On May 2, 2017, the Quebec government introduced new legislation intended to modernize the Quebec Consumer Protection Act (CPA), as well as provide for new consumer protection measures. The CPA provisions on credit, in particular, are long overdue for change as they have not been significantly amended since 1978.
The liberal government, under Jean Charest, previously attempted to pass similar legislation in the form of Bill 24, introduced in June 2011. Bill 24 proposed extensive amendments that focused on the consumer lending and leasing provisions, with the underlying policy reason of improving consumer debt loads. However, the government was not able to push Bill 24 through the various legislative stages before the summer election call of 2012, and Bill 24 died on the order paper.
With Bill 134, titled An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs, the liberal government, led by Philippe Couillard, now has a second chance to update the CPA’s credit related provisions.
The proposed amendments to Bill 134 can be categorized into modernization and harmonization measures and new rights for consumers. This bulletin summarizes the key aspects of these amendments, focusing on those of interest to financial services providers.
MODERNIZATION AND HARMONIZATION
Cost of Credit Disclosure Laws
The explanatory notes prefacing Bill 134 state that measures arising from the Agreement for Harmonization of Cost of Credit Disclosure Laws in Canada are to be integrated into the CPA. This agreement was prepared by the Consumer Measures Committee and reflects harmonization proposals that were agreed to in principle by the federal and provincial Consumer Affairs Ministers on September 12, 1996. The objectives of the proposed reforms were to develop uniform cost of credit disclosure requirements to reduce compliance costs, provide uniform consumer protection across Canada and simplify cost of credit disclosure rules. This was particularly of concern to lenders and lessors operating on a national level. The first province to adopt harmonized cost of credit disclosure laws was Alberta in 1999. Since that time, British Columbia, Manitoba, New Brunswick, Newfoundland, the Northwest Territories, Ontario and Saskatchewan (with Alberta, the Harmonized Jurisdictions) have each enacted harmonized laws. Although the harmonization efforts in the common law provinces are not complete, nor have they resulted in complete harmonization, lenders and lessors operating in the common law provinces are generally able to use one form for most types of consumer credit and leases.
Bill 134, however, does not go as far as the laws enacted in the Harmonization Jurisdictions and critical differences remain, meaning lenders and lessors operating across Canada will continue to need different forms and systems for use in Quebec.
Importantly, the concept of the “credit rate” remains for both fixed and open credit. In the Harmonized Jurisdictions, a contract for fixed credit must disclose both the annual interest rate and the annual percentage rate (APR). The APR includes both the interest rate and certain non-interest finances charges that are payable by the borrower, expressed as a percentage. In contrast, under the CPA only one credit rate may be disclosed in a contract of credit (except contracts extending variable credit). The credit rate is conceptually equivalent to the APR, although it is not calculated in the same manner. As a result, a lender offering fixed credit is unable to comply with the requirement to disclose only one credit rate (for Quebec) and the requirement to disclose both the annual interest rate and the APR (in the common law provinces) on one form, since these requirements are directly at odds with one another.
For open credit, in the Harmonized Jurisdictions, a lender must disclose the annual interest rate as well as the various fees and charges that may become payable by the borrower in connection with the credit agreement. There is no requirement to disclose an APR. However, the concept of a credit rate remains under the CPA for open credit. Bill 134 purports to work around the issue by setting out certain fees that are not required to be included in the credit rate for an open credit contract, such as credit card customization fees, card replacement fees and statement fees, as well as other fees that are not required to be included in the credit rate for fixed or open credit, such as security registration fees and optional insurance fees. However, the list omits certain fees that are routinely charged by lenders, such as fees for optional services (not just optional insurance), foreign exchange fees, cash advance fees and not sufficient funds (NSF) fees, although additional fees may be excluded under the regulations.
We also note that format requirements may be set out in the regulations. The contract form for fixed and open credit must be “presented in conformity with the model provided by regulation”. This language suggests that the regulations will not set out a prescribed format, such as the information box that is required under the federal Bank Act. However, the extent of any format or presentation requirements remains to be seen, including whether lenders and lessors will still need to comply with the existing format requirements, such as the requirement to have all numbers presented in bold, 12-point font.
Despite this, the laundry list of disclosures that must be set out in the contract form for fixed or open credit will appear relatively familiar to lenders operating outside of Quebec.
Additional Requirements for Open Credit, Credit Cards
Bill 134 introduces disclosure requirements for credit card applications, which are relatively consistent with the laws in the Harmonized Jurisdictions, with the exception of the requirement to disclose the credit rate, rather than the annual interest rate.
However, there are some interesting deviations from the harmonized laws.
Bill 134 mandates that a merchant must give consumers a grace period of at least 21 days, starting after the last day of the applicable statement period. During this period, no credit charges can accrue except for an advance of money. The laws in the Harmonized Jurisdictions do not require a grace period. We expect that the Quebec government looked to the minimum grace period requirements set out under the Credit Business Practices Regulations (CBP Regulations) under the Bank Act when drafting these provisions. However, there is an important distinction between Bill 134 and the CBP Regulations on this point, which is that under the CBP Regulations, the 21-day grace period refers specifically to purchases of goods and services, whereas Bill 134 states that the only exception to the grace period is for an advance of money (such as a cash advance). Accordingly, a merchant would need to ensure that any type of transaction where credit charges are applied prior to the expiry of the grace period can be properly characterized as an advance of money.
Bill 134 also imposes new requirements for open credit grantors, and in particular credit card issuers, as well as merchants accepting credit cards, that are meant to protect consumers against increasing their level of indebtedness. Bill 134 requires that the minimum monthly payment for a credit card contract must be at least five per cent of the outstanding balance, exclusive of any payments required under an instalment payment program. No other Canadian jurisdiction has a similar requirement. Credit limits for all open credit cannot be increased except with the consumer’s express consent. Bill 134 would also prohibit a merchant from allowing a consumer to make a transaction that would exceed the credit limit unless:
- The merchant sends a notice to the consumer
- No charges are imposed for exceeding the credit limit
- The excess must be included as part of the minimum payment required for the subsequent period
This process presents some challenges from a systems and operational perspective. First, this will mean that credit card issuers will not be able to allow users to exceed their credit limit on a discretionary basis as the first requirement is unlikely to be met at the time a card is presented to a merchant. Second, no other jurisdiction requires that the excess is included in the minimum payment and this requirement will result in one-off, customized minimum payment calculations that will likely be costly to implement.
Quebec is also the first jurisdiction to introduce regulation regarding pre-authorized credit card payments as Bill 134 provides that a consumer can end pre-authorized credit card payments at any time upon notice to the merchant. Bill 134 will also require card issuers to post up-to-date versions of their credit card contracts on their website.
Another unique requirement is that Bill 134 will impose restrictions on credit card holds. Before an amount can be withheld on a credit card, the consumer must receive, before the transaction, information on the amount that will be withheld, the reason for the hold and how long the amount will be withheld.
Consumers are also given the right to limit their joint liability with another consumer for card transactions (although the provision is in respect of all open credit contracts, not just credit cards). A consumer will be released from any joint obligations if the consumer notifies the merchant in writing that the consumer will no longer use the credit and no longer intends to be jointly liable. The consumer must also provide proof to the merchant that a similar notice was provided to the other consumer(s) who are liable under the contract.
One helpful change is that Bill 134 clarifies that credit cards issuers (as well lenders offering lines of credit) can charge a variable credit rate. Further, a change in the variable credit rate does not constitute an amendment to the contract.
Finally, maximum card liability under laws of the Harmonized Jurisdictions is capped at C$50 for unauthorized use of a lost or stolen card, except in most of the Harmonized Jurisdictions, this cap does not apply where the card is used in conjunction with a PIN at an ATM (or in certain other circumstances, depending on the jurisdiction). Bill 134 would extend the C$50 cap to instances of fraud or other unauthorized use of the card, and the PIN exception applies only if the issuer can prove the consumer committed a gross fault regarding the protection of the PIN.
Notably absent are provisions on leases that are consistent with the harmonized cost of credit disclosure laws. It may be that the Quebec government, in an effort to ensure that Bill 134 does not suffer the same fate as Bill 24, has decided to postpone the introduction of harmonized leasing provisions. However, Bill 134 does provide that merchants are required to assess the consumer’s ability to make the lease payments due under the lease.
NEW RIGHTS FOR CONSUMERS
High Cost Credit Contracts
Bill 134 introduces a regime for “high-cost” credit, including new licensing requirements for high-cost credit grantors. The proposed amendments are silent on what constitutes high-cost credit. Manitoba recently enacted a high-cost credit regime that applies to loans with specific characteristics, for example a loan of money or line of credit with an annual interest rate that exceeds 32 per cent (for more information, see our January 2016 Blakes Bulletin: “High-Cost Credit” Consumer Lenders Face New Laws in Manitoba).
It is possible that the Quebec government will also consider loans with substantially similar characteristics to be “high-cost”. However, we also note that Quebec courts have previously held that credit agreements that provide for a credit rate that exceeds 35 per cent, 32 per cent or even 28 per cent are considered to be harsh and unconscionable, which has resulted in some uncertainty as to what is the maximum credit rate that may be charged in Quebec. A high-cost credit regime that expressly allows lenders to charge up to a specified threshold, such as the 60 per cent threshold set out under the federal Criminal Code, would provide welcome clarity.
If the credit is considered to be “high-cost”, the consumer will benefit from a 10-day cooling-off period.
Capacity to Repay
Bill 134 imposes a new requirement on consumer credit grantors and lessors to assess the consumer’s capacity to repay the loan or make their lease payments before entering into the credit agreement or lease, or granting a credit limit increase. If a credit grantor offers high-cost credit, the credit grantor must also provide the consumer with a written copy of the assessment and information on the consumer’s debt ratio. The information to be taken into account to conduct the assessment of the consumer’s capacity to repay and the formula used to calculate the consumer’s debt ratio will be set out in the regulations.
For high-cost credit grantors, if the debt ratio exceeds a maximum percentage, to be set out in the regulations, the contract will be deemed to be unconscionable.
The consequences of failing to comply with these new requirements are significant. Credit grantors, as well as any person who approves and takes assignment of the contract, may be required to forfeit all future credit charges and refund the credit charges that have already been paid.
Bill 134 imposes new restrictions on certain market and advertising practices with a view to better protect consumers against indebtedness. Of interest, there is a proposed prohibition covering advertising on credit which prohibits false and misleading suggestions to the effect that a loan product may improve a consumer’s financial situation or solve the consumer’s debt problems.
Debt Settlement Services, Loan Brokering
Bill 134 introduces a new regime of requirements to protect consumers that use debt settlement services. Merchants offering such services will have to be licensed. Contracts for such services must be in writing and include certain disclosures. Consumers have a 10-day cooling-off period during which the contract can be cancelled without penalty. Merchants must manage funds received from, or paid for, on behalf of the consumer using a trust account and must comply with certain conditions prior to withdrawing funds from such account. Merchants must also comply with the CPA’s debt settlement process.
Certain practices relating to debt settlement services and loan brokering are prohibited. These include a prohibition against offering debt settlement services along with lending products and services. Loan brokers are prohibited from requiring partial or full payment from consumers before providing loan brokerage services. Similarly, providers of debt settlement services with the intent of improving the consumer’s credit score are prohibited from collecting partial or full payment from consumers before the provider has in fact improved the consumer’s credit score. The debt settlement regime, along with the prohibitions against advance payments to loan brokers and debt settlement service providers, is similar to the credit repair regime currently found in Ontario’s Consumer Protection Act, 2002.
Loyalty programs have recently been the subject of legislative scrutiny, as recent media coverage has highlighted consumer concerns with the expiry of loyalty points. Recently, legislation on loyalty programs was passed in Ontario (for more information, see our December 2016 Blakes Bulletin: Ban Proposed on the Expiry of Rewards Points in Ontario) and introduced in Prince Edward Island.
For Quebec consumers, Bill 134 would: require merchants to provide certain disclosures (to be set out in the regulations) to the consumer before entering into a contract relating to a loyalty program; prohibit the expiry of points by a set date or by the lapse of time; and prevent the unilateral amendment of the rewards program contract, unless the contract indicates the elements that may be unilaterally amended and the merchant provides written notice of the change.
Bill 134 also proposes to amend An Act respecting the collection of certain debts. In brief, Bill 134 will require that each individual representative who is acting for a licensed debt collection agency must obtain a certificate authorizing the individual to act in that capacity. It also includes certain measures to protect vulnerable consumers such as providing that debt collection activities and debt settlement services constitute incompatible occupations and granting the consumer a right to claim punitive damages from a person failing to perform an obligation set out in the legislation.
TIMELINE FOR IMPLEMENTATION
Bill 134 will be subject to a parliamentary committee review, which will likely be held in the fall, meaning that Bill 134 could be adopted in its final form as early as the end of 2017. Once adopted, draft regulations will be released to fully implement the amendments proposed by Bill 134 and such regulations will be subject to a comment period before being enacted.