Australian lenders, including the four major banks, have “substantial work” to do to eliminate unfair terms from their loan agreements with small businesses, the Australian Securities & Investments Commission has warned.
In a review of small business standard form contracts from eight lenders, including the country's big four banks, ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) found that there had been “a failure [by lenders] to take sufficient steps to comply with their new obligations under unfair contract terms (UCT) legislation”.
The unfair contract term protections for consumers in the Australian Securities and Investments Commission Act 2001 (ASIC Act) were extended to cover standard form small business contracts entered into, or renewed on, or after 12 November 2016.
Only a court or tribunal can decide whether a term in a loan agreement is unfair. If they do, the term will be void (but the remainder of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term).
However, ASIC and the ASBFEO found that – despite lenders having a one year transition period before last year’s November implementation deadline – there are still cases where lenders are using “clauses of concern” in their standard form loan agreements.
The clauses in question included:
- Terms that give lenders a “very broad discretion” to unilaterally vary terms and conditions of the contract;
- Terms that provide for loan default (such as non-monetary default) in a “very broad range of circumstances”, rather than where the borrower has “materially defaulted” on their obligations;
- Terms that absolve the lender from responsibility for conduct, statements or representations that the lender makes to borrowers outside of the contract (otherwise known as ‘entire agreement clauses’); and
- Terms that too broadly indemnify the lender against losses, costs, liabilities and expenses.
ASIC noted that while it is not its role to endorse contract terms or to state that they are unfair, it is responsible for enforcing the unfair contract terms in financial products and services. As such, it warned that it may apply to a court to have a term declared unfair if it is in the public interest to do so.
Both ASIC and the ASBFEO have also reiterated their support for the recommendations made by the independent review of the Code of Banking Practice – undertaken by Mr Phil Khoury – in relation to small business loan contracts.
They suggested that banks must move quickly to implement:
- A prohibition on non-monetary default clauses where the borrower is meeting their obligations under the contract;
- 90 days' notice period where a loan facility will not be extended; and
- More comprehensive access to the Financial Ombudsman Service.
Calls for the banks to amend their practices ‘falling on deaf ears’
Kate Carnell, the ASBFEO, warned that she was “firmly of the belief that the loan contract terms, as they currently stand, fail to comply with the UCT law”.
She continued: “Once again, repeated calls for the banks to amend their practices are falling on deaf ears, despite inquiry after inquiry highlighting major flaws in the way they treat their small business customers.”
ASIC deputy chair Peter Kell said that – once it identifies a potentially unfair term – it will “work with the lender to remove or amend the term”.
Stating that ASIC has “already started to raise these issues with lenders”, he added: “If the lender refuses to do so we will consider all regulatory options, including taking the matter to court as ultimately a court can decide whether or not a term is unfair.”