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Banks Agree to Eliminate Unfair Contract Terms

Thursday, September 28, 2017 - Posted by Michael McCulloch

In our March 2017 edition we released a blog article Bank Lenders Must Meet Unfair Contract Laws.

The Australian Securities & Investments Commission ("ASIC") have now reported by media release on Thursday, 24 August 2017 that National Australia Bank, Commonwealth Bank of Australia, Australian and New Zealand Banking Group (ANZ) and Westpac Banking Corporation have now agreed to specific changes to eliminate unfair terms from their Contracts.

The changes mean that:

  • The loan documents will not contain 'entire agreement clauses' that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.
  • The operation of the banks' indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
  • Clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as 'material adverse change event' clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.
  • Banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.

The banks have agreed that any customer who entered into a Contract from November 2016 will be protected by the changes introduced by ASIC with ASIC also indicating that they will conduct regular audits to ensure compliance.

In a statement to the media ASIC Deputy Chair, Peter Kell, said, "ASIC welcomes the significant improvements made by the banks to their small business lending agreements. 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".

At this point in time ASIC have indicated that they will also conduct a further review in the coming months so that other lenders to small business can consider their position and whether changes to their Contracts may be required in the near future.

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