‘Big four’ banks to modify unfair contract terms

Meeting with ASBFEO and ASIC results in positive change for small business loan contracts

‘Big four’ banks to modify unfair contract terms
Carnell says the banks' earlier response in the matter had been 'unsatisfactory'.


The four biggest banks in Australia have agreed to make changes to terms of loan contracts to protect small businesses against "unfair" clauses.

Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell says the "unfair terms" made sure the interests of the "advantaged party", which in this case refers to the banks, was protected against the interests of small businesses.

Following a meeting with ASBFEO and the Australian Securities and Investments Commission (ASIC), the 'big four' banks have agreed to make changes to their terms agreement.

The four banks – National Australia Bank (NAB), Commonwealth Bank (CBA), Australia and New Zealand Banking Group (ANZ), and Westpac (WBC) – will make a series of changes to ensure all small business loans entered into or renewed from November 12, 2016 onwards are protected against unfair contract terms.

An ASBFEO-ASIC joint statement says the 'big four' banks have committed to:

  • "Removing 'entire agreement clauses' from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract

  • Removing financial indicator covenants from many applicable small business contracts. For example, 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, will be removed

  • Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer

  • Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower

  • Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days’ notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made."

"In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers," the statement notes.

"The banks have agreed 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."

Both ASBFEO and ASIC had urged lenders to "significantly improve" loan agreements to ensure that small businesses met the new rules.

Carnell says the banks had been given a one-year transition period starting November 2015 to remove such contract terms from their loan agreements but their response was "unsatisfactory" earlier.

ASIC deputy chairman Peter Kell says it is "important that the banks have committed to improving their small business loan contracts.

"ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms."

All small business customers, who entered into or renewed a loan from 12 November 2016, will be notified by the respective bank about the changes to their loans.

The new unfair contract terms have been under investigation by the Australian Competition and Consumer Commission (ACCC) since March this year.           

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