In news set to shake up small to medium business, the big four banks will implement small business loan contract reforms, following a regulatory investigation into unfair contract terms.
In March 2018, the Australian Securities and Investments Commission (ASIC) released a report, Unfair Contract Terms and Small Business Loans, which outlines changes to be implemented by Australia’s major lenders. The report follows an investigation by the regulator and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
The investigation found that the big four banks had not done enough to bring small business loan contracts in compliance with Australian Consumer Law in November 2016, which extended consumer protections to small business loan contracts of up to $1 million.
Changes to be made by the major banks include:
Entire agreement clauses: Clauses that prevent lenders from being held contractually responsible for conduct, statements or representations made to small business borrowers outside the written contract are likely to be unfair. The banks have confirmed that the clauses will no longer be applied to their small business loan contracts.
Broad indemnification clauses: Clauses that require borrowers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or agents or a receiver appointed by the bank are likely to be unfair. The banks have confirmed that the clauses will no longer be applied to their small business loan contracts.
Event of default clauses: Clauses that allow lenders to treat a loan as being in default because of any unspecified ‘material adverse change’ are likely to be unfair. These clauses gave the banks a very broad discretion to call a default against the borrower without giving the borrower any clarity about what types of change could result in a default. The banks have confirmed that these clauses have been removed or will no longer be applied to their small business loan contracts.
Specific events of non-monetary default: The banks have also considerably limited the specific events of default listed in the loan contract that could allow the bank to call a default (other than for non-payment) and terminate a loan contract with the small business borrower.
Financial indicator covenants: The use of a breach of some financial indicator covenants such as loan-to-valuation ratio (LVR) in small business loans to trigger a default and enforcement of the loan could be unfair where a potential breach does not present a risk to the lender.
Unilateral variation clauses: Clauses that give lenders a broad ability to vary contracts without agreement from the small business borrower have a high risk of being unfair as they cause a significant imbalance in the rights of the lender and small business borrower (in favour of the lender).
The report has noted that the banks will contact borrowers to inform them of the changes. ASIC will also monitor the banks’ implementation of the reforms, and it will investigate unfair contract terms issued by other lenders. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.
What does this mean for you ?
While your small business clients are afforded a new measure of protection from the four big banks, it’s good to know that there are other options for your clients to obtain finance.
Invoice finance is a flexible, scalable and easy way for your clients to access working capital. invoice finance provides a business with quick access to up to 80 per cent of the funds owing in outstanding invoices, with the remaining percentage paid when the invoice is paid