Unfair contract terms regime for financial services
Since November 2023, a term in a standard-form financial services contract that is unfair can attract civil penalties — not just be declared void. The unfair contract terms (UCT) regime in the ASIC Act 2001 now applies to insurance contracts, credit contracts, and other financial product contracts with consumers or small businesses. This guide covers 10 core obligations.
Coverage
Any entity that uses standard-form contracts to provide financial products or services to consumers or small businesses, including banks, insurers, fund managers, lenders, and fintech providers. The small business threshold applies to businesses employing fewer than 100 people or with turnover under $10 million.
Legal basis
Australian Securities and Investments Commission Act 2001 (Cth), Part 2 Division 2 Subdivision BA (ss 12BF–12BM), as amended by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022. The Insurance Contracts Act 1984 was also amended to bring insurance contracts within the regime.
The obligations
Review all standard-form financial contracts for unfair terms
Systematically review every standard-form contract used with consumers or small businesses to identify terms that may be unfair under the three-part test: significant imbalance, not reasonably necessary, and would cause detriment.
Remove or amend terms that create significant imbalance
Amend or remove terms that cause a significant imbalance in the parties' rights and obligations, such as unilateral variation clauses, broad termination rights, or penalty clauses disproportionate to the provider's legitimate interests.
Assess whether terms are reasonably necessary
For each potentially unfair term, assess whether it is reasonably necessary to protect the legitimate interests of the party who would benefit from the term. The burden of proof falls on the party relying on the term.
Consider the contract as a whole
Evaluate transparency, the overall rights and obligations of each party, and other relevant circumstances. A term may be unfair even if it appears clear on its face if the contract as a whole is one-sided.
Ensure insurance contract terms are fair
Review insurance contract terms — including exclusions, conditions, and claims-handling provisions — that were previously outside the UCT regime. The 2022 reforms brought insurance contracts within the ASIC Act UCT provisions.
Provide transparent contract terms
Draft terms that are expressed in plain language, legible, presented clearly, and readily available to the party affected. Transparency is a factor courts consider in assessing fairness.
Establish a contract review governance process
Implement a governance framework for ongoing review of standard-form contracts, including when products are updated, regulatory guidance changes, or complaints suggest a term may be unfair.
Train product and legal teams on the UCT regime
Ensure staff responsible for drafting and approving financial product contracts understand the three-part unfairness test, the penalty regime, and the examples of potentially unfair terms in the ASIC Act.
Monitor ASIC enforcement and industry developments
Track ASIC enforcement actions, court decisions, and regulatory guidance on unfair contract terms to identify emerging risks and update contracts proactively.
Document assessments and remediation decisions
Maintain records of UCT assessments, the reasoning for retaining or amending terms, and any remediation actions taken. These records support a defence of reasonable necessity if challenged.
What happens if you do not comply
Since November 2023, penalties apply: up to $2.5 million per contravention for individuals and the greater of $50 million, three times the benefit, or 30% of adjusted turnover for bodies corporate. Courts can also declare terms void and grant injunctions.
Reporting requirements
No mandatory self-reporting requirement, but entities should proactively remediate customers affected by terms declared or identified as unfair. ASIC expects timely consumer remediation when unfair terms are identified.
What firms should do today
- Conduct a full UCT audit of all standard-form financial product contracts
- Prioritise high-risk terms: unilateral variation, automatic renewal, broad indemnities
- Brief the board on UCT exposure and remediation strategy
- Include UCT review in the product approval and review process
- Build a clause library of pre-approved fair alternatives
- Track ASIC reports and enforcement outcomes quarterly
Compliance with Quillio
Quillio helps financial services providers by flagging potentially unfair clauses in standard-form contracts, benchmarking terms against ASIC guidance, and tracking enforcement developments. See /resources/security or start a free trial.
This guide is general information about the unfair contract terms regime — not legal advice. Always obtain specialist legal advice when reviewing and amending financial services contracts.
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