Banks cave in on overdraft clause

The Australian, May 25, 2017

Finally, after 18 months, the banks have caved in on small business bank overdraft agreements.

Many tens of thousands of small enterprises around Australia, including farms, are now set to have their bank overdraft agreements completely rewritten. The horrendous clauses that gave banks total power to do anything they wished and made conducting small businesses in Australia using a bank overdraft an incredibly risky affair have been removed on all agreements signed since November 12 2016.

Ironically the agreement between the banks and the Australian Securities and Investments Commission (ASIC) and the Australian Small Business and Family Enterprise Ombudsman was concluded on budget eve and the agreement got lost the budget storm over the bank tax.

Also ironically while one part of ASIC was negotiating with banks on overdraft contracts and the other was working with the government on sweeping new powers to investigate mortgage pricing and register executives as part of the measures attached to the bank tax.

What triggered the tough action on the banks was my revelation that the National Australia Bank wrote to all its small business customers saying it had amended its overdraft agreements to comply with the unfair contracts act. The letter was completely incorrect. The amendments did not make the 100 page overdraft agreement compliant with the act and still left the bank with unfettered power to do anything it wanted. The NAB agreements were the same as all the other banks. Read more about it in this article — National Australia Bank is defying the will of the Parliament on fair contracts.

I then called on the chairs of the big four banks David Gonski (ANZ), Ken Henry (NAB), Catherine Livingstone (CBA) and Lindsay Maxsted (Westpac) — to each take their chief executives aside and have a frank discussion. It worked, albeit 18 months after the legislation was passed. Full marks to the chairmen.

And so a round table hosted by ASIC and the small business ombudsman saw the, the big four banks commit “to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 (the act came into force a year after passing the Parliament) will be protected from unfair contract terms”.

ASIC and the Small Business Ombudsman (Kate Carnell) have announced that the big four banks have committed to:

  • Removing ‘entire agreement clauses’ from small business contracts. These apply to terms that absolve the bank from any responsibility for their conduct, statements or any representations they make to small enterprises borrowers outside the formal contract. Bank executives make all sorts of representations to small enterprises, which are rarely, incorporated the written overdraft agreements. Indeed in most cases they are specifically excluded.
  • Removing the “financial indicator covenants” from many applicable small business contracts. These were shocking clauses that covered loan-to-valuation ratio covenants that gave banks total power to call a default when the value of secured property falls, even where a small business customer has met all financial repayments. Thousands of small businesses have been destroyed including many farms by these horrendous clauses.
  • Removing “material adverse event clauses” from all small business contracts. These are just as horrendous as the “ financial indicator covenants” and give the banks the power to call a default for an unspecified negative change in the circumstances of the small business customer. For example if a huge supermarket opens down the road the banks have the power to send the small nearby retailer to the wall.
  • Significantly limiting the operation of “indemnification clauses”. These protect the banks against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower. Again these were nasty clauses, which put small enterprises including farms at the mercy of bank head offices.
  • Significantly limiting the operation of “unilateral variation clauses”, which gave the bank the ability to change the contract at will and without permission of the small enterprise. Banks have agreed to limit the circumstances in which unilateral variations can be made and have agreed to provide small business customers with a minimum of 30 days notice for any contract changes
  • The banks have agreed to significantly limit the operation of clauses such as financial indicator covenants to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will redraft them to ensure that they are clear, transparent and limited to the appropriate circumstances.
  • ASIC and the Small Business Ombudsman have made it clear to the banks that simply including the word ‘reasonable’ in contracts does not go far enough. This is a favourite stunt of the “Pitt and Collins Street” big law firms whose bad practices played a big role in the 18 months delay between the Parliamentary act and the banks agreeing to obey the law.

The small business ombudsman, Kate Carnell, said that her role was to consider the interests of small business and to ensure that the unfair contract term legislation was working across all industries. She said it was clear what “unfair” means — to protect the interests of the advantaged party, in this case it is the banks, against the interests of small business.

Ms Carnell said: “The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory.”

ASIC Deputy Chairman Peter Kell said: “We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.”

“It is important that the banks have committed to improving their small business loan contracts. ASIC will be following up with the big four banks — and other lenders — to ensure that small business contracts do not contain unfair terms.”

What the banks never understood was that the unfair lending contracts they peddled among small enterprises held back lending in the area. Report after bank report bemoaned the lack of growth in lending to small enterprises. The small enterprises were not fooled. They had seen what happened to their brethren.