Australian lenders including the country's big four banks 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 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 Mr 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; and
- 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.'
The unfair contract term protections for consumers in the Australian Securities and Investments Commission Act 2001 (ASIC Act) were extended to cover standard form small business contracts entered into, or renewed, on or after 12 November 2016.
In February 2016, ASIC released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211). This information sheet gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.
In INFO 211, ASIC also outlined its expectations that financial product issuers review their standard form small business contracts to remove any terms that could be considered to be unfair to ensure compliance by 12 November 2016.
ASIC is responsible for enforcing the unfair contract terms law in relation to financial products and services. For other goods and services, enforcement of the unfair contract terms law is shared between the Australian Competition and Consumer Commission (ACCC) and the State and Territory consumer protection agencies.
ASIC and the ACCC have worked together to help small businesses understand the unfair contract term protections. On 16 March 2016, the two agencies hosted a webinar to provide practical guidance about the protections for small businesses, including a discussion of the types of terms that may be unfair and what action small businesses can take if they receive a contract that contains an unfair term.
Small businesses that are concerned about whether a contract term is unfair can make a complaint directly to their financial services provider or to the relevant external dispute resolution scheme if the dispute is not resolved, or directly to ASIC.
The Code of Banking Practice is a voluntary code of conduct which sets standards of good banking practice for member-banks of the Australian Bankers' Association.
While it is not ASIC's role to endorse contract terms or to state that they are unfair, ASIC may apply to a court to have a term declared unfair if it is in the public interest to do so. Any party to the contract may also apply to the court if they are not satisfied with the outcome of the dispute resolution process.
Only a court or tribunal can decide whether a term is unfair.
If a court or tribunal finds that a term is ‘unfair’, the term will be void—that is, it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.