ASIC has today released a report setting out the details of the 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 (REP 565), provides more detailed guidance to bank and non-bank lenders about compliance with the unfair contract terms laws as they relate to small business.
The report follows the announcement in August 2017 that the big four banks had committed to improving terms of their small business loans following work with ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). (See 17-287MR).
ASIC Deputy Chair Peter Kell said, ‘The UCT 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. 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.
ASIC and ASBFEO will continue work together to ensure small business loan contracts comply with the unfair contract terms law.
Background
Unfair contract terms protections were extended to small business from 12 November 2016.
ASIC and the ASBFEO have been working with the big four banks to ensure their small business loan contracts meet the standards that are required by the unfair contract terms law (refer: 17-139MR).
Small business loans are defined as loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.
In August 2017, ASIC and the ASBFEO welcomed the changes to small business loan contracts by the big four banks (refer 17-278MR) that have:
- Ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (e.g. about how bank discretions will be exercised)
- Limited the operation of broad indemnification clauses
- Addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (e.g. misrepresentations by the borrower)
- Limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
- Limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.
