Small business lender Prospa removes unfair contract terms following ASIC review

Small Business and Family Enterprise Ombudsman Kate Carnell has welcomed a move by small business lender Prospa to amend its contract terms, following a review by the Australian Securities and Investments Commission.

Prospa became the target of a look-in by the corporate regulator earlier this year, prompting the lender to delay a planned float on the Australian Stock Exchange (ASX).

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

A raft of changes to Prospa’s standard form small business loan contract have been agreed to, including allowing businesses to pay back loans early without Prospa’s consent, with more transparency about early-payment discounts.

Prospa’s ability to vary fees has also been “significantly limited” under the agreement with ASIC, which will see the lender extend its notice period to 60 days where it intends to vary fees.

Clauses have also been amended to add remediation periods in the event of loan defaults, while other clauses that enabled Prospa to default a loan based on defaults in related finance documents, such as guarantees or security documents, have been removed.

Prospa will amend its contract terms in early October, but has agreed that all customers who entered into or renewed agreements from November 12, 2016 will benefit from the changes.

Carnell said the agreement sends a clear message to small business lenders, amid ongoing scrutiny over unfair contract terms by ASIC under laws that came into effect in 2016.

“The message here is very simple — don’t use unfair contract terms. ASIC has made it clear that it will consider regulatory action,” she said in a statement.

“Small business standard loan contracts can no longer contain terms that cause significant imbalance in rights and obligations, or cause detriment to the small business.”

Prospa’s general counsel, Nicole Johnschwager, said the contract changes further the company’s commitment towards transparency with lenders.

“Prospa looks forward to continuing to improve financial inclusion for small business owners,” she said in a statement.

“This is an evolving area of regulation and we will work with industry peers and stakeholders to support this important and growing industry.

“We call on other small business lenders in the industry to engage with ASIC and complete their own reviews.”

When Prospa delayed its initial public offering in June the company said its discussions with ASIC were “not material” to its listing, but it has yet to confirm if it will now move forward with plans to go public.

Prospa’s float was tipped to be one of the most significant listings of 2018, with the fast-growing business expected to raise $146 million.

Founded by Beau Bertoli and Greg Moshal in 2012, Prospa has made a mark in the fintech space in recent years, booking $22 million in revenue during 2015-16.

Unfair contract terms review on the way

Both Carnell and the ACCC have expressed concern that many Australian small businesses continue to fall victims to unfair contract terms.

Meanwhile, a recent survey carried out by the Small Business Ombudsman, FinTech Australia and theBankDoctor.org found that only 50% of local fintechs considered their contracts compliant with unfair contract terms legislation.

ACCC chair Rod Sims said earlier this month financial penalties need to be introduced for those found to be contravening unfair contract laws.

Sims said under current Australian Consumer Law potentially unfair contract terms can be challenged in a court and declared void, but the terms themselves are not prohibited.

“There is little the ACCC can do to hold them to account for prior conduct,” Sims said.

“The law simply isn’t strong enough. Unfair contract terms should be illegal.”

A two-year review of 2016 unfair contract protection legislation is due in November, which is expected to reignite conversation among regulators about the issue.

Both the ACCC and Carnell’s office intend to argue the laws need to be strengthened and expanded.

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