Bank of Queensland has fallen on its sword in an act of remorse over unfair loan and guarantee terms in the financial products it offered for a decade after they came under the scrutiny of ASIC.
The ritual hari-kari occurred in Federal Court proceedings concerning more than 4,500 business loan from November 2016 with the bank agreeing numerous terms offended the unfair terms provisions of s 12BG of the ASIC Act.
The matter came before Justice Katrina Banks-Smith in August for declarations as to the offending terms and for the making of orders for the conversion of the clauses into a compliant format.
In joint submissions, ASIC and the bank noted that “a significant number” of the loans related to business borrowers with fewer than 20 personnel thus engaging s 12BF (4) – which came into effect in November 2016 – to render the unfair terms void.
BOQ could not identify the precise number of affected small business loans because – surprisingly – the bank does not store data in relation to the number of employees as part of its lending process.
The impugned terms fell into four broad categories that in each case met all three criteria of s 12BG (1) in that they created a significant imbalance in the parties’ rights and obligations; were not reasonably necessary to protect BOQ’s legitimate interests; and would cause detriment to the customer if relied upon by the bank.
Offending “event of default” clauses allowed BOQ to unilaterally – and even mistakenly – enliven “disproportionately severe default consequences” including for events that did not imperil repayment of the loan and without giving borrowers prior notice or opportunity to remediate the concern.
The impugned “indemnification” provisions allowed BOQ to recover losses from the customer even if they arose from the bank’s own error or negligence or which it could have mitigated.
In the third category, “conclusive evidence” terms deemed the amount specified by the bank – for example – of arrears, to be correct unless the customer could prove otherwise. The displacement of such “evidential burden” on to the customer in relation to “matters upon which the Bank is best placed to provide primary evidence” clearly demonstrated in the judge’s view, a significant imbalance in the parties’ rights.
More than 20 terms reserving a “unilateral variation” right in favour of the bank regarding the services it would provide and the price payable for same – without giving borrowers notice or an opportunity to exit the contract without break fees – were cited among the standard form commercial loan terms that BOQ conceded were unfair.
“Imposing a termination fee regardless of the reason for termination,” Her Honour observed in relation to break fees was, “unfair”.
The court declared the offending clauses avoid ab initio noting such orders were appropriate even though the bank offered suitable undertakings “because they serve to record the Court’s disapproval of the contravening conduct and vindicate the claim by ASIC that the Bank had contravened the Act”.
It should be noted that the unfairness of the contract terms was upheld notwithstanding none of the provisions were ruled as having lacked “transparency” pursuant to s 12BG(3).
The parties agreed variations to the offending clauses which the court ordered to stand in place of those it ruled and the bank conceded were unfair. The “compliant” clauses appear in a schedule to the order. In many cases the updated business loan provisions ameliorate what is otherwise “unfair” by simply creating a carveout with the use of the words “if you are a small business customer” or “unless you are a small business customer”.
Other changes are instructive as to the extent of “fairness” that consumers and small businesses can expect in their commercial transactions.
In the case of an alleged default for example, the ameliorated terms allow for the giving of 30 days’ written notice to remedy the bank’s concern.
And a certificate of arrears is no longer “conclusive” but is “sufficient evidence unless it is proved to be incorrect”.
One wonders why it took ASIC scrutiny for the bank to address these issues given each of the impugned terms fell within the list of examples of potentially unfair terms set out in s 12BH(1) and had been included in the Australian Consumer Law since 2010.
The orders concern only small business loans from November 2016. There are many other transactions prior to that date – and those whose counterparties have 20 or more employees since that date – where loan documentation contains identically harsh provisions.
BOQ’s undertaking to the court not to rely on the impugned terms does not extend to those other loans.
Arguably any such reliance would however in many cases constitute unconscionable conduct under the general law or under ASIC Act s 12CB.