The major banks have agreed to remove unfair terms in their loan contracts with National Australia Bank taking a leading-industry position on non-monetary default clauses.
The move follows action by ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), which called on the banks to review their small loan contracts with the aim of removing unfair terms and conditions for loans up to $1 million. Banks have agreed to extend this cover to loans up to $3 million.
Under the changes, ‘Entire Agreement Clauses’ will be removed from loan contracts, which means banks are no longer absolved from any commitments or agreements they make to borrowers outside written contracts.
Indemnification clauses will be significantly limited, which means that small businesses will no longer need to cover losses, costs and expenses incurred due to fraud or negligence by the bank or a receiver appointed by the bank.
Banks have also 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.
Banks will also limit the instances where breach of a financial indicator covenant will be an event of default to specialised finance transactions such as margin lending, self-managed super funds financing and property development.
Importantly, banks will now no longer have the power to terminate the loan for an unspecified negative change in the circumstances of the customer – which occurred under non-monetary default clauses.
NAB and CBA lead
The issue of non-monetary default clauses was a hot button issue in the second-round of public hearings into the conduct of Australia’s major banks in Canberra earlier this year with bank chiefs previously adopting different positions on the issue.
Australia New Zealand Banking Group chief executive Shayne Elliott said non-monetary loan covenants are important as they allow banks to have a conversation with SME customers when their business starts going off track while Westpac chief Brian Hartzer flagged that the bank would scrap all monetary default clauses from small business loans.
However, according to a statement by ASIC, NAB has taken an industry-leading position about the application of non-monetary default clauses following Thursday’s announcement.
NAB, touted as Australia's largest business bank, has already taken steps to address non-monetary default clauses with its small business customers.
"We've been working constructively and closely with the industry over recent months, and we are proud to be helping lead the charge," NAB executive general manager, business direct and small business, Leigh O'Neill told AB+F.
The Commonwealth Bank was also singled out for its initiative in providing an industry-leading 90 calendar days’ notice for any changes to loan contracts that the small business customer does not wish to accept.
ASBFEO’s Kate Carnell has consistently pushed for better agreements in bank loans for small businesses.
“This reflects nine months of hard work by ASIC,” she said in a statement. “There are now very positive signs that the big four banks are demonstrating industry leadership in embracing best practice."
A sticking point
However, Carnell believes that the loan agreements should extend to cover loans up to $5 million, adding that “this remains a sticking point that will need to be addressed”.
The Council of Small Business Australia CEO Peter Strong also supported the banks’ deicson to apply the new rules to loans at the $3 million level but agreed the limits should be extended.
“The new maximum threshold for the changes to take effect is well up from the $300,000 set for other contracts,” Strong said. “This is much more reflective of the real situation in the small business finance space. We do not want to appear greedy, we’d like it to be $5 million, but $3 million is a great leap forward.”
However, Strong supported the overall changes.
“Good on the banks. It’s taken longer than it should have done, but the big four banks have finally agreed to eliminate unfair terms from their contracts,” he said. “Small business people are now safe from banks unilaterally changing loan contracts."
The four banks will contact their small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans.
ASIC also announced the launch of its Small Business Strategy on Thursday, a three-year plan to “engage, assist and protect” the sector.