Commissioner's reasons for decision
(FCAC ACT, subsection 23(2))
This decision concerns clear and concise disclosure about an "interest free" promotional credit card offer, and about the monthly payments needed to benefit from the promotional offer.
On January 30, 2009, the Deputy Commissioner of the Financial Consumer Agency of Canada (FCAC) issued a Notice of Violation to the Bank pursuant to subsection 22(1) of the Financial Consumer Agency of Canada Act (Act). The Notice stated:
I have reasonable grounds to believe that the Bank committed two violations by contravening subsection 6(4) and paragraph 12(5)(b) of the Cost of Borrowing (Banks) Regulations, SOR/2001-101, because it failed to:
- communicate information that must be in plain language that is clear and concise and must be presented in a manner that is logical and likely to bring to the borrower's attention the information required by these Regulations to be disclosed within the meaning of subsection 6(4) of the Cost of Borrowing (Banks) Regulations.
- indicate on monthly credit card statements the amount that the borrower must pay, on or before a specified due date, in order to have the benefit of a grace period within the meaning of paragraph 12(5)(b) of the Cost of Borrowing (Banks) Regulations.
The Deputy Commissioner proposed an administrative monetary penalty of $50,000.
As permitted by paragraph 22(3)(b) of the Act, the Bank responded to the Notice of Violation with written submissions dated March 2009.
I have carefully reviewed the file, including the Bank's written submissions. Based on a balance of probabilities, the Bank has contravened the legislation in this case. But I do not find that the Bank has committed the two violations stated in the Notice of Violation. This is because there is doubt about whether the FCAC acted within the time period allowed by the Act for commencing proceedings.
The Act states:
30. (1) No proceedings in respect of a violation may be commenced later than two years after the subject-matter of the proceedings became known to the Commissioner
6. (2) A disclosure statement may be a separate document or may be part of a credit agreement or an application for a credit agreement.
6. (4) A disclosure statement, or a consent in relation to a disclosure statement, must be in plain language that is clear and concise. It must be presented in a manner that is logical and likely to bring to the borrower's attention the information required by these Regulations to be disclosed.
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.
The FCAC received a written complaint against the Bank from a consumer on December 29, 2006. It concerned a promotional credit card offer promoting "interest free" credit card cheques. The complainant had taken the offer and made use of two "interest free" cheques. The letter of complaint stated that the Bank appeared to be charging the consumer the regular credit card interest rate on the cheques. The letter also stated that the Bank advised the consumer by telephone that if the consumer was carrying an outstanding balance, the regular interest rate would apply to all transactions on the credit card, including use of the promotional cheques.
The interest-free feature of the Bank's promotional offer is prominent:
This fall, make your projects a reality!
Get a break from interest rates and plan a getaway or complete a dream project this fall. Whatever your plans, you can pay your purchases with your [credit card] cheques and take advantage of an interest-free reimbursement plan in [regular periodic] payments or pay off the total amount in [a set period of time]. You decide! No interest will be charged during this period except on missed payments, which will accrue interest at your card's normal rate. For your information, the annual interest rate of your [credit card] was 19.5% on September 1, 2006. (emphasis in original)
With two exceptions, there is no indication in the promotional offer of how other terms and conditions of the credit card apply to it. The first exception is the reference to "missed payments" above, without further explanation. The second is in the "Answers to Questions" which states in part:
[Credit card] cheques are treated as purchases on your credit card. They are subject to the terms and conditions of your credit card, according to the credit available for purchases as indicated on your statement.
There is no explicit or direct reference to the credit card agreement itself, or to any other documentation governing the credit card account.
In this case, the consumer chose the option of "[regular periodic] payments." The consumer's monthly statements identify the [regular periodic payment] amount. But that amount is not included in the minimum monthly payment. The minimum monthly payment appears calculated based on the overall outstanding monthly balance, which aggregated the [regular periodic payment] amount with all other purchases. The interest charge (described as the "finance charge") also appears to be based on the entire outstanding monthly balance without excluding the [regular periodic payment] amount subject to the "interest-free" promotional offer.
The file was assigned to an FCAC compliance officer who conducted an investigation. According to the compliance officer's report of November 27, 2008, on February 2, 2007, the Bank responded to the complaint by maintaining:
The consumer must pay each deferred monthly payment on his/her account statement in full. For the months of (………), the consumer made a minimum payment on the account balance. Therefore the consumer did not comply with the terms and conditions of his credit card agreement to be able to benefit from the promotional offer [sic] of [periodic payments].
The compliance officer's report contains an additional communication from the Bank about the monthly payments:
If the consumer does not make one or more payments to pay off the financing, interest will be charged on the payment or payments at the credit card rate. So that the consumer can adequately benefit from the promotional offer (no interest), all payments to pay off financing must be made every month.
In response to a further query from the compliance officer, as to why the [regular] monthly amounts were not described in the monthly credit card statements as part of the "minimum payment", on April 7, 2007 the Bank stated:
"Clause 6 of the Agreement governing the use of the credit card stipulates the following:
…This payment shall be made as follows:
a) Either as a total payment within the 21-day period following the statement date;
b) Or as a partial payment of 3% of the unpaid balance or a minimum payment of $10, whichever of the two amounts is higher, and in this case, interest will be charged."
"That is why the account statement will indicate the minimum payment, which includes a portion of the monthly payment, but not the total monthly payment associated with the financing (promotional offer)."
The compliance officer was of the view that the interest-free promotional offer describes a "grace period" for the purposes of paragraph 12(5)(b) of the Regulations. The monthly statements do not specify the amount the consumer has to pay, on or before a specified due date, in order to have the benefit of that grace period. The complainant appeared to lose the benefit of the grace period by paying only the minimum monthly balance and not a larger amount (such as the minimum monthly payment plus the [regular periodic] amount, or the full monthly balance); but that is not spelled out in either the promotional offer or the monthly statements.
Position of the bank
The nature of the promotional offer
In its written submissions, the Bank describes the promotional offer:
The promotional offer that the consumer took advantage of is as follows: he had the option of paying for purchases with three [credit card] cheques that had been sent to him. In making these purchases, he chose the method that involved a reimbursement of these transactions to his card [credit card] by paying the entire amount within [the predetermined time period] or by staggering the payments [periodic instalments]. No interest was accumulated during this period, unless there were unpaid instalments, in which case interest was charged to the credit card.
. . .
Under the terms and conditions of this promotional offer, the consumer can stagger the payment for a purchase over a [predetermined period]; he does not pay interest, unless he fails to make the required payments in accordance with the provisions of the agreement governing use of the card. In other words, the amount indicated on the consumer's monthly account statement constitutes a purchase under the same terms and conditions as a "standard" purchase.
The promotional offer that the consumer took advantage of constituted an interest‑free loan period and not a second grace period on the same credit card account. The conditions for the promotional offer were correctly described in the offer sent to the consumer, in the conditions governing use of the credit card and in the issued monthly statements.
As a result, the Bank maintains that paragraph 12(5)(b) of the Regulations does not apply. The promotional offer does not establish a grace period; rather enjoyment of the "interest-free" feature of the promotional offer depends on meeting all the usual and stated obligations of the credit card account.
The Bank states that the promotional offer clearly indicates that the [credit card] cheques are treated as any other purchases and count against the credit limit of the card. This is because of the references to the credit card agreement in the "Answer to Questions"
The period for commencing proceedings
The Bank points out that according to subsection 30(1) of the Act, no proceedings in respect of a violation may be commenced later than two years after the subject-matter of the proceedings became known to the Commissioner. This submission elaborates on a point made in the Bank's December 29, 2008 comments on the Compliance Officer's Report. The Bank argues that the two year period began as of December 29, 2006, when the FCAC received a letter of complaint against it from the consumer. That letter included a copy of a promotional offer from the Bank and a copy of one of the consumer's monthly statements. The Bank concludes:
Therefore, since December 29, 2006, the FCAC has had all of the information, ie, the promotional offer letter and the consumer's monthly statement, that enables it to conclude, or not conclude, that the Bank committed a violation. In fact, in the period since December 29, 2006, the FCAC did not receive any other document that could help it conduct its investigation.
. . .
We are of the opinion that because the FCAC had all of the relevant information in its possession on December 29, 2006, the FCAC was supposed to close the file on December 30, 2008.
By implication, the Bank takes the position that the Notice of Violation issued January 30, 2009, was out of time.
Paragraph 12(5)(b): Do the monthly statements disclose the amount the borrower must pay, on or before a specified due date, in order to have the benefit of a grace period?
Paragraph 12(5)(b) sets out a disclosure requirement for monthly credit card statements: the amount that a consumer must pay, on or before a specified date, in order to have the benefit of a "grace period." The term "grace period" is not defined in the legislation. Two general definitions are:
Typically, a "grace period" in relation to a credit card statement is the period from the statement date to the payment due date; if the payment is made before or on the due date, no interest is charged for that period.
In this case, and like the "interest free" promotional offer itself, the monthly statements provide no information specifying the amount the consumer must pay on or before a specified date in relation to the promotional offer. The Bank seems to take the position that there is no connection between a "grace period" and the promotional offer.
The promotional offer is only reflected on the consumer's monthly statements in the posting of the [regular periodic] amounts. As mentioned, the promotional offer does not provide any guidance on what monthly payment must be made and by what date to maintain the "interest free" benefit. Nor does the monthly statement. Neither document speaks to when payment is due to maintain the "interest free" feature of the promotional offer; by default, the monthly statement suggests that it is the monthly statement's "due date."
Neither the promotional offer nor the monthly statements disclose clearly what the consumer must pay and when to maintain the benefit of the "interest free" promotional offer so the consumer is not informed how to take complete advantage of the promotional offer. While not clear, the written submissions of the Bank suggest that the consumer must pay either the full [regular periodic] amount or the full outstanding monthly balance – including the [regular periodic] amount – within the monthly grace period to continue to enjoy the "interest free" feature of the promotional offer.
The absence of such disclosure "in plain language that is clear and concise" in the monthly statements is a contravention of paragraph 12(5)(b).
The monthly statements have another problem, one not identified in the Notice of Violation: they do not disclose the interest rate that applies to the promotional offer balance, in this case the [regular periodic] amounts. To the extent that different terms apply to different transactions on a credit card, they must be clearly, fully and separately disclosed on the monthly statements. As I observed in finding a violation of subsection 12(5) of the Regulations in my Decision No. 104:
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. 3
Subsection 6(4): Is the disclosure in plain language that is clear and concise, and presented in a manner that is logical and likely to bring the borrower's attention to the information required by these Regulations to be disclosed?
It is not.
The language of the promotional offer is quite clear on its face. It provides the option of equal [regular periodic] "payments." In the next line it states that "no interest" will be charged during this period except on missed "payments." This seems an unequivocal promise that interest is only a possibility if one of those [regular periodic] payments is missed, and would be limited to the missed payment(s). But that is where the clarity of the disclosure ends; the promotional offer gives no further details.
Nor do the monthly statements. It is difficult to understand why the monthly statements do not explicitly require complete payment of the [regular periodic] amount to avoid interest. In fact, in the absence of such a stated requirement, it is difficult to understand exactly what the consumer must do to take advantage of the promotional offer.
The Bank has not provided in its exchange of information with the compliance officer, or in its comments on the compliance officer's report, or in its written submissions, reference to any disclosure to the consumer that spells out clearly and concisely the monthly payment that must be made to maintain the "interest free" promotional offer.
To comply with subsection 6(4) of the Regulations, if the MasterCard cheques are interest-free only if the monthly balance on the credit card account is paid off in full, then the promotional offer should say so. If they are interest-free only if the monthly [regular periodic] amount on the credit card account is paid off in full (either separately from or in addition to the minimum monthly payment), then the promotional should say so. If they are interest-free on some other basis, then the promotional offer should say so. This would be best done in the body of the offer and not in Answers to Questions that are less than direct and fulsome.
When does the "subject matter of the proceedings" become known?
The Bank says that the file should have been closed before the Notice of Violation was issued because more than two years had passed since the FCAC received the complaint. But the mere receipt of a consumer complaint by the FCAC, whether or not documented, does not necessarily mean that the "subject matter" of what may become violation proceedings becomes known.
A complaint or other information sent to the FCAC must receive sufficient scrutiny to determine if it raises a matter (a) within the authority of the FCAC and (b) if it has sufficient substance or plausibility to warrant information gathering, examination or investigation. In other words, while all complaints potentially raise "the subject matter of proceedings," only some actually do. To separate the latter from the former requires application of judgment and expertise. Until that judgment and expertise is applied, and a compliance officer forms a view that the complaint or other information may indicate a violation, then I do not think "the subject matter of [a] proceeding" has been established. This is consistent with the fact and the law that the complainant is not even a party to the "proceedings" but merely a source of information should the complaint be judged by the FCAC to raise a possible violation that itself might become "the subject of the proceedings."
If the drafters of the legislation had intended that the two year time period start upon mere receipt of a complaint or other information, without any appropriate examination to determine whether the Act applied and whether the matter had any substance, they could have so provided in the Act. The record shows that the FCAC investigation had engaged the Bank within weeks of receipt of the complaint. The Bank has had ample opportunity to respond to the investigation, to comment on the compliance officer's report, and to make written submissions in response to the Notice of Violation. There is no prejudice. The Bank did not move to quash the Notice of Violation as being out of time. I take it that the Bank wishes to avoid needless litigation on a procedural question.
I share that wish. I prefer to focus on compliance with the consumer provisions of the Bank Act. I note that if this proceeding were to be quashed for being out of time, there would be nothing to prevent the FCAC from investigating the continuing practices of the Bank or similar practices of other banks. However, since this Notice of Violation was not issued until twenty-five months after the FCAC received the complaint, I will not find the Bank to be in violation.
I have decided not to find the Bank in violation. However, I must make clear that absent doubt about the timing of the Notice of Violation, I would have.
I must decide on possible violations based on the material before me, particularly the written submissions of the Bank. In this case the intended operation of the "interest free" promotional offer is not clear. But the actual impact on the consumer is: loss of the "interest free" benefit because they did not make the right or adequate monthly payment. Not only are the Bank's disclosure documents incomplete, the Bank has not been able to enlighten me in its written submissions as to what a consumer should do to avoid being charged the credit card's regular interest rate. Neither the general requirements of subsection 6(4) of the Regulations nor the requirements of paragraph 12(5)(b) have been met.
The requirement for accurate and complete disclosure of promotional interest rates on credit card products is at the heart of both this decision and my Decision No. 104. I expect that the Bank, and all other financial institutions offering credit card products, has already reviewed its practices in view of prior discussions with the Canadian Bankers Association and in view of Decision No. 104. 4
Therefore, I expect the Bank can advise me within five working days of receipt of this decision of the measures that it has taken to ensure accurate and complete disclosure of its promotional credit card offers, including the one in issue. I will monitor this issue closely and I will be vigilant if the requisite remedial action has not been prompt and effective.
Ottawa, March, 2009
Financial Consumer Agency of Canada
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