The Statutory Right to Seek a Credit Contract Variation on the Grounds of Hardship: a History and Analysis

In the context of consumer credit, the term ‘financial hardship’ refers to a situation where a consumer takes on obligations under a credit contract, but then becomes unable to meet them when they fall due. One of the most important statutory protections for Australian consumers in financial hardship is contained in section 72 of the National Credit Code. Section 72 gives consumers in financial hardship the right to apply for a variation of their contractual payment arrangements — for example, a moratorium on repayments or a loan extension — from the credit provider. It also allows them a temporary reprieve from enforcement action while the credit provider responds to the application in accordance with a prescribed process.

In our recent paper (available here), we provide a comprehensive history of this right, which has been part of Australian consumer credit law since the 1970s. It began as a very limited right to seek one type of contractual variation — an extension of time to pay a debt — in circumstances confined to short-term illness or unemployment. Over time, the various statutory versions of this right became less prescriptive in relation to the types of variation that could be sought by the consumer. They also allowed consumers in a broader range of circumstances to potentially make use of this important consumer protection.

It is tempting to view this history simply through the lens of progress towards a stronger level of consumer protection. However, we argue for a more nuanced view. We document how the right contained in section 72 remains geared towards a middle class consumer who has a strong awareness of their rights, and who requires no more than a short-term reprieve from their credit provider to improve their financial position. Meanwhile, consumers experiencing ongoing financial hardship — often as a result of being on a low, fixed or irregular income, or having a long-term illness or disability — face significant barriers to making effective use of this provision.

The evolution of the right contained in section 72 also highlights a tension between two approaches to the regulation of consumer credit. The first of these is the neo-liberal approach, which has, to date, been the dominant one in Australia. This approach assumes that the role of consumer credit law in the context of financial hardship should be limited to informing consumers of their rights, and providing a mechanism for them to seek, but not necessarily receive, a measure of flexibility from their credit provider.

We highlight the benefits of another approach, which envisages a more extensive role for consumer credit law in redistributing rights and obligations to address the imbalance of power between consumers and credit providers. This approach recognises that in a society where access to credit has become essential for full socio-economic participation, there is a need to ensure that consumers in financial hardship are able to receive — and not only to ask for — the flexibility they need.

We argue for the imposition, for the first time, of a statutory obligation to provide a minimum range of options for consumers in financial hardship directly upon credit providers. This would be a step towards addressing what continues to be an imbalance of power between credit providers and consumers. It would also provide more meaningful protection to the broad group of consumers who may, at some point in their lives, find themselves affected by financial hardship.

Paul Ali is an Associate Professor of Law, Evgenia Bourova is a Research Fellow, and Ian Ramsay is a Professor of Law, all at Melbourne Law School, the University of Melbourne. This research is part of the Financial Hardship Project, which is funded by an Australian Research Council Discovery Grant.