that the Australian Securities and Investments Commission (ASIC) has commenced proceedings against it in the Federal Court of Australia.
The proceedings relate to contract terms in certain small-business contracts entered into between November 2016 and June 2019, which ASIC alleged included unfair contract terms.
Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small-business owner, along with clauses that allow the bank to call a default, even if the small-business owner has met all of its financial obligations.
ASIC alleged that certain terms used by the Bank of Queensland are unfair, as the terms:
According to ASIC, if the court agrees with ASIC, the specific terms would be “void and unenforceable” by the Bank of Queensland in these contracts. These would be void from the outset of the contracts, not from the time of the court’s declaration; however, the remainder of the contract would continue to bind parties if it can operate without the unfair terms.
ASIC is also seeking a declaration from the Federal Court that the same terms in any other small-business contract are also unfair, which could have wider ramifications for the industry.
In a statement, BOQ stated that it “takes compliance with its legal and regulatory obligations seriously” and has “sought to respond in a constructive manner and has taken immediate action to address the vast majority of ASIC’s concerns”.
BOQ added that it has now “proactively commenced a review of all small-business lending contracts entered into from November 2016”.
It continued: “If BOQ identifies any small-business customers who have been adversely affected, it will compensate them.
“While BOQ’s review is ongoing, it currently believes that the potential total compensation will be limited and not impact BOQ’s financial performance in any material way.”
It said that it would notify the ASX should this change.
The news comes just days after supply chain lender Octet revealed it had secured a long-term partnership with BOQ that would see it assume responsibility for all the bank’s debtor finance clients across Australia, and less than 24 hours after the bank announced that its interim CEO, Anthony Rose, had advised the bank that his employment with BOQ will conclude on 31 December 2019.
Mr Rose will be replaced by George Frazis, Westpac’s former chief executive, consumer banking, who was appointed as BOQ’s permanent CEO in June 2019 and will commence his role on 5 September.
ASIC takes Bendigo and Adelaide Bank to court
Meanwhile, Bendigo and Adelaide Bank has also been served with court proceedings by ASIC in relation to the application of the unfair contract terms legislation.
The proceedings relate to a version of its small-business loan contracts under each of its Delphi Bank and Rural Bank brands, which were in place between 2016 and June 2019.
The relevant terms and conditions appear in previous versions of small-business loan contracts, which were updated in July 2019 in response to additional guidance by ASIC released last year and the new Banking Code of Practice.
According to ASIC, certain terms used by the Bendigo and Adelaide Bank are unfair, as the terms:
Like the BOQ case, ASIC is also seeking a declaration from the Federal Court that the same terms in any other small-business contract would also be deemed unfair.
“The bank is cooperating with ASIC in relation to the court proceedings with a view to reaching a mutually agreed outcome,” Bendigo and Adelaide Bank said in a statement.
“We remain committed to keeping our customers at the centre of everything we do and ensuring we satisfy all regulatory requirements and guidelines.”
ASIC has been reviewing small-business contracts over the past few years and last year released its Unfair Contract Terms and Small Business Loans report outlining changes to be implemented by Australia’s major banks.
This came following a joint investigation with the Australian Small Business and Family Enterprise Ombudsman that found that the big four banks “had not done enough” to bring small-business loan contracts in compliance with amendments to Australian Consumer Law in November 2016, which extended consumer protections to small-business loan contracts of up to $1 million.
As a result, the big four banks updated their terms to ensure they were compliant with the legislative amendments.
The changes that were required by the banks to be compliant with the law included:
ASIC cautioned last March that it would continue to monitor the implementation of the reforms and investigate unfair contract terms issued by other banks and non-banks.
The fintech 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 included addressing “problematic terms” outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms that “could have operated unfairly for borrowers and guarantors” were said to provide “improved terms for borrowers and guarantors”.
The details of the changes to Prospa’s standard form small-business loan contract include:
Since ASIC’s unfair contract terms report was released, several SME lenders have developed and signed the Online Small Business Lenders Code of Practice that aims to help make SME loans more transparent and easy to understand.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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