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‘Big four’ banks change small business loan contract rules

Carnell says the banks should also consider extending the cover to small business loan facilities up to $5 million Carnell says the banks should also consider extending the cover to small business loan facilities up to $5 million

ASIC, ASBFEO welcome changes agreed to by the banks - The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC) have welcomed new contract agreements from the ‘big four’ banks.

National Australia Bank (NAB), Commonwealth Bank (CBA), Australia and New Zealand Banking Group (ANZ), and Westpac (WBC) – the four biggest banks in Australia – have agreed to eliminate specific "unfair" terms from small business loan contracts.

The four banks had earlier announced plans to review their small business loan contracts.

Customers who entered or renewed their contracts with the four banks from November 12, 2016 will benefit from the changes agreed with ASIC, which include:

• the loan documents will not contain 'entire agreement clauses' that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract

• the operation of the banks' indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank

• clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as 'material adverse change event' clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer

• banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.

The Ombudsman says the banks have acted on ASIC's and ASBFEO's calls to change their practices.

While some of the agreed terms are "different" to the original suggestion, ASBFEO commends the banks for, in some instances, going further than what the law demands to address concerns about the clauses.

"For example, NAB has taken an industry-leading position about the application of non-monetary default clauses, while the Commonwealth Bank will provide an industry-leading 90 calendar days' notice for any changes to loan contracts that the small business customer does not wish to accept," an ASBFEO statement notes.

The banks have agreed that financial indicator covenants will not be applied to property investment loans, and there will be limited use of these covenants in small business contracts to certain classes of loans.

ASIC will monitor the actual use of these clauses by the ‘big four’ banks to determine if they are in fact applied or relied on in an unfair way.

ASIC and ASBFEO will assess the results of this supervision.

"The improvements have raised small business lending standards and provide important protections for small business customers," ASIC deputy chairman Peter Kell says.

ASIC will publish more detailed information about the new agreements to allow other lenders to small business to consider whether changes to their contracts may be required.

ASBFEO Kate Carnell had earlier welcomed the Australian Competition and Consumer Commission (ACCC’s) investigation on unfair contract rules across many industries.

"This reflects nine months of hard work by ASIC working with the big four banks to meet the expectations of the Unfair Contract Term legislation," Carnell says.

"The banks’ initial underdone response to the legislation serves as a reminder that banks were once again trying to ‘game’ the rules and this erodes trust. 

"There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice."

The four banks will soon start contacting all relevant small business customers who will affected by these changes.

In the future, the banks should also consider extending the cover to small business loan facilities up to $5 million, Carnell says.

"In meeting the law to cover individual loan contracts up to $1million the banks have agreed to extend the cover to small business total loan facilities up to $3 million which is a move in the right direction.

"Recent reviews have consistently raised that a small business loan facility of $5m is the correct benchmark.

"This remains a sticking point that will need to be addressed."

This article was first published by
Last modified onTuesday, 29 August 2017 00:08

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