Unfair contract terms: how the new regime will affect fund managers

By Mark Lebbon, James Deady and Vanessa Murphy

Amendments to Australia’s unfair contract terms (UCT) regime commenced on 10 November. These amendments significantly expanded the reach of the laws and introduced significant penalties for non-compliance. This adds yet another layer of consumer protection fund managers need to address in their systems and documentation within a broader financial services regulatory environment that has seen an increased focus in recent years on managers being responsible for reducing potential risks to investors.

The UCT regime is contained in the Australian Consumer Law provisions of the Competition and Consumer Act 2010 (Cth) and, more relevantly for fund managers, the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Key changes

The key changes to the UCT regime under the ASIC Act include:

Broader application to cover more financial products and financial services

From 10 November 2023, the UCT regime applies to financial products or contracts for the supply of financial services that are standard-form contracts where:

• (small business contract) the upfront price does not exceed $5 million and where at least one party has:
  • fewer than 100 employees (previously fewer than 20 employees); or
  • less than $10 million in annual turnover during the previous financial year (this is a new qualifying criteria); or
• (consumer contract) at least one of the parties is an individual whose acquisition of what is being supplied is wholly or predominantly an acquisition for personal, domestic or household use or consumption.

The changes to what is considered a small business contract significantly expand the scope of the UCT regime to include an even broader range of financial products and financial services contracts. Importantly:

• the employee and annual turnover criteria are assessed on an entity-by-entity basis (ie not within the whole of a corporate group), and only one needs to be satisfied for a standard-form contract to be captured by the regime. This means arrangements with even large institutional investors or groups may be captured (for example, on the basis that the investee entity within their group may have fewer employees than the threshold); and
• given the ‘upfront price’ threshold of less than $5 million is not aligned with the $500,000 consideration threshold for classification as a wholesale client, the UCT regime provides additional protections to clients that do not otherwise fall within the more onerous level of regulation.

The $5 million upfront price threshold does not apply to the UCT regime under the Australian Consumer Law.

Introduction of significant civil penalties

The UCT provisions of the ASIC Act are now civil penalty provisions so significant penalties for contraventions of the UCT regime now apply.

The maximum penalty for corporations for a contravention is the greater of:

• 50,000 penalty units (currently $15.65 million);
• three times the amount of the benefit derived or detriment avoided; and
• 10% of annual turnover subject to a cap of 2.5 million penalty units (currently $782.5 million).

The maximum penalty for an individual is the greater of 5,000 penalty units ($1.56 million) and three times the amount of the benefit derived or detriment avoided.

The penalties under the Australian Consumer Laws are greater than those prescribed under the ASIC Act.

In addition to the penalties that can be imposed under the UCT regime itself, actions that amount to breaches of the UCT prohibitions may cause additional regulatory issues for Australian Financial Services Licensees, on the basis that such conduct may (depending on the circumstances) constitute a contravention of financial services laws (raising the potential for a ‘reportable situation’ to be triggered).

What you have to do: our key tips

All businesses, whether large or small, should take steps to ensure they comply with the amended UCT regime. This will include:

• considering how template documents are used and whether or not they are used in a manner that would make them standard form contracts and therefore potentially subject to the UCT regime;
• assessing whether their standard form contracts comply with the relevant changes to the UCT regime. For fund managers, this not only includes certain procurement agreements, but also documents such as subscription materials (including application forms) and investment management agreements (to the extent that they are ‘standard form’); and
• as with other areas of competition law (such as the cartel and misleading and deceptive conduct prohibitions), including the UCT regime as a key part of staff and executive training and risk management decisions.

Hall & Wilcox has significant experience working with businesses to minimise regulatory risk under the UCT regimes of the Australian Consumer Law and the ASIC Act. Please contact Mark Lebbon, James Deady or Vanessa Murphy or our team if you require assistance with unfair contract compliance.

Listen to our podcast, where our experts outline the key changes to the UCT regime, or check out our Unfair contract terms regime resource centre.