Review of small business standard form loan contracts

ASIC has announced that its initial review of small business standard form loan contracts undertaken together with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has revealed there has been a failure by lenders to take sufficient steps to comply with their new obligations under unfair contract terms legislation.

In their review of 8 lenders (after the one year transition period ending in November 2016) ASIC and the ASBFEO found lenders continue to use clauses of concern such as:

  • Terms that give lenders a very broad discretion to unilaterally vary terms and conditions of the contract;
  • Terms that provide for loan ‘default’ (such as non-monetary default) in a very broad range of circumstances, rather than where the borrower has materially defaulted on their obligations;
  • Terms that absolve the lender from responsibility for conduct, statements or representations that the lender makes to borrowers outside of the contract (known as ‘entire agreement clauses’); and
  • Terms that too broadly indemnify the lender against losses, costs, liabilities and expenses.

ASIC says that where it identifies a potentially unfair term it will work with the lender to remove or amend the term, and it has already started to raise these issues with lenders. If the lender refuses to do so ASIC will consider all regulatory options, including taking the matter to court to decide whether or not a term is unfair.

Both ASIC and the ASBFEO have also expressed their support for the recommendations made by the independent review of the Code of Banking Practice in relation to small business loan contracts.

The COBP Review recommends small business lenders implement amongst other things:

  • A prohibition on non-monetary default clauses where the borrower is meeting their obligations under the contract;
  • 90 days’ notice period where a loan facility will not be extended; and
  • More comprehensive access to the Financial Ombudsman Service.


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