Canadian regulators, with an eye
on the surge of pro-consumer card reforms taking place in the US,
are set on implementing their own shake-up of Canada’s credit card
industry, changing the way issuers set interest rates. But Canadian
banks are warning that changes could be costly, as Charles Davis reports.


With the ink still drying on new US credit
card reforms, Canada’s Department of Finance is proposing a host of
new regulations of its own aimed at quelling a populist uprising
over card fees.

The proposed new Credit Business Practices
Regulations seek to implement nine consumer protection measures
promised by the federal government in its 27 January 2009 budget
and will apply to credit cards and, in some cases, lines of credit
and other loans offered by Canadian financial institutions. It is
clearly a politically-savvy response to a growing row over fees,
and while the proposal does not rise to the level of rate
regulation, it is a far-reaching set of new rules.

The government is accepting comments on the
proposed regulations until 13 June 2009, after which regulators
will begin to implement final rules.

In announcing the proposed changes, Canadian
finance minister Jim Flaherty said that average credit card
interest rates continue to be unacceptably high for consumers. Many
Canadian banks charge interest rates on credit cards as high as 20
percent on outstanding balances.

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The new credit card industry regulations could
include a uniform 21-day interest-free period before payment is due
and clearer disclosure of card rates and fees, for starters.

Populist anger spreading in

Credit card interest rates are high
because the economic downturn has caused credit card delinquency
rates to soar, the Toronto-based Canadian Bankers Association said.
Some 70 percent of Canada’s credit card customers pay no interest
because they typically do not revolve a monthly balance on their
card accounts, a far higher percentage than in the US, but given
the gloomy economy, populist anger over rates is spreading
throughout Canada.

At a parliamentary hearing in late May,
Conservative Member of Parliament Ted Menzies, the parliamentary
secretary to the finance minister, told representatives of Canada’s
banks that constituents have their representatives’ ears.

“Our constituents were complaining to us,
enough so that we were going to have to do something about it,”
Menzies said at the parliamentary hearing into credit card
practices. “And I told you, if we end up having to regulate… you
are probably not going to like the regulations we have to put in
place. We’re still trying to avoid that.”

Flaherty later announced the nine new proposed
regulations designed to make the industry more transparent and
fairer to consumers. The bill will have to be passed by parliament
before becoming law, but no one expects much in the way of

The main change would be the mandated minimum
21-day interest-free grace period on all new transactions when
consumers pay their balance in full by the due date. Currently,
there is no mandatory grace period, but Canadian issuers typically
provide a grace period on new purchases, which generally means that
no interest will be charged on new purchases if the cardholder pays
the balance on the card in full by the payment due date.

But many cardholder agreements currently
provide that the cardholder loses the interest-free grace period
for new purchases if the cardholder is carrying a balance from the
previous month. Under the proposed regulations, issuers would be
required to provide a minimum 21-day interest-free grace period on
all new purchases if the cardholder pays the full balance by the
payment due date in respect of those new purchases (which, under
the proposed regulations, cannot be less than 21 days after the
last day of the billing cycle), even if the cardholder did not pay
the balance in full the previous month.

The proposed regulations also require that any
payment made by the borrower in excess of the required minimum
payment be applied either to the charges with the highest rate
first, then the next highest and so on, or pro rata to each type of
charge with a different rate in proportion to the amounts of such

Drive for more

The new regulations would also
require card issuers to clearly display information about grace
periods and interest rates in a summary box on bills. In addition,
the regulations would require bills to give a clear indication of
how long it would take people to pay off their balances in full if
they only made the minimum payments every month.

Card issuers would be required to give advance
notice if interest rates were going to increase during the next
payment period, and consumers would be informed in advance if a
rate was set to expire or if a penalty for missed payments was to
be imposed.

Card issuers would also be forbidden from
increasing credit limits without expressed written consent of

The regulations will also prohibit
over-the-limit fees solely arising from holds placed by merchants,
and limit debt collection practices that financial institutions use
in contacting a consumer to collect on a debt. Financial
institutions would no longer be allowed to contact customers
outside specific hours on weekdays and weekends, for example,
Flaherty said.

Flaherty said the federal government’s new
credit card regulations would protect consumers, but Canadians
should not expect to see lowered or capped interest rates.

“No, there’s not a move to limit interest
rates – we have a choice on credit card interest rates in Canada,”
Flaherty said.

Although consumer advocates and some Canadian
politicians have lobbied for restrictions on interest rates, which
can exceed 20 percent, the government has decided not to wade into
the politically volatile territory of introducing cap rates.

Banks warn of unintended

Canada’s banks warned that the
proposed regulations will be costly for the industry and may have
unintended consequences, including restricted access to credit for

“There are huge implications to changing the
ways you calculate grace periods and allocate payments to people’s
accounts,” said Nancy Hughes Anthony, the Canadian Bankers
Association president and CEO. “The concern that I would have is to
make sure that the regulations do not have the unintended
consequence of being detrimental at the end of the day to