Decision #108

Commissioner's reasons for decision

(FCAC ACT, subs. 23(2))

Bank

File: XXXXX-XXXXX

This decision concerns compliance with the Cost of Borrowing (Banks) Regulations and a financing program offered by merchants by credit card.

On December 13, 2010, the Deputy Commissioner of the Financial Consumer of Canada (FCAC) issued a Notice of Violation to the Bank pursuant to subsection 22(2) of the Financial Consumer Agency of Canada Act (the Act). The Notice stated:

The letter accompanying the Notice of Violation proposed a Compliance Agreement seeking assurance from the Bank that it would comply with the regulatory requirements.

As permitted by paragraph 22(3)(b) of the Act, the Bank responded with written submissions dated January 19, 2011.

I have carefully reviewed the file, including the Bank's written submissions. Based on a balance of probabilities, the Bank has contravened the legislation, and I have decided to impose an administrative monetary penalty of $150,000. Moreover, the Bank's name will not be disclosed to the public.

Applicable Legislation

Paragraph 452(2)(e) of the Bank Act states:

Paragraphs 10(3)(a) and 10(3)(d) of the Cost of Borrowing (Banks) Regulations states:

Paragraphs 12(5)(a) and 12(5)(c) of the Cost of Borrowing (Banks) Regulations states :  

Section 21 of the Cost of Borrowing (Banks) Regulations states:

Paragraphs 157(2)(e) and 157(2)(f) of the Bank Act state the following:

Facts

Introduction

On December 18, 2009, the Deputy Commissioner issued a Notice of Violation to the Bank listing five violations of the Cost of Borrowing (Banks) Regulations. In response to the Notice of Violation, the Bank provided its submissions to the FCAC on January 21, 2010.

On February 10, 2010, the Deputy Commissioner sent the Bank a letter notifying it of the withdrawal of the Notice of Violation of December 18, 2009, which rendered it inoperative. She also asked the Compliance and Enforcement Branch to launch a new investigation in light of the new facts raised in the Bank's submissions.

The compliance officer's report, submitted on October 28, 2010, includes an analysis of the various compliance issues raised in the officer's initial compliance report submitted on November 30, 2009, the Bank's submissions and a conclusion based on the compliance officer's observations.

The financing plan

The financing plan allows consumers to pay for products and services in monthly instalments on their credit card. The program is offered by some merchants. The financing plan must be offered as a payment option by the merchant to the consumer at the time of acquisition of a product.

When an existing Bank customer is approved for the Financing plan program, the customer must fill out a coupon to select the number of months over which the borrowed amount will be repaid. The customer must also have a sufficiently high balance of available credit on his or her credit card to be approved. If the available balance is not sufficient to make the purchase, the customer must approve an increase of his or her credit limit to be able to take advantage of the program. Once the increased credit limit has been approved, the total purchase price is paid to the merchant (according to the Bank's normal compensation procedures) and various monthly instalments are charged to the customer's credit card and are subject to the same conditions as a purchase charged to the account.

When a new customer of the Bank and merchant has been approved for the Financing plan program, a credit card application must be completed to be able to participate in the program. The application is faxed to the Bank for approval. Once the approval has been confirmed (a relatively short process identical to that used for a credit card), the total purchase price is paid to the merchant (according to the Bank's usual procedures) and various monthly instalments are charged to the customer's credit card, subject to the same conditions as a purchase charged to the account. The customer must also fill out a coupon to select the number of months over which the payments will be spread out.

In both cases, the customer receives a letter from the Bank containing the following statement: [translation] "Your monthly statement will indicate purchases made with your card as well as your purchase made using the financing plan solution."

Amount appearing on credit card statement

The total amount of the purchase never appears on the consumer's statement. The consumer's monthly instalment is listed among the purchases; the statement indicates the amount of the instalment to be paid and the total number of instalments, in the following format: [translation] "Club Voyages purchase $200 1/6". The minimum payment represents 3% of the balance owing on the monthly statement (balance including the monthly the financing plan instalment). If the balance owing on the monthly statements is not paid in full, the balance of the purchases, including the monthly the financing plan instalment, would bear interest at the card's interest rate.

This excerpt from the legal opinion provided with the Bank's submissions of January 21, 2010, describes as follows the process for posting the monthly the financing plan instalments to the customer's credit card statement:

The customer may contact customer services at any time to find out how many the financing plan instalments are outstanding as well as the remaining credit card balance. The customer must make a specific request to find out the number of instalments remaining and the balance of the financing plan amount separately from the credit card balance.

Cancellation of the financing plan and credit card

If the customer wishes to pay the full balance of the financing plan before it comes due or to cancel the credit card and therefore pay the full balance of the financing plan before it comes due, he or she may do so through the Bank's customer services. The payment can be made by cheque or some other form of payment. The customer then receives a credit card account closing letter.

When a customer's credit card account (whether or not it includes thefinancing plan) is overdue, the Bank sends the customer a notice indicating the amounts owed. Then, if the customer still does not pay, the Bank's credit card debt recovery procedure (whether or not the account includes the financing plan) is engaged.

Advertising for the financing plan

The Bank does nothing to promote the financing plan. The merchant produces its own advertising, which must be approved by the Bank before being posted. An agreement between the merchant and the Bank governs the process of approval, advertising and offer for the product.

Nature of the financing plan product

According to section 8 of the Cost of Borrowing (Banks) Regulations, when entering into a credit agreement for a loan for a fixed interest rate, the bank must provide the borrower with a disclosure statement that includes the information listed in paragraphs 8.1(a) to (q) of the Cost of Borrowing (Banks) Regulations. Although most of the items listed in these paragraphs apply to the financing plan, the Bank and the merchants do not issue a disclosure statement. However, a credit card application (in the case of a new customer), a credit agreement and a monthly statement are provided to the customer.

According to sections 11 and 12 of the Cost of Borrowing (Banks) Regulations, the Bank must provide the borrower with an application form, a credit agreement and a periodic statement including certain of the items governed by the Regulations. The Bank and the merchant provide these three documents to the customer during the approval process for the financing plan and over the course of the program's use.

Moreover, the features of the credit card issued to the customer remain the same when the financing plan is approved; in other words, the card will have:

• the same credit limit;
• the same application form;
• the same credit agreement;
• the same periodic statement;
• the same interest rate; and
• the same account number.

In light of the clarifications made by the Bank, I conclude that the financing plan is not a promotional offer, but rather a type of the financing plan delivered by credit card that is an integral part of that card.

The bank's submissions

The Bank's written submissions submitted on January 19, 2011, challenge the first, second, fifth and sixth violations listed in the Notice of Violation. These written submissions also include an action plan addressing all six violations in the Notice of Violation. No argument is raised in the Bank's written submissions to challenge the third and fourth violations listed in the Notice of Violation.

Discussion

The first violation (subsection 6(4) of the Regulations)

Subsection 6(4) of the Cost of Borrowing (Banks) Regulations states that any disclosure of information made a bank must be made in language and presented in a manner that is clear, simple and not misleading. Subsection 6(4) includes a set of requirements related either to language or to presentation. Each requirement has its own content. Compliance with one requirement does necessarily not imply compliance with all of the requirements. For example, information may be disclosed in simple language, but if its presentation is incomplete and omits essential elements, it may lack clarity and be misleading.

The fact that the Bank does not disclose the initial purchase amount on the customer's monthly statement does not simplify the customer's understanding of the product, as information is missing. Furthermore, the customer must expressly ask customer services for the balance of the financing plan to receive that amount separately from the credit card balance. Also, the statements "interest-free" and "0% interest" mislead the customer, as the instalments are charged to his or her account like any other credit card transaction, at the same interest rate (generally between 18% and 19%). Finally, the failure to disclose non-interest charges may also mislead the customer, who does not expect this product to be subject to charges, especially given the "no-fee" claim included in the advertising.

The Bank has not challenged this violation, maintaining instead that if it is also in violation of its obligation under paragraph 12(5)(a) to disclose the full initial purchase price for "each transaction" in the monthly statement, it should not be penalized twice for the same alleged violation. It adds that, starting in October 2011, it will disclose the full initial amount of purchases made under the financing plan on the monthly statement.

However, that only responds to one aspect of the failure to meet the language and presentation requirements of subsection 6(4) regarding the language in the circumstances. As the compliance officer indicated in the report, it is not only the monthly statement, but also the promotional material that lacks clarity, at least from the perspective of the card holder. For example, the financing plan advertisement on the Club Voyages website states: [translation] "No interest will be charged during this period. Unpaid instalments, however, will bear interest at the rate of the credit card issued by the Bank." This implies that if the card holder makes the monthly financing plan payments in full and on time, there will be no interest to pay. However, this is not necessarily the case. If the customer has a monthly balance on his or her credit card as a result of other purchases and does not pay them off in full, he or she must pay interest not only on that balance but also on the unpaid balance of the initial financing plan purchase. In other words, the credit card holder must be completely up to date in his or her financing plan payments and all other credit card purchases and advances to avoid paying interest on the financing plan purchase. There is no information in the monthly statement that would enable a credit card holder to understand this.

In this case, the failure to disclose the full amount of a purchase made with the financing plan on the monthly statement and the failure to disclose clearly that interest may apply to such a purchase do not meet the requirement that the disclosure be made in language and presented in a manner that is clear, simple and not misleading. I conclude that the Bank has violated subsection 6(4) of the Cost of Borrowing (Banks) Regulations.

The second violation (paragraph 12(5)(a) of the Regulations)

Paragraph 12.5(a) of the Cost of Borrowing (Banks) Regulations states that a bank must provide borrowers with a statement, at least once a month (monthly statement), that contains an itemized statement that describes each transaction and discloses each amount credited or charged, including interest, and the dates when those amounts were posted to the account.

When the financing plan is obtained by a customer, the initial amount borrowed (e.g. $1,200) is paid directly to the merchant to pay for the product or service purchased by the customer. After that, the monthly instalments (e.g. 6 instalments of $200) selected by the customer are charged to his or her monthly credit card statement. However, the total amount of the customer's purchase ($1,200) is never listed on the customer's statement. However, this purchase price reduces the customer's credit card limit (in this case, by $1,200).

Again, the Bank is not directly challenging this alleged violation. It simply argues that it should not be penalized for the same alleged violation under both subsection 6(4) and paragraph 12(5)(a). As stated above, the Bank adds that, starting in October 2011, it will disclose the full initial amount of purchases made under the financing plan on its monthly statements.

This acquiescence aside, given that the initial purchase price reduces the credit card limit, it constitutes a charge to the credit account. It follows that by failing to disclose all of the transactions or amounts credited or charged to the account, the Bank is in violation of paragraph 12(5)(a) of the Cost of Borrowing (Banks) Regulations.

The third violation (paragraphs 10(3)(a) and 12(5)(c) of the Regulations)

According to paragraphs 10(3)(a) and 12(5)(c) of the Cost of Borrowing (Banks) Regulations, a bank must, at least once a month, provide the borrower with a statement that discloses the period covered.

The Bank's monthly statements indicated a "statement date" and a "due date", but they did not indicate the complete period covered by the monthly statement. In theory, the period covered by a monthly statement corresponds to a one-month period. In this case, the Bank did not disclose the period covered by the monthly statement by including a start date and an end date.

In its written submissions, the Bank does not challenge this alleged violation. It states that it solve the problem since September 1, 2010. Accordingly, I conclude that a violation has been committed.

The fourth violation (paragraph 12(5)(c) of the Regulations)

According to subsection 12(5) and, more specifically, paragraph 12(5)(c) of the Cost of Borrowing (Banks) Regulations, a bank that issues credit cards must provide borrowers with disclosure statements on a regular, periodic basis, at least once a month, that include the sum for non-interest charges. The English wording of the provision establishes the requirement clearly: "the sum for purchases, credit advances and interest and non-interest charges" [emphasis added].

Paragraph 12(5)(a) is included in the Regulations to require that each amount credited or charged be disclosed, namely, the sum for purchases, credit advances and interest and non-interest charges. If the objective of paragraph 12(5)(c) were to require the disclosure of each of these charges and not the sum of these charges, 12(5)(a) would serve no purpose.

In its written submissions, the Bank does not challenge this alleged violation. It states that it will attempt to solve the problem by April 2012. Accordingly, I conclude that the violation has been committed, but I cannot accept that it will require an additional fourteen months to resolve this issue. I will ask the FCAC's Compliance and Enforcement Branch to work with the Bank to help it achieve full compliance more quickly.

The fifth violation (section 21 of the Regulations)

Section 21 of the Cost of Borrowing (Banks) Regulations states that a bank that makes a representation of the annual interest rate or the amount of any payment or non-interest charge in a credit card advertisement must also disclose the annual rate of interest and any initial or periodic non-interest charges. Furthermore, this information must be displayed at least as prominently as the representation and in the same manner, whether visually, aurally, or both.

It should also be noted that the advertisements on the Internet say the following: [translation] "Obtain no-fee, interest-free financing and pay in six equal instalments (Bank the financing plan). Moreover, the statements "interest-free" and "0% interest" mislead the customer, as these instalments are charged to his or her account like any other credit card transaction, at the same rate of interest (generally between 18% and 19%). Finally, the failure to disclose non-interest charges can also mislead the customer, who does not expect fees to be associated with the product, particularly given the "no-fee" statement made in the advertising.

However, the financing plan can be applied to any of the Bank's credit cards, and most of them include non-interest charges, such as annual fees.

In its written submissions, the Bank acknowledges that it is the participating merchants and not the Bank itself who are responsible for advertising the financing plan. However, the Bank and the merchants reached an agreement whereby any advertising is subject to the Bank's approval. The merchants are acting as intermediaries or agents of the Bank when they promote the Bank's credit cards. In the circumstances, the merchants' role cannot justify the Bank's failure to comply with its legal obligations.

The fact that Bank, through the merchant, mentions "no-fee" financing in its advertising or remains silent on this point violates section 21 of the Cost of Borrowing (Banks) Regulations.

The sixth violation (paragraphs 157(2)(e) and (f) of the Bank Act)

Paragraphs 157(2)(e) and (f) of the Bank Act states that the directors of a bank shall manage or supervise the management of the business and affairs of the bank by:  

During the meeting between the FCAC and the Bank, the FCAC showed the Bank two advertisements found on the Internet that included the statements "interest-free" and "0% interest" in association with the financing plan program. The Bank stated that the advertisements had been produced by franchises of the participating merchants that did not follow the Bank's advertising approval procedures, and that the Bank had therefore been unaware that these advertisements had been posted. Since our meeting, the Bank has undertaken a review of the advertisements posted by merchants on the Internet.

Legal agreements exist between the merchants and the Bank stating that the merchants must consult with the Bank before posting any advertising that includes the Bank's logo and products. However, it appears that the Bank had no monitoring system in place to ensure that these mechanisms and procedures were followed. Moreover, an old advertisement dating back to 2008 and including the statement "0% interest" was found on the Internet, indicating that the procedures had not been monitored for some time.

In its written submissions, the Bank explained that the participating merchants have networks including points of sale, retailers, franchises or agents. The two advertisements brought to the Bank's attention by the FCAC had not been approved by the Bank, which argues that finding a violation in such circumstances would be too harsh.

However, the Bank has not demonstrated that it has implemented procedures or systems to ensure that all the members of a merchant's network comply with the regulatory requirements governing appropriate disclosure to holders of the Bank's credit cards. For example, there does not seem to be any monitoring of the information or advertising distributed by the members of the merchants' networks. The requirements set out at subsection 157(2) of the Bank Act are clear. The Bank cannot absolve itself from its obligations on the basis of weak agreements with its merchant partners or the poor execution of such agreements.

I conclude that the Bank has violated paragraphs 157(2)(e) and (f) of the Bank Act.

Degree of Intention or Negligence

In my Notice of Decision dated April 21, 2009 (File No. 800-127348), I asked the Bank to advise me of the measures that it has taken to ensure accurate and complete disclosure of information relating to its promotional credit card offers.  The Bank completely stopped its promotional cheque offer but did not conduct any other review of its promotional credit card offers.  In light of this, FCAC had to review the Bank's promotional offers for the last six months.

Following this review, a compliance report was issued on November 30, 2009, which raised several compliance-related issues. The Deputy Commissioner issued a Notice of Violation against the Bank listing five violations of the Cost of Borrowing (Banks) Regulations.  The Bank then provided submissions.

Following receipt of the Bank's written submissions, the Deputy Commissioner decided to withdraw the Notice of Violation on December 18, 2009, and asked the Compliance and Enforcement Branch to launch a new investigation.

This decision is based on a new analysis by the compliance officer responsible for the new investigation. It should be noted that all of the compliance issues identified are systemic in nature. These issues affect all credit card consumers in respect of monthly statements and have an impact on all holders using the financing plan.

Although the Bank did indeed co-operate with FCAC throughout the review of promotional offers, the compliance issues identified in the report persist to this day.  Credit card holders still do not benefit from clear and explicit disclosure of the information regarding the financing plan and their monthly credit card statements.

Furthermore, during the meeting held between the FCAC and the Bank to clarify certain information regarding the financing plan, the FCAC produced documents found on the Internet that included the statements "interest-free" or "0% interest". As the Bank confirmed, these statements do not reflect the true conditions of use of the product. It is important to emphasize that the Bank has not had any system set up for quite some time to monitor the established mechanisms and procedures. The Bank confirmed that following its meeting with the FCAC, it had initiated a review of the advertisements to follow up on the legal obligations assumed by the Bank and the merchants as a result of the agreements into which they entered.

Seriousness of Harm Done

The systemic violations described above adversely affect many of the Bank's consumers. These violations also deprive consumers of their legal right to full disclosure of information, presented in a manner that is clear and concise, as prescribed by the Cost of Borrowing (Banks) Regulations. A consumer may be misled by the information currently provided by the Bank and thus unable to understand the financial product. This lack of explicit information may also lead to a lack of understanding of:

• the financing plan program
• advertisements for the Bank's credit cards
• the period covered by the monthly credit card statement
• non-interest charges applying to the monthly credit card statement

It should also be noted that the Bank did not have any system in place to monitor the merchants' compliance with the clauses regarding advertising contained in the legal agreements entered into by the Bank and the merchants. It is certainly important for the Bank to have policies and procedures in place; however, it is equally important that it set up monitoring mechanisms to ensure that its instructions are followed regarding the disclosure of the correct information to consumers. The Bank's failure to do this raises serious concerns on the part of the FCAC with respect to compliance.

Compliance history over a five-year period

The FCAC notes a previous compliance violation by the Bank (File No. 800-73939).

Conclusion

I find that the Bank committed five violations of the Cost of Borrowing (Banks) Regulations and one violation of the Bank Act.

I note a degree of negligence on the part of the Bank. This has caused prejudice to its customers. This is not the Bank's first violation related to the cost of borrowing. I am therefore imposing an administrative monetary penalty of $150,000.

As stated in the letter accompanying the Notice of Violation, a formal Compliance Agreement will assist the Bank with its ongoing efforts to satisfy the legislative requirements.

It is not my intention to publicize this case pursuant to section 31 of the Financial Consumer Agency of Canada Act.

Ottawa, March 1, 2011

Ursula Menke

Commissioner

Financial Consumer Agency of Canada