In a decision dated June 2008, released January 15, 2009, the Financial Consumer Agency of Canada applied a $50,000 administrative monetary penalty to a bank as a result of the bank’s credit card interest rate disclosure practices. This penalty is notable because it was applied despite the FCAC Commissioner’s finding that there was no evidence of overcharging interest costs.
Customers of the bank accepted an offer to transfer a balance from another credit card issuer at a promotional interest rate that was lower than the standard rate. In these types of promotional offers, additional credit on new purchases is charged a standard rate. Typically transactions such as cash advances or cheques will also have a promotional interest rate.
Here the standard rate was disclosed on the customers’ credit card statements and the promotional interest rate was only included as part of the transaction description. The customers believed that the higher standard rate had been applied to the entire balance, without the proper application of the promotional rate. In fact, the correct interest rates were applied.
Subsections 10(3), 10(4) and 12(5) of the Cost of Borrowing (Banks) Regulations, and the similar regulations applicable to authorized foreign banks, trust and loan companies and insurance companies, require monthly disclosure to customers of, amongst other matters, “the annual interest rate that applied on each day in the period and the total of interest charged under those rates in the period.” This disclosure is not required if there have been no advances or payments during the period and there is no outstanding balance at the end of the period or if the credit agreement has been suspended or cancelled due to default.
The Commissioner's Decision
The Commissioner specifically rejected the Bank’s arguments that the Cost of Borrowing (Banks) Regulations do not make reference to promotional, special, introductory or other time limited interest rate offers and require only disclosure of the “annual interest rate”, in this case the standard interest rate.
The Commissioner’s decision states:
The issue here is not whether the correct promotional interest rate was applied; the issue here is whether the customer knew that it was. The customers were not over-charged. The higher standard interest rate was not applied instead of the much lower promotional interest rate. The difficulty is that the customers could not be sure that was the case. They are entitled to be sure.
Accurately disclosing the application of a reduced or promotional interest rate is every bit as important as accurately charging it. Otherwise customers cannot know that in fact they have the benefit of the promotional interest rate. Without that information, customers are in no position to know if the financial institution ever makes an error, and in no position to take steps to have it corrected.
The Commissioner made reference to two prior situations where the same bank had been before the Commission in relation to promotional interest rates, one instance resulted in an adverse finding against the bank and the other saw the bank revise certain disclosure practices. Having regard to this “compliance history”, and despite finding “that there has been no actual harm done by the violation” the Commissioner applied an administrative monetary penalty of $50,000.
Banks, authorized foreign banks, trust companies, loan companies and insurance companies must ensure that interest rate disclosure is clear, particularly where more than one interest rate may be applied to a particular customer’s account. Merely charging the appropriate interest rate to the correct portion of the account or type of transaction is not sufficient, interest rates must be accurately disclosed to permit customers to know that they have been charged correct interest rates.