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The Family Enterprise Ombudsman has called the big four banks’ decision to eliminate unfair terms from small business loan contracts a “very positive” sign that banks are “demonstrating industry leadership”.
The agreement was made with the Australian Securities and Investments Commission (ASIC) and the Family Enterprise Ombudsman (ASBFEO) and was announced on 24 August.
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The changes apply to customers who have entered or renewed contracts from 12 November 2016, and the major banks will soon begin contacting relevant small business customers about changes to their loans.
The terms of the agreement are:
1. Loan documents will no longer contain clauses that absolve banks from responsibility for conduct or statements made outside of written contracts.
2. Indemnification clauses will be “significantly limited”. As such, banks won’t be able to require small business borrowers to pay for expenses incurred due to the negligence, wilful misconduct or fraud of the bank, its employees or receivers appointed by the bank.
3. Banks will no longer have the ability to terminate loans for an “unspecified negative change in the circumstances of the customer”.
4. The banks have also “restricted” their power to change contracts to specific situations. In the case a bank does vary a contract and the customer wants to exit the contract, a 30–90 day period will be provided for the borrower to do so.
ASBFEO Kate Carnell said: “This reflects nine months of hard work by ASIC working with the big four banks to meet the expectations of the 'unfair contract term' legislation. The banks’ initial underdone response to the legislation serves as a reminder that banks were once again trying to 'game' the rules and this erodes trust. There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice.”
She added: “In meeting the law to cover individual loan contracts up to $1 million, the banks have agreed to extend the cover to small business total loan facilities up to $3 million, which is a move in the right direction. Recent reviews have consistently raised that a small business loan facility of $5 million is the correct benchmark. This remains a sticking point that will need to be addressed.”
ASIC will work with the ASBFEO to track individual banks’ use of the clauses to determine if they are applied in an appropriate manner.
Peter Kell, ASIC deputy chairman, said that ASIC welcomes the “significant improvements” made to the major banks' small business lending contracts.
He added: “The improvements have raised small business lending standards and provide important protections for small business customers.
“ASIC will be following up with other lenders to ensure that their small business contracts do not contain unfair terms, and we will continue to work with the ASBFEO on these issues.”
The ASBFEO began its enquiry into small business loans in September 2017. In May this year, together with ASIC, it held a roundtable where the big four banks committed to making improvements to the loan contracts and ensure they satisfy unfair contract terms law.
[Related: ASIC to scrutinise broker mortgages]
