Following intervention by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC), the four major banks are taking action to protect small businesses from unfair terms in loan contracts.
After a round table hosted by ASBFEO and ASIC, the major banks have committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 will be protected from unfair contract terms.
The ASBFEO and ASIC have publicly raised concerns that lenders needed to lift their game in meeting unfair contract terms legislation. The banks have committed to:
- Removing ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract.
- Removing financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed.
- Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer.
- Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower.
- Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days’ notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.
The banks have agreed to contact all small business customers who entered into or renewed a loan from 12 November 2016 about the changes to their loans. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.
The banks have agreed to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances.
For more information, refer to the ASBFEO website.