Could Small Business Win as a Result of the Banking Royal Commission Fallout?


Could Small Business Win as a Result of the Banking Royal Commission Fallout?

Sometimes, the timing is just right, and forces in the business universe combine. Sometimes it’s for the worse, but occasionally, as in this case of the Banking Royal Commission fallout, it’s for the better.

Could small business actually win as a result of the Banking Royal Commission? The fallout from the Banking Royal Commission has caught up to the years-long struggle by the Australian Small Business and Family Enterprise Ombudsman and other small business lobby groups against unfair contracts.

The result of this collision? Legal action by ASIC against Bank of Queensland and Bendigo and Adelaide Bank under the Unfair Contracts Legislation. This is not a good look for these institutions, having branded themselves as friends of small business.

According to ASIC, these banks used unfair terms in their small business loan contracts between November 2016 and June 2019. As usual, the culprits were clauses that allowed the bank to make variations to the contract that the customer did not have to agree to. 

A “non-monetary” default.”

One of the changes that the banks were allowed to make was to declare a loan was in default – even if the customer had never missed a payment. This is called a “non-monetary default”. 

The bank could invoke this clause if the customer’s assets fell in value. In some cases we heard about in the Royal Commission evidence, original values had been inflated by the loans officer to make the loan more palatable to the bank.

The resulting foreclosure saw many small businesses forced to close, often leaving the owner with less than nothing. Regional businesses – especially rural property – figured prominently in the list of victims.

The legislation with very few teeth

The problem with the Unfair Contracts Legislation – and always has been – is that the unfair clauses have to be “declared” unfair by the courts. Before that can happen, someone has to take action to get the case in front of the courts in the first place.

In this case, that “someone” is the Australian corporate regulator, ASIC. This is where the timing part comes in. Early in 2018, ASIC took a look at the unfair contracts issue, probably after prodding by the ASBFEO.

Forces in the business universe collide 

That review happened to coincide with some of the Royal Commission hearings, and the media spotlight shone directly onto the whole subject of unfair contracts.

And it seems that BOQ and Bendigo and Adelaide weren’t paying sufficient attention. They had not acted to alter their standard form contracts. Hence, the action by ASIC. 

Just make it illegal …

There has been a chorus of small business voices asking that such unfair contact clauses actually be made illegal. That would have two effects:

Small business owners would not have to initiate the investigation into the potentially unfair clause. The power differential makes sure that most don’t speak up.

A financial penalty would be an incentive for large companies to leave such clauses out. Under the current legislation, there is no penalty – just that the unfair clause is unenforceable.

ASIC is apparently starting down this path in the BOQ/Bendigo case. They will ask the court to rule that similar clauses would be unfair in any small business contract.

It’s not the full wish list, but it’s a start. We may have to wait some time for another fortuitous collision of forces in the business universe that produces legislation with teeth.

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