On Tuesday June 30, 2009, the Standing Senate Committee on Banking Trade and Commerce (the "Senate Committee") tabled its report entitled "Transparency, Balance and Choice: Canada's Credit Card and Debit Card Systems" (the "Report"). The Report makes a number of important recommendations discussed below that will help to shape further consideration of changes to rules governing credit and debit cards in Canada.
The Current Landscape
Over the past couple of years, Visa and MasterCard have changed from member associations into publically traded companies and have recently indicated their intention to introduce their own brands of debit cards. Interac, the debit network in Canada, responded by entering into discussions with the Competition Bureau to change the 1996 Consent Order to allow it to restructure as a for-profit-entity to enable it to compete with Visa and MasterCard. Last fall the Competition Commissioner announced that the Competition Bureau would not bring an enforcement action to prohibit credit card duality in Canada, effectively permitting credit card networks, issuers and acquirers to enter into agreements with multiple credit card brands or networks.
In March 2009, facing pressure from retailer and consumer groups, the Senate Committee and the House of Commons Standing Committee on Industry, Science and Technology (the "House Committee") began hearings on Canada's credit and debit payment systems. Then on May 21, 2009, the federal government released the Credit Business Practices Regulations and Amending Disclosure Regulations (the "Draft Federal Credit Regulations") as part of the budget bill. When in force, these Draft Federal Credit Regulations will change disclosure requirements and set new rules for every federally regulated financial institution that extends credit. Most recently, a Quebec Superior Court has issued rulings in three separate class actions, ordering a number of named financial institutions to pay over $200 million in compensatory and punitive damages to consumers for failure to disclose credit card mark-ups, commissions and fees in accordance with the requirements of the Consumer Protection Act (Québec).
The Senate Committee's Recommendations
The key recommendations are summarized as follows:
- Establish and appoint a federal "oversight" board within an existing federal organization: to make recommendations by December 31, 2009 for any necessary regulatory or legislative measures that will ensure fairness for all participants in the credit and debit card payment systems; to monitor and publish information on trends in certain fees; and to establish and police a code of conduct for payment systems participants.
- Mandate certain practices in credit and debit payment systems: to permit merchants to add surcharges and/or discounts and require them to display the surcharge or discount at the point of purchase; to allow merchants to inform customers about lower-cost payment methods; and to prohibit any "honour all cards" rules, allowing merchants to decide not to accept certain types of cards.
- Regulate certain aspects of the debit payment systems: to require switch and interchange fees for debit cards to be calculated on a flat fee basis; to set the debit card interchange fee at zero for three years; and to prohibit priority routing so that cardholders can select at point of sale their preferred payment method when using a co-badged card.
- Require credit card issuers to provide further disclosure: to include the number of months it would take to pay off the balance owing (if no further advances or purchases are made) and the monthly payment that would be required to pay off the balance within 36 months (if no further advances or purchase are made) and year to date interest costs and other fees that have been charged from use of the credit card.
- Implement the Federal Draft Credit Regulations and additional measures: to supplement the Federal Draft Credit Regulations by also requiring card issuers to allocate payments to the balance with the highest interest rate, restrict interest charges to the net balance owing, protect cardholders from unexpected interest charges in the first year, give 45 days notice for any significant changes to terms of the card agreement, extend promotional rates for at least 6 months, consider the ability of the cardholder to make payments, post copies of card agreements on their website, and stop offering any tangible inducements to students to apply for a credit card while promoting the credit card on or near a higher institution campus.
The breadth of the Senate Committee's recommendations, which proposed a number of measures that extend beyond the Federal Draft Credit Regulations requirements, were surprising to many industry participants. Some of the Senate Committee's recommendations would align Canada's credit card disclosure rules with those recently introduced in the United States.
While the federal government was prepared to mandate certain disclosure and related practices in the Federal Draft Credit Regulations, it was not prepared to regulate credit card merchant fees. However, the federal government is now faced with an explicit call for action from the Senate Committee in respect of merchant fees. In addition, the Committee called on the Financial Consumer Agency of Canada to "exercise its regulatory power," which seems to call for more enforcement action.
The Senate Committee's recommendations illustrate that Canada's payment systems are at a crossroads. The practical consequences of the Senate recommendations could lead to consumer confusion and technological regression. Card users could be faced with situations where merchants advertise that a brand of card will be accepted, but have their particular card of the same brand rejected because it is a premium card. Measures that encourage merchants to advertise and charge surcharges for using cards and offer discounts for using cash, incentivize a to return to cash. Requiring flat fee switch and interchange fees for debit cards could substantially reduce card association and payment networks' ability to fund future research and development. As a result, some of the Senate Committee's recommendations could potentially seriously undermine the development of Canada's payments systems.
The House Committee hearings are expected to be completed this fall, and the corresponding report will be another important development with implications for financial institutions, retailers and consumers. The federal government will most certainly consider carefully the Federal Draft Credit Regulations in light of the reports of each committee. BLG will continue to monitor and analyze the implications of further developments in Canada's credit card and debit card systems.