The Financial Consumer Agency of Canada (FCAC) issued several guidance notes and decisions affecting the payments and card business of federally regulated financial institutions (FRFIs) and others in 2011. In this bulletin, we highlight some of the FCAC’s more important pronouncements.
In January 2010, the Canadian government introduced the Credit Business Practices Regulations1 (CBP Regs) and amended the Cost of Borrowing Regulations (CoB Regs) under the Bank Act, Trust and Loan Companies Act and the Insurance Companies Act to enhance the protection of consumers of financial products and to better ensure that consumers have access to credit on terms that are fair and transparent. In addition, in August 2010, the government introduced a Code of Conduct for the Credit and Debit Card Industry in Canada (the Code) to promote greater transparency for business owners and consumers who use credit and debit cards. In addition to monitoring various other consumer provisions applicable to FRFIs, the FCAC monitors compliance with, and provides guidance on the interpretation of, these regulatory requirements.
Commissioner's Guidance Notes
Consent for Increases in Credit Limits
Guidance No. CG 5, April 28. As part of the CBP Regs, FRFIs are required to obtain express consent from consumers before increasing the credit limit on their credit card accounts. The FCAC Commissioner interpreted these rules to require a FRFI to obtain express consent from consumers in each instance of a proposed credit limit increase by the FRFI and to obtain such consent at the time of the proposed credit limit increase. This clarification was deemed necessary because the FCAC had found that some institutions had implemented a process to obtain a one-time, or "evergreen," consent from consumers for any future increase to their credit card credit limit. In the FCAC’s view, an evergreen consent would contradict the intent of the regulations because consumers must be able – at the time of the offer to increase the credit limit – to assess their current financial situation in order to make informed decisions regarding the benefit or otherwise to their credit profile.
Online and Other Electronic Credit Card Applications and Information Boxes
Guidance No. CG 6, September 19: The CoB Regs require FRFIs to include information boxes on their credit card application forms and in credit agreements for credit cards and other lending products. These boxes are meant to provide salient information, consolidated in one location, to help consumers better understand their options when applying for a credit card or entering into credit agreements. The FCAC Commissioner confirmed that the regulatory requirements to provide information boxes and the requirements regarding how the boxes are to appear in lending disclosure documents and credit card applications apply equally to both written and electronic documents.
90 Days' Notice of a Fee Increase or a New Fee
Guidance No. CG 7, October 18. Element 2 of the Code states that payment card network rules shall ensure that merchants receive a minimum of 90 days’ notice of any fee increase or the introduction of a new fee related to any credit or debit card transactions. In addition, Element 3 of the Code states that payment card network rules shall ensure that following notification of a fee increase or the introduction of a new fee, merchants will be allowed to cancel their contracts without penalty. The FCAC Commissioner expects that the 90-day period during which merchants will be able to cancel their contracts without penalty should begin only after the merchants are able to reasonably assess the impact of the fee changes on their businesses.
As a commentary, this decision indicates that the FCAC requires transparency with respect to fee increases or new fees. In that context, when notifying merchants of fee increases or new fees under their contracts, acquirors should explain fully how they will affect merchants’ rights and obligations under those contracts.
Additionally, the Code is not drafted with the rigor or precision of legislation, and little guidance is available as to its interpretation. Consequently, acquirors may encounter ambiguities in the Code provisions, and will need to be careful when structuring and drafting contracts with merchants.
Summary of FRFI Compliance Deficiencies: Decision No. 107
On March 18, 2011, the Commissioner of the FCAC posted Decision No. 107, which provided a summary of the compliance actions and decisions that arose as a result of the FCAC’s examination of FRFIs’ compliance with the CBP Regs and the CoB Regs. Of the 70 FRFIs that were affected by the new regulatory requirements, enforcement actions were taken with 30 institutions. To deal with the range and severity of the compliance issues, the FCAC initiated a variety of compliance approaches, including action plans and compliance agreements, in addition to monetary penalties imposed on 9 of the 30 institutions. In general, the violations of the CoB Regs included the following:
- Some FRFIs failed to provide (i) information boxes for disclosure statements in respect of loans, mortgages, lines of credit or credit cards; or (ii) disclosure statements, either consolidated in a single location in the agreement or provided before entering into the agreement for a loan, mortgage or line of credit;
- Some FRFIs failed to present information in the information box in an easily readable font and size of at least 12 points and bold for titles and numbers, and 10 points for any other text;
- At least one FRFI failed to provide disclosure statements for a loan in a timely manner;
- At least one FRFI failed to disclose in credit agreements for mortgages that there is no requirement to provide prior disclosure before entering into a credit agreement when certain conditions are met; and
- Some FRFIs failed to provide consumers, in writing, with any resulting changes to the initial disclosure statement 30 days after the day on which an amendment to a credit agreement for a line of credit, loan or residential mortgage was made.
In addition, the Commissioner noted two violations of the CBP Regs:
- When a consumer had given oral consent for an increase to his credit limit, the FRFI failed to provide him with a written document by the date of the first statement of account that was provided after the date of that consent; and
- The FRFI failed to provide, without delay, written confirmation to the debtor, when he had given oral consent to the institution that it could communicate with his family, relatives, neighbours, friends or acquaintances in order to obtain his address or telephone number.
Credit Card Financing Plan Disclosure Deficiencies: Decision No. 108
On April 8, 2011, the Commissioner of the FCAC posted Decision No. 108, which imposed a $150,000 monetary penalty on a bank for five violations of the CoB Regs and one violation of the Bank Act. The violations were in respect of a financing plan in connection with the bank’s credit cards.
The plan was offered through merchants, and it permitted cardholders to elect to have a purchase from the merchant charged to their credit card in equal monthly installments. Merchants had inaccurately advertised the plan as zero interest without indicating that all other amounts charged to the card had to be paid each month in order for zero interest to apply. Although an agreement between the bank and the merchants required the bank to approve all plan advertising by merchants, merchants had advertised the plan inaccurately without the bank’s approval or knowledge. The bank was found to be responsible under the Bank Act for monitoring merchant advertising of the bank’s plan, and had failed to do so. The bank was also found to have contravened various provisions of the CoB Regs, including failing to disclose the plan in clear language and failing to provide monthly disclosure statements with the required information.
This decision highlights the compliance complexities that may arise in connection with the introduction of new or enhanced products or services and, in particular, when third parties are involved in offering or advertising the products or services.
1 These regulations apply to the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act and the Trust and Loan Companies Act.
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