On 27 October 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act) was passed in Parliament and received Royal Assent on 9 November 2022. Significantly, the Act will introduce civil penalties into the Unfair Contract Terms (UCT) regime in the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Commission Act 2001 (Cth) (ASIC Act). The relevant amendments in the Act will take effect on 9 November 2023 (Commencement).

General information about the changes, including in relation to Australian Consumer Law, can be found in Beefed up unfair contract terms regime to commence next year.

This article will focus on the amendments to the ASIC Act and how that will impact financial service providers.

Financial product / service

In the context of the ASIC Act, the UCT regime will only apply to contracts that are a financial product or for the supply (or possible supply) of financial services.

Importantly, the ASIC Act definition of 'financial product' and 'financial service' are broader than that of the Corporations Act 2001 (Cth). Accordingly, the Act would cover products which require an Australian Financial Services Licence and Australian Credit Licence, as well as certain unregulated products. Below is a non-exhaustive list of some of the products that would come within the operation of the ASIC Act:

• credit contracts with consumers;
• credit contracts with small business (which are traditionally unregulated);
• terms and conditions relating to deposit-taking facilities with consumers and small business;
• contracts for securities, derivatives and interests in a managed investment scheme with consumers and small business;
• insurance contracts with consumers and small business; and
• contracts for providing financial product advice or dealing in a financial product (e.g. mortgage broker agreements).

New contraventions

This Act inserts two new contraventions into the UCT regime in the ASIC Act. These contraventions prevent a person from:

• including an unfair term in a standard form consumer or small business contract; and
• applying or relying, or purporting to apply or reply on an unfair term in a standard form consumer or small business contract.

Importantly, each unfair terms that is included in a contract will be a separate contravention. This is significant given that the civil penalty framework can result in substantial penalties (discussed below).

The first contravention listed above will apply where a person 'makes a contract', which according to the Explanatory Memorandum "…includes where a person enters into a contract." This contravention will apply to new contracts made at or after Commencement, and to contracts which are renewed or varied after Commencement. The second contravention listed above will apply at the point in time that a person purports to rely on an unfair term. It applies to new contracts made at or after Commencement and also to existing contracts which are renewed or varied after Commencement.

Civil penalties to apply to unfair terms

Currently, if a term is considered unfair, the Court's main method of redress is to declare the term to be void. However, as foreshadowed above, this Act will bring the UCT regime into the existing civil penalty framework in section 12GBB of the ASIC Act.

Under section 12GBB, ASIC may apply to the Court for an order to require a person to pay the Commonwealth a pecuniary penalty where they have breached a civil penalty provision. Significantly, the Court has discretion to decide the civil penalty to be applied, having regard to various factors such as the nature and extent of the contravention, whether any loss or damage was suffered, the circumstances of the contravention and previous conduct.

However, the pecuniary penalty that the Court can order is limited by section 12GBCA to a maximum of:

1. for an individual, the greater of:

• 5000 penalty units (currently $1,110,000, from 1 January 2023 will be $1,375,000); and
• the value of the benefit derived multiplied by 3.

2. for a body corporate, the greater of:

• 50,000 penalty units (currently $11,100,000, from 1 January 2023 will be $13,750,000);
• the value of the benefit derived multiplied by 3; and either:
  • 10% of the annual turnover of the body corporate for a 12 month period; or
  • if the amount worked out above is over 2.5 million penalty units, then it is limited to 2.5 million penalty units (currently $555,000,000, from 1 January 2023 will be $687,500,000).

The Act also gives the Court wider powers in relation to other remedies. For example, the Court will be able to void, vary or refuse to enforce a contract, if it is appropriate to prevent loss or damage that is likely to be caused. These new provisions do not require a Court to consider whether actual loss or damage has occurred (which is the case in the current laws).

Expansion of the UCT regime application

Another significant change is that the Act will expand the definition of a 'small business contract'. A contract will be a small business contract where the upfront price payable is not more than $5,000,000 and at least one party to the contract satisfies either or both of the following:

• is a business that employs less than 100 persons; and/or
• has a turnover (at the time the contract is made) of less than $10,000,000.

Currently, a contract will be a small business contract if a party is a business that employs less than 20 persons and either the upfront price payable is not more than $300,000, or if the duration of the contract is longer 12 months, then the upfront payable is not more than $1,000,000.

The Act also clarifies that a contract may be determined to be a 'standard form contract' despite there being an opportunity for:

• a party to negotiate changes to contract terms that are minor or insubstantial in effect;
• a party to select a term from a range of options determined by another party; or
• a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

This is significant as under the current law, the existence of these factors would usually be regarded by the Court to indicate that a contract is not a 'standard form contract'.

Because of this expansion, financial service providers will need to ensure that they undertake adequate due diligence to ascertain whether their customers are in fact 'small businesses' and therefore whether the relevant contracts are regulated by the UCT regime.

Example unfair terms

Section 12BG of the ASIC Act states that a term will be unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Section 12BH contains a non-exclusive list of unfair terms, which at a high level includes unilateral rights to limit performance, terminate, vary, renew or assign the contract.

In the context of lending, ASIC has released Report 565 Unfair contract terms and small business loans (March 2018), which identifies certain types of industry standard clauses that could be unfair. This includes entire agreement clauses, broad indemnification clauses, certain types of events of default clauses, financial indicator covenants and unilateral variation clauses.

In the context of insurance, ASIC has identified potential unfair terms in insurance contracts. Some of these included terms that gave insurers unilateral discretion, qualifying terms that reduce barriers for an insured person to lodge a legitimate claim, overly broad terms and qualifying terms where compliance with preconditions was not feasible.

What financial services providers should do now

With the introduction of the new contraventions, the civil penalty framework and the expansion of its application, financial service providers should act promptly and as discussed above use the next 12 months to:

• understand which contracts and types of consumers will come within the expanded UCT regime;
• review and update standard form contracts to ensure they do not contain unfair terms; and
• update policies and procedures (particularly enforcement procedures), to ensure that unfair terms are not relied on or included in future contracts.