Banks face legal action over unfair contracts: regulators

The Australian 12:00am March 10, 2017

Richard Gluyas

The corporate watchdog is ramping up the pressure on the nation’s banks over unfair contracts with small businesses, threatening court action if the banks do not take immediate steps to amend their standard form loan agreements.

As revealed yesterday by The Australian, small business ombudsman Kate Carnell has teamed up with ASIC to investigate the level of compliance with legislation that bans lopsided contracts.

Despite a one-year transition period until the legislation became effective last November, the continuing probe has found that changes made to contracts have fallen short of requirements.

ASIC deputy chairman Peter Kell said yesterday the regulator had already started discussions with lenders to remove or amend unfair terms. “If a lender refuses to do so we will consider all regulatory options, including taking the matter to court as ultimately a court can decide whether or not a term is unfair,” Mr Kell said.

Ms Carnell said she firmly believed the contentious loan terms failed to comply with the law. Once again, she said, repeated calls on the banks to change their practices had fallen on deaf ears, despite “inquiry after inquiry highlighting major flaws in the way they treat their small business customers”.

Protections in the 2016 legislation apply where the contract is for the supply of financial goods or services and at least one of the parties is a small business employing less than 20 people. The upfront price payable must not exceed $300,000, or $1 million if the contract is for more than 12 months.

In their initial review, ASIC and the ombudsman found a number of areas of concern, including clauses that gave lenders a very broad discretion to unilaterally vary terms.

Non-monetary defaults could also occur in a very broad range of circumstances, and there were terms that absolved the lender from responsibility for conduct and statements outside the contract.

Finally, some terms broadly indemnified the lender against losses, costs, liabilities and expenses.

ASIC senior executive Michael Saadat said attempts had been made to improve contracts, but often they went no further than including the word “reasonable” in the contract.

“Our view is that we need more transparency,” Mr Saadat said. “It’s not enough for the lender to say it will act reasonably.”

The eight banks under investigation, including the big four, have been given another opportunity to make the necessary improvements.

Mr Saadat said no individual bank had been more at fault than the others.

Both ASIC and Ms Carnell reiterated their support for recommendations made by the independent review of the Code of Banking Practice in relation to small business contracts.

They said the additional protections for small business borrowers proposed by the review were long overdue and consistent with Ms Carnell’s recent inquiry into small business loans.

Banks should therefore move quickly to implement a prohibition on non-monetary default clauses where the borrower was meeting its obligations, and give 90 days’ notice when a loan facility was not going to be extended.

More comprehensive access should also be given to the Financial Ombudsman Service.