The unfair contracts that the banks forgot

The Australian, November 18, 2016 – Robert Gottliebsen

The overdraft agreements that Australian banks dictate to small enterprises give banks wide powers and, particularly in tough times, many banks have used these powers to savage small enterprises.

As of November 12, that overdraft game completely changed with the coming into force of the Unfair Contracts Act.

Almost certainly, hundreds of thousands of overdraft agreements will have to be rewritten and, as a result, operating a small business will become that much safer.

It so happens that the Parliament’s introduction of the Unfair Contracts Act to force a fundamental change in bank behaviour in small business loans comes just as Australian banks are being asked by APRA to submit to a special stress test.

Under this test they are being asked to set out the circumstances that would create severe turmoil and possibly send them to the wall. As I explained yesterday, the events that might push a bank beyond the brink include a major break down in systems and a deep Australian recessiondepression, perhaps created by China withdrawing its support for Australia (What could cause our banks to go belly up, November 17).

But, at least a few of banks have failed to include the impact of the unfair contracts legislation in their stress test results, even though the banks are likely to be among of the most affected industries.

The unfair contracts legislation will cover overdrafts and lending agreements to businesses with less than 20 employees where the amount involved is up to $300,000 if it is a one-year contract and $1 million if the contract extends for longer than one year.

The Unfair Contracts Act does not make the overdraft agreement void but it does make void the unfair clauses in the overdraft agreement. The act will not apply to existing overdraft agreements but applies immediately when these agreements are renewed or a new agreement is entered into.

My understanding is that if a small enterprise reneges on its repayment obligations, then the bank will continue to have rights to take action. The act allows “unfair clauses” to exist in circumstances like that.

But, if a small enterprise was keeping up with its payments and the banks decided to use their power to change the rules on security or payments (and therefore pulling the rug out from under the business), then almost certainly the banks would be operating outside the law.

The ACCC would come down on them very hard. They might be forced to cover all losses incurred by the customer, which would create very large losses for delinquent banks.

There are many other standard clauses in current bank overdraft agreements that swing the balance of power too far to the banker. The ACCC, in its statement last week, picked out seven industries that would be the initial targets of their investigation (Big business needs to get with the contract overhaul program, November 11).

Due to the complexities involved, banking was probably one of the biggest areas not to be included in the ACCC’s overview. But because the banks have had so much notice of this new change, if they don’t respond and rewrite their overdraft agreements over the coming months they will be vulnerable.

Many banks rely on those unfair clauses to limit their exposure to small enterprises. At this stage we don’t know how many overdraft agreements will need to be rewritten but it certainly covers a wide area and it should be included in any stress test.

I suspect that a number of Australia’s largest companies, particularly in industries like banking, telecommunications, franchising and supermarkets, have not done the work, so executives will now need to limit their Christmas festivities and start rewriting the terms of hundreds and thousands of agreements that have suddenly become partially inoperable.

In all, it is expected that between 8 and 10 million Australian standardised agreements will need to be changed. It is an enormous task that should have been done in the last 12 months rather than after the act came into operation.