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The big four banks are set to implement small business loan contract reforms, following a regulatory investigation into unfair contract terms.
An Unfair Contract Terms and Small Business Loans report released by the Australian Securities and Investments Commission (ASIC) has outlined changes to be implemented by Australia’s major lenders, following an investigation by the regulator and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
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The investigation 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.
Changes to be made by the major banks include:
- Entire agreement clauses: The removal of clauses that prevent lenders from being held contractually responsible for conduct, statements or representations made to small business borrowers outside the written contract.
- Broad identification clauses: The removal of clauses that require borrowers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or agents or a receiver appointed by the bank.
- Event of default clauses:
(a) Material adverse change events of default – The removal of clauses that allow lenders to treat a loan as being in default because of any unspecified “material adverse change”.
(b) Specific events of non-monetary default – The banks have also considerably limited the specific events of default listed in the loan contract that could allow the bank to call a default. - Financial indicator covenants: The limiting of some financial indicator covenants such as loan-to-valuation ratio (LVR) in small business loans to trigger a default and enforcement of the loan.
- Unilateral variation clauses: The limiting of clauses that give lenders a broad ability to vary contracts without agreement from the small business borrower.
The report has noted that the banks will contact borrowers to inform them of the changes. ASIC will also monitor the banks’ implementation of the reforms, and it will investigate unfair contract terms issued by other lenders.
“ASIC will review small business lending contracts across the market,” ASIC deputy chair Peter Kell said. “There are no excuses for failure to comply with the [unfair contract terms] laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law.”
[Related: ASIC fully implements cash flow coaching for SMEs]
