Canadian Government Imposes Additional Requirements on Certain Financial Products and Services

The Canadian federal government recently published three regulations that will impose additional requirements and restrictions on the use of credit card cheques, on cheque hold periods and on the provision of new optional products or services.

Proposed amendments to the Credit Business Practices Regulations would require federally regulated financial institutions (FRFIs) to obtain the express consent of borrowers before distributing credit card cheques. The Access to Funds Regulations will reduce the maximum cheque hold period for consumers and small and medium-sized enterprises. In addition, the Negative Option Billing Regulations will require FRFIs to obtain consumers' express consent before providing a new optional product or service.

The Credit Business Practices Regulations were published in the Canada Gazette on March 10, 2012, for a 30-day comment period and will come into force on the date on which they are registered. The other two regulations were published on March 14, 2012, in final form and will come into force on August 1, 2012. The Financial Consumer Agency of Canada (FCAC) will oversee compliance with each regulation.

The details of these regulations are discussed below.

Credit Business Practices Regulations

A number of credit card issuers currently send cardholders unsolicited credit card cheques allowing funds to be withdrawn directly from a credit card. These cheques are considered to be cash advances, which generally accrue higher interest rates, as well as fees, and do not qualify for an interest-free grace period. It appears that the proposed amendments are meant to address consumer confusion over the immediate application of interest upon use of such cheques, and to help consumers manage their debt levels.

The proposed amendments to the Credit Business Practices Regulations would specify that (1) a FRFI may not provide credit card cheques to a borrower without first obtaining the borrower’s express consent to do so; and (2) if the borrower’s consent to receive credit card cheques is given orally, the FRFI must, no later than the date of the first statement of account that is provided after the date of that consent, give the borrower written confirmation of that consent, in paper or electronic form. FRFIs will be able to choose the channel by which they receive the consumer’s consent: through mail, by phone or during a visit to a branch.

Access to Funds Regulations

Currently, under the Canadian Bankers Association’s Voluntary Commitment on Cheque Holds, the maximum cheque hold period is seven business days for all dollar amounts of paper cheques that are drawn on branches located in Canada and issued in Canadian dollars. The Access to Funds Regulations will reduce the maximum hold period for consumers and "eligible enterprises" 1 to four business days for cheques of $1,500 or less that are deposited in person with an employer of the institution (or to five business days if the cheque is deposited in any other manner, such as through an automatic banking machine). Cheques greater than $1,500 will continue to be subject to a maximum hold period of seven business days if deposited in person (or eight business days if deposited in any other manner). Additionally, the regulations will provide consumers with immediate access to the first $100 of all funds deposited in person by cheque at a branch on any one day (or with next business day access if the cheque is deposited in any other manner).

A FRFI has the discretion not to comply with the maximum cheque hold periods with respect to eligible enterprises if it has reasonable grounds to believe that there is a material increased credit risk. Furthermore, the foregoing amendments do not apply in certain circumstances, such as when

  • the FRFI has reasonable grounds to believe that a deposit is being made for illegal or fraudulent purposes,
  • an account has been open for less than 90 days,
  • a cheque has been endorsed more than once, or
  • a cheque is deposited at least six months after the date of the cheque.

FRFIs relying on the aforementioned exceptions as grounds for refusing to comply with the reduced hold period or immediate access to the first $100 must provide depositors with a written notice of their refusal and a statement indicating that depositors may contact the FCAC if they have a complaint.

FRFIs must disclose in writing the maximum periods for which they may hold funds deposited by cheque, and such disclosure must be displayed or made available at each branch where personal deposit accounts are offered and on their websites.

The Access to Funds Regulations will repeal the current Cheque Holding Policy Disclosure Regulations and will effectively codify many aspects of the Canadian Bankers Association’s Voluntary Commitment on Cheque Holds.

Negative Option Billing Regulations

The Negative Option Billing Regulations require FRFIs to obtain the express oral or written consent of consumers that are natural persons before providing them with a new primary financial or "optional product or service." In this context, "optional product or service" means a product or service that is offered or provided to a person by a FRFI for an additional fee and is available only with an agreement for a primary financial product or service provided by the FRFI.

To obtain the express consent of a consumer, the FRFI must provide a summary of the key information relating to a product or service. Once such consent has been received and an agreement entered into, the FRFI must provide the prescribed information within 30 days of entering into the agreement. This information includes a description of the product or services, the term of the agreement, the charges for the product or service (or the method for determining the charges) and an example to illustrate the method, the conditions under which the consumer may cancel the product or service, the date from which the product or service is available for use and the steps required to use the product or service. The regulations will also require FRFIs to refund charges on a prorated basis following cancellation.

If the FRFI makes any changes to the terms and conditions that apply in respect of an agreement for an optional product or service, it must communicate such changes in writing to any person who subscribes to the product or service no less than 30 days before the day on which the changes take effect.

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1 Under the regulations, "eligible enterprises" are defined to include businesses with authorized credit of less than $1 million, fewer than 500 employees and annual revenue of less than $50 million.

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