Australian bank lenders including the country’s big four have substantial work to do to eliminate unfair terms from their loan agreements, a joint review of small-business standard form contracts undertaken by ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has revealed.
ASIC and the ASBFEO reviewed small-business loan contracts from eight bank lenders and found there’s been a failure to take sufficient steps to comply with their new obligations under unfair contract terms (UCT) legislation.
This is despite being provided with a one-year transition period, ahead of last year’s November implementation deadline.
ASIC and the ASBFEO are sending a very clear message that lenders need to immediately take steps to ensure their standard form loan agreements fully comply with the new legislation.
In their initial review ASIC and the ASBFEO found lenders continue to use clauses of concern such as:
- 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.
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 Phil Khoury – in relation to small-business loan contracts.
The additional protections for small-business borrowers proposed by the Code Review are long overdue and consistent with the recent ASBFEO inquiry into small-business loans.
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
- More comprehensive access to the Financial Ombudsman Service
ASIC Deputy Chair Peter Kell said: “ASIC is committed to ensuring the UCT provisions help to raise small business lending standards. Where we identify a potentially unfair term we will work with the lender to remove or amend the term, and we have already started to raise these issues with lenders. 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.”
ASBFEO Kate Carnell said: “I’m firmly of the belief that the loan contract terms as they currently stand, fail to comply with the UCT law.
“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.”
Inside Small Business
