Imminent changes to the unfair contract terms regime under the ASIC Act and their specific impact on the financial services sector

Summary of unfair contract term changes

New amendments to the unfair contract terms (UCT) regime under the ASIC Act which come into effect on 9 November 2023 will expand and strengthen the existing unfair contract terms provisions that apply to financial services by:

• expanding the class of financial services standard contracts caught
• extending the existing civil penalty regime under the ASIC Act to apply to a 'financial product' and 'financial service' as defined under the ASIC Act which is broader than those terms separately defined in Corporations Act 2001.

Scope of contracts caught under the ASIC Act

The primary criteria for the UCT law to apply to a term in a contract are:

• it is a consumer contract
• the contract is a 'standard form contract'
• the contract is for a financial product or service.

In the context of financial services, the UCT regime will apply to a standard contract (s12BK ASIC Act) which is:

• a consumer contract (s12BF(3) ASIC Act) is a contract where at least one party to the contract is a consumer – that is, an individual who is acquiring a financial product or service under the contract wholly or predominantly for personal, domestic or household use or consumption; or
• a small business contract (s12BF(4); and
• for a 'financial product' or is for the supply or possible supply of services that are 'financial services' (s12BF(1)(c)).

Proposed amendments - Financial services

Overall the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) which takes effect from 9 November 2023 significantly expands:

(a)    the scope of the unfair contract terms (UCT) regime under the Australian Consumer Law (ACL) in the Competition and Consumer Act 2010 (Cth) (Act) which captures standard 'consumer contracts' or 'small business contracts' 

(b)    the scope of the UCT regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) which captures standard financial services contracts.

There are similarities and differences between the application of the UCT regime to standard form contracts for the supply of goods or services under the ACL and separately to standard form contracts for the provision of financial products and services under the ASIC Act. That is, significantly, the legislative changes and impact under the ACL and the ASIC Act, whilst similar in some respects are not identical. 

This article focuses on the specific impact of the UCT amendments on the financial services sector and explores issues that financial product service providers and issuers and credit providers may need to consider in order to ensure that their standard form contracts and terms comply with the new provisions.

The changes to the ASIC Act and the corresponding impact on the financial services sector are summarised in the table below:

Nature of UCT change	ASIC Act	Comparison with changes to UCT regime under ACL	Financial services impact
Broader scope of standard form contract	The ASIC Act replicates the ACL amendments but the definitional test is based on a standard form contract which must be a contract for financial products or for the supply, or possible supply, of financial services.	Applies a similar regime to the ASIC Act but applies a standard form contracts ACL definition based on 'consumer contracts' or "small business contracts" generally.	The criteria in determining if a contract is a 'standard form contract' has been expanded to include circumstances where a party may have had the opportunity to negotiate a standard form contract or choose from a range of contractual options.
Broader application to standard-form small business contracts	Applies to small business contracts for financial products or services where the upfront price does not exceed $5 million and where at least one party has: fewer than 100 employees; or less than $10 million in annual turnover during the previous financial year.	Applies a similar regime to the ASIC Act but does not include an upfront price threshold.	Currently, the UCT regime under the ASIC Act applies to contracts where one party has fewer than 20 employees and either the upfront price payable is not more than $300,000, or if the duration of the contract is longer than 12 months, where the upfront payable is not more than $1,000,000. The monetary contract value threshold for small business contracts will be increased to the effect that the UCT regime under the ASIC Act will apply where the upfront price payable (excluding interest) for the contract is $5 million or less.  This increased threshold broadens the scope of contracts for the provision of financial products/services captured by the UCT regime.
Introduction of civil penalties for contraventions of the UCT regime	Civil penalties will be introduced for contraventions of the UCT provisions to apply the penalty regime under the ASIC Act with the maximum penalty imposed for a corporation being the greater of:  50,000 penalty units (currently $15.65 million); The amount of the benefit derived or detriment avoided multiplied by three; or 10% of annual turnover subject to a cap of 2.5 million penalty units (currently $782.5 million).	Civil penalties will be introduced for contraventions of the UCT provisions but the penalty regime differs from the ASIC Act.	Previously, unfair and void terms were not considered "contraventions" under the ASIC Act leading to non-compliance with financial services law.   Under the new changes it will be a contravention and a breach will be notifiable to ASIC as a significant breach of a core obligation under an AFS Licence.
Application of penalties	Civil penalties will now apply where a person: makes and which includes an unfair term in a standard form contract for financial products or for the supply, or possible supply, of financial services; or a person applies or relies, or purports to apply or rely on an unfair term of a standard form contract for financial products or for the supply, or possible supply, of financial services.	The ACL is similar to the amendments under the ASIC Act except that it applies to all standard form consumer and small business contracts but not contracts for financial products or for the supply of financial services.	Current provisions do not impose civil penalties by way of contravention if a contract term is unfair and void. The amendments introduce significant civil penalties which are applied on a term by term basis if a term in an applicable standard form contract is unfair or a person seeks to rely on an unfair term included in an applicable standard form contract.
Notification	An AFS licensee that is the issuer or provider of a standard contract that is captured by the ASIC Act and which contravenes the amended UCT regime may be deemed a significant breach and the licensee may be obliged to report to ASIC.	Not applicable	The amendments make the inclusion of an unfair and void term in an applicable standard form contract a breach and contravention of financial services law, which may give rise to a reportable situation in relation to a significant breach of a 'core obligation'.

 

What 'financial products' and 'financial services' are captured under the UCT regime?

The ASIC Act definitions of 'financial product' and 'financial service' are broader than their equivalent definitions in the Corporations Act 2001 and therefore will capture a wider scope of financial products and services as well as credit products. 

Generally, the ASIC Act will capture: 

• financial products and services which require an Australian Financial Services Licence
• credit products that require an Australian Credit Licence
• some unregulated products, that is, financial products or services which may not be regulated under the Corporations Act or credit products issued to a business.

Some examples of financial products and services captured by the ASIC Act include:

• Banking and credit products such as credit contracts with consumers and small businesses (now including some credit contracts to small businesses previously unregulated) and deposit-taking facilities with consumers and small business
• Insurance products such as insurance contracts with consumers and small business
• Other financial services and products such as contracts for the provision of financial product advice or dealing in a financial product including mortgage broker agreements, contracts for securities or derivatives with consumers and small businesses and interests in a managed investment scheme. 

In the context of the current changes to the UCT Regime under the ASIC Act, it is important for issuers and providers of financial products and services and credit providers to assess the scope of standard contracts and types of customers and clients to whom they issue products or provide services in order to establish if they will now fall within the expanded UCT Regime.

For an explanation of what constitutes an unfair term, see this article prepared by our Corporate and Commercial team.

In future articles, we will be examining the practical impact of the UCT amendments on some specific financial services sectors.

Key amendments to the UCT under the ASIC Act

In summary, the amendments to the UCT regime under the ASIC Act: 

(a)    expand the class of standard form contracts for a financial products or for the supply, or possible supply, of financial services covered by the UCT regime;

(b)    impose new contraventions that prohibit:

(i)    a person including an unfair term in a standard form contract for a financial product or for the supply, or possible supply, of financial services; or

(ii)    a person applying or relying on an unfair term in a standard form contract for financial products or for the supply, or possible supply, of financial services; and

(c)    transition the application of the current civil penalty regime under the ASIC Act to import it into the UCT regime with consequent increases in the potential penalties imposed for breach.

AFS Licensees and issuers and providers of financial products and services and credit providers should note in particular that the application of the changes to the UCT Regime and the imposition of penalties under the ASIC Act may differ substantially from the UCT Regime under the ACL.

Therefore, standard form contracts for financial products or for the supply, or possible supply, of financial services need to be reviewed in the context of the financial services sector by focussing on the specific details of the proposed changes to the ASIC Act.

In this regard, the UCT amendments will apply to new contracts made from 9 November 2023. 

Even though they will not apply to pre-existing contracts, they may however apply to pre-existing contracts which are 'renewed' or a term of the contract is 'varied' which are common in the financial services sector, particularly insurance. In these circumstances, the amendments to the UCT regime will apply to the terms that have been varied.