Fintech company Prospa Advance Pty Limited (“Prospa”) has agreed to change its standard form small business loan contract to remove unfair contract terms following a review by ASIC.

Background

ASIC’s review of Prospa is part of its broader surveillance of small business loan contracts for compliance with unfair contract term (“UCT”) laws. In November 2016, the UCT protections for consumers were extended to cover business contracts under the Australian Securities and Investments Commission Act 2001 (Cth). A small business contract is one where:

  1. the upfront price payable under the contract does not exceed $300,000, or
  2. if the contract has a duration of more than 12 months, the upfront price does not exceed $1m.

At least one party to the contract must be a business that employs fewer than 20 people.

Prospa contract changes

Some of Prospa’s standard form small business loan contract changes are outlined in the table below.

Previous clause

Amendment

Borrowers could receive a discount upon prepayment at Prospa’s absolute discretion.

Borrowers can now prepay their loan without requiring Prospa’s consent. Fixed discounts are publicly available for prepayment.

Borrowers defaulted the loan if any other finance documents related to the loan, such as a guarantee or security document, defaulted (the cross-default clause).

Cross-default clause now removed.

Borrowers had to indemnify Prospa for any fraud, negligence or wilful misconduct of Prospa or any of its employees, officers, agents, contractors or receivers.

Indemnity for fraud, negligence and wilful misconduct now removed.

Prospa was not responsible for conduct, statements or representations made to borrowers about the loan contract (the entire agreement clause).

Entire agreement clause now removed.

Default clauses did not have the required remediation periods and materiality thresholds.

Remediation periods and materiality thresholds now added to event of default clauses.

No appropriate limitations on who could be a guarantor.

Only persons who are actively involved in the management of the borrower’s business, directors or shareholders of the borrower, can provide guarantees. The guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan.

No guarantor notice clause included.

Introduced a 5-bussiness-days’ notice provision to guarantors concerning: (a) borrowers who are 30 calendar days behind their repayment schedule, and (b) the commencement of legal proceedings against a borrower, or the appointment of a receiver.

Many of the Prospa contract changes are similar to those required of the big four banks following ASIC Report 565 released March 2018, which examined the banks’ small business contracts for compliance with the UCT laws. ASIC continues to review both bank and non-bank small business lenders for compliance with UCT laws.