ABA Chief Executive, David Bell, today told the Senate Economics Committee the banking industry needed more time to transition and the definition of ‘unfair’ was also causing concern in the banking industry.

Mr Bell said: “It should be made clear in the existing definition that a term will be ‘unfair’ only if it causes material detriment to consumers in accordance with the Productivity Commission’s recommended approach.”

“The definition of this term and others in the legislation is vague and needs to be clarified before this regime is introduced. We have a living example in Victoria where uncertainty created by the lack of clarity in its unfair contracts law has created disruption and costs for business.”

“Business resources have been drained during investigations by regulators of standard form contracts to which vague and uncertain criteria are applied to assert the terms are unfair.”

A fundamental principle of contract law is certainty of contract. This principle is an essential element of all commercial transactions because it allows the parties to adequately allocate and price risk.

Mr Bell said: “The proposed regime affects consumer standard form contracts which form the base of banks’ contractual arrangements to ensure certainty of compliance with laws affecting banks and management of risk, especially credit risk. It could result in increased risk for banks, high costs for consumers and conflicts with the Government’s own best practice regulation guidelines.”

The ABA is asking the Government to postpone the start date of this legislation until January 2011 so the industry has enough time to become compliant with the proposed regime.

To prepare for this law, banks will have to review all their consumer standard form contracts which is a massive undertaking adding cost into the system.

None of this can be achieved in a realistic way by the current proposed start date of 1 January 2010 leaving banks and other businesses seriously exposed to the risk of litigation and redress, not to mention intervention by the regulator.  

Banks are also facing changes to consumer credit and reform of personal property securities laws in the coming year which will also require a review and amendment, where necessary, of credit contracts and security documentation.

The ABA believes substantial costs to banks can be avoided and efficiencies achieved if the necessary changes to ensure compliance with the unfair contracts terms regime dovetail with the proposed changes required of consumer credit law and personal properties securities law.