Court rules Bendigo Bank small business loans were 'unfair'

Australian lenders have been sent a stern warning about including unfair contract terms in small business loans after the Federal Court sided with the corporate regulator to slap down Bendigo and Adelaide Bank over a number of unfair contracts.

Although there was no financial penalty to be paid by Bendigo and Adelaide Bank, which had sold the small business loans from late 2016 through its subsidiary bank brands Delphi and Rural, the regional lender will no longer be allowed to use the terms – a ruling which applies to the same terms appearing in contracts sold by other banks.

Federal Court Justice Jacqueline Gleeson on Thursday found the unfair terms were not necessary to include to protect the bank’s interest and would hurt small business borrowers if the terms were relied on.

The Australian Securities and Investments Commission launched the case last year, alleging Bendigo and Adelaide Bank had sold 15,529 non-compliant loans that included terms that created a significant imbalance in rights and obligations between the lender and borrower.

The regulator’s probe found Bendigo and Adelaide Bank – the fifth largest bank in Australia with $70 billion worth of assets on its books — had given itself “broad to discretion to unilaterally vary the terms and conditions” of the contract without giving the borrower notice or a chance to exit the contract.

It could also tip the borrower into default without giving the borrower an opportunity to fix the issue.

Justice Gleeson said the “significant imbalance” created by the contract terms could have “severe default consequences” for borrowers which could be triggered even when there was no credit risk to the bank.

“Each of the impugned event of default clauses would cause detriment to the customer if relied upon,” Justice Gleeson said.

Enforcing the law

A spokesman for Bendigo and Adelaide Bank said the lender remained committed to keeping its customers at the "centre of everything we do".

"Importantly, the Court acknowledged that ASIC did not allege the Bank had relied upon any of these clauses in a manner that was unfair, or that had caused any customers to suffer loss or damage," Bendigo and Adelaide Bank said.

"The bank also gave an undertaking to ASIC in June 2018 and will give an undertaking to the Court, not to use or rely upon any of the terms in question."

ASIC commissioner Sean Hughes said the regulator was committed to protecting small business owners.

“Yesterday’s judgment shows that ASIC will take the necessary steps to enforce the law,” Mr Hughes said.

“Importantly, insurance firms should be preparing to extend these obligations in insurance contracts,” he said.

“We are pleased the government backed us with additional funding that was ear-marked to enforce this area of the law.”

The issue of unfair terms in bank loan contracts had been thoroughly examined in recent years, including via a consultation process run by ASIC before the release of its report on the regime in March 2018.

The Hayne royal commission revisited the topic in its public hearings in May last year, and then commented on the importance of the provisions in its final report last year. The unfair contracts provision has been extended to insurance contracts.

Bendigo and Adelaide Bank’s contracts for the loans, which were provided by its Delphi and Rural brands, had been updated in July last year. The lender handed back its authorised deposit taking license for Rural Bank earlier last year.