Prospa changes term after ASIC review

Prospa has changed certain loan terms to satisfy queries raised by the Australian Securities and Investments Commission (ASIC). 

On Tuesday 5 June 2018, Prospa received a letter from ASIC requesting information as part of a broader industry review of non-bank small business lending contract terms.

Prospa was due to begin market trading back in June, but held off. At the time it said the ASIC issues were "not material" to the IPO. 

The review of Prospa’s contract was part of a broader surveillance by ASIC to examine lenders' small business loan contracts to reduce the risk of unfair contract terms.

As a result of ASIC’s review, Prospa has made a number of changes resulting in improved terms for borrowers and guarantors. The changes include addressing problematic terms outlined in the ASIC report, and changes to other terms which could have operated unfairly for borrowers and guarantors.

Prospa’s COO Ben Lamb said, “We’re always looking for ways to improve finance outcomes for small business owners. As the first non-bank lender to complete its review, we believe these changes are industry-leading.  
 
“We specialise in lending to small businesses and we know any changes we can make to ensure access to finance is simple and easy to understand are going to help our customers save precious time so they can focus on growing their businesses.” 

Prospa’s General Counsel, Nicole Johnschwager, said the small business lender has worked with the wider industry, ASIC and customers to address queries raised by ASIC in its industry-wide review of loan contracts.  
 
She added, “These changes have been made as part of Prospa’s commitment to helping lift transparency across the industry.  
 
“Prospa looks forward to continuing to improve financial inclusion for small business owners. This is an evolving area of regulation and we will work with industry peers and stakeholders to support this important and growing industry. 
 
“We call on other small business lenders in the industry to engage with ASIC and complete their own reviews and to subscribe to the Code of Lending Practice if they haven’t already.” 

Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC and the lender will communicate these changes to its small business customers with the amended contract coming into effect in early October.

ASIC’s surveillance of small business loan contracts is ongoing, and will consider regulatory action where appropriate.

Prospa has agreed to make the following changes to its standard form small business loan contract. The full list can be found on ASIC's website.

• amended the early repayment clause so that borrowers can now prepay their loan early without requiring Prospa’s consent, and removed Prospa’s absolute discretion whether to provide a discount for prepayment. Prospa will now 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; 
• amended 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; 
• amended 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); 
• removed 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); 

Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended. The amount of interest is therefore part of the “upfront price” of the loan and is excluded from review under the unfair contract term provisions.

Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions. ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.