Eliminating unfair contract terms in small business lending contracts

28 August 2017

The Australian Securities and Investments Commission (ASIC) and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has issued a joint media release (accessible here) welcoming the changes agreed to by the big four banks to eliminate unfair contract terms in small business lending contracts.

The changes will be applied by the big four banks to small business loan contracts:

  • Entered or renewed from 12 November 2016 – being the date of commencement of the unfair contracts terms laws for small business; and
  • For total loan facilities up to $3 million (being more than the $1 million statutory threshold).

The changes include:

  • Removing ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract;
  • Limiting the operation of indemnities given by the borrower (for example, indemnities will exclude loss incurred by the bank as a result of fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed);
  • Removing ‘material adverse change event’ clauses which give the power to terminate the loan for an unspecified negative change in the borrower’s circumstances; and
  • Restricting the ability to vary contracts to specific circumstances, and where such a variation would cause a borrower to want to exit the contract, providing a period of between 30 and 90 days for the borrower to do so.

In addition, ASIC and ASBFEO states that all four banks have limited the use of financial indicator covenants to certain classes of loans (e.g. property development and specialised lending such as margin loans) not including property investment loans.

ASIC states that it will monitor the application of the changes in practice and will assess the results with ASBFEO to determine if the changes are in fact applied or relied on in an unfair way.
For other lenders ASIC states that:

  • The improvements have raised small business lending standards and it will be following up with other lenders to ensure that their small business contracts do not contain unfair terms; and
  • It will publish more detailed information about the changes agreed with the big four banks so that other lenders to small business can consider whether changes to their contracts may be required.

The HWL Ebsworth Financial Services & Regulatory team has experience with the proposed changes and can assist lenders to comply with the recommendations. For more information or assistance please contact a member of our team.

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