Banks roll out fairer SME loan contracts

by Miklos Bolza25 Aug 2017
After a lengthy consultation period with the Australian Securities and Investment Commission (ASIC), the four major banks have agreed to eliminate unfair terms in their small business lending contracts.

The changes mean the elimination of ‘entire agreement clauses’ which absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.

The use of indemnification clauses has also been significantly limited. For instance, banks will not be allowed to force SME customers to cover losses or costs incurred due to the bank’s fraud, negligence or wilful misconduct.

‘Material adverse change event’ clauses which permitted banks to call in a default for an unspecified negative change in circumstances for the customer have also been removed.

Finally, restrictions have been put in place on how banks can vary contracts in specific circumstances. If these variations convince the customer to try and exit the contract, banks will have to provide a period of between 30 to 90 days allowing them to do so.

These changes were welcomed by both ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).

“The improvements have raised small business lending standards and provide important protections for small business customers. ASIC will be following up with other lenders to ensure that their small business contracts do not contain unfair terms, and we will continue to work with the ASBFEO on these issues,” ASIC deputy chairman Peter Kell said.

The ASBFEO Kate Carnell said that this development represents nine months of hard work by ASIC and the big four banks.

“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 big four will commence contacting relevant SME customers who entered into or renewed a loan from 12 November 2016. This coverage will apply to small business loan facilities of up to $3m which Carnell said was 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.”

ASIC will be monitoring how the banks use these clauses to determine whether they are applied or relied upon in an unfair manner. The regulator will work with ASBFEO to assess the results of this monitoring.

Additionally, ASIC will publish more detailed information about these changes at a later date so that other lenders can consider whether to apply these same changes to their own contracts.

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