Movement in marketplace lending regulation for small business loans

By Jim Bulling and Michelle Chasser

Marketplace lenders who cater to small businesses are about to face increased regulation in relation to the credit they provide. From 12 November 2016, some businesses will receive the same protection currently available to consumers as unfair contract terms in small business contracts will become prohibited.

Small business contracts include loans which are entered into with businesses which have fewer than 20 employees for an amount less than $300,000 or less than $1 million if the term of the loan is more than 12 months.

Under the new law, a contract term will be unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations;
  • it is not reasonably necessary to protect the interests of the party who would be advantaged by the term; and
  • it would cause detriment to a party if the term is relied on.

For example, a term giving one party a unilateral right to vary the contract without giving the other party the right to terminate the contract is likely to be unfair.

The Government is also considering further protections for small businesses. Earlier this year, the Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into the impairment of customer loans. One of the recommendations made as a result of the inquiry was to extend responsible lending obligations and ASIC’s monitoring ability under the National Consumer Credit Protection Act to small business loans. In response to the recommendations, in August the Government directed the Australian Small Business and Family Enterprise Ombudsman to undertake an inquiry into small business lending practices and identify if further reforms are required. The Government is due to receive the final report in November.

With the Government currently doing its homework we may see proposals for new regulation for small business loans provided by marketplace lenders soon.

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