Commissioner’s reasons for decision
(FCAC ACT, subsection. 23(2))
Files: XXX-XXXXXX and XXXXXX
Cost of Borrowing (Banks) Regulations – Credit Cards – Monthly Statements – Failure to Fully Disclose Promotional Interest Rate
In March, 2008, the Deputy Commissioner issued and caused to be served 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 one violation by contravening subsection 12(5) of the Cost of Borrowing (Banks) Regulations, SOR/2001-101 in that, by not disclosing the promotional interest rate applicable to a portion of the outstanding balance in its credit card statements, the Bank does not disclose the annual interest rate that applied on each day of the statement period as required.
The Deputy Commissioner proposed a penalty of $50,000 for the violation. The Bank responded to the Notice of Violation with its representations as permitted under the Act.
I have studied the file, including the Bank’s representations. On a balance of probabilities, I consider that the Bank has committed one violation by contravening subsection 12(5) of the Cost of Borrowing (Banks) Regulations (the Regulations). I impose an administrative monetary penalty of $50,000.00.
The Cost of Borrowing (Banks) Regulations state:
12. (5) A bank that issues credit cards must provide borrowers with supplementary disclosure statements on a regular periodic basis, at least once a month, that disclose the information referred to in subsections 10(3) and (4), other than paragraphs 10(3)(b) and (c) and that, in addition, contain the following information:
(a) an itemized statement of account that describes each transaction and discloses each amount credited or charged, including interest, and the dates when those amounts were posted to the account;
(b) the amount that the borrower must pay, on or before a specified due date, in order to have the benefit of a grace period; and
(c) the sum for payments and the sum for purchases, credit advances and interest and non-interest charges.
In July 2006, the Bank self-reported a consumer provision complaint to the Financial Consumer Agency of Canada (FCAC), as required by FCAC’s compliance framework. A credit card customer who had accepted a promotional cash advance offer had raised concerns about the interest calculation.
According to the compliance officer’s report, the investigation confirmed that the cardholder had made a number of cash advances that were charged the lower promotional interest rate. The cardholder’s credit card statements listed the “standard” higher interest rate.
The Bank advised the compliance officer that the promotional interest rate appears as part of the transaction description on the monthly statement. The same form of information appears in the monthly statements at issue relating to the complaint summarized below.
No further compliance action was taken on this self-reported complaint at the time.
In October 2006, FCAC raised concerns about disclosure practices for promotional interest rate offers through the Canadian Bankers Association (CBA) of which the Bank is a member. FCAC advised that disclosures made by some banks for credit card promotional rate balances were not sufficiently clear and had led to misunderstandings by some bank customers. On January 22, 2007, the CBA responded to FCAC’s concerns stating that having “…now been made aware that some disclosures have not been as clear as intended, banks will examine their disclosures related to promotional balance transfers and will individually take steps at the next review to improve any disclosures that appear to them to be problematic.”
In May 2007, FCAC received a letter of complaint from another credit card customer of the Bank who had accepted a similar promotional interest rate offer. The lower promotional interest rate was in fact applied when the customer used the cash advance or cheque feature of the credit card. The customer’s monthly statement showed the “standard” higher interest rate and the promotional interest rate appears as part of the transaction description on the monthly statement.
According to the letter of complaint, the cardholder concluded that the promotional interest rate had not been applied to the outstanding balance. The letter of complaint states that the cardholder contacted the Bank’s customer service staff by telephone and explained that cardholder had been charged the wrong interest rate. The letter goes on to state that the cardholder was told that this would be corrected and that a new bill showing the correct amount would be sent to the cardholder. The Bank’s systems were set up to disclose the higher standard interest rate.
The letter of complaint goes on to assert that the cardholder raised concerns at the branch and was led to believe that the standard interest rate was being applied to her entire credit card balance. The cardholder refused to make any payment until a statement accurately reflecting the interest rate applied to the outstanding balance was received. When the cardholder missed the normal deadline for monthly payments, under the credit card agreement provisions for payment delinquency, the Bank withdrew the promotional interest rate.
Position of the Bank
After the Bank received the Notice of Violation issued in March 2008, it submitted its representations on April 14, 2008. The most relevant portions of the representations are:
1. Action taken
The Bank did not implement changes to the promotional rate information on its monthly statements as a result of the October 2006 discussions between the CBA and the FCAC because it was and continues to be the Bank’s position that it meets all applicable requirements of the Regulations.
Now that we understand the FCAC’s specific concerns, we are looking at additional changes below that could further enhance the disclosure we provide to cardholders on monthly statements:
- [proposed enhancement described]
- [proposed enhancement described]
The Bank would be pleased to report to the FCAC separately, by July 1, 2008, the progress it has made in reviewing these options and any actions it intends to take as a result of this review. We would also report on the timing proposed for any such actions.
2. No harm done to the customer
The Compliance Report suggests that cardholders carrying a balance at a promotion rate may believe that they are actually paying interest at the higher standard rate. In that case, any misunderstanding would always resolve to the customer’s favour, resulting in no customer harm. In case #4216-644Q203, the FCAC found this to be a basis upon which not to impose any monetary penalty.
The Compliance Report also cites as potential consumer harm, this one cardholder’s decision not to make any payment on her account until she received a statement accurately reflecting the interest rate applied to the outstanding balances. The Bank submits that this was an isolated response and does not constitute the level of customer harm that would justify a penalty of $50,000. We submit that the consumer’s statement contained no inaccuracies, indeed all calculations and interest incurred were correct.
The Bank also submits that the monthly statement is not the primary means for disclosing information about promotional rate offers. That information has already been fully disclosed to any cardholder taking advantage of these offers.
3. Degree of negligence
We note that the regulations never once make reference to promotional, special, introductory, or any other temporary or time-limited rate offers. The term that is used consistently including in Subsection 12(5) as well as Subsection 10(3)(d) is “the annual interest rate.” While the FCAC interprets this to implicitly include “or rates”, the Bank respectfully submits that it is reasonable to read the regulations as only requiring the disclosure of the standard annual interest rate and therefore the Bank has complied with the current Regulations. [Italics added.]
4. Compliance with Regulations
Subsection 12(5) of the Regulations does not require disclosure on the monthly statement of special promotional interest rates. What is required to be disclosed is “the annual interest rate” for which Bank cardholders is the rate of interest that they will pay in the ordinary course. Special low promotional rate offers that are time limited and may apply only to a single cheque surely do not have the same status as the annual interest rate for the card does. [Italics added.] In fact, to suggest that a mere promotional rate is in fact the annual interest rate applicable to the account, may in itself be misleading to customers. A temporary lowering of the rate applied to a single balance transfer is not, in our respectful submission, a change to the annual interest rate for the credit agreement.
The Bank has taken these customer complaints and the FCAC Investigation as an opportunity to review the manner of disclosure on its statements, and will implement enhancements to create greater transparency to cardholders.
I have carefully reviewed the compliance officer’s report and the Bank’s written representations. I am not persuaded that the Bank met its disclosure obligations and I believe an administrative monetary penalty is in order.
The issue here is not whether the correct promotional interest rate was applied; the issue here is whether the customer knew that it was. The customers were not over-charged. The higher standard interest rate was not applied instead of the much lower promotional interest rate. The difficulty is that the customers could not be sure that was the case. They are entitled to be sure.
Accurately disclosing the application of a reduced or promotional interest rate is every bit as important as accurately charging it. Otherwise customers cannot know that in fact they have the benefit of the promotional interest rate. Without that information, customers are in no position to know if the financial institution ever makes an error, and in no position to take steps to have it corrected.
Failure to disclose application of the promotional interest rate
Subsection 12(5) of the Regulations requires monthly disclosure to borrowers of the annual interest rate and other matters specified in subsections 10(3) and (4). I do not accept the submission from the Bank that subsection 12(5) only requires disclosure of “one” annual interest rate.
The particular requirements of subsection 12(5) of the Regulations must be read in the context of the general provisions for disclosure in subsection 6(4): a disclosure statement must be in plain language that is clear and concise, and it must be presented in a manner that is logical and likely to bring to the borrower’s attention the information required to be disclosed by the regulations.
The notion that the Regulations only require disclosure of one interest rate, when more than one may apply to transactions in a particular monthly statement, is simply unfounded. It is contrary to subsection 34(2) of the Interpretation Act, R.S.C. 1985, c. I-21 which provides that an enactment’s words in the singular include the plural. “Interest” or “interest rate” in the Regulations includes reference to “interest rates” when relevant.
This is not the first time that FCAC has drawn this principle of statutory and regulatory interpretation to the Bank’s attention. The principle is the underpinning for my predecessor’s decision on disclosure to co-borrowers (File 37923-585Q205). The September 15, 2005 letter from the Commissioner following that decision advised federally regulated financial institutions to “review their practices in terms of providing disclosure to all borrowers whose loans fall within the scope of the Cost of Borrowing Regulations.”
Furthermore, a monthly statement’s description of a transaction as effected by the bank in this case does not, in my view, disclose an applicable promotional interest rate for the particular transaction.
Harm done to customers
As the compliance officer’s report noted, and which the Bank did not dispute in its written submissions, the issue here is systemic in nature and would affect all cardholders whose credit card balances are subject to an interest rate that is less than the “standard” or “monthly” interest rate normally disclosed in monthly credit card statements. The compliance officer also recorded that the Bank provided no evidence during the investigation that the Bank conducted verifications to ensure that cardholders were not confused by its credit card disclosures related to promotional interest rate offers. No such evidence was offered in the written submissions.
Degree of intention
There is a degree of intention in the Bank’s approach to the disclosure failure in this case.
As noted earlier, the Bank continues to invoke an erroneous interpretative principle even after the discussions regarding the obligation of disclosure to co-borrowers. The Commissioner’s letter advising banks to review their practices was an opportunity missed by the Bank to address the issue that led to this decision.
The issue of disclosure of promotional rates was raised by FCAC with the CBA after the self-reported complaint from the Bank in 2006. The Bank had the opportunity to change its disclosure for promotional rates on monthly statements but chose not to do so. In its written submission, the Bank offers no reasons for not doing so (or any evidence of the steps it took to consider the issue). The complaint of the second cardholder can be seen as a result of the Bank’s decision.
That the Bank still appears to be unwilling to change its practices in violation of the Regulations is reinforced by its written submission which takes the various positions that (a) the Bank did and continues to meet the requirements of the Regulations, (b) the Bank will consider options for change, and (c) the Bank will make unspecified enhancements. This points to a continuing lack of regard for the letter and the spirit of subsection 12(5).
This is not the first case of the Bank violating the Regulations in reference to promotional interest rates. The decision of the Commissioner in April 2005 was to find a violation. The violation was acknowledged by the Bank and a resolution proposed by FCAC was accepted. On that basis, the Commissioner determined not to assess an administrative monetary penalty.
More recently, in another case, also involving a Notice of Violation, the Bank was ultimately found not to have violated subsection 6(4) of the Regulations concerning confusing disclosure of “special promotional offers” in a credit card agreement. But the Commissioner noted that the Bank revised its credit card agreement to eliminate the inconsistency that led to compliance proceedings, and had sent the revised agreement to all credit card holders.
In this case there is no acknowledgement of the disclosure problem and no concrete steps proposed by the Bank to address it.
On a balance of probabilities, I find that the Bank committed one violation by not disclosing the promotional interest rate applicable to a portion of the outstanding balance in its credit card statements, as required under subsection 12(5) of the Regulations.
I also find a degree of intention on the part of the Bank. Despite knowing of the disclosure failure for several years, the Bank maintains that it complies with the Regulations. It has missed opportunities to address the problem and continues to contest the letter and the spirit of the Regulations.
Even though the Bank’s failure has broader implications, and raises the possibility of harm to cardholders, I do not find that there has been actual harm done by the violation; there was no evidence of overcharging interest costs. However, I find that the compliance history of the Bank weighs against it in this case and should have caused it to view the disclosure issue raised by its customers and by FCAC in a different light. I therefore impose an administrative monetary penalty of $50,000.00.
The Bank must comply with the Regulations. FCAC will review the changes the Bank has made within one year of this decision to ensure that it does so.
It is not my intention to publicize this case pursuant to section 31 of the Financial Consumer Agency of Canada Act.
Ottawa, June 2008
Financial Consumer Agency of Canada
- Date modified: