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Banks to face court over ‘unfair’ credit contracts

ASIC has launched civil proceedings against two non-major lenders over the alleged application of “unfair” credit contract terms.  

Bendigo and Adelaide Bank and BOQ will be taken to the Federal Court by the Australian Securities and Investments Commission (ASIC) in relation to the application of the unfair contract terms legislation.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank and BOQ were unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the banks’ legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

If the Federal Court agrees that Bendido and BOQ’s credit contracts were “unfair”, the specific terms will be void and unenforceable by the lenders in these contracts.

The proceedings against Bendigo relate to a version of its small-business loan contracts under each of its Delphi Bank and Rural Bank brands in place between 2016 and June 2019.


The relevant terms and conditions appear in previous versions of small-business loan contracts, with the terms updated in July 2019 in response to additional guidance provide by ASIC via Report 565 and the new Banking Code of Practice.

Bendigo has stated that it is cooperating with ASIC in relation to the court proceedings with a view to reaching a mutually agreed outcome.

“We remain committed to keeping our customers at the centre of everything we do and ensuring we satisfy all regulatory requirements and guidelines,” Bendigo stated.

Meanwhile, the proceedings against BOQ relate to contract terms in certain small-business contracts entered into between November 2016 and June 2019, which ASIC alleged included unfair contract terms.

The details of the terms have not yet been released.

In a statement, BOQ stated that it “takes compliance with its legal and regulatory obligations seriously” and has “sought to respond in a constructive manner and has taken immediate action to address the vast majority of ASICs concerns”.

BOQ added that it has now “proactively commenced a review of all small-business lending contracts entered into from November 2016”.

It continued: “If BOQ identifies any small-business customers who have been adversely affected, it will compensate them. 

“While BOQs review is ongoing, it currently believes that the potential total compensation will be limited and not impact BOQs financial performance in any material way.”

Unfair contracts

ASIC has been reviewing small-business contracts over the past few years and last year released its Unfair Contract Terms and Small Business Loans report outlining changes to be implemented by Australia’s major banks.

This came following a joint investigation with the Australian Small Business and Family Enterprise Ombudsman that found that the big four banks “had not done enough” to bring small-business loan contracts in compliance with amendments to Australian Consumer Law in November 2016, which extended consumer protections to small-business loan contracts of up to $1 million.

As a result, the big four banks updated their terms to ensure they were compliant with the legislative amendments.

The changes that were required by the banks to be compliant with the law included:

  • Entire agreement clauses:
    • The removal of clauses that prevent lenders from being held contractually responsible for conduct, statements or representations made to SME borrowers outside the written contract.
    • The removal of clauses that require borrowers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or agents or a receiver appointed by the bank.
  • Event of default clauses:
    • The removal of clauses that allow lenders to treat a loan as being in default because of any unspecified “material adverse change”.
    • The banks have also considerably limited the specific events of default listed in the loan contract that could allow the bank to call a default.
  • Financial indicator covenants: The limiting of some financial indicator covenants such as loan-to-valuation ratio in small-business loans to trigger a default and enforcement of the loan.
  • Unilateral variation clauses: The limiting of clauses that give lenders a broad ability to vary contracts without agreement from the small-business borrower.

ASIC cautioned last March that it would continue to monitor the implementation of the reforms and investigate unfair contract terms issued by other banks and non-banks.

This led to several SME lenders developing and signing the Online Small Business Lenders Code of Practice that aims to help make SME loans more transparent and easy to understand.

[Related: ASIC reveals plan to curb misconduct in next four years]

Banks to face court over ‘unfair’ credit contracts

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