ASIC sues two non-majors for "unfair" lending

ASIC has sued two non-major banks for their use of “unfair" contract terms in small business contracts.

ASIC alleges the terms used by Bendigo and Adelaide Bank and Bank of Queensland are unfair as they:

• Would cause detriment to the small businesses if the terms were relied on
• Caused a significant imbalance in the parties’ rights and obligations under the contract
• Were not reasonably necessary to protect the bank’s legitimate interests

Some of the allegedly unfair terms 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.

Jesse Vermiglio, partner for Holley Nethercote Commercial and Financial Services Lawyers, recently spoke to Australian Broker about the obligation to act efficiently, honestly and fairly, a topic "heavily discussed during the royal commission."

“We are seeing ASIC allege a breach of this obligation in most cases against licensees it takes to court," Vermiglio said. 

“ASIC has indicated it’s going to push harder on efficiently, honestly, and especially fairly. A lot of their cases now reflect that, and I’d expect to see more and more of it in the coming years.”

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts.

If the federal court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void, as if the terms never existed in the contracts. Further, ASIC is seeking that the terms are declared void from the outset - not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

It was in November 2016, that ASIC’s law addressing unfair terms in standard form consumer contracts for financial products and services, including loans, was expanded to cover small business contracts as well.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

• The contract is for the supply of financial goods or services, including a loan contract
• At least one of the parties is a ‘small business’ meaning it employs fewer than 20 people
• The upfront price payable under the contract does not exceed $300,000, or $1m if the contract is for more than 12 months