The Australian Securities and Investments Commission (ASIC) and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) have promised to hold the major banks to account when revamping their small business loans.
Following intervention and a roundtable by ASIC and ASBFEO, the big four banks have pledged their commitment to a series of changes designed to protect small business owners from unfair loan conditions.
These changes apply to loans entered into or renewed from 12 November 2016.
ASIC deputy chairman
Peter Kell said the regulator made it clear that lenders had to “significantly improve” their lending agreements to ensure they met the new rules.
“It is important that the banks have committed to improving their small business loan contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”
Changes to SME contracts committed to by the big four banks include:
- Removing ‘entire agreement clauses’ which absolve the lender from responsibility of conduct, statements or representations made outside of the contract
- Removing ‘financial indicator covenants’ which give lenders the power to call a default when certain conditions are met regardless of whether the customer has met their financial commitments
- Removing ‘material adverse event clauses’ which give lenders the power to call a default in the event of an unspecified negative change to the customer’s situation
- Limiting the operation of ‘indemnification clauses’ which broadly protect the lender against losses, costs and liabilities that may arise sometimes outside the control of the business owner
- Limiting the operation of ‘unilateral variation clauses’ to give business customers a minimum of 30 days’ notice for any changes to the contract
Both ASIC and ASBFEO have warned that merely including the word ‘reasonable’ in the SME lending contracts does not go far enough.
ASBFEO Kate Carnell said her role was to ensure that the unfair contract term legislation was working across all industries, adding that it was clear what the word “unfair” meant in relation to the majors: protecting the interests of the banks against those of small business.
“The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory,” she said.
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