Following a commitment to further review their small business loan contracts, the big four banks have now agreed to specific changes with ASIC to eliminate unfair terms for their contracts from September 2017.
ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) have welcomed the changes, which mean that:
- the loan documents will not contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.
- the operation of the banks’ indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
- clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer )known as ‘material adverse change event’ clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.
- banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.
The banks have all acted on ASIC’s and the ASBFEO’s calls to change their practices although have taken different approaches – and in some instances, gone further than the law requires – to address concerns about these clauses.
For example, NAB has taken an industry-leading position about the application of non-monetary default clauses, while the Commonwealth Bank will provide an industry-leading 90 calendar days’ notice for any changes to loan contracts that the small business customer does not wish to accept.
All four banks have limited the use of financial indicator covenants in small business contracts to certain classes of loans (e.g. property development and specialised lending such as margin loans). The banks have agreed that financial indicator covenants will not be applied to property investment loans.
The banks have agreed that all customers who entered or renewed contracts from 12 November 2016 – when the protections for small businesses began – will have the benefit of the changes agreed with ASIC.
To ensure that the new clauses do not operate unfairly in practice, ASIC will monitor the individual banks’ actual use of these clauses to determine if they are in fact applied or relied on in an unfair way. ASIC will work with ASBFEO when assessing the results of this monitoring.
ASIC will publish more detailed information about the changes agreed with the big four banks so that other lenders to small business can consider whether changes to their contracts may be required.
The four banks will shortly commence contacting all relevant small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans.
ASIC released Information Sheet 211 Unfair contract term protections for small businesses to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services and the protection that are available for small businesses.
From 12 November 2015, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that 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. Industry had one year to prepare their contracts for the legislation coming into effect on 12 November 2016.
In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law. Subsequently, ASIC established an Office of Small Business.
Changes to Contracts:
Some practical examples of the kinds of contract clauses which will no longer be acceptable are:
- If the bank manager makes a promise, the bank cannot rely on its contract to avoid the consequences to such a promise;
- If bank officials make mistakes which lead to losses, the contract can no longer make the customer pay;
- If the customer is up to date with their payments, the bank can no longer unilaterally decide that the customer’s security is devalued and call up the loan.
- If the bank wants to make a variation to the contract it will need to provide the customer with a reasonable notice period so that they can consider refinancing elsewhere.
If you feel your business is not being treated fairly by its bank, call O’Shea Lawyers on 07 3359 7967 or email firstname.lastname@example.org