The major banks have failed to remove unfair contract terms from small business loans six months after it became law to do so, prompting intervention by the Australian Securities & Investments Commission (ASIC) and the Australian Small Business & Family Enterprise Ombudsman (ASBFEO).
Under laws that came into effect on November 12, 2016, after passing Parliament a year earlier, banks are obliged to remove a series of clauses and covenants from new loans of up to $1 million to businesses employing fewer than 20 staff.
These included controversial loan-to-vauation ratio covenants, which gave banks the power to default loans when the value of secured property fell, even when the small business customer had met all repayments.
Despite having a year to prepare for the changes to unfair contract terms legislation, the banks continued to issue new loan contracts with the forbidden terms, said ASBFEO Kate Carnell.
"It's very frustrating, not to mention illegal," said Ms Carnell.
"I understand it's some work to go back and change template loan documents, but I'd have thought one thing the banks aren't light on is lawyers."
The four major banks' heads of small business lending were called to a roundtable last week hosted by Ms Carnell and ASIC deputy chairman Peter Kell, and quizzed on their non-compliance.
"They admitted these terms were still there, but that they wouldn't enforce them. That's not good enough," said Ms Carnell.
ANZ denied it was flouting the law.
"ASIC has had a summary of the changes we made across our small business contracts and ANZ's revised main lending contract for six months, and has not advised where it believes we are non-compliant," a spokesperson said.
Following the roundtable, ASIC said the banks agreed to contact all small business customers who entered into or renewed a loan since November 12, 2016, and inform them of the changes.
Mr Kell said the regulator would pursue the banks to ensure future small business loan contracts did not contain unfair terms.
Ms Carnell commended the Commonwealth Bank for agreeing to extend its definition of a small business loan to $3 million, and apply the unfair contract changes to all of its small business loans no matter their inception date.
Australian Banking Association chief executive Anna Bligh said banks had been "working closely" with ASIC and ASBFEO to ensure small business loan contracts were compliant and would "continue to do so".
Under the unfair contract term law changes, and following the ASIC/ASBFEO roundtable, an ASIC statement said the big four banks had committed to terms that "absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract" and significantly limiting the operation of indemnification clauses
The banks had also promised to remove financial indicator covenants, such as "loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments".
Lenders also agreed to remove terms that "give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer" and "significantly limit the operation of unilateral variation clauses".
