ASIC has announced that the four major banks have agreed to specific changes to eliminate unfair terms from their small business loan contracts. Background.

The banks have agreed to apply the changes to small businesses with total loan facilities up to $3 million who entered or renewed contracts from 12 November 2016 .

The changes mean that:

• the loan documents will not contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.
• the operation of the banks’ indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
• clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as ‘material adverse change event’ clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.
• banks have 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.

Some of the banks have taken different approaches – and in some instances, gone further than the law requires – to address concerns about these clauses.

For example, the Commonwealth Bank will provide 90 calendar days’ notice for any changes to loan contracts that the small business customer does not wish to accept.

All four banks have limited the use of financial indicator covenants in small business contracts to certain classes of loans (e.g. property development and specialised lending such as margin loans). The banks have agreed that financial indicator covenants will not be applied to property investment loans.

ASIC will publish more detailed information about the changes agreed with the four banks so that other lenders to small business can consider whether changes to their contracts may be required.