ASIC takes BoQ, Bendigo and Adelaide to Federal Court over small business contracts

Allegations of unfair small business contracts have landed BoQ and Bendigo and Adelaide in the Federal Court.

BoQ and Bendigo tried enforce contract terms that could be varied without the consent of small business owners, ASIC alleges Picture: Getty

The corporate regulator has launched legal action against Bank of Queensland and Bendigo and Adelaide Bank, alleging the regional lenders were using contracts terms that favoured the banks over their small business customers.

In a federal court action the Australian Securities and Investments Commission alleges some lending contracts included clauses that gave the banks, but not borrowers, broad discretion to vary the terms and conditions without the consent of the small business owner.

ASIC said the unfair terms cause a “significant” imbalance in the parties’ rights and obligations. It also argued that they were not necessary to protect the bank’s interests and would cause detriment to the small businesses if the contract terms were relied on.

The legal moves highlights the corporate regulator has become more aggressive in using the courts to take on the banks following an overhaul in the wake of the Hayne financial services royal commission.

However while ASIC was seeking the court to rule the contract terms should be declared void, it stopped short of seeking penalties from the banks. For Bendigo, the case also extends to its Delphi and Rural Bank subsidiaries.

“Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms,” ASIC said in a statement.

“Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.”

The move comes after the regulator faced heavy criticism during last year’s financial services royal commission for not seeking appropriate punishments for the misconduct of the banks through the court system.

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, said that while the proceedings show that ASIC is serious about enforcing unfair contract terms, the regulator fell short of imposing penalties on the banks for their conduct.

“I’m just frustrated that unfair contract terms legislation came into being in 2016 and the fact that large companies still haven’t changed their standard form contracts for small business and are pulled kicking and screaming to do so, I think is a real problem,” she told The Australian.

“You’d hope that major companies in the finance sector in Australia would have made sure that their contracts didn’t have unfair terms in them, but obviously many companies just haven’t bothered and I think that’s an indictment on the companies involved.”

ASIC deputy chair Daniel Crennan responded by saying seeking penalties in the proceedings was “not suitable”.

“If the parties involved wish to resolve the proceedings and make admissions, and these meet ASIC’s regulatory objectives, then this could be an appropriate outcome,” Mr Crennan told The Australian.

“That is a matter for the respective banks.

“At this point, we have filed with the Federal Court and the outcome will be determined by the court.”

In a statement, regional lender Bank of Queensland said it had taken immediate action to address the majority of ASIC’s concerns and said that it takes its compliance with legal and regulatory obligations seriously.

It also said that it had commenced a review of all small business lending contracts.

“If Bank of Queensland identifies any small business customers who have been adversely affected, it will compensate them,” the statement said.

“While Bank of Queensland’s review is ongoing, it currently believes that the potential total compensation will be limited and not impact Bank of Queensland’s financial performance in any material way.”

Bank of Queensland has branches in every state and territory of Australia.

Bendigo and Adelaide Bank, Australia’s fifth largest retail bank with around 1.6 million customers, said it was co-operating with ASIC in relation to the court proceedings with a view to reaching a mutually agreed outcome.

“We remain committed to keeping our customers at the centre of everything we do and ensuring we satisfy all regulatory requirements and guidelines,” Bendigo said in a statement.

The proceedings follow the release of an ASIC report last year, which identified the types of terms in small business loan contracts that were unfair, and provided guidance to lenders to help them assess whether loan contracts meet the legal requirements.

“We allege that despite our report and recommendations, and moves by the big banks to change their contracts, these banks still have sections of their standard contracts that we allege are unfair within the meaning of the Unfair Contract Terms Regime,” Mr Crennan said.

Shares in both lenders dropped as much as 1.6 per cent on Tuesday. Bendigo and Adelaide Bank bounced back close up 0.3 per cent at $10.74 while Bank of Queensland closed 0.9 per cent lower at $8.99.