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Ombudsman to small businesses: Check your business loan contract terms


small business

The statement follows an ASIC report on unfair contract terms by the Big Four banks.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, has urged small business owners to check their business loan contracts after a report was released yesterday outlining the unfair contract terms the big banks have been forced to remove. The Unfair contract terms and small business loans report was released by the Australian Securities and Investments Commission (ASIC) and sheds light on the changes made by the Big Four banks to their small business loan contracts.

“Just over a year ago, ASBFEO 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,” Carnell said.

The banks were given a one year transition period with a deadline of November 2016. However, all major banks failed to meet this deadline. The banks agreed to the changes in May 2017 and applied these to small business loans entered into or renewed from 12 November 2016.

While the Big Four have removed these unfair terms, Carnell says other lenders are yet to follow.

“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.”

ASIC's report aims to help bank and non-bank lenders make their small business loan contracts fair and compliant.

The unfair contract terms which were removed, or limited in use, from small business loan contracts include:

  • Entire agreement clauses: Clauses that prevent banks being held accountable for conduct, statements or representations made to the borrower outside the written contract.
  • Broad indemnification clauses: Clauses which require borrowers cover losses, costs and expenses incurred due to fraud, negligence or willful misconduct of the bank.
  • Event of default clauses: Clauses which give lenders very broad discretion to decide which types of changes will result in them treating a loan as being in default. This has been limited to non-payment.
  • Financial indicator covenants: These are used to trigger a default and debt recovery even if loan payments are made.
  • Unilateral variation clauses: These clauses gave the lender the ability to vary anything in the contract without agreement, the scope of allowable changes now needs to be established in the contract.

ASIC deputy chair Peter Kell said it will be reviewing small business lending contracts across the market.

"There are no excuses for failure to comply with the UCT (Unfair Contract Term) laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law."

Carnell also said the ASBFEO will continue to work with ASIC to ensure the Big Four continue to comply with the changes and that these changes are taken up by other lenders.

“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.”

You can read the full ASIC report here.

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