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Recent Developments in Consumer Finance in Canada

Suhuyini Abudulai

Recent Developments in Consumer Finance in Canada Leman

This article provides a brief overview of recent developments in Canadian consumer protection legislation. In addition to federal legislation, each Canadian province and territory has consumer protection legislation in place governing transactions with consumers. Canadian consumer protection legislation is not entirely harmonized and therefore the laws of the applicable jurisdiction must be considered when engaging in a consumer transaction.

Lowering the Criminal Rate of Interest, Regulation "Junk Fees," and Interchange Fees"

Criminal Rate of Interest

On March 28, 2023, the Canadian federal government released the federal budget. In the budget, the government announced its intention to amend the federal Criminal Code (Canada) (the “Code”) to lower the current criminal rate of interest under the Code (equivalent to a 47% annual percentage rate) to the equivalent of a 35% annual percentage rate. Currently, the criminal rate is an annual interest rate of 60% or more. The budget proposes to move from an annual rate to an annual percentage rate and to concurrently lower the criminal rate to a 35% annual percentage rate. The legislative wording has yet to be proposed and this amendment is being closely watched given the significant impact on consumer finance (and potentially commercial transactions as the criminal rate applies to both consumer and commercial transactions).

Payday lending is exempt from the Code’s rate cap; however, in the budget, the government has stated its intention to adjust the Code’s exemption to require payday lenders to charge no more than $14 per $100 borrowed. Further, the government will launch public consultations on additional revisions to the Code’s payday lending exemption.

Junk Fees

The federal government is also targeting so-called “junk fees” in the budget, which are defined as “unexpected, hidden and additional fees” charged to consumers for goods and services, including with respect to higher telecom roaming charges, event and concert fees, baggage fees, and shipping and freight fees. No particular industry is referenced and the government provided no details as to how the government will approach addressing these fees other than a statement that the federal government will work with regulatory agencies, provinces and territories to reduce such fees.

Interchange Fees

In 2022, a long-awaited settlement was reached in a decades-long Canadian credit card interchange fees class action against Visa and Mastercard. Following the settlement, the budget announced that the credit card payment networks agreed to reduce the interchange fees charged to businesses. While this measure is designed to benefit small business merchants, there are concerns of any passing down of such fees to consumers (as businesses have the ability to do so as a result of the class action settlement).

Regulating Retail Payment Services Providers

The Retail Payments Activities Act (“RPPA”) is federal legislation introduced in 2021. The proposed draft of the regulations made under the RPPA (which provide salient legislative requirements) were published in February 2023 with a consultation period ending on March 23, 2023.

The RPPA applies to any “retail payment activity” performed by a “payment service provider” (“PSP”) that has a place of business in Canada and also applies to any retail payment activity performed for an “end user” in Canada by a PSP that does not have a place of business in Canada but directs retail payment activities at individuals or entities that are in Canada. A “retail payment activity” is defined as payment function that involves an electronic funds transfer (“EFT”) in Canadian or other currency. “Payment function” captures a variety of services provided by PSPS including providing or maintaining an account, holding funds, initiating EFTs and providing clearing and settlement services.

In addition to other requirements, PSPs that are not exempt from the application of the RPPA will be required to be registered with the Bank of Canada prior to performing any retail payment activities. The RPPA also requires such PSPs to comply with prescribed operational and financial measures, safeguarding of funds and reporting requirements.

Mortgage Lenders To Be Subject to AML/ATF Measures

The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its associated regulations (collectively, the “PCMLTFA”) address Canadian anti-money laundering and anti-terrorist financing measures. The most detailed measures under the PCMLTFA apply only to certain persons and entities (commonly referred to as “reporting entities”) and then only in specified circumstances. Reporting entities are subject to reporting and recordkeeping requirements, client identification requirements, and must have a compliance program in place.

Currently, private lenders (including individuals), brokers and administrators and servicers in the mortgage lending space are not reporting entities. Proposed draft regulations published in February 2023 amending the PCMLTFA will expand its application to capture persons involved in the mortgage lending process including lenders who underwrite loans, administrators servicing loans, and brokers responsible for mortgage origination. The proposed draft regulations would also make such persons reporting entities under the PCMLTFA.

New Consumer Protection Legislation in Ontario

In Ontario, Canada’s second largest province, efforts have been underway to amend the primary consumer protection legislation, the Consumer Protection Act, 2002 (the “Ontario CPA”). The relevant regulator has been engaging in a comprehensive review of the Ontario CPA, the first in over 15 years, to modernize the legislation and propose a new version of this Act. The Ontario CPA applies to consumer transactions where either the consumer or the person engaging in the transaction with the consumer is located in Ontario when the transaction takes place.

In February 2023, a consultation paper was published for comment, including various proposed amendments to the Ontario CPA. Given the significant changes considered and the resulting impact, businesses that operate in Ontario and transact with consumers are encouraged to participate in the consultation process. Changes proposed to the Ontario CPA include:

  • enhanced protections and rescission rights for unfair practices (i.e., the making of false, misleading or deceptive representations);
  • prohibiting businesses from including contract terms that appear to waive important consumer rights, such as joining a class action lawsuit or suing in court, or that infringe on consumers’ rights to make fair public reviews or comments;
  • restricting price escalation clauses on explicit consent of the consumer and if the consumer has the ability to subsequently cancel at no cost; and
  • measures to protect consumers from business practices that make it difficult to unsubscribe from, or terminate, a subscription- or membership-based contract.

This article was prepared by the Business Law Section’s Consumer Financial Services Committee.