Banks need to fix unfair contracts mess in order to avoid royal commission

The Australian, March 14, 2017: Robert Gottliebsen

The chairs of the big four banks — David Gonski (ANZ), Ken Henry (NAB), Catherine Livingstone (CBA) and Lindsay Maxsted (Westpac) — need to each take their chief executives aside and have a frank discussion.

If they don’t do this and do it quickly, there is nothing surer than a struggling government will be forced into setting up a royal commission into Australian banks, including their profits and practices. This won’t be good news for bank shareholders.

The Australian Securities and Investments Commission (ASIC) along with another government body, the Australian Small Business and family Enterprise Ombudsman, has taken the unprecedented step of declaring that the big four banks are not complying with the requirements of the law.

Accordingly, it becomes a board matter of great importance. It’s also without precedent for all the banks to openly defy the law, although obviously they can have the courts rule on the ASIC declaration.

ASIC has responsibility for banking market integrity and consumer protection and also oversees anti-competitive behaviour among the banks.

My regular readers will guess that the ASIC declaration is related to the unfair contracts legislation. I had a significant role in shepherding the unfair contracts legislation through the Parliament. In 2015, the Coalition, the ALP, the Greens and most of the crossbenchers in the last Parliament supported the legislation which will require at least eight million contracts to be changed in Australia (Big business needs to get with the contract overhaul program, November 11).

Unless the banks really believe that the government regulator is wrong, the ASIC declaration that banks are either not complying with the law by doing nothing or have actually revised their small business lending contracts in a way that does not comply with the law, raises these questions:

Have the bank CEOs formed a cartel to defy the Parliament of Australia?

Was any such decision board approved?

Do the CEOs (and directors) understand that their lending contracts to an important part of their business are now in chaos and may require government intervention?

Was this a situation in which the CEOs simply took their eye off the ball and the bad culture deep in each the banks was allowed to take over?

It’s the job of David Gonski, Ken Henry, Catherine Livingstone, and Lindsay Maxsted (alphabetical order) to find the answer. My experience in the matter leads me to suspect the answer to last question holds the key.

I discovered in January that NAB had informed its small business clients (those employing less than 20 people) that it had changed its lending contracts to comply with the act.

After the bank stonewalled my questioning, I obtained a copy of the bank’s new agreement and concluded (with nervousness) that the bank was misleading its small business customers because there were clauses in the agreement that appeared not to comply with the act (National Australia Bank is defying the will of the Parliament on fair contracts, March 3).

I sent ASIC a copy of the agreement, so, when ASIC made its declaration it was indirectly confirming my conclusions about NAB.

I believe at least one other bank has followed NAB in apparently misleading its small business customers in claiming that a new agreement complies with the unfair contracts act.

This is what ASIC says:

“Australian lenders, including the country’s big four banks, have substantial work to do to eliminate unfair terms from their loan agreements, a joint review of small business standard form contracts undertaken by ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has revealed.

“ASIC and the ASBFEO reviewed small business loan contracts from eight lenders and found there’s been a failure to take sufficient steps to comply with their new obligations under unfair contract terms (UCT) legislation.

“This is despite being provided with a one year transition period, ahead of last year’s November implementation deadline.

“ASIC and the ASBFEO are sending a very clear message that lenders need to immediately take steps to ensure their standard form loan agreements fully comply with the new legislation.

“In their initial review 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 (otherwise known as ‘entire agreement clauses’); and
  • Terms that too broadly indemnify the lender against losses, costs, liabilities and expenses”

Back to my comment. The 100-page NAB agreement that mislead its customers can be accurately summarised in once sentence — the bank can do anything it likes provided that the action is reasonable.

The act provides that when a bank has clauses that breach the act such clauses are void and the NAB contract bristles with such void causes.

Again, in my view, the bank small business lending contacts are now a shambles because they are so unreasonable and not in accordance with the act.

I have great faith in the abilities of David Gonski, Ken Henry, Catherine Livingstone and Lindsay Maxsted to do their jobs well and I hope I am right because I don’t think a Royal Commission is a good idea, albeit that the banks are doing everything they can to bring one on.