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

DOI10.1177/0067205X1604400104
AuthorEvgenia Bourova,Paul Ali,Ian Ramsay
Published date01 March 2016
Date01 March 2016
Subject MatterArticle
THE STATUTORY RIGHT TO SEEK A CREDIT CONTRACT
VARIATION ON THE GROUNDS OF HARDSHIP: A
HISTORY AND ANALYSIS
Paul Ali,* Evgenia Bourova** and Ian Ramsay***
ABSTRACT
In this article, we focus on one of the most important statutory protections for Australian
consumers in financial hardship: the right to seek a variation of a credit contract
contained in s 72 of the National Credit Code. We provide a comprehensive history of
this right, which has been part of Australian consumer credit law since the 1970s. Over
the years, it has ev olved from a very limited right to seek an extension of time to pay a
debt on grounds of illness and unemployment, to a broader provision that requires
credit providers to comply with a prescribed process before they can commence
enforcement action against a consumer who has sought a variation to their payment
arrangements. We also undertake an analysis of the evolution of this rig ht to
demonstrate that despite improved understandings of the causes of financial hardship,
it continues to envisage a middle-class subject with a strong awareness of their rights,
and excludes some particularly vulnerable consumers. This r ight is also representative
of a regulatory approach that envisages a limited role for consumer credit law, and does
not sufficiently address the imbalance of bargaining power between the consumer and
the credit provider. We argue for the imposition of an obligation to provide a minimum
range of hardship assistance directly upon credit providers, as a means of addressing
this imbalance and ensuring more meaningful protection for consumers in financial
hardship.
I INTRODUCTION
Since the earliest attempts to establish a regulatory framework for consumer credit in
Australia, policymakers ha ve struggled to formulate an appropriate response to the
problem of financial hardship. In the context of consumer credit , the term ‘financial
hardshiprefers to a specific situation where a consumer takes on obligatio ns under a
* Associate Professor, Melbourne Law School, The University of Melbourne.
** Research Fellow for the Financial Hardship Project, Melbourne Law School, The University
of Melbourne.
*** Harold Ford Professor of Commercial Law and Director for the Centre for Corporate Law
and Securities Regulation, Melbourne La w School, The University of Melbourne. This
research is supported under the Australian Research Council’s Discovery Projects funding
scheme (project number DP140101031). The authors thank the two anonymous reviewers of
this article for their comments and recommendations.
78 Federal Law Review Volume 44
_____________________________________________________________________________________
credit contract, but then becomes unable to meet them when they fall due.
1
Much of the
time, this occurs because of some sudden misfortune that leaves the consumer facing
unforeseen expenses, or a reduction in their household income for example, loss of
employment, illness, or a relationship breakdown. Such events can cause payment
difficulties for even those consumers who fall within the broad category of the ‘middle
class’,
2
showing that fina ncial hardship is neither synonymous n or necessarily
associated with the problem of poverty. And yet it is also clear that being at increased
risk of financial hardship and poverty very frequently go hand in hand. People on a low,
fixed or irregula r income many of whom also belong to socio-economically
disadvantaged groups such as single parents, migrants from a non-English speaking
background and pe ople with an ongoing physical or mental illness or disability are
recognised as being at particular risk of living below the poverty line,
3
and also
experiencing both temporary and ongoing difficulties with debt. There is no one way of
measuring the incidence of financial hardship, particularly in the credi t sector, where
there is no framework for reporting on the number of consumers who default on their
contracts and have enforcement proceedings brought against them. However, figures
published by the Australian Bureau of Statistics showed levels of household d ebt in
Australia reaching a 25-year high in May 2014.
4
In the same year, Dun & Bradstreet
attributed rising consumer financial stress levels to increases in the number of
consumers with an adverse credit history, and those with a greater likelihood of b eing
in default of their obligations under a credit contract.
5
These figures confirm that
financial hardship is becoming a major problem in what is undoubtedly a credit society.
1
This is the general definition employed in Australia in the context of consumer credit: see,
eg, Australian Bankers’ Association (‘ABA’), ‘Industry Guideline: Promoting Understanding
About Banks’ Financial Hardship Programs’ (March 2015) 1–2. In other jurisdictions,
different terms for example, ‘financial difficulty’, ‘debt entanglement’ and
‘overindebtedness’ — are used more commonly than ‘hardship’, and demonstrate that there
are many ways of conceptualising this phenomenon. Overindebtedness the preferred
term in the United Kingdom is defined as ‘debt which has become a major burden for the
borrower’, or circumstances where the consumer cannot meet their existing credit
obligations without ‘reducing other expenditure below normal minimum levels’:
Department of Trade and Industry and Department for Work and Pensions (UK), ‘Tackling
Over-Indebtedness: Action Plan 2004 (Report, Ministerial Group on Over-Indebtedness,
2004) 9.
2
The difficulty of defining the ‘middle class’ in Australia is acknowledged in Ian Ramsay and
Cameron Sim, ‘Personal Insolvency in Australia: An Increasingly Middle Class
Phenomenon’ (2010) 38 Federal Law Review 283, 284, 2913. They define the ‘middle class’ by
reference to characteristics such as property ownership; being in a higher status profession;
and having a higher household and personal income.
3
The Australian Council of Social Service defines poverty by looking at the proportion of the
Australian population that is living below a ‘poverty line’ of 50 per cent of the median
household income. This is a n internationally recognised measure of poverty that is used by
the Organisation for Economic Co-oper ation and Development. In 2012, the proportion of
Australians living in poverty reached 13.9 per cent: Australian Council of Social Service,
‘Poverty in Australia 2014’ (Report, 2014) 7, 8, 12.
4
Australian Bureau of Statistics, Australian Social Trends (6 May 2014)
>.
5
Dun & Bradstreet, ‘Consumer Financial Stress Index: Stress Forecast to Rise’ (Media Release,
22 September 2014) to-
rise.html#.VYz89_mqpHx>.
2016 The Statutory Right to Seek a Credit Contract Variation on the Grounds of Hardship 79
_____________________________________________________________________________________
In the consumer credit sector, the most significant response to this proble m is
contained in s 72 of the National Credit Code (‘NCC’). The NCC is scheduled to the
National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’) a landmark piece of
legislation that establishes Australia’s f irst uniform national f ramework for the
regulation of consumer credit. Section 72 of the NCC gives consumers in financial
hardship the right to seek a variation of their payment arrangements for example, a
moratorium on repayments, or a temporary reduction in repayment amounts combined
with an extension in the term of a loan from their credit provider. The consumer can
exercise this right by giving the credit provider notice (referred to as a ‘hardship notice’),
orally or in writing, that they may not be able to meet a scheduled payment under the
contract.
6
This sets off a statutory process that mu st be completed before the credit
provider can commence enforcement proceedings against the consumer, even if the
consumer has already been given a default notice in accordance with s 88 of the NCC.
7
The credit provider must respond to the hards hip notice within time frames prescribed
in the legislation by giving the consumer notice of whether or not they agree to a
variation,
8
confirming particulars of any agreement reached,
9
and, if refusing to vary the
contract, stating the reasons for this.
10
Importantly, s 72 does not set out any
circumstances in which the credit provider might be required to gra nt a hardship
variation, expressly stating instead that the credit provider need not agree to change the
credit contract.
11
If the credit provider refuses to grant a hardship variation under s 7 2, the NCC
provides the consumer with two avenues for seeking review of the credit provider’s
decision: either through the courts,
12
or, more realistically, through the external dispute
resolution scheme of which the credit provider is a member.
13
As mentioned previously,
the legal framework does not require credit providers to report on the number of
hardship applications they receive, let alone refuse, each year. However, the importance
of the right contained in s 72 is evidenced by the high volume of financial hardship
disputes received by the Financial Ombudsman Service (‘FOS’) and the Credit and
Investments Ombudsman (‘CIO’).
14
For example, in 201314, FOS received 4,705
disputes relating to fi nancial hardship, out of a total caseload of 31,680 disputes.
15
Out
of the financial hardship disputes, 34 per cent were in relation to a credit provider
declining a request for assistance under s 72, and 3 3 per cent involved a credit provider
6
National Consumer Credit Protection Act 2009 (Cth) sch 1 cl 72(1) (‘NCC’).
7
NCC s 89A(1).
8
Ibid s 72(4)(5).
9
Ibid s 73.
10
Ibid s 7 2(4).
11
See note to ibid s 72(3 ).
12
Ibid s 7 4(1).
13
Membership of an external dispute resolution scheme approved by the Australian Securities
and Investments Commission (‘ASIC’) is compulsory under s 47(1) of the National Consumer
Credit Protection Act 2009 (Cth) (‘NCCP Act’). If a credit provider refuses an application for a
hardship variation under s 72, they are required to notify the consumer of the name and
contact details of the external dispute resolution scheme of which they are a member, and
outline the consumer’s rights under that scheme: NCC s 72(4)(b).
14
Until November 2014, the Credit and Investments Ombudsman (‘CIO’) was known as the
Credit Ombudsman Service Limited.
15
Fin ancial Ombudsman Service (FOS), Annual Review 201314’ (Annual Report, 2014) 44,
79.

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