Payday Lender Responds to PIAC Report

Payday Lender Responds [pdf file:0.17mb] to PIAC Report on Regulating Payday Lending

Payday Lending – Consumer Measures Committee

Consumer Measures Committee Addresses Possible Regulation of Payday Lending.

Pragmatic Solutions to Payday Lending: Regulating Fringe Lending and “Alternative Banking"

Full text is available here [pdf file: 0.44mb]

Executive Summary

This report is a follow-up to PIAC’s November 2002 Report: “Fringe Lending and “Alternative” Banking: The Consumer Experience” (“Report 1”). From that report, a much clearer picture emerged of the “alternative financial sector” (AFS). The November 2002 report analyzed survey findings of users of the AFS and made several recommendations for consideration by policy makers. This report builds on those recommendations and undertakes an in-depth consideration of possible regulation of a major aspect of the AFS, the payday loan industry, from a consumer perspective. This report outlines several possible options for regulation of the payday loans industry and highlights the advantages and shortcomings of each possible approach. The report is timely, as provincial and federal regulators are presently meeting to determine the scope and method of regulating the AFS in general and the payday loans industry in particular.
Report 1 concluded that the best course of action to deal with problems in payday lending was fairly complete and specific regulation of the payday loan industry. Also discussed was the possible amendment of s. 347 of the Criminal Code (the criminal interest offence and related interest rate cap of 60% effective annual rate of interest) and the resultant need for effective regulation. In light of the possible amendment of s. 347 to permit small, short-term loans, more partial regulatory schemes such as simple licensing, (with or without industry self-regulation or codes of conduct), was rejected as likely to be inadequate to the task of protecting consumers.
This report continues these conclusions, expands upon the regulatory options and justifies extensive regulation. It also suggests which regulatory policies would be most likely to curb industry excesses while encouraging responsible provision of credit to users of payday loan services.
The Report concludes with a plea to mainstream financial institutions to enter the payday loan market once the necessary changes are made to the Criminal Code usury provision, however, it cautions that such an entry by federally-regulated financial institutions must be in accordance with the relevant provincial regulatory scheme.
The regulatory recommendations include:
Licensing of Operators
Extensive Regulator Powers, including

jurisdiction over all payday lenders, licensed or unlicensed;
Prosecution powers – fines, licence suspensions
consumer complaints mechanism (toll-free 1-800 number);
Require transaction data from lenders;
Educate borrowers about cost of credit and payday loans in particular;
Report on industry each year to provincial legislature with suggested changes to industry regulation

Cost of Credit Disclosure, including

All fees and charges must be clearly detailed in writing in contracts and advertising and promotional materials;
Provide loan application and loan agreement before completion of application/transaction; allow customer to have copy of completed application/loan transaction
Standardized loan documentation should be produced by the regulator with regulatory requirements;
Reference to Consumer complaints mechanism on documents
Fees and charges may not be excluded from definition or calculation of interest (NSF fees may be excluded);

Annual Percentage Rate (APR) statement

APR must be calculated for all loans and displayed on loan documentation.
Typical APRs for standard loan increments and standard loan terms should be available in chart form for borrowers.

Interest Rate Cap, including borrowing limits
Limits on Specific Charges and Fees, including

Allowable NSF fees should be limited to a modest amount, representing the real cost of administration;
Electronic NSF charges must be limited to one attempt to collect;
Lender-specific identification card charges must be modest and not become a revenue source.
No default or delinquency charges.
Interest may not accrue after a default.
No “broker” or “agency” fees permitted.

No Rollovers, Extensions, Back-to-Back Loans
Advertising Rules, including

Advertising must not be deceptive or misleading;
Must detail typical APR of standard loan amount for typical term in clear and conspicuous type;
Must detail all applicable fees and charges for loans, as well as other charges such as those for convenience cards.

Education and Awareness Campaigns for Consumers, including

campaigns to increase financial literacy of payday borrowers, with specific emphasis on cost of this form of credit and alternative credit sources.
education and action programs to encourage consumer savings.
Payday lender funding of consumer borrowing education

Other Borrower Rights

Right of rescission immediately following a loan (cooling-off period).
Right of Prepayment of loan at any time and to pay it down in increments
floating or variable rates should be limited to the lowest rate
prohibition on secondary marketing purposes borrowers. Lenders should clearly and conspicuously post privacy policies. Clear, express written consent of borrowers should be provided before lenders may use borrowers’ personal information with related entities.

Collection and Litigation Limits, including

No assignment of wages
No security or contingent security.
No personal guarantees from third parties
No interest in land
No threatening of prosecution for “crime” of bad cheque passing
method of cheaply and expeditiously contesting amounts illegally demanded by lenders, with right of set-off against present debts.
no private arbitration clauses– disputes to be handled by payday loans dispute tribunal or small claims court
Statutory damages should be recoverable to borrowers

Lender Database (Positive Credit Reports)

Should not be used as surveillance of borrowers but to create positive credit histories
Positive payday lending records should be made portable to mainstream credit reporting agencies to allow borrowers to improve their credit rating while taking payday loans.

“Executive Summary (français) [pdf file: 0.06mb]

Identity Theft: The Need for Better Consumer Protection

Public Interest Advocacy Centre
The Full Report in PDF [pdf file: 0.44mb]

EXECUTIVE SUMMARY

Identity theft is a rapidly growing problem in Canada. It represents a grave threat to consumer security and confidence in the modern marketplace. It also represents a serious challenge to business in general and to the financial marketplace in particular.
Identity theft is the unauthorized collection and fraudulent use of someone else’s personal information. Victims of ID theft suffer financial loss, damage to their reputation, and emotional distress, and are left with the complicated and sometimes arduous task of clearing their names.
ID theft is a truly modern crime, being carried on out of the sight of, and often beyond the effective reach of, the victim. It is carried out through compromising electronic data systems, obtaining false primary documents, directing mail to new addresses, obtaining new credit accounts and improperly charging existing ones. It can be carried out by a next-door neighbour or by criminals hunting from thousands of miles away. It relies on the commercial culture of ubiquitous personal information holdings, easy consumer credit and the facility of modern technology. It also relies on lax consumer security. However, ID thieves also exploit business and government information leaks, credit industry excesses and unsafe practices, inadequate consumer control over trade in credit information, and the use of personal information for collateral uses. Government identification weaknesses, government ID “function creep”, a lack of specific ID theft offences, uncoordinated law enforcement and unfocussed privacy laws round out the list. Given these weaknesses, in many cases, there is no action consumers can reasonably take to prevent ID theft.
Biometrics and a national ID card have recently been touted as the answer to ID theft.1 Neither of these ‘magic bullets” will have a serious effect on ID theft. ID theft results from the combination of human and systemic factors listed above and can only be dealt with by addressing the causes individually and collectively.
1 See the remarks of Minister Denis Coderre, Minister of Citizenship and Immigration, at the forum: “Biometrics: Implications and Applications”, Ottawa, October 8, 2003, (http://www.cic.gc.ca/english/press/speech/bio-forum.html) and similar remarks entitled: “Document Integrity And Biometrics: Exploring The Options For Our Furture” at the Kiwanis Club, Ottawa, Ontario, September 19, 2003 (http://www.cic.gc.ca/english/press/speech/biometrics.html).

SOMMAIRE

Le vol d’identité connaît une croissance fulgurante au Canada. Il menace gravement la sécurité et la confiance des consommateurs dans le marché actuel. Il met également en péril le monde des affaires en général et le marché financier en particulier.
Le vol d’identité est caractérisé par la collecte non autorisée et l’utilisation frauduleuse des renseignements personnels d’un individu. La victime d’un vol d’identité subit des pertes financières, des inconvénients et un préjudice à sa réputation, souffre de trouble émotionnel et doit s’efforcer de clamer son innocence, tâche compliquée et parfois ardue.
Le vol d’identité est une infraction des temps modernes qui est commise hors de vue et hors de portée de la victime. Le vol d’identité se produit de différentes façons : en compromettant des systèmes de données électroniques, en obtenant de faux documents principaux, en adressant le courrier à de nouvelles adresses, en obtenant de nouveaux comptes de crédit et en facturant frauduleusement des comptes existants. Il peut être commis par un voisin immédiat ou par des criminels à des milliers de kilomètres. Ce crime repose sur la culture commerciale omniprésente de la collecte des renseignements personnels, le crédit facile au consommateur et les avantages de la technologie moderne. Le manque de sécurité offerte aux consommateurs est également propice au vol d’identité. Cependant, les voleurs d’identité exploitent aussi les fuites constatées dans les entreprises et le gouvernement, les excès et les pratiques douteuses en matière de crédit, le manque de contrôle des consommateurs quant à l’utilisation de leurs informations en matière de crédit, et l’utilisation de renseignements personnels à des fins collatérales. Le laxisme du gouvernement en matière d’identification, « la reptation de fonction » des pièces d’identité gouvernementales, l’absence de délits spécifiques relatifs au vol d’identité, le manque de coordination en matière d’application de la loi et les faiblessesdes lois actuelles sur les renseignements personnels complètent cette liste. Étant donné ces lacunes, il est presque impossible pour les consommateurs de prendre des mesures pour empêcher le vol d’identité.
On avance déjà que la biométrie et la pièce d’identité nationale mettront fin au vol d’identité1. Aucune de ces « solutions miracles » n’aura d’effet sérieux sur le vol d’identité. Le vol d’identité est le résultat de la combinaison des facteurs humains et systémiques mentionnés ci-dessus, et on ne pourra y mettre fin qu’en examinant les causes individuellement et collectivement.
1 Voir les commentaires du ministre Denis Coderre, ministre de la Citoyenneté et de l’Immigration, lors du forum d’automne : « Biométrie : incidences et applications », Ottawa, le 8 octobre 2003, (http://www.cic.gc.ca/francais/nouvelles/discours/bio-forum.html) et la déclaration similaire intitulée : « L’intégrité des documents et la biométrie : explorer des solutions pour l’avenir », Club Kiwanis, Ottawa (Ontario), le 19 septembre 2003 (http://www.cic.gc.ca/francais/nouvelles/discours/biometrie.html).

Identity Theft as a Justification for a National Identity Card

Submission to the House of Commons Standing Committee on Citizenship and Immigration

Download Complete Report [PDF: 0.19 mb]
Executive Summary
Executive Summary
It has been suggested that a national identity card would help to reduce the incidence of ID theft in Canada. There are many problems with such a conclusion. Such a “universal identifier” would invariably face immense pressure towards function creep – it could become a “super-SIN”. Once in the hands of thieves, this information will aid, not impede, identity theft. There is a strong likelihood that business will not alter creditgranting systems to accommodate it. Yet, even were business and government to do so, their information practices would put National ID card data at risk – possibly increasing the prospect of identity theft. Consumer credit data will continue to be traded, this time with the added “gold” of National ID card information. A National ID card will not bring necessary legal reform, or additional funding to law enforcement agencies. Police will continue to be ineffective in controlling identity theft without increased resources and legal powers. Canadians can also not count on their privacy laws to protect them from identity theft. Finally, biometrics is a highly invasive technology that will not guarantee document integrity. Perversely, excessive trust in the technology could aid ID thieves.
There are instead many practical measures that can be taken now to combat identity theft. None of these requires the introduction of a National ID card.
In conclusion, the case has not persuasively made that a National ID Card would necessarily limit identity theft in a manner that represents an acceptable trade-off between privacy and security, or indeed in any appreciable way at all.
Citizenship and Immigration Minister Denis Coderre has recently introduced the concept of the National ID card into the public debate. Minister Coderre has taken a more or less positive stance towards the need for such a card. Minister Coderre has also linked the issue of biometrics to the debate over the National ID card. Finally, Minister Coderre has, to a large extent, justified the need for a national ID card, with biometrics, due to the problem of identity theft.
The only difficulty with this logic is that it is flawed. Identity theft will not be seriously curtailed by the introduction of a National ID card. Biometrics may barely dent it and indeed has the potential to make some cases of identity theft far worse. Identity theft is a security state’s straw man for introducing invasive measures designed to reduce personal privacy.

PIAC comments on Ontario proposals for mutual fund disclosures – Link to proposals

Link to proposals: www.fsco.gov.on.ca

PIAC comments on Ontario proposals for mutual fund disclosures

Stephen Paglia, Senior Policy Analyst
Joint Forum Project Office
5160 Yonge Street,
Box 85, 17th floor
North York, ON, M2N 6L9
Telephone: 416-590-7054
fax: 416-590-7070
e-mail: spaglia@fsco.gov.on.ca
BY EMAIL ONLY
Dear Mr. Paglia:
Comments on Joint Forum Proposals re: Disclosure System for Segregated Funds and Mutual Funds
We have recently been made aware of the Joint Forum’s proposals for changes to the way information is communicated to consumers of segregated funds and mutual funds about their investment choices. The following are comments submitted by the Public Interest Advocacy Centre (PIAC) on certain aspects of the above-noted proposals.
The Public Interest Advocacy Centre is a national non-profit organization devoted to the representation of consumer interests in matters involving public utilities, essential services, and public interest issues of broad application to Canadians. PIAC has developed a strong record of consumer advocacy since its inception in 1976, and is widely recognized as an important and influential voice for ordinary consumers in a variety of marketplace issues, including financial services and electronic commerce. PIAC is governed by a distinguished volunteer Board of Directors from across the country, and is supported by member groups and donors representing hundreds of thousands of Canadians.
Given resource constraints and our focus on the protection of lower income and vulnerable consumers, we are have restricted our comments to a few key consumer protection issues.
As a preliminary matter, we commend you on the process you are following: the plain language consultation paper and background document, the allowance of several weeks for comments, and the posting of all submissions on an OSC webpage for this purpose. However, we are concerned about the apparent lack of consumer involvement in the development of these proposals. In some respects (e.g, the “access equals delivery” approach), it appears that the interests of industry have taken precedence over those of consumers.

Disclosure needs of investing consumers

We agree that the current disclosures made to consumers by segregated funds and mutual funds are sub-optimal, primarily due to their complexity. There is no question that they can and should be improved from the perspective of plain language, focus on key issues for consumers, and timeliness. We therefore support the Joint Forum’s proposal for replacement of current disclosure requirements with new documents that are more geared toward the needs of the investing consumer. We are particularly supportive of the proposed new “Consumers’ Guide” that would be made available to all participants, especially novice investors. We also support the proposed requirement for a short “Fund Summary” document, as well as the separation of “static” Fund information from ongoing performance information about each Fund.
However, we have serious concerns about proposals regarding mode of disclosure and cooling-off periods.

“Access equals delivery”

As we understand it, the proposal calls for actual delivery of only the Fund Summary document to all new investors. The Consumers’ Guide would be provided only where deemed appropriate by the sales representative (i.e., to novice investors). The other two documents – the Foundation document and the Continuous disclosure record – would only be provided to investors upon request; otherwise, availability online, together with notice thereof in the Fund Summary document, would be considered adequate disclosure.
While sympathetic to the desire to reduce paper waste and to minimize mailings that are not appreciated by the recipient, we strongly disagree with the “access equals delivery” approach advocated in this consultation paper. We are also concerned that the recommended approach to disclosure of the Consumers’ Guide might leave many consumers without the benefit of this information.
Quite simply, online access does not equal delivery. Many investors do not use computers. Many others do not wish to use computers for this purpose. If disclosure is to be meaningful, it must be made in a manner that accounts for the range of individual circumstances and that does not put an undue burden on the intended recipient.
The problem with the proposed “access equals delivery” approach to two of the four documents is not that it allows for online access instead of paper delivery, with its associated cost and waste. Indeed, we agree that consumers should have the option of refusing paper documents and instead relying on electronic disclosures. Rather, the problem is that, by following a “negative option” approach to electronic disclosure, this proposal puts the onus on the wrong party, and thus effectively ensures that the disclosure will not reach many investors who might otherwise have benefited from it.
It is important not to confuse two distinct issues: that of the content of the disclosure and that of the mode of disclosure. With improved content and presentation of the information in question, it can be expected that more consumers will be interested in reviewing the documents. Thus, even if current evidence suggests that few consumers are reading prospectuses, that could well change with the move to more consumer-friendly information.
In any case, instead of putting the onus on consumers to “opt-out” of electronic disclosure, the default rule should require a mode of disclosure which works for everyone. It should also allow for alternative modes of disclosure, upon clear direction from the consumer. These alternatives need not be limited to website postings and full information mailings. Electronic mail delivery, or at least notices of new postings, can be offered, for example. Consumers can and should be encouraged to opt-in to electronic disclosures, whether by e-mail or website postings; but their ability and willingness to do so should not be taken for granted.

Distribution of the Consumers’ Guide

We are also concerned that the Consumers’ Guide, a valuable primer on segregated funds and mutual funds, may not be provided to investors who would benefit from it. Just because a consumer has been investing in mutual funds for many years (and is thus not a “novice” investor) does not mean that they understand the basics of this industry. Indeed, we suspect that many long time investors are lacking in basic information, and would appreciate receiving this proposed new guide.
We therefore submit that industry participants should always offer this document to clients, unless they are sure that the client already has the document and is aware of its contents. Efforts should be made to ensure that all individual investors have this document and are aware of its contents. For example, it should be referred to in the Fund Summary document, along with references to other fund-specific documents.

Consumer rights of withdrawal and recission

The Consultation Paper further proposes that withdrawal and rescission rights (other than for misrepresentations) attached to mutual fund purchases be eliminated. We oppose this proposal.
The fact that information on a mutual fund will now “be made widely available [online] before the point of sale” does not obviate the need for a cooling-off period so as to protect consumers from pressure sales in this industry. First, many consumers will not in fact have ready access to this information online. Those who continue to rely on paper disclosures will not be able to access this information until it is delivered to them.
Second, just because the information is available online before the point of sale does not in any way guarantee that the consumer has not been subject to the kind of pressure sale that cooling off periods are meant to mitigate. Individual investors will definitely be prejudiced from removal of these rights, even if they have not taken advantage of such rights in large numbers in the past. Once again, the improved content of information disclosure proposed by the Joint Forum could well lead to greater investor awareness, and thus more exercise of investor rights.
If possible, measures should be implemented to prevent investors from using the cooling-off period to play the markets. For example, an investor exercising this right could be limited to recovery of his or her initial investment.
Yours truly,
original signed
Philippa Lawson
Senior Counsel

Submission to the Standing Committee on Finance

PIAC’s submission to the House of Commons Standing Committee on Finance on the major considerations that should apply in determining the “public interest” in the bank merger review process.

Payday Lending – Fringe Lending and “Alternative Banking”?

First Report on Fringe Lending and Alternative Banking, The Consumer Experience [pdf file: 0.76mb]

“White-label” ATMs

“White-label” ATMs: ‘taking away’ consumers’ cash as fast as they’re ‘giving it out’

By Sue Lott – Counsel, Public Interest Advocacy Centre
Have you had the experience recently of being in a strange town or city (or maybe even your own), needing cash and trying unsuccessfully to find an automatic teller machine (ATM) from your own bank? Out of desperation, you might have turned to a no name or “white-label” automatic teller machine, only to realise how much it just cost you to withdraw your own money!
This week, two national consumer advocacy groups called on consumers to boycott “white-label” ATMs (also called automatic bank machines or ABMs) found in growing numbers in retail outlets across Canada. The Public Interest Advocacy Centre (PIAC) and Option consommateurs have taken this action out of a growing sense of consumer frustration about the increasing level of fees that consumers are being forced to pay when they use these no name or “white-label” ATMs.
Consumers are now routinely subject to three levels of fees when they use the “white-label” ATMs that are independently operated by private businesses and found in retail stores, shopping malls, etc.: their regular bank account transaction fees plus the network access fee (also known as the INTERAC fee) plus convenience fees charged by the independent operators (and now by some banks). A customer could end up paying total fees of $5.50 or over 27% in fees on a $20 withdrawal!
The industry’s response to criticism of these fees is that Canadians don’t mind paying for the added convenience represented by the “white-label” ATMs. But statistics don’t support that contention. Findings from a recent survey PIAC conducted with EKOS Research Associates on Canadians’ attitudes towards financial services show that a decisive majority of Canadians do not want to pay an additional service fee to use a no-name automatic bank machine. Seventy percent of Canadians indicated that they would not be willing to pay an additional service charge to withdraw money from a no name ATM in return for the convenience of being able to access their money more easily.
However, people’s actual behaviour is quite different. Twenty-four percent of Canadians also reported using one of these machines in the last month, so these machines are clearly taking advantage of people’s immediate need for cash.

Where did the “white-label” ATMs come from?

In 1996 the federal Competition Tribunal made an order that opened up the ATM market to independent operators. Prior to this decision, only banks and other deposit taking financial institutions had been allowed to join the Interac Association and operate ATMs.
“White-label” or no name ATMs are mostly owned and operated by private companies, not financial institutions. Any business incorporated and operating in Canada is eligible for membership in the Interac Association, the non-profit corporation that runs the network which allows for the sharing of electronic financial services and the electronic access to bank accounts. The association also sets the convenience fee that is charged to users of “white-label” ATMs.
The Competition Tribunal’s mandate is to maintain and encourage fair competition in Canada. Thus the purpose behind the 1996 decision was to increase competition in the ATM market.
The question for the Competition Bureau is this: There are clearly more competitors in the market. If increased competition is supposed to result in lower prices, why have ATM fees only increased since your decision?

“White-label” ATMs are growing quickly

The growth of “white-label” ATMs is significant. The Canadian Banking Association points out that whereas five years ago, three quarters of ABMs were owned by banks, now less that half are bank-owned. Of the more than 35,000 ATMs in operation in Canada in 2001, over 18,000 of them were “white-label” ATMs compared to over 16,000 operated by financial institutions.
The “white-label” ATMs are increasingly found in locations with high customer traffic such as retail outlets, shopping malls and gas stations. Their growth is a direct result of the financial incentive for merchants to install these machines rather than bank-owned ATMs. The private ATM companies compensate them for installing the “white-label” ATM at a much higher rate than they receive from financial institution ATMs.
As a result, financial institutions are now in direct competition with the private ATMs. Banks are aggressively competing with independent operators to install ATMs in off-premise (retail) locations. In addition, some of the major banks have entered the no name ATM market and are now imposing that 3rd tier of fees, called convenience fees, on non-clients who use their ABMs at retail locations. This recent development has taken place without the knowledge of the consumer. The EKOS survey found that two out of three Canadians are unaware that banks now own no-name ATMs that charge more than the bank’s own machines.
Some financial institutions are even charging convenience fees for non-clients who use the financial institution’s own ATMs located at branches of that financial institution! Financial institutions have generally charged non-clients who use their ATMs, only the first and second tier fees: the regular bank account transaction fee plus the Interac fee, not the convenience fee.
All of these developments and variations in approach create huge confusion and frustration for customers. There is a growing sense that there is no control over the nature or extent of the fees associated with these ATMs.

Who regulates ATMs?

The problem is that no one really does. White-label ABMs are owned and operated by private companies. They are not under federal jurisdiction because they are not financial institutions. As a result, there is a role that provincial governments could and should be playing in terms of regulating the fees and activities of the privately operated “white-label” ATMs. PIAC urged the Ontario Government to include provisions relating to “white-label” ATMs in its new consumer protection legislation. So far, there is nothing in the legislation, which specifically addresses “white-label” ATMs.
Financial institution ATMs do fall under federal jurisdiction but the fees not regulated. The only regulations that the federal government imposes on federal financial institutions with respect to bank fees and charges are requirements concerning disclosure.
The Interac Association has the power to set the convenience fee charged to customers.

What can consumers do about them?

Doing something about “white-label” ATMs is important because we have grown increasingly dependent upon electronic banking services. According to Ministry of Finance figures, Canada has the highest number of ATMs per capita in the world. In 2001 Canadians conducted 2.2 billion debit card transactions from over 328,000 merchants, ranking Canada first in the world in ATM use. This has happened, not because consumers demanded it, but because financial institutions have gradually withdrawn from providing personal banking services, beginning with the reduction in bank branch hours, followed by branch closures throughout the country.
What can we, as consumers do about the proliferation of “white-label” ATMs? First of all, we can boycott “white-label” ATMs and tell merchants why we are not using them. We should also demand of merchants that they post clearly what kind of ATM is installed in their store and indicate all of the fees are associated with its use.
Using your own financial institution’s branch ATM is a way of reducing fees and/or trying to minimize the number of transactions you make during a month.
But beyond what we can do as consumers, we also need to direct our concerns politically. We should be asking our provincial and federally elected representatives why this significant and growing segment of the financial services sector has been ignored and left unregulated.
Finally, we as consumers can complain to the Competition Bureau. We should be asking why a decision that was supposed to increase competition and result in competitive prices, has produced more competitors, much higher prices, and very unhappy consumers.