Earlier this month, Australia’s big four banks—Westpac, Commonwealth Bank, National Australia Bank, and Australia and New Zealand Banking Group—announced they will be implementing major changes to small business loan contracts to make them fairer.
ASIC Investigation on Unfair Contracts
This news comes after the Australian Securities and Investments Commission (ASIC) together with the Australian Small Business and Family Enterprise Ombudsman (ASFEO) conducted a regulatory investigation into unfair contract terms.
In their investigation, the agencies found that the country’s top lenders had not done nearly enough to ensure their small business loan contracts met the requirements mandated by the Australian Consumer Law in November 2016. The said legislation explicitly extended consumer protections to contracts of small business loans covering a maximum of $1 million.
ASIC published the result of their investigation in a report entitled, “Unfair Contract Terms and Small Business Loans”. This report also outlines the various changes that the big four banks need to implement.
Changes to Small Business Loan Contracts
The following is an excerpt from ASIC’s report, outlining the various changes that major banks must implement:
- Entire Agreement Clauses
Clauses that prevent lenders from being held contractually responsible for conduct, statements or representations made to small business borrowers outside the written contract are likely to be unfair.The banks have confirmed that their small business loan contracts now do not contain clauses that have this effect or the clauses will no longer be applied to their small business loan contracts.
- Broad Indemnification Clauses
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 are likely to be unfair.
The banks have confirmed that any clauses that have this effect have been removed or the clauses will no longer be applied to their small business loan contracts.
- Event of Default Clauses
Clauses that allow lenders to treat a loan as being in default because of any unspecified “material adverse change” are likely to be unfair. The banks have confirmed that these clauses have been removed or will no longer be applied to their small business loan contracts.
- Financial Indicator Covenants
The use of a breach 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 could be unfair where a breach of a particular covenant by a small business borrower does not present a material credit risk to the lender.
- Unilateral Variation Clauses
Clauses that give lenders a broad ability to vary contracts without agreement from the small business borrower have a high risk of being unfair as they cause a significant imbalance in the rights of the lender and small business borrower (in favour of the lender). The banks have limited their variation clauses to specific defined circumstances set out in the contract (e.g. interest rate changes).
ASIC also requires banks to use multiple channels to inform small business borrowers about the updates and changes to the contract. This also includes reaching out to the relevant borrowers who started or renewed their loan from November 12, 2016.