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ASIC and ASBFEO team up to stop unfair contract terms for small businesses

stressed business owner

stressed business owner

The regulator and the ombudsmen have put the banks on notice.

A joint review of business loan contracts from eight lenders has found that sufficient steps have failed to be taken in order to comply with new obligations. The Australian Securities and Investments Commission (ASIC) and the Australian Small Business and Family Enterprise Ombudsmen (ASBFEO) have teamed up to undertake the review and are now sending a "clear message" that lenders need to make sure that their standard form loan agreements comply with the new legislation.

In February 2016, unfair contract term protections in the Australian Securities and Investments Commission Act (2001) were extended to cover standard form small business contracts entered into or renewed on or after 12 November 2016.

ASIC informed lenders that they would need to review their standard form small business contracts and remove any unfair terms by 12 November 2016. Despite being given a one-year transition period, ASIC and the ASBFEO found lenders still using unfair clauses. These included terms that:

  • Give lenders broad discretion to vary contract terms and conditions.
  • Provide for a loan default in various circumstances other than just where the borrower has materially defaulted on their obligations.
  • Absolve the lender of being responsible for conduct, statements or representations that the lender makes to borrowers outside of the contract.
  • Broadly indemnify the lender against losses, costs, liabilities and expenses.

"I’m firmly of the belief that the loan contract terms, as they currently stand, fail to comply with the UCT law," said ASBFEO Kate Carnell.

"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 banks have come under intensified scrutiny as of late, with an inquiry into small business lending being conducted in November last year.

While ASIC and the ASBFEO put the pressure on lenders to comply with contract expectations, small businesses that are concerned over contract terms can make a complaint to their financial provider. If the dispute fails to be resolved, those businesses should contact ASIC directly.

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