The Australian, November 5, 2016; John Durie:
The big banks face a new legal test next week when the unfair contract provisions that protect consumers are extended to small business, threatening to void one-sided big business contracts.
Changes to the Australian Consumer Law and to the ASIC Act come into effect on November 12 after a year in which the ACCC and the big law firms have warned big business of the impending changes.
The banks are prime candidates given they issue standard- form contracts that give themselves all the rights and leave nothing but scraps for the businesses or consumers on the other side.
The law was originally introduced by then assistant treasurer Chis Bowen back in 2009 to give consumers increased rights in dealing with companies. He then planned to extend it to small business, but this was later canned by his successor Craig Emmerson. It was later revived by former minister Bruce Billson.
Some lawyers argue the measure will have more benefit to small business than the amendments to section 46 will ever have. Section 46 aims stop abuse of market power and will be amended later this year under government plans to reform competition law.
The unfair contracts provisions apply to standard-form contracts that result in imbalance of rights by giving one side the right to alter the terms and which are often written in a take it or leave it form.
On these grounds it would be considered unfair and voided.
The likely targets start with the big banks that have been through similar provisions with consumers and so should have the arguments ready, but it is certain they will be tested.
Big phone companies like Telstra and supermarkets and other retailers will also be tested in their dealings with suppliers, builders and farm suppliers. The law only applies to contracts made or changed after November 12. But after a year of warnings, the ACCC is ready to pounce.
Job ad for ASIC chair
ASIC chair Greg Medcraft doesn’t leave his position until next November, but headhunter Heidrick & Struggles advertised his position in the newspapers yesterday.
Commissioner Greg Tanzer leaves this month and his job was also advertised. The government is also due to appoint an enforcement commissioner shortly, as recommended by the ASIC review panel last year.
By throwing the door open for the top job so early the government is no doubt keen to test offshore candidates.
The $1.6 billion Moly-Cop sale yesterday was just one step, but the real revolution happened at the Arrium creditors’ meeting when they agreed to a new structure in which all sale proceeds and debt will be grouped under a new entity called Arrium Creditor Distribution Company.
The structure devised by Mark Korda and Arnold Bloch Leibler’s Leon Zwier created deeds of arrangement over the 94 different corporate entities to give the administrator (Korda Mentha) the power to put all debt ($4bn) into the one vehicle that will also collect the proceeds of the asset sale.
The integrated steel company, which is expected to go for around $1bn, will be sold as a separate entity free of debt with all the customers and workers as an ongoing enterprise.
Federal Court judge Jennifer Davies approved the new structure, although ASIC made clear “ASIC should not be taken to have given its approval”.
The plod was worried about the discretion given to the administrator and the power of attorney granted by the creditors. But with court and creditor approval now in the bag, the model is set for all big company insolvency cases and Justice Davies is to be commended for approving a practical solution to a complex set of problems.
If the Morgan Stanley-led sale proceeds as planned in late January, her pragmatism in confirming the Korda-Zwier plan will be marked down as a giant step forward in Australian insolvency law.
The creditors all transfer to ACDC which will collect the sale proceeds and apportion them as per normal processes.
But in the meantime the operating assets will be sold as a complete vehicle, with staff and customers, thus avoiding more claims, not to mention further complexity.
Half way through this annual meeting round there have been six strikes and votes of more than 25 per cent against ASX 300 company remuneration reports.
These include Boral, AGL, CSL, Mortgage Choice, Spotless and Car Sales.
Next week’s CBA annual meeting is sure to join the list, which follows some 19 strikes recorded last year.
The banks have differing concerns about the Australian economy, with ANZ more worried about high consumer debt levels and Westpac and NAB more worried about regional weakness. But, like all good economists, both could be right.
Some of course argue the banks themselves are the problem.
On Reserve Bank figures consumer debt levels rank right up with the highest in the world — on par with Denmark, Switzerland and the Netherlands — but there is room to argue the concerns are overblown.
The RBA puts the value of total consumer liabilities at $2.2 trillion and assets at $11.1 trillion, including residential housing at $5.7 trillion.
On this score, on economist Saul Eslake’s numbers, the value of assets to liabilities is 21.3 per cent and of housing assets some 27.6 per cent.
The more frightening numbers are total household debt to income, at 131 per cent, and total housing assets to income, at 186 per cent.
There are some moderating factors, like the fact the top two- thirds of housing debt is owned by the top 40 per cent of incomes.
These people are more likely to be able to repay liabilities.
Culturally, Australians tend not to default on their mortgage and are more likely to sell a property before it gets to that stage.
Still, debt-to-income is at an highest high, which is of itself a cause for caution. This was also the view laid down by ANZ’s Shayne Elliott yesterday.
The regional weaknesses in central Queensland and Western Australia are another source of concern, which is where Westpac’s Brian Hartzer and NAB’s Andrew Thorburn are more focused.
Of course they can both be right.
The good news is the level of household debt is well known to the RBA and would tend to moderate interest rate hikes, for the simple reason that you don’t have to move rates by much to have an impact.
The bottom line, then, is the economy is muddling along around trend rates absent any known external shocks.