Non-Bank Lenders : Accountability & Unconscionable Conduct

26 October 2025 in Banking and Finance | 7 min read | skip to FAQs

This article looks at the accountability of non-bank lenders. We discuss the regulatory regime and recent case law that will affect the responsibility and accountability of second-tier lenders and highlights some of the potential risks for borrowers.

Background

Non-bank and non-listed mortgage funds have grown massively across the Australian financial sector, with their provision of credit increasing by around 240% over the past 10 years, as noted by the Australian Securities and Investments Commission. Private lenders, and what are often referred to as, second-tier lenders are not, in all circumstances, subject to the National Credit Code. The growth of such lenders has provided opportunities to many investors, who earn a return on such lending, and benefits to many borrowers, particularly for business purposes.

The Regulation of Banks and the National Credit Code

The Banking Act 1959 (Cth) regulates banking business and section 9 of the Banking Act 1959 (Cth) prohibits any person that is not authorised by the Australian Prudential Regulation Authority (APRA) from carrying on banking business. Any body corporate which is authorised by APRA is called an Authorised Deposit Taking Institution (ADI) and APRA publishes a list of all ADIs.

The National Consumer Credit Protection Act 2009 (Cth) includes the National Credit Code that provides a national consumer credit regime. The National Credit Code includes, among other things, requirements for credit contracts for personal, domestic and household use and licence obligations and standards for the providers of credit.

In certain circumstances non-bank or second tier lenders are not obliged to comply with the National Credit Code, particularly where the loan is for business purposes. There has been recent growth in this form of lending.

Case Law in the Accountability of Non-Bank Lenders

The case of Stubbings v Jams 2 Pty Ltd & Ors [2022] HCA 6 marks an important development in shaping the accountability of second-tier lenders.

Background of the Lender, Mr Stubbings: The guarantor, Jeffrey Stubbings, owned two properties in Narre Warren, Victoria and wanted to purchase a third residential property on the Mornington Peninsula. Mr Stubbings was unemployed, lacked a regular income, had not filed tax returns for several years before obtaining the loans and was in arrears on council rates payments for his Narre Warren properties. In short, he was not a suitable candidate for a traditional home loan and his financial circumstances left him vulnerable to exploitation.

The Business Loan offered by the Non-Bank Lenders: Mr Stubbings was introduced to the lenders by an agent. Ultimately, a business loan was offered to a company owned by Mr Stubbings that lacked assets and had never traded.

The Problem with this Loan:

1. Structuring the loan in this fashion created the impression that the loan was made for business purposes, therefore the National Credit Code did not apply.
2. The loan itself was an asset-based loan, based on the value of the properties, made without consideration for Mr Stubbings’ income or his ability to pay off the loan.
3. Mr Stubbings became the personal guarantor for the asset-based loan, with his properties forming the security in the form of mortgages.

Mr Stubbings’s company defaulted:

1. The company, which had never traded defaulted on its repayment obligations under the loan.
2. The lenders sought to enforce their contractual rights against Mr Stubbings as the guarantor, with the proceedings ultimately escalating to the High Court.
3. On the basis of several factors, the High Court determined that the loan was unenforceable and that the lender had engaged in unconscionable conduct. 

The Finding of Special Disadvantage in the High Court’s Decision

A finding on unconscionable conduct will be dependent upon there being a finding of one of the party’s “Special Disadvantage”, which means, as described in the case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 that there is something at hand that would seriously affect the ability of the innocent party to make a judgement as to their own best interests. Among other disadvantaging factors, poverty, lack of education and lack of assistance and explanation in matters where assistance and explanation is needed can culminate to place a party at Special Disadvantage. For further information on the general topic of unconscionable conduct in business please see our article on this topic.

The High Court noted that Mr Stubbings was incapable of understanding the risks of the loan at the time it was made, and that, alongside his general financial illiteracy and precarious financial position, this left him at a special disadvantage.

Other Reasons the High Court found Unconscionable Conduct

Any finding of unconscionable conduct would also be reliant upon demonstrating that the lenders had knowledge of Mr Stubbings’ special disadvantage. The High Court determined that the agent acting on behalf of the lenders would have reasonably known of Mr Stubbings’s special disadvantage and that this special disadvantage would make it highly likely that he would lose his equity in the properties through the inevitable default of the loan and foreclosure pursuant to the mortgages.

The concept of Wilful Blindness and Knowledge in Unconscionable Conduct

The Court also found that the various practices the agent had engaged in for facilitating the loan, such as lending to Mr Stubbings’s company, using intermediaries and requesting that Mr Stubbings obtain evidence certifying he had sought independent advice, amounted to wilful blindness. The lender deliberately separating itself from the apparent evidence of the serious implications of a transaction for the innocent party may also amount to wilful blindness and knowledge.

Meaningless Pro-Forma Certificates of Independent Advice

The High Court also dismissed the lender’s position regarding the certificates of independent legal and financial advice, noting that their generic, boilerplate language that did not reference Mr Stubbings’s company plan, nor the zoning issues with the Mornington Peninsula property. These were issues that one would expect to be covered under financial and legal advice and was therefore evidence of their artificiality. Moreover, they therefore could not be relied upon to demonstrate that Mr Stubbings had overcome his financial illiteracy in order to enter into the loan with a genuine appreciation of its risks and likely consequences.

Why the Court did not find Unconscionable Conduct in Kakavas v Crown Melbourne

Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392 is a case that held that for a party to be guilty of unconscionable conduct it must have actual knowledge of the other party’s special disadvantage. Kakavas was able to make rational decisions in his own interests, including deciding to refrain from gambling altogether. Crown did not knowingly victimise Kavakas by allowing him to gamble at its casino. In contrast, in the case of Stubbings v Jams 2 Pty Ltd & Ors [2022] HCA 6, the lender had knowledge of Mr Stubbings special disadvantage.

Summary of the Stubbings Case

The High Court held in the case of Stubbings v Jams 2 Pty Ltd & Ors [2022] HCA 6 that asset-based lending itself is not inherently unconscionable. However, loans and securities provided in circumstances where the lender has acted unconscionably may be unenforceable.

Key Takeaways : Lessons regarding Second-Tier Loans

It is useful to refer to the following regarding what lessons might be learned from the Stubbings case:

1. Non-bank lenders and borrowers should be aware of the risks inherent in asset-based loans;
2. Borrowers should be aware of the risks when they are offered a business loan, which is not covered by the National Credit Code;
3. Non-bank lenders should properly scrutinise a borrower’s financial circumstances before granting a loan;
4. Mere pro-forma certificates stating that financial and legal advice has been sought can be meaningless if it cannot be demonstrated that the borrower has a genuine appreciation of the risks of the loan;
5. Non-bank lenders should not intentionally avoid seeking information about the borrower; and
6. A lender’s agent role in assessing information and securing the loan can be attributed to the lender.

How can BSM Sydney Lawyer assist you?

Navigating any loan, but especially a more potentially nebulous loan from a second-tier or non-bank lender can be challenging. The banking and finance lawyers at Brander Smith McKnight have accumulated significant experience and expertise in dealing with second-tier loans and are able to advise our clients on how best to approach a problematic lender or borrower. Our banking and finance lawyers have decades of experience with contract drafting and negotiation and can review your contract with a non-bank lender to ensure that you are aware of potential risks and costs. With the sophistication of a top corporate firm without the hefty price tag, our experienced Sydney Lawyers will ensure that your legal and financial interests are protected. Our senior business lawyers offer a free 20-minute initial consultation.

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