Fairer terms for small business loans locked in as the big four banks sign off on contract changes

Australia’s big four banks will soon be contacting small business customers to inform them of changes to their loan terms, following what is being described as a hard-fought win for SMEs against unfair banking practices.

Fairfax reports the nation’s four biggest financial institutions have now agreed to specific changes that have been pushed by the Australian Securities and Investments Commission (ASIC) and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to ensure small business loans of up to $3 million comply with unfair contract laws.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell has questioned the leadership of the banks for failing to act on unfair contracts legislation until they were “called on it”, but says an agreement from the big four to improve lending practices is a step in the right direction.

Speaking to SmartCompany, Carnell says gaining agreement from Commonwealth Bank, Westpac, ANZ and NAB to remove clauses, including the right to vary loans for non-monetary reasons, is a long-fought win for SMEs.

“It will mean that the majority of non-financial default clauses will go … and the timeframes for any changes will be longer,” Carnell says. 

It is understood the banks will now be writing to inform small business customers that have signed up to loans on or after November 12 of last year, when new contract fairness provisions came into effect, that the new terms apply to them.

Carnell says this is good news, but questions why it has taken the big four from November 2016 until now to formally commit to changes, with her own office’s inquiry into small business lending practices last year making many of the recommendations now in effect.

“The reality of this is that this was indicative of the approach that the banks have taken in the past, which is, you know, ‘let’s do nothing and see if someone takes us on’. Well that’s just not leadership,” she says. 

While the banking sector gave in-principal support for a number of findings from Carnell’s inquiry into small business lending, she says ASIC was still finding unfair contracts popping up in the sector this year.

“ASIC had to sit down with them individually and go through it all to get an outcome that should have been able to delivered last November,” she says. 

What has been agreed

In general terms, each of the big four banks have agreed to introduce more simply worded loan summary statements and remove a range of “non-monetary” default clauses, which previously gave banks scope to change loan terms for reasons other than a company’s ability to make payments.

Other significant changes include limiting the banks’ indemnification clauses that previously required small businesses to cover costs incurred through any negligent acts of the lender, and the removal of “material adverse event clauses” that could be used to terminate a loan because of a change of an SME’s circumstances other than the ability to repay the loan.

Fairfax reports lenders will now also be more tightly tied to written contract clauses through limitations on what representations can be made to businesses outside of the loan agreement.

Each bank has a differently worded set of policies for when loan terms can be changed or a loan cancelled, most of which involve major changes in a business’s circumstances.

For example, the Commonwealth Bank referred SmartCompany this morning to details it released in April stating a small business could still default on a loan in the event of the loss of a licence needed to conduct a business, or insolvency or bankruptcy.

National Australia Bank’s general manager of small business Leigh O’Neill told SmartCompany the bank has been working on making changes to its small business loans over several months.

“We’ve been working constructively and closely with the industry over recent months, and we are proud to be helping lead the charge on this – including taking measures beyond the Ombudsman’s recommendation,” O’Neill said in a statement this morning.

SmartCompany has contacted ANZ and Westpac for comment.

Where to next?

Carnell says despite these changes being formalised, there is still plenty to monitor when it comes to unfair business lending and contract practices.

“The great dilemma for small businesses is taking the banks on in court is not vaguely even reasonable. So we have to make sure they deliver on their agreements, and they do so in a way that is reasonable,” she says.

And it’s not just the big banks that need to ensure they have fair contracts, says Carnell, who points to Australia’s emerging fintect sector. She believes the rapid growth in the space might have seen companies set up agreements in breach of contract law obligations.

“We think a lot of the fintechs have a lot of work to do. We dont’ believe some of them have quite realised they are also have to comply,” she says.

“The agreement has been agreed with the big four [banks], but now all the other banks have to agree. Now it’s up to all the other banks and financial institutions to come to the party as well.”

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