Commissioner’s reasons for decision
(FCAC ACT, subs. 23(2))
In September 2007, the Acting Commissioner issued and caused to be served on the Bank a Notice of Violation pursuant to subsection 22(2) of the Financial Consumer Agency of Canada Act (the Act). The Notice stated:
I have reasonable grounds to believe that the Bank has committed two violations by contravening subsections 10(1) and 13(1) of the Cost of Borrowing (Banks) Regulations in that it:
- Failed to provide a borrower with an initial disclosure statement as required by subsection 10(1) of the Regulations.
- Failed to disclose to a borrower, in writing and at most 30 days after entering into the subsequent agreement, the changes to the information required to be disclosed in the initial statement, in accordance with subsection 13(1) of the Regulations.
Further, the Acting Commissioner proposed to impose a penalty of $20,000 for the violations.
In October 2007, the Bank responded to the Notice of Violation by making representations as permitted under the Act. The Bank included a copy of the client’s initial disclosure document, which it had been unable to locate earlier during the investigation process.
After reviewing the additional information provided in the representations, I consider that the Bank has complied with subsection 10(1) of the Regulations.
With respect to subsequent disclosures that were said not to have been provided, on a balance of probabilities I conclude that the Bank has committed a violation of subsection 13(1) of the Regulations. Pursuant to subsection 23(2), therefore, I confirm that there has been a violation of subsection 13(1) of the Regulations. Taking into consideration the circumstances of the case, I have not assessed a penalty.
In its representations, the Bank took certain positions with respect to its responsibilities under the law. I feel it is important to address these positions in the reasons for this decision. In doing so, I am mindful of the underlying purpose of the Regulations: that borrowers receive complete and clear disclosure when they enter into credit agreements so that there are no subsequent surprises.
In September 2005, the Financial Consumer Agency of Canada (the Agency, or FCAC) received a complaint from a consumer regarding her line of credit with the Bank. The complainant stated that she had not received disclosure documents on entering into the credit agreement in July 2002. She added that she had not received disclosure documents informing her of amendments to the credit agreement affecting the interest rate charged by the Bank.
During the investigation, the Bank was unable to produce copies of either the initial or subsequent disclosure statements.
In summary, the information from the Bank reveals there were both increases and decreases from 2002 to 2006 to the non-variable portion of the interest rate charged for the complainant's line of credit.
On the basis of the information contained in the case file at the time, a Notice of Violation was issued in September 2007. The Bank responded in October 2007, with detailed representations that included a copy of the credit agreement containing the initial disclosure information.
Position of the Bank
I have considered in full the representations submitted by the Bank in October 2007, in response to the Notice of Violation issued in September 2007. Following are specific points raised by the Bank that I wish to address:
Alleged violation #1 – failure to provide a borrower with an initial disclosure statement
However, we believe that even without the signed Agreement, a violation should not have been found. We believe that it is essential for the FCAC to look beyond the existence of a copy of a disclosure document as the only acceptable evidence of disclosure, and consider other factors. In particular, we feel that the FCAC relied too heavily on the customer’s unsubstantiated assertion in reaching its conclusion on this issue. The customer acknowledged receipt of other disclosure documents (e.g. monthly statements) and there was no indication of a failure in our systems that would result in some customers not receiving system generated mailings. We feel that this fact, as well as the ones that follow, should have had more bearing in the FCAC’s decision regarding the likelihood that disclosure was provided.
We feel that an examination of the surrounding circumstances of this case makes it reasonable to conclude that the customer did receive the credit agreement, even if we had not been able to locate the actual signed agreement.
Under the Cost of Borrowing (Banks) Regulations, banks must provide borrowers with various types of disclosure. The onus is on the banks to demonstrate that they have complied with their obligations.
The Bank argues that it is not legally required to retain records. FCAC does not dispute this fact. However, the Agency will call on banks to demonstrate that they have complied with the Regulations. In a case dealing with an allegation of non-disclosure, the simplest way for the financial institution to demonstrate compliance is by providing a copy of the actual disclosure document given to the client. This does not, however, preclude the use of other, less direct means to demonstrate compliance in certain circumstances.
The Bank originally could not supply a copy of the signed credit agreement. However, its subsequent representations included this document, which confirms that the Bank complied with the initial disclosure requirements.
I therefore conclude that no violation of subsection 10(1) of the Regulations has occurred.
Alleged violation #2 – failure to disclose subsequent amendments
In our view it is reasonable to conclude that in addition to having signed and received the Agreement, the customer also received notification of subsequent changes to her interest rate.
- As indicated above, the copy of the enclosed Agreement evidences that the customer actually received initial disclosure, despite her assertions to the contrary to the FCAC. This discrepancy in the customer’s version of events detracts from the credibility of her claim that she did not receive notifications about changes to the variance in her interest rate.
- The customer also acknowledges that monthly statements were received. As there were no address changes, and no indication of any system failure regarding the mailing of the rate change notifications, there’s no reason to conclude that the notices were not mailed to her correct address. We have confirmed that these notifications were system generated, and there has been no indication of a failure in our system process for mailing.
However, despite our position that the customer did receive notification of changes to her interest rate, we believe that these notifications were not required under the Cost of Borrowing Regulations. The Compliance Report indicates that notification must be made, in a prescribed manner, regarding changes to the information required to be disclosed in the initial statement. The report further goes on to state: “This includes changes to the method of determining the annual interest rate, if it is variable.” In this case the ‘method’ of determining the interest rate did not change. The method remained the same — the interest rate was calculated using a fixed rate plus or minus a variance. The actual interest rate changed, as a result of changes in the variance, and this new interest rate was disclosed, as required, on the customer's monthly statement.
The Compliance Report also states:
“A review of the monthly statements would have made the client aware of the total interest rate applied to her line of credit, but would not have indicated whether any interest rate fluctuation was due to a change in the fixed rate or in her variance.”
As the fixed rate is a public index rate (as defined in the Cost of Borrowing Regulations), customers are presumed to know the rate and the Bank has no obligation to disclose it for any purposes under the Regulations (unless it is in a marketing piece or part of the initial disclosure). All customers can therefore easily determine what their variance is by determining what the fixed rate is on any day, and can also check upon receipt of the monthly statement.
FCAC accepts that the customer received monthly statements noting the total interest rate being applied to the line of credit. However, the client believes that she did not receive disclosure notices informing her about changes made to the method of calculating the interest rate charged on her line of credit. In its response to this claim, the Bank has relied on the fact that it has policies and procedures in place for providing such notices, and that there is an automated process for issuing disclosure documents that inform customers about interest rate increases. The Bank states that it has no indication of a malfunction of its automated processes or of a misdirection of the complainant’s monthly statements.
The Bank provided a copy of a disclosure notice template used by its automated system. The Bank argues that it has reliable processes in place, providing assurance that the complainant received the disclosure notices.
The Bank informed the investigation officer that each of the rate increases was centrally prepared and that notification was sent. The information provided by the Bank is far from conclusive, nevertheless, on a balance of probabilities I agree that the Bank provided the complainant with the centrally generated notifications.
However, there is apparently no automated process to ensure the issuing of a disclosure statement when a branch changes the assigned non-variable portion of the interest rate charged to a borrower. The Bank provided no information concerning branches’ manual processes or the format of the documentation used by a branch to notify a borrower of a rate change. Under the circumstances, I conclude that on a balance of probabilities the branch concerned — and therefore the Bank — did not provide the borrower with disclosure notices when changing the method of determining the borrower’s interest rate.
The Agency will follow up on this matter to ensure that the Bank has policies and procedures as well as appropriate training for branch personnel.
In its representations, the Bank further argued that, because there had not been an amendment to the method of calculating the annual interest rate, no subsequent disclosure was required in this case. It also maintained that customers can easily determine what the non-variable portion of their interest rate is from the information presented in the monthly statement.
The relevant sections of the Regulations are sections 10 and 13. In particular, paragraph 10(1)(b) requires the initial disclosure statement to include the annual interest rate or the method for determining it if it is variable. Subsection 13(1) requires the disclosure of any changes to the information that is required to be disclosed in the initial disclosure statement.
In this case, the initial disclosure statement indicated the method of determining the complainant’s interest rate.
It is true that the annual interest rate is simply the sum of the applicable fixed rate and the non-variable rate, whatever those rates actually are at any time. Nevertheless, each rate component is fundamental to the method of determining the interest rate, and a change in the non-variable rate is a change in the method of determining the actual interest rate paid by the borrower. This interpretation is confirmed by the credit agreement, which makes clear that a change to the non-variable portion of the interest rate requires notification to the borrower.
I also cannot accept the Bank’s assertion that disclosure of a change in the non-variable rate has occurred because the customer is capable of calculating it by subtracting the fixed rate from the actual interest rate indicated in the monthly statement. The Regulations require disclosure to be made when there is a change in the method of determining the interest rate; this means that the borrower must be informed in writing of the specific change to the non-variable rate made by the financial institution. It is not sufficient for the borrower to be given the means to calculate the information.
Further, it is unfortunate that neither the credit agreement nor the initial disclosure document indicates where the borrower can find information about changes in the fixed rate.
I therefore confirm the violation and find that the Bank failed to disclose to a borrower, in writing and at most 30 days after entering into the subsequent agreement, the changes to the information required to be disclosed in the initial statement, in accordance with subsection 13(1) of the Regulations.
However, I take into consideration the circumstances surrounding the failure to provide disclosure notices of the decrease in the non-variable rate — particularly the fact that the borrower was aware of the rate changes because she had negotiated them herself with branch personnel, as well as the fact that there was no harm done in this case. I therefore do not propose to impose a penalty.
It is not my intention to publicize this case pursuant to section 31 of the Financial Consumer Agency of Canada Act.
Ottawa, January, 2008
Financial Consumer Agency of Canada
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