Smaller firms should check their bank for unfair credit terms

I welcome the Unfair contract terms and small business loans report released by the Australian Securities and Investments Commission (ASIC).

Just over a year ago, the Ombudsman’s Office and ASIC jointly reviewed small business standard form contracts, and we found the major four banks had failed to take the necessary steps to comply with their obligations under unfair contract terms (UCT) legislation.

This was after a generous one year transition period to meet the November 2016 implementation deadline.

Shortly after our UCT review, the big four banks committed to a series of changes to make sure small business loans of up to $3 million entered into or renewed from 12 November 2016 would be protected from unfair contract terms.

The legislation covers all financial institutions in Australia and we are yet to see the rest of the financial services industry make the appropriate changes, so their standard form loan agreements comply with the law.

However  small business loan contracts are complex, with many pages and in highly legalistic language, and all too often small businesses do not understand the significance of what they are signing.

The unfair contract terms removed, or limited in use, from small business contracts by the big four banks are:

1. Unilateral variation: the ability to vary anything in the contract without agreement.

2. Financial indicator covenants: used to trigger a default and debt recovery even if loan repayments made.

3. Material adverse change events: the power to terminate the loan for an unspecified negative change in the circumstances.

4. Entire agreement clauses: prevent bank being held responsible for conduct, statements or representations made to the borrower outside the writer contract.

5. 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.

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.