Banks forced to walk the talk on loans as ASIC cracks down on unfair contracts
Wednesday, May 17, 2017/
It’s been a big week for Australian banks, but it’s not just the government’s proposed deposits levy that’s on their minds, with financial regulators promising to scrutinise their promises on fair terms for small business contracts.
The Australian Securities and Investments Commission (ASIC) and Australian Small Business and Family Enterprise Ombudsman (ASBFEO) say they will be watching closely after the nation’s biggest banking institutions used a round-table event to promise to uphold their legal obligations when writing small business loan terms.
After handing down recommendations from her small business lending enquiry, ombudsman Kate Carnell revealed in March that many of the small business contracts from the country’s biggest lenders contained potential breaches of new unfair contract laws, which came into effect in November 2016.
Concerns raised include the frequency of clauses within loan contracts that allow the banks to unilaterally vary loan terms.
After being asked to “lift their game”, ASIC and the ombudsman’s office said this week the big four have come to the table with a number of commitments to stamp out unfair lending.
These include removing non-financial covenants for a number of small business loans and giving applicable customers 30 days’ notice when loan terms do need to be changed.
Now ASIC is putting the hard word on the banking sector, saying it better walk the talk on these commitments or face action for breaching unfair contracts legislation.
“We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules,” ASIC deputy chairman Peter Kell said in a statement yesterday.
However, many of the changes that the banks have committed to come directly from their responses to recommendations from Carnell’s lending inquiry.
Carnell previously told SmartCompany these responses were “feeble” because they didn’t include important elements, such as a concession that a small business loan should be classed as any credit facility up to $5 million, rather than $3 million.
The banks have claimed their concessions will cover 95% of small business loans, but Carnell remains sceptical on this number.
“I can’t see where they got this 95% figure from, I’m yet to be convinced,” she told SmartCompany last month.
However, National Australia Bank says it is serious about making changes, and has a commitment to “remove red tape” in its dealings with SMEs.
“NAB has been working constructively with the industry to address concerns raised in the Australian Small Business and Family Enterprise Ombudsman Kate Carnell’s Small Business Loans Inquiry report. We are proud to be leading the charge on this by applying changes to all new and existing loans,” said Leigh O’Neill, bank’s executive general manager of Business Direct and small business in a statement to SmartCompany this morning.
A spokesperson for the Commonwealth Bank told SmartCompany the bank will continue to work with ASIC.
“ASIC has reviewed changes we made for unfair contract terms and has not raised any issues around illegality,” the spokesperson says.
Carnell said in a statement on Tuesday that the banks have “been given every opportunity” to change their ways, considering unfair contracts legislation came into effect last November, and she’ll be watching to ensure claims of “reasonable” actions are actually played out in reality.
SmartCompany also contacted ANZ and Westpac this morning. Westpac referred SmartCompany to the Australian Bankers’ Association, while ANZ did not respond prior to publication.
In its response to the Carnell inquiry in April, the Australian Bankers’ Association committed to improving lending practices.
“Banks recognise they need to improve lending practices so small business customers have more certainty and can better understand loan terms and conditions,” said chief executive Anna Bligh in a statement last month.
Bank levy furore could see big four quiet on loan terms
The banks currently have plenty on their plate as they battle the government on its proposed banking levy, says Neil Slonim, an independent banking commentator and founder of theBankDoctor.org. He believes this could be a good thing for SMEs when it comes to loan terms.
“With the furore caused by the new bank levy, its unlikely that the banks will want to take on ASIC over unfair contract terms,” he says.
All parties are in public agreement that better transparency and fairness is needed, but regulators are increasingly wary of banks being all talk, no action.
“If the regulator believes the banks are bloviating, it is quite possible that we will see some action taken,” Slonim says.