ASIC targets Bendigo and BoQ over fairness

Banking Day staff Authorised deposit-taking institutions

Bendigo Bank and Bank of Queensland are facing potentially hefty fines and remediation bills after ASIC launched civil actions in the Federal Court against each lender over the inclusion of unfair terms in small business loan contracts since 2016.

In separate statements of claim lodged on Tuesday in the NSW registry of the court, the regulator alleges that Bendigo and BoQ each breached the unfair contracts provisions of the ASIC Act by adding unreasonable terms in loan agreements that were detrimental to small business borrowers.

The claim against Bendigo concerns more than 19,000 business loans made by two of its subsidiaries – Delphi Bank and Rural Bank.

The claim against BoQ relates to 3754 business loans of less than A$1 million that were issued since November 2016.

The unfair terms cited by ASIC include clauses that gave BoQ and the Bendigo subsidiaries “broad discretion to vary the terms and conditions of the contract without the consent of the small business owner”.

Other unfair terms included default clauses that allowed each of the banks to call a default, even if the business borrower had met all of their financial obligations.

The court action is potentially more serious for Bendigo, partly because of the larger number of loans affected by the alleged breaches but also because the Hayne Royal Commission identified a raft of compliance and conduct issues within Rural Bank.

In a statement to the ASX on Wednesday, Bendigo indicated it hoped to settle the legal action.

“The bank is cooperating with ASIC in relation to the court proceedings with a view to reaching a mutually agreed outcome,” the bank said in the filing.

Bendigo noted that the alleged unfair terms had been removed from standard form business loan contracts.

“The relevant terms and conditions appear in previous versions of small business loan contracts,” the bank said.

“These contracts were updated in July 2019 in response to additional guidance provided by ASIC.”

BoQ did not comment on the likelihood of a settling with the regulator, but said it had addressed “the vast majority of ASIC’s concerns”.

“BoQ takes compliance with its legal and regulatory obligations seriously and has proactively commenced a review of all small business lending contracts entered into from November 2016,” the company told the ASX.

“If BoQ identifies any small business customers who have been adversely affected, it will compensate them.

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

ASIC alleges in its claim that BoQ also inserted indemnification clauses in standard contracts that sought to limit the bank’s vicarious liability for agents acting on its behalf.

Since 2016 Australian banks have been required to remove unfair terms from standard form small business contracts after ASIC acquired new powers to audit business loan agreements for up to $1 million.

In May 2017 the four major banks began reviewing their standard form contracts after the Australian Small Business and Family Enterprise Ombudsman raised concerns about the use of indemnification and default clauses in loan agreements.