Unfair contract terms for financial products: changes incoming

Significant changes to the existing unfair contract terms (UCT) regime take effect on 9 November 2023. These changes will broaden the scope of financial products captured by the regime and introduce significant civil penalties (up to $780 million for corporations).

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) was passed in November 2022, significantly expanding the scope of the UCT regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The key changes include:

Broader application to cover more financial products

From 9 November 2023, the UCT regime will apply to financial products that are standard-form small business contracts where the upfront price does not exceed $5 million and where at least one party has:

• fewer than 100 employees (currently fewer than 20 employees); or
• less than $10 million in annual turnover during the previous financial year.

This expands the scope of the UCT regime to include an even broader range of financial products.

Introduction of significant penalties and expanded court power

As with the changes to the Australian Consumer Law (ACL) UCT regime, the ASIC Act UCT regime contains significantly enhanced penalties for contraventions of the UCT regime.

The maximum penalty for corporations for a contravention is 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).

Spotlight on insurance contracts

The UCT regime presents a particular problem for insurance contracts because there is little in the way of available guidance as to what constitutes unfairness in an insurance context. The examples of unfair terms set out in the ASIC Act do not generally apply to insurance contracts.

Since product issuers first carried out reviews of their product wordings ahead of the April 2021 introduction of the UCT regime for insurance contracts, ASIC has revealed through its enforcement work a particular view around how insurance contracts may be ‘unfair’. Elements of this approach were not well-understood to be unfair by the insurance industry at the time, so there is a risk that many insurance products will be susceptible to challenge once the expanded penalty regime comes into force.

How we can help you

Our team can help you identify what you need to do to ensure your financial products are consistent with existing UCT guidance and aligned with your organisation’s product governance arrangements and risk-management framework.