With only 3 months until the Unfair Contract Terms reforms take effect, time is running out for the financial services sector to review standard form contracts for terms that might be deemed unfair.
The reforms were enacted last year in the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) and will impact loan documents and other financial services contracts signed after 10 November 2023 as well as older agreements varied or renewed after that date. The reforms both broaden the reach of the existing UCT regime and introduce significant penalties for breach.
The Unfair Contract Terms (UCT) regime has two prongs – the Australian Securities and Commission Act 2001 (Cth) (ASIC Act) applies to financial services and the Competition and Consumer Act 2010 (Cth), to non-financial goods and services. The UCT reforms align with both ASIC and ACCC regulatory enforcement priorities for 2023. The reforms impose new and serious penalties for breaches of the UCT regime, and significantly expand the reach of the regime.
We discuss the impact on financial services sector in this article.
The application of the UCT regime to financial products and services
- Small Business Contract criteria The UCT regime applies to a small business loan or financial services contract where
- the upfront price payable is $5,000,000, increased from the previous $3,000,000; and
- at least one party to the contract is a business that employs less than 100 staff, increased from the previous limit of 20 staff, and/or a turnover of less than $10,000,000 at the time the contract is made.
- Standard form contract A court may find a document to be a “standard form contract” even if the customer or client can negotiate minor or insubstantial changes, or can select a term from a range of options determined by service provider.
- Civil Penalties The reforms will impose significant civil penalties for contraventions of the regime. Previously, the only consequence of an unfair term was the risk of a court order rendering it void. The new penalty regime introduces the possibility of multiple contraventions arising in one document and substantial penalties piling up. These penalties apply not just when a clause that is deemed unfair is relied on or enforced, but also to a proposal including an unfair term: it is not necessary for a contract with an unfair term to even have been made for penalties to apply.
Unfair Contract Terms relating to financial products and services
What is ‘Unfair under the ASIC Act?
The ASIC Act deems a term in financial services contract to be unfair if it:
- causes significant imbalance in the parties’ rights and obligations under the contract.
- is not reasonably necessary to protect the legitimate interests of the financial services provider.
- would cause detriment (financial or otherwise) to the customer if it were to be applied or relied on.
What this means on the ground can be a matter of judgement and is a decision to be made by the courts. The ASIC Act sets out some examples of terms that may be unfair, including provisions that appear to advantage one party to the agreement over the other but, importantly, these must be assessed by reference to the contract as a whole and how plain and clearly expressed the terms of the contract are. As a result, examples taken out of context can oversimplify and mislead.
ASIC’s 2018 Report ‘Unfair contract terms and small business loans’ surveys the response of the big four banks to the recommendations of a review conducted by the Australian Small Business and Family Enterprise Ombudsman. It identifies four kinds of clauses that these banks revised in response to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) recommendations and which may be viewed as at high risk of drawing the attention of the courts under the UCT regime. These are:
- entire agreement clauses
- broad indemnification clauses
- events of default clauses
- financial indicator covenants and
- unilateral variation clauses.
What you need to do if you are a financial services provider
The significant penalties soon to apply for contraventions of the UCT regime have raised the stakes and potentially render the cost of non-compliance extremely high. ASIC’s enforcement priorities for 2023 make it important to get product and service terms right. With only 3 months before the Act takes effect, we recommend that you consider a thorough review of your terms and conditions to assess your product or service terms and conditions pass the test.
Next Steps:
- consider whether you have any clients or customers within the scope of the UCT regime and the terms on which you do business are standard form contracts.
- if so, review the terms on which you do business, and identify any that may be considered potentially unfair under the UCT regime.
- consider the business reasons for these high risk provisions and whether they are necessary to legitimately protect those interests, or they go further than necessary.
- if they are necessary, document these legitimate business interests and how the relevant clauses protect them.
- If they go further than necessary, consider what changes to these provisions and/or business policies and procedures are necessary to minimise the risk of contravening the unfair contract terms criteria.
- consider how clearly and plainly expressed, easy to find and read, and accessible your business and product terms are.
- in the case of existing customers, if contracts are renewed or amended for any reason, ensure the changes made include those identified as necessary to eliminate potentially unfair terms.
When updating your contracts, you can mitigate the risk of reliance on unfair terms by,except as necessary to protect your legitimate business interests in the context of the agreement as a whole:
- excluding unilateral terms that create potential imbalance of rights.
- extending the variation, renewal and termination rights and consents to both parties.
- avoiding lock-in contracts or periods that may not be necessary to protect your legitimate commercial interests.
- including rights of remedy to address defaults prior to termination.
- including mutual warranties and indemnities.
We recommend seeking expert advice in reviewing your documents prior to the commencement of the Reforms, to ensure compliance. Our Banking and Finance experts can help you understand and apply the unfair contract terms regime to your business, assist you with a review and make any required amendments to your contracts and other documents.
Reach out to Andrew Ham ([email protected]) or Sirisha Pinnali ([email protected]) from our Banking and Finance team to clarify any questions or provide you with specific advice.
By Andrew Ham with Sirisha Pinnali
