New measures for banks reflect ongoing focus on consumer protection

On October 17, the federal government announced four “new measures to ensure that Canadians are treated fairly by their banks”.

What you need to know

• A focus on minimizing costs and mortgage default risk. Three of the recently announced measures are aimed at minimizing “banking” costs and addressing mortgage default risk—an unsurprising area of focus for the government given the current economic environment of rising interest rates and cost of living.
• A push for more consistency in the external complaint process. The transition to a single, external body (the Ombudsman for Banking Services and Investments (OBSI)), while not directed at reducing banking fees, still (1) aims to improve the bank/customer relationship by addressing a perceived lack of neutrality created by a dual, external complaint body (ECB) regime and (2) strives to ensure more consistency in the process.
• A shifting regulatory framework for banks. The emphasis in the federal measures on fees signals a potential shift in bank regulation as, historically, banks have had significant discretion with respect to the fees they charge, subject to providing customers with proper disclosures in compliance with applicable law.
• A rising trend of enhancing consumer protection. These federal measures, along with recently announced amendments to provincial consumer protection legislation in Ontario, are part of a trend toward enhancing consumer protections and ensuring banks treat customers fairly.

Federal measures reflect ongoing developments

In its news release, the federal government announced the following four measures, each of which is aimed at increasing the affordability of banking and facilitating the government’s action to “bring down inflation and stabilize prices for Canadians”. While characterized in the news release as “new”, the measures are largely built upon initiatives that are already underway.

1. The Financial Consumer Agency of Canada’s (FCAC) Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances, published in July 2023, sets out the FCAC’s expectations as to how federally regulated financial institutions will assist mortgage holders who are at risk of default on their principal residence. Proposed measures include waiving prepayment penalties, waiving internal fees and costs, extending amortization, and not charging interest on interest. On October 6, 2023, Minister Freeland met with the CEOs of Canada’s largest banks and outlined her expectations that they abide by these FCAC guidelines.
2. With the objective of making banking more affordable for Canadians, Minister Freeland announced that the government will work with financial institutions to expand no-cost account eligibility to more Canadians and to improve the features of low-cost accounts, such as providing additional debit transactions, online bill payments and e-transfers with no extra fees. This is the only new measure that had not been previously announced.
3. In its 2023 Budget, the federal government announced its intention to crack down on junk fees and singled out telecom roaming charges, event and concert fees, excessive baggage fees and unjustified shipping and freight fees. The recently announced measures have now added non-sufficient funds (NSF) fees to the list of targeted “junk fees”, and Minister Freeland has issued a direction to lower NSF fees, which are currently as high as $50. An update on this and additional actions to crack down on junk fees will be announced in the Fall Economic Statement.
4. In its 2023 Budget, the federal government announced its intention to strengthen the external complaints handling system for banks by designating a single, not-for-profit entity to be the sole ECB. The recent announcements confirm that the chosen entity is the OBSI. Financial institutions that currently use ADR Chambers Banking Ombuds Office as their external complaint body will have until November 1, 2024 to transition over. This measure marks a return to the time when financial institutions were required to use OBSI, and it also seeks to enhance transparency and address a perceived lack of neutrality in complaints handling.

The new measures around fees also complement other recent federal initiatives that are aimed at reducing the financial costs of consumers and businesses:

• Commitments from Visa and Mastercard to lower interchange fees for small businesses: It is expected that more than 90% of credit card-accepting businesses will see their interchange fees reduced by up to 27% from the existing weighted average.
• Proposed amendments to the Criminal Code to address predatory lending, including the lowering of the criminal interest rate from 60% (which the government states is the equivalent of 47% APR) to 35% APR.

Government directing banks in the pricing of bank products and services

Several of the new measures impact fees and charges that are charged by banks. Specifically, banks will be expected, with respect to mortgages, to waive prepayment penalties and internal fees and to not charge interest on interest when individuals are at risk of defaulting on their mortgages. Banks will also be expected to lower their NSF fees and improve the features of low-cost accounts by providing additional debit transactions, online bill payments and e-transfers with no extra fees.

The announced measures represent a shift from the existing regulatory framework to which banks are subject. Historically, consumer protection was achieved by requiring banks to disclose specific, key information regarding product features, interest and fees; however, banks have generally had significant discretion in determining the amount of the fees or interest they could charge to consumers. The existing regulatory regime was based on the premise that the market effectively regulates itself by permitting customers to compare products and services, including their fees and charges, and choose the lowest-cost product.

This approach has, as a result, encouraged competition among the banks to reduce fees, or else face the risk that other banks or non-financial institution competitors could offer comparable products with lower fees. While the new Bank Act consumer protection framework (the “Framework”) has enhanced the previous disclosure-focused approach by introducing a number of “responsible business conduct” requirements aimed at improving the banks’ conduct when selling or offering products (including around the sale of appropriate products), the Framework, which is aligned with the approach adopted by other jurisdictions, does not impose any obligations with respect to the pricing of bank products and services. We expect that the continued emergence of fintechs that offer financial products (which we expect will continue to grow with the introduction of an open banking framework in Canada) will only bring additional competition to the marketplace, including pressure to keep fees and charges low.

An April 2020 amendment to the Financial Consumer Agency of Canada Act recognizes the banks’ needs to manage their business operations; section 3(2)(b) identifies as one of the FCAC’s objects that the FCAC is to “strive to protect the rights and interests of consumers of financial products and services and the public, taking into account the need of financial institutions to efficiently manage their business operations”. The exception to that rule is the 2014 Bank Commitment on the Expansion of Low-cost and No-cost Bank Accounts, which aims to ensure that Canadians have access to basic banking services at a nominal cost through a low-cost account and that certain vulnerable groups have access to a no-cost account. But in general, the government has shied away from regulating the pricing of bank products.

Consumer protection is coming to the forefront

Canada is also not the only country focused on enhancing measures to reduce the fees charged to financial consumers. On October 11, 2023, the Consumer Financial Protection Bureau (CFPB), the U.S. equivalent of the FCAC, issued a Guidance advising U.S. banks that they could no longer charge “junk fees” when consumers seek basic information about their own accounts. The CFPB referred to a 2010 federal law requiring large banks and credit unions to provide complete and accurate account information when requested to support their position that fees could not be charged when responding to such requests.

Although it is not yet clear whether the Canadian federal government’s new measures signal a new direction in the government’s oversight of financial institutions, one thing is clear: consumer protection issues are taking center stage as more regulators in Canada and abroad continue to announce and advance measures to enhance consumer protection.

Recently announced provincial developments also confirm an enhanced focus on strengthening consumer protections. On October 23, 2023, the Ontario government introduced Bill 142, Better for Consumers, Better for Businesses Act, 2023, which contains a new draft Consumer Protection Act, 2023 that would replace the existing Consumer Protection Act, 2002, along with targeted amendments to the Consumer Reporting Act. The proposed new Consumer Protection Act, 2023 contains several enhancements, including to clarify and strengthen prohibitions against unconscionable conduct, to address predatory practices by some leasing equipment suppliers and to provide clarifications around gift cards. The proposed legislation would also double the maximum fines to $100,000 for individuals and $500,000 for corporations. Banks may be subject to provisions of provincial consumer protection legislation and should carefully review the proposed amendments to assess the potential impact on their own customer relationships.