Banks snap into line on contract terms
Standard contract terms for small business borrowers will be modified by November to remove a list of sometimes notorious terms.The Australian Securities and Investments Commission and the Australian Small Business and Family Enterprise Ombudsman yesterday said the big banks were "taking action to protect small businesses from unfair terms in loan contracts."ASBFEO and ASIC said the Big Four banks "committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 will be protected from unfair contract terms."Unusually for a reform of this nature, banks omitted yesterday to share corresponding publicity on their conformity to what regulators have said they've agreed to.On the other hand, major banks have made clear, most recently at parliamentary hearings in March, that they supported reforms along these lines.??Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, has been the most animated scrutineer on this topic.The reforms agreed include:• removing financial indicator covenants such as loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments;• removing material adverse event clauses that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer; and • "significantly limiting" the operation of unilateral variation clauses.ASBFEO and ASIC said the banks agreed to contact all small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans. They added that "in many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers."The banks have agreed, ASIC said, "to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). "Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances."ASBFEO and ASIC have made it clear to the banks that simply including the word 'reasonable' in contracts does not go far enough.Carnell, in the media release, renewed the caustic language employed by her office over the last year."The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory."