However in December 2016 the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) queried whether the changes banks were making to their small business terms went far enough. The report on ASBFEO’s inquiry raised the example of whether inserting the word “reasonable” into certain clauses which give banks discretionary powers would be sufficient for compliance with the new legislation.
In March 2017, ASIC and ASBFEO announced that they had reviewed small business loan contracts from eight lenders and found there had been a failure to take sufficient steps to comply with their new obligations.
The review identified concerns about unilateral variation rights, non-monetary default provisions, entire agreement clauses and broad indemnities. ASIC and ASBFEO reiterated that simply including the word “reasonable” in contracts does not go far enough. ASIC said that it would use its range of regulatory powers including taking a matter to court if ASIC identified a potentially unfair term and a lender refused to amend or remove it.
In March, the ABA’s response to the independent review of the Code of Banking Practice said that it supported the removal of catch all material adverse change clauses but that individual banks needed time to consider the potential consequences of removing those clauses.
Following a round table hosted by ASIC and ASBFEO in May 2017, the regulators announced that the big four banks had committed to a series of comprehensive changes to apply to small business loans entered into or renewed from 12 November 2016. In some cases the changes will apply to all small business loans.
The changes include:
- removing entire agreement clauses from small business contracts;
- limiting financial indicator covenants (such as loan-to-valuation ratio covenants) to products where those clauses are essential to the operation of the product;
- removing material adverse effect clauses (that give banks the power to trigger a default) when unspecified negative changes occur;
- limiting the operation of indemnities against losses, costs, liabilities and expenses beyond the control of the borrower; and
- significantly limiting the operation of unilateral variation clauses.
These developments send a strong message to lenders to ensure that contacts with small businesses fully comply with the requirements in the legislation. ASIC has already identified particular types of provisions of concern and may test the operation of the new unfair contact term legislation in the courts.
