ASIC report provides small business lenders with guidance on unfair contract terms laws

Loan agreement

The Australian Securities and Investments Commission (ASIC) has released a report detailing changes made by the big four banks to remove unfair terms from their small business loan contracts of up to $1 million.

The report, Unfair contract terms and small business loans, also provides detailed guidance to bank and non-bank small business lenders about compliance with the unfair contract terms laws, which were extended to cover small businesses from 12 November 2016.

The report follows an announcement in August 2017 that the big four banks had committed to improving terms of their small business loans following work with ASIC and Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).

ASIC Deputy Chair Peter Kell said, ‘The UCT [Unfair Contract Terms] report provides further guidance to help banks and other lenders ensure that their small business loans are fair, and do not breach the rules prohibiting unfair contract terms.’

The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law
  • Provides details about the specific changes that have been made by the banks to ensure compliance with the law
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law

“ASIC will review small business lending contracts across the market,” Kell said. “There are no excuses for failure to comply with the UCT laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law.’

ASIC will monitor the four banks’ use of the clauses to ensure they are not applied or relied on in an unfair way. ASIC will also examine other lenders’ loan contracts to ensure that their contracts do not contain terms that raise concerns under the unfair contract terms law.

Carnell welcomed the Unfair contract terms and small business loans report released by ASIC. She said the unfair contract terms removed, or limited in use, from small business contracts by the big four banks are:

  • unilateral variation: the ability to vary anything in the contract without agreement
  • financial indicator covenants: used to trigger a default and debt recovery even if loan repayments made
  • material adverse change events: the power to terminate the loan for an unspecified negative change in the circumstances
  • entire agreement clauses: prevent bank being held responsible for conduct, statements or representations made to the borrower outside the writer contract
  • broad indemnification clauses: borrower to cover losses and costs incurred due to fraud, negligence or wilful misconduct of the bank employees, agents or a receiver appointed by the bank.

“The actions a big four bank can take on a small business loan is now more transparent to the borrower and proportional to the management of risk,” Carnell said.

“We will monitor the use of the changed clauses by the big four banks, and ensure their existing applicable small business customers are aware of the changes.

“We will also continue to apply pressure on the rest of Australia’s financial institutions, to make sure they too meet the unfair contract terms legislation.”

Related: New Financial Complaints Authority will improve small businesses access to justiceThe ‘quest for stability’ in the financial system is detrimental to SME growth, says Ombudsman, ACCC has improved ‘tens of thousands’ of contracts for SMES since November 2016NAB “first off the mark” with shorter, plain English loan contracts for small businessesOne in two small businesses relying on new protections against unfair contract terms and Small businesses urged to air grievances with the Royal Commission into the banking sector.