Unfair contract terms in fintech small business loan contracts

Following its review of Prospa Advance Pty Limited (Prospa) earlier this year, ASIC has announced that Prospa has agreed to change the loan terms in its standard form small business loan contract. The changes are to redress those terms considered to be in breach of the unfair contract terms provisions of the ASIC Act. Prospa has also agreed that any customer who entered into or renewed a contract from 12 November 2016 will receive the benefit of the changes.

Background

In March, ASIC indicated that, in addition to monitoring the big four banks, it would be reviewing loan contracts from smaller providers to ensure their compliance with the unfair contract terms provisions. 

Prospa is an online lender to small businesses offering loans between $5,000 and $250,000. In June, Prospa was scheduled to list on the ASX, however, its float was delayed so that it could clarify queries raised by ASIC. Prospa’s float was expected to be one of the more significant listings of 2018, with the fast-growing business aiming to raise $409 million. 

ASIC had expressed concern that some of Prospa’s loan terms were in breach of unfair contract terms legislation.

The result of ASIC’s review 

Prospa has made a number of changes to its small business loan terms as a result of ASIC’s review. The changes include:

• amendments to its early repayment clause to enable borrowers to repay their loan early without requiring Prospa’s consent
• removing its absolute discretion as to whether it would provide a discount for prepayment. This has been replaced with a published ‘Early Prepayment Policy’ so that borrowers can determine the discounts they can expect to receive if they do pay back their loan early
• amendments to the “unilateral variation” clause so to significantly limit Prospa’s ability to unilaterally vary contracts to specific instances
• extending the notice period to 60 days where Prospa intends to vary fees
• amendments to clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the borrower with the lender’s consent (not to be unreasonably withheld)
• removing a broad ‘cross-default’ clause which allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan, for example, a guarantee or security document
• removing an ‘entire agreement’ clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract.

Takeaways

This is yet another salutary reminder of the application of the unfair contract terms in small business contracts and, in particular, its application to the financial services sector and non-bank financial institutions.

In the aftermath of the Prospa review, ASIC has now issued a call to the fintech industry body FinTech Australia, calling on it to prompt its members to consider the Prospa outcomes and assess their own loan contracts for compliance. In a letter to the lobby group, ASIC has expressed its concerns with the terms used by online lenders and reiterated its message that regulatory action will be taken where appropriate, if fintechs fail to comply. ASIC’s message comes as the US Senate’s banking committee raises similar questions in hearings on the fintech industry. 

In light of ASIC's ongoing surveillance in this area, we recommend that all businesses, particularly those operating in the technology and financial sectors, review their standard form contracts. 

Authors: Darren Pereira &  Olivia Pasternak

Contacts:

Sydney
Darren Pereira, Partner
T: +61 2 8083 0487
E: darren.pereira@holdingredlich.com

Melbourne
Dan Pearce, Partner
T: +61 3 9321 9840
E: dan.pearce@holdingredlich.com 

Brisbane

Trent Taylor, Partner
T: +61 7 3135 0668
E: trent.taylor@holdingredlich.com

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.

Published by:

Darren Pereira

Olivia Pasternak

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