The Quebec government is further revising and strengthening its consumer protection regime and is seeking industry feedback on its recently released draft Regulation respecting the application of the Consumer Protection Act (Draft Regulation) and Bill 178, An Act to amend various legislative provisions concerning protection (Bill 178).
Many of the changes contemplated by Bill 134, An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs (Bill 134) will be implemented through the Draft Regulation. For an overview of the amendments introduced by Bill 134, which was adopted on November 15, 2017, please see our May 2017 Blakes Bulletin: Take Two: Quebec Introduces Bill 134 to Modernize the Consumer Protection Act.
In brief, Bill 178 will amend the Consumer Protection Act (Act) by introducing new regimes for time shares, prearranged funeral services and ticket resales. Bill 178 will also prohibit credit card issuers from soliciting students in certain specified education institutions (which do not include universities), the intent being that younger students will not be targeted. Finally, Bill 178 sets out some minor amendments to the required statutory content for long-term leases with a residual value. However, the amendments are simply a summary of such content; the actual disclosures are set out in a prescribed form, which has been updated by the Draft Regulation and is almost identical to the current version of the Act.
Modernization and Harmonization of Credit Contracts
In a marked contrast to other provincial regimes, the Draft Regulation will require credit grantors to include a mandatory information box either at the beginning of each contract or in a separate document provided to the consumers. Separate forms are prescribed for different types of credit, such as fixed or open credit, credit accessed by way of a credit card and installment sales. No other provincial or territorial cost of credit disclosure regime prescribes an information box, although the concept is similar to the federal regime under the Cost of Borrowing (Banks) Regulations and similar regulations. The content of the Quebec information boxes is not the same as the boxes required under federal laws.
Credit grantors must still include mandatory statutory clauses, as well as other disclosures, similar to what is currently set out in the Act and Regulation respecting the application of the Consumer Protection Act.
A final detail of note: credit card issuers that provide online statements to cardholders will be required to maintain and make these statements available for at least two years from the date the consumer receives a notice that the statement is available online.
New Rights for Consumers
High-Cost Credit Contracts
Other existing or proposed provincial high-cost credit regimes are (or are proposed to be) triggered by a fixed interest rate threshold. For example, Manitoba’s current high-cost credit regime is triggered if a lender charges an annual rate of 32 per cent or higher. Alberta’s proposed high-cost credit regime also contemplates a 32 per cent annual interest rate threshold. In contrast, Quebec’s high-cost credit regime hinges on a floating rate, defined as a rate that is higher than the Bank of Canada’s “Bank rate” (taux officiel d’escompte), plus 22 percentage points. The Bank rate is currently 1.5 per cent. At a current rate of 23.5 per cent per year, this rate is significantly lower than Manitoba’s rate and the proposed Alberta rate and will capture a larger subset of lenders. For example, many credit card issuers may be caught by this threshold, although we note that banks, financial service cooperatives, trust and loan companies, mortgage lenders, insurance premium lenders and insurance companies are exempt from the licensing requirements of the proposed regime.
The Draft Regulation includes further details on the licence application process, the documentation that must be filed to obtain such licence and the entities that are exempt from licensing (noted above).
The Draft Regulation also sets out the specific disclosure requirements that must be included in a high-cost credit contract and in the information document (described below) that must be provided by the high-cost credit grantor to the consumer before the consumer enters into the loan.
Capacity to Repay
Bill 134 provides that consumer credit grantors and lessors have the obligation to assess the consumer’s capacity to repay the loan or make his or her lease payments before entering into the credit agreement or lease, or granting a credit limit increase. To make the assessment, credit grantors and lessors must consider the following information:
- The consumer’s gross income (including information on the consumer’s source of income, occupation, employment situation, employer and the duration of the employment relationship)
- The consumer’s total monthly recurring expenses in respect of housing and any obligation under a contract of credit and long-term lease of goods
- The information found in a credit report of the consumer requested contemporaneously to the assessment of the consumer’s capacity to repay
- If applicable, the consumer’s credit history with the credit grantor.
In addition, high-cost credit grantors must provide the consumer with a written information document that sets out the grantor’s assessment of the borrower’s capacity to repay and the borrower’s debt ratio. The debt ratio is calculated by dividing the sum of the consumer’s monthly expenses, including the amounts that will be paid under the high-cost credit contract, by his or her monthly income, expressed as a percentage. If the consumer’s debt ratio exceeds 45 per cent, the high-cost credit grantor must include a prescribed warning clause in the information document that states the consumer’s obligations under the high-cost credit contract are deemed to be excessive, abusive and exorbitant.
Mortgage lenders are also required to assess the consumer’s capacity to repay, although they are not required to calculate the borrower’s debt ratio. However, under Bill 134, certain regulated entities, such as banks, credit unions and insurance companies, are already deemed to comply with this new obligation.
Quebec’s Minister responsible for Consumer Protection and for Housing, Lise Thériault, decided to target the recent practice known as “umbrella mortgages”. In a mortgage loan that is structured as an umbrella mortgage, consumers grant a hypothec over the value of their homes to secure the payment of amounts owed under not just a traditional mortgage loan, but various existing and future consumer loans, such as home equity lines of credit and credit card obligations. A hypothec is a right registered on the property that allows the creditor to take possession of the debtor’s property if the debtor cannot repay the creditor.
The Minister’s decision to address this issue was likely in reaction to a 2017 paper that found that the practice of granting umbrella mortgages was problematic because consumers were not sufficiently informed about, and did not understand, the nature and the scope of their commitment. Among other things, the report recommended that mortgage loans should be subject to the robust disclosure and other requirements under the Act. Currently, first ranking mortgages are exempt from the application of the Act, as are other mortgages, provided certain conditions are met.
The Minister did not follow this recommendation. Rather, she chose to require all mortgage lenders, including those that offer umbrella mortgages, to identify each contract secured by the mortgage (hypothec) in the notarial document creating the hypothec and to have the borrower agree, in each contract, that the contract is secured by the mortgage (hypothec). If the mortgage lender does not comply with these conditions, the mortgage will be subject to usual disclosure and other obligations set out in the Act. In addition, the Draft Regulation specifically prohibits amounts owed under a credit card from being secured under an umbrella mortgage.
Debt Settlement Services
The Draft Regulation provides further details on the new debt settlement services regime. Debt settlement services contracts will need to include an information box, a statement of cancellation right, certain precise information elements and a cancellation form. Each party will be required to sign the contract and the merchant will be required to provide the consumer with an executed copy of the agreement, unless the contact is a distance contract (for example, if the contract is entered online or over the telephone).
The Draft Regulation sets the maximum fee amount that can be charged to consumers for debt settlement services. The maximum fee is calculated by applying a prescribed rate to each payment made by the debt settlement services merchant to a creditor on behalf of the consumer. This rate is calculated on a per creditor basis by (i) multiplying 15 per cent by the difference of the amount of debt reduction less the amount of the payment made by the merchant and (ii) dividing the result by the amount of the new debt owed to the creditor.
The Draft Regulation also sets out additional requirements for the debt settlement merchant’s permit application process.
The Draft Regulation provides additional details on the new loyalty program regime established under Bill 134, which are more comprehensive and restrictive than those set out in Ontario’s consumer protection laws, which came into force on January 1, 2018. Other than Ontario, no other jurisdiction has passed legislation that specifically targets loyalty points. The elements covered by the Draft Regulation are the following:
- Exemptions: Loyalty programs for a single good or service or for a set of goods or services and loyalty programs where the program offers rewards that do not exceed C$50 in value are exempt from the Act. The C$50-threshold appears to be intended to apply on an individual reward basis, but the text, as currently worded, should be clarified to avoid any potential interpretation that the C$50-threshold applies on an aggregate basis. Similar exemptions exist under the Ontario regime.
- Cancellation of Points: Loyalty program operators may only cancel a participant’s loyalty points if the following conditions are met:
- The participant has not received or exchanged any of his or her loyalty points for at least one year; and
- Between 60 and 30 days before the points’ expiry date, the participant must receive a written notice telling the participant of his or her inactivity, the expiry of the loyalty points caused by such inactivity and the date of expiry of the loyalty points.
These requirements are more restrictive than Ontario’s loyalty laws, which restrict the expiry of points solely due to the passage of time.
- Loyalty Program Agreement Contents: A loyalty program agreement must include: the conditions that the participant must satisfy to receive loyalty points, the terms applicable to the exchange and expiry of loyalty points, and the conversion factor used by the program sponsor to exchange the participant’s loyalty points into rewards.
- Prohibitions: The Draft Regulation sets out significant restrictions for loyalty program operators. Most importantly, loyalty program operators will not be permitted to devalue points or to change the conversion factor, even on a go-forward basis. Given that loyalty programs may operate for many years, and the economics of offering the rewards may change, this may result in program cancellations or a drop in the number of rewards programs offered in Quebec. Program operators are also prohibited from expiring any balance of points remaining after a redemption. Finally, operators cannot disproportionally increase the number of points required to obtain a reward unless the fair market value of such reward has also increased.
- Unilateral Amendments: Before unilaterally amending the loyalty program agreement, the loyalty program operator is required to send a notice to the consumer between 90 and 60 days before the amendment comes into force. This notice requirement does not apply to promotional or similar offers.
COMMENT PERIOD AND TIMELINE FOR IMPLEMENTATION
Comments on the proposed Draft Regulation may be submitted to the Minister before June 1, 2018. The Draft Regulation is set to come into force on July 15, 2019, except for the debt settlement services provisions and the requirement to hold a debt settlement services permit, which will come into force on January 29, 2019. Corresponding provisions in Bill 134 will also come into force on those dates. The specific consultations and public hearings on Bill 178 were announced on April 26, 2018, and will be held on May 8 and 10, 2018.
Consumer lenders, loyalty program operators and other merchants affected by these new requirements will want to review the product features, processes, procedures and policies they currently have in place to determine what particular changes are required in respect of their Quebec operations to comply with the new requirements imposed by Bill 134 and the Draft Regulation.