Every federally regulated entity that extends credit to consumers in Canada will be interested in the final form of the federal Credit Business Practices regulations (the "Final Credit Business Practices Regulations") and the final form of the amendments to the Cost of Borrowing regulations (the "Final Cost of Borrowing Amendments"), which were published in the Canada Gazette on September 30, 2009. Drafts of these regulations were previously announced on May 21, 2009 and published in the Canada Gazette on May 23, 2009 and were the subject of our article "Boxed In: Canadian Federal Regulations to Prompt Changes for Credit Card Issuers and Other Creditors."
As a result of these finalized regulations, federal institutions will need to review and may need to revise policies, practices and documentation to ensure compliance with these regulations.
Must Change Standard Documentation by January 1, 2010
The earlier draft amendments to the Cost of Borrowing Regulations prompted numerous questions and concerns from industry participants. Most notably, industry participants wanted further details on the summary box, questioned how calculations could be made for each individual when many of the variables shift on a day to day (or hour to hour) basis, and wanted to know the timeframe to implement the changes.
It appears that the Department of Finance listened to some of these concerns. For example, the Final Cost of Borrowing Amendments now incorporate a tiered timeframe to recognize some of the system challenges federally regulated institutions face. The requirement to set out how long it will take to pay off the balance for each individual if only minimum payments are made will not come into force until September 1, 2010. In addition, permitted assumptions were added to the Final Cost of Borrowing Amendments to assist with the challenges of the calculation itself.
However, the sections of the Final Cost of Borrowing Regulations that require a summary box to be included in disclosure statements and an overhaul of standard documentation for credit agreements (all loans, lines of credit, and credit cards) as well as credit card applications come into force January 1, 2010. The Final Cost of Borrowing Regulations also go into great detail regarding the form and the content of the box. For example, titles and numbers must be in bold and no smaller than 12 points, all other text must be at least 10 points and in an "easily readable font." The regulations even specify the use of white space, margins and the colour of the background. Schedules to the regulations, which vary for each credit product, specify exactly what information must be included in the box. It is particularly noteworthy, in light of the recent court judgments on foreign currency fees, to highlight that credit agreements for a line of credit or for a credit card as well as applications for a credit cards must include the conversion rate for foreign currency as well as a brief description of how such charge will be determined and the date on which it will apply as part of the information that is required to be in the summary box.
It is also noteworthy that the Department of Finance confirmed its intent to remove section 6(5), which currently allows federally regulated institutions to provide disclosure electronically. This section will be repealed when the new Electronic Documents Regulations come in force via the new but not yet in force Part 18 of the Bank Act. The new Electronic Documents Regulations will make the requirements for communication by electronic means consistent across the Bank Act and all regulations thereunder.
The Final Cost of Borrowing Regulations also clarify that the new summary box requirement and the former credit card application disclosure requirements are not intended to duplicate efforts. When the summary box is implemented in the required form, the federal institution is deemed to have complied with section 11(1) of the Cost of Borrowing Regulations addressing credit card application disclosure.
A Change in Course: The Final Credit Business Practices Regulations
The Final Credit Business Practices Regulations will have a widespread effect on industry practices of federally regulated entities that issue credit to consumers under any credit agreement, not just in connection with credit cards. From grace periods to debt collection, these regulations apply not only to federally regulated entities but also the affiliates they control, their agents and representatives. However, the inclusion of a definition of "credit card" that was not in the draft form of regulations now clarifies that these regulations do not apply to credit cards issued for business purposes and so commercial credit cards are not subject to these regulations.
The following practices will need to be adopted by January 1, 2010 when these sections come into force:
- Fees – A consumer may not be charged a fee for surpassing their credit limit as a result of a hold placed on the credit card.
- Credit Increases – Express consent must be obtained from the borrower for any prospective increase in their credit card limit. Where that consent is obtained verbally, written confirmation of the consent must be provided to the borrower in paper or electronic form.
- Debt collection – New restrictions must be implemented regarding practices for all debtors including who may be contacted, when they may be contacted, and how they may be contacted and new rules on permitted charges must be incorporated. The Final Credit Business Practices Regulations require any person attempting to collect payment on behalf of an institution to provide the debtor with either their identity or a unique identifier, which according to the regulatory impact statement, is designed to provide the consumer with a means to track their dealings with debt collectors.
The sections of the Final Credit Business Practices Regulations that require an interest-free grace period (providing consumers a minimum 21 day interest-free grace period on all new purchases) and allocations of payment practices to be established to ensure consumer payments on an outstanding balance are "allocated in a manner beneficial to the consumer" do not come into force until September 2010.
Opportunity knocks: Planning a Strategic Review of Documentation and Practices
While the final form of the regulations answer many of the initial questions from industry participants, many questions and concerns still remain. These regulations require all federally regulated entities who extend credit to consumers to act quickly. Credit card issuers in particular must act in a climate of tremendous uncertainty. In addition to this action by the Department of Finance, the Standing Senate Committee on Banking Trade and Commerce called for further regulation of the credit card industry in its report entitled "Transparency, Balance and Choice: Canada's Credit Card and Debit Card Systems" released on June 30, 2009. Additionally, The House of Commons Standing Committee on Industry, Science and Technology are expected to continue their hearings on Canada's credit and debit payment systems this fall. Meanwhile, the courts have issued recent judgments that indicate federal institutions may be required to adhere to applicable provincial regulation as well.
Although much effort and cost will need to be expended by federally regulated entities in complying with these new regulations, in our view these new regulations also create a natural opportunity to consider what proactive steps can be taken that could create strategic opportunities to incorporate the requirements in ways that are most beneficial from a business perspective. As always, BLG will be there to help our clients navigate their way through the regulations and leverage this opportunity to its fullest advantage.