ASIC takes banks to court over ‘unfair’ loan terms

The proceedings relate to contract terms in certain small-business contracts entered into between November 2016 and June 2019, which ASIC alleged included unfair contract terms.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small-business owner, along with clauses that allow the bank to call a default, even if the small-business owner has met all of its financial obligations.

ASIC alleged that certain terms used by the Bank of Queensland are unfair, as the terms:

• cause a significant imbalance in the parties’ rights and obligations under the contract;
• were not reasonably necessary to protect the Bank of Queensland’s legitimate interests; and
• would cause detriment to the small businesses if the terms were relied on.

According to ASIC, if the court agrees with ASIC, the specific terms would be “void and unenforceable” by the Bank of Queensland in these contracts. These would be void from the outset of the contracts, not from the time of the court’s declaration; however, the remainder of the contract would continue to bind parties if it can operate without the unfair terms.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small-business contract are also unfair, which could have wider ramifications for the industry.

In a statement, BOQ stated that it “takes compliance with its legal and regulatory obligations seriously” and has “sought to respond in a constructive manner and has taken immediate action to address the vast majority of ASIC’s concerns”.

BOQ added that it has now “proactively commenced a review of all small-business lending contracts entered into from November 2016”.

It continued: “If BOQ identifies any small-business customers who have been adversely affected, it will compensate them. 

“While BOQ’s review is ongoing, it currently believes that the potential total compensation will be limited and not impact BOQ’s financial performance in any material way.”

It said that it would notify the ASX should this change.

The news comes just days after supply chain lender Octet revealed it had secured a long-term partnership with BOQ that would see it assume responsibility for all the bank’s debtor finance clients across Australia, and less than 24 hours after the bank announced that its interim CEO, Anthony Rose, had advised the bank that his employment with BOQ will conclude on 31 December 2019.

Mr Rose will be replaced by George Frazis, Westpac’s former chief executive, consumer banking, who was appointed as BOQ’s permanent CEO in June 2019 and will commence his role on 5 September.  

ASIC takes Bendigo and Adelaide Bank to court

Meanwhile, Bendigo and Adelaide Bank has also been served with court proceedings by ASIC in relation to the application of the unfair contract terms legislation.

The proceedings relate to a version of its small-business loan contracts under each of its Delphi Bank and Rural Bank brands, which were in place between 2016 and June 2019.

The relevant terms and conditions appear in previous versions of small-business loan contracts, which were updated in July 2019 in response to additional guidance by ASIC released last year and the new Banking Code of Practice.

According to ASIC, certain terms used by the Bendigo and Adelaide Bank are unfair, as the terms:

• cause a significant imbalance in the parties’ rights and obligations under the contract;
• were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
• would cause detriment to the small businesses if the terms were relied on.

Like the BOQ case, ASIC is also seeking a declaration from the Federal Court that the same terms in any other small-business contract would also be deemed unfair.

“The bank is cooperating with ASIC in relation to the court proceedings with a view to reaching a mutually agreed outcome,” Bendigo and Adelaide Bank said in a statement.

“We remain committed to keeping our customers at the centre of everything we do and ensuring we satisfy all regulatory requirements and guidelines.”

Unfair contracts

ASIC has been reviewing small-business contracts over the past few years and last year released its Unfair Contract Terms and Small Business Loans report outlining changes to be implemented by Australia’s major banks.

This came following a joint investigation with the Australian Small Business and Family Enterprise Ombudsman that found that the big four banks “had not done enough” to bring small-business loan contracts in compliance with amendments to Australian Consumer Law in November 2016, which extended consumer protections to small-business loan contracts of up to $1 million.

As a result, the big four banks updated their terms to ensure they were compliant with the legislative amendments.

The changes that were required by the banks to be compliant with the law included:

• Entire agreement clauses:
  • The removal of clauses that prevent lenders from being held contractually responsible for conduct, statements or representations made to SME borrowers outside the written contract.
  • The removal of clauses that require borrowers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or agents or a receiver appointed by the bank.
• Event of default clauses:
• The removal of clauses that allow lenders to treat a loan as being in default because of any unspecified “material adverse change”.
• The banks have also considerably limited the specific events of default listed in the loan contract that could allow the bank to call a default.
• Financial indicator covenants: The limiting of some financial indicator covenants such as loan-to-valuation ratio in small-business loans to trigger a default and enforcement of the loan.
• Unilateral variation clauses: The limiting of clauses that give lenders a broad ability to vary contracts without agreement from the small-business borrower.

ASIC cautioned last March that it would continue to monitor the implementation of the reforms and investigate unfair contract terms issued by other banks and non-banks.

For example, last year, Prospa became the first online small-business lender to have undertaken a full review of its loan terms, after consultation with ASIC, and update its loan terms accordingly.

The fintech changed the loan terms in its standard form small-business loan contract to “address terms being unfair under the unfair contract terms provisions of the ASIC Act”.

The changes included addressing “problematic terms” outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms that “could have operated unfairly for borrowers and guarantors” were said to provide “improved terms for borrowers and guarantors”.

The details of the changes to Prospa’s standard form small-business loan contract include:

• Amending the early repayment clause so that borrowers can prepay their loan early without requiring Prospa’s consent.
• Removing Prospa’s absolute discretion whether to provide a discount for prepayment to instead apply a published Early Prepayment Policy so borrowers can determine the discounts they can expect to receive if they do pay back their loan early.
• Amending the “unilateral variation” clause to “significantly limit” Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees.
• Amending clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the borrower with the lender’s consent (not to be unreasonably withheld).
• Removing a broad “cross-default” clause which “allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan” (for example, guarantee or security document).
• Removing an “entire agreement” clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract.

Since ASIC’s unfair contract terms report was released, several SME lenders have developed and signed the Online Small Business Lenders Code of Practice that aims to help make SME loans more transparent and easy to understand.

[Related: SME lenders sign new Code of Lending Practice]