Commissioner’s reasons for decision
(Financial Consumer Agency of Canada Act subsection 23(2))
This decision concerns non-compliance of credit card disclosure with the Cost of Borrowing Regulations.
In December, 2012, the Deputy Commissioner of the Financial Consumer Agency of Canada (FCAC) issued a Notice of Violation to a bank pursuant to subsection 22(2) of the Financial Consumer Agency of Canada Act (Act). The Notice of Violation stated:
I have reasonable grounds to believe that the bank has committed four violations by contravening Paragraphs 12(1)(a), 10(3)(d), 12(5)(a) and subsection 6(4) of the Cost of Borrowing Regulations.
The Bank failed to comply with the following regulatory requirements:
- Paragraph 12(1)(a) of the Cost of Borrowing Regulations — the bank failed to disclose the manner in which interest is calculated in the initial disclosure statement
- Paragraph 10(3)(d) of the Cost of Borrowing Regulations — the bank failed to disclose the interest rate that applied during the period on the monthly statement
- Paragraph 12(5)(a) of the Cost of Borrowing Regulations — the bank failed to disclose the date interest was posted to the account on the monthly statement
- Subsection 6(4) of the Cost of Borrowing Regulations — the bank failed to provide disclosure that is clear, simple and not misleading
The Deputy Commissioner proposed a penalty of $225,000 for the violations.
In January 2013, the bank provided written representations in response to the Notice of Violation.
I have carefully reviewed the file, including the bank’s written representations in which it does not dispute committing the violations. I find on a balance of probabilities that the bank has committed the four violations set out in the Notice of Violation. I have taken into account the bank’s written representations and considered the degree of intention or negligence, the harm done by the violations and the bank’s compliance history, and impose an administrative monetary penalty of $225,000.
Cost of Borrowing Regulations (the Regulations)
6(4): Any disclosure that is required to be made by a bank under these Regulations must be made in language, and presented in a manner, that is clear, simple and not misleading.
10(3): Subject to subsections (4) and (5), the bank must, at least once a month, provide the borrower with a subsequent disclosure statement that contains the following information:
(d) the annual interest rate that applied on each day in the period and the total of interest charged under those rates in the period;
12(1): A bank that enters into a credit agreement for a credit card must provide the borrower with an initial disclosure statement that includes the following information in addition to that required by paragraphs 10(1)(a) and (c) to (k):
(a) the manner in which interest is calculated and the information required by paragraph 11(1)(a);
12(5): Subject to subsections (8) and (9), 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 paragraphs 10(3)(a) and (d) to (h) 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.
Beginning in December 2010, the Compliance and Enforcement Branch (CEB) of FCAC initiated an investigation into numerous consumer complaints and self-reported complaints about the credit card disclosure provided by the bank. The investigation revealed the following compliance concerns as detailed in the Compliance Officer’s report dated December 2012:
Disclosure of manner in which interest is calculated in initial disclosure
The initial credit card disclosure statement provided by the bank to its customers describes the manner in which interest is calculated in the following way:
[The bank multiplies the average daily balance by the periodic rate. To obtain average daily balance, the bank takes the beginning balance of the account each day, adds any new transactions and subtracts any payments or credit. It then adds up all of the daily balances for the billing period and divides the total by the number of days in the billing period to obtain the average daily balance].
The disclosure clearly delineates the average daily balance (ADB) as a key component of how interest is calculated. However, CEB’s investigation revealed that this description does not reflect the actual calculation used by the bank to arrive at the ADB value.
The bank confirmed that the incorrect disclosure stems from an omission made during its implementation of new requirements set out in the Credit Business Practice Regulations, which came into force in 2010. The bank had correctly updated its systems to ensure that the interest calculation adhered to the new requirement to provide an interest-free grace period on all new credit card purchases during a particular billing cycle when the customer pays the full amount owing on or before the due date; however, it did not adequately update its initial disclosure to reflect this change. Due to this inaccuracy in the description of how the bank arrives at the ADB value in the initial disclosure statement, consumers did not have the requisite information regarding the manner in which interest is calculated.
Disclosure of annual interest rate on monthly statements
CEB’s investigation revealed that the bank disclosed a blended interest rate on its monthly statements where:
- the consumer’s interest rate changes between periods (e.g. due to an increase or decrease in prime lending rate), and
- the consumer does not pay the balance owing in full by the due date.
The blended interest rate disclosed is a combination of the rate applicable in the previous billing period and the rate that applied during the period—not the annual interest rate that applied on each day of the period.
CEB’s investigation also exposed that the bank disclosed an incorrect blended interest rate, because the formula it used to calculate the rate was based on an incorrect value. Moreover, the rate disclosed by the bank was lower than the rate that would have applied.
In response to CEB’s investigation, the bank agreed that while the amount of interest charged to customers and disclosed on monthly statements was correct, it should have disclosed the rate that applied on each day in the period. It indicated that [the disclosure would be amended so that] customers would see the annual interest rate for the current cycle on their monthly account statements.
Disclosure of date interest posted to the account on monthly statements
Since before the creation of FCAC in 2001, the Regulations have required banks to disclose the date when interest is posted to customers’ accounts on their monthly statements. CEB’s investigation revealed, however, that the bank did not disclose this date on monthly statements.
In response to CEB’s investigation, the bank has amended the monthly statement by adding the date interest is posted in the account activity section.
Position of the bank
In its written representations, the bank does not dispute that it committed the four violations as set out in the Notice of Violation. The bank stated that:
- there was no intent on its part to contravene the Regulations
- there was no financial harm to customers
- remediation has been completed for three of the four violations and a remediation plan has been formulated for the remaining violation
- it has no negative compliance history within the preceding five-year period
The bank submitted that a lower penalty than that proposed in the Notice of Violation be assessed.
I - Violations
I have reviewed the compliance officer’s report and I have fully considered the bank’s written representations in coming to the following determinations:
First violation: failure to disclose manner in which interest is calculated in initial disclosure
According to paragraph 12(1)(a) of the Regulations, a bank that enters into a credit agreement for a credit card must provide the borrower with an initial disclosure statement that includes the manner in which interest is calculated.
The bank’s initial disclosure statement states that it includes new transactions in arriving at ADB. It states that the bank multiplies this value by the periodic rate to calculate the interest charge. In fact, the bank applies an interest-free grace period on all new credit card purchases when the customer pays the balance in full on or before the due date. Therefore, the initial disclosure statement does not include a description of the manner in which interest is actually being calculated by the bank. The bank has confirmed this.
Accordingly, I conclude that on a balance of probabilities, the bank has committed the violation.
Second violation: failure to disclose annual interest rate on monthly statements
According to subsection 12(5) and paragraph 10(3)(d) of the Regulations, 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 annual interest rate that applied on each day in the period and the total of interest charged under those rates in the period.
When a customer’s interest rate changed between billing periods and the customer did not pay the balance in full by the due date, the bank did not disclose the interest rate that it applied on each day in the period on the customer’s monthly statements. Rather, the bank admitted that it disclosed a blended rate in those circumstances.
Consequently, I find that on a balance of probabilities, the bank committed the violation.
Third violation: disclosure of date when interest posted on monthly statements
According to paragraph 12(5) of the Regulations, a bank that issues credit cards must provide borrowers with supplementary disclosure statements on a regular periodic basis, at least once a month, that contain 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.
The bank’s monthly statements did not include the date when interest charges were posted to a customer’s account on the customer’s monthly credit card statements. The bank has confirmed this. Therefore, I find that on a balance of probabilities, the bank committed the violation.
Fourth violation: clear, simple and not misleading disclosure
Subsection 6(4) of the Regulations states that any disclosure required to be made by a bank under the Regulations must be made in language, and presented in a manner, that is clear, simple and not misleading.
The bank’s disclosure documentation contains several elements that were misleading for consumers. In particular, on reading their initial disclosure from the bank, consumers would have thought that the bank included new purchases when it determined the ADB value for the purpose of calculating interest. This, however, was not the case. Customers received misleading information regarding how the bank would calculate interest on their account.
In addition, the disclosure of a lower interest rate on monthly statements was based on an incorrectly calculated blended rate. As well, the omission of the date interest was charged to the account was misleading to customers.
Therefore, I find that the disclosure that was required to be made by the bank in these circumstances was not made in language and presented in a manner that is clear, simple and not misleading. The bank has not disputed this. I conclude on a balance of probabilities that the bank committed the violation.
Subsection 28(1) of the FCAC Act provides that due diligence is a defence in a proceeding in relation to a violation.
In its written representations, the bank has not expressly raised the defence of due diligence. The bank does state that
“our intent is always to fully comply with our legislative requirements.” A lack of intent to violate the regulations, however, is not sufficient to establish a defence of due diligence (Canada (Superintendent of Bankruptcy) v. MacLeod, 2011 FCA 4; Mega International Commercial Bank (Canada) v. Canada (Attorney General) 2012 FC 407).
Given my determination with respect to the bank’s negligence below, I conclude that the bank has not exercised the due diligence necessary to make out this defence in relation to the violations.
II - Penalty
Having concluded that the bank has committed the violations, I may impose a penalty taking into account the factors set out in s. 20 of the Act. As of May 2012, the maximum penalty for a violation committed by a financial institution has been increased to $500,000.
I have considered the bank’s written submissions on the proposed penalty, including the Commissioner’s decisions cited by the bank. I also acknowledge that the bank took remedial action at FCAC’s request. That said, in view of the following considerations, I do not believe that a lower penalty than that proposed in the Notice of Violation is warranted in this case.
Harm done to customers
While the bank’s customers have not suffered any direct financial harm, I cannot conclude that they have not suffered considerable harm.
A central principle underlying the cost of borrowing disclosure regime is that consumers should be in a position to understand how the bank actually calculates interest on their accounts. Without this knowledge, consumers will never be in a position to verify whether the bank made an error, nor to compare the charges with those of other financial institutions.
Yet, for over two years, the bank’s active credit cardholders were not provided with an accurate description of the manner in which the bank calculated interest, neither in the form of an initial disclosure statement nor as an amendment to initial disclosure. Consequently, for over two years these customers did not have fundamental information in relation to the costs of borrowing applicable to their accounts.
In addition, the bank informed CEB that [a certain number of] cardholders carry a balance on their credit cards in any given month. The bank did not have statistics on how many of those customers would have also experienced an interest rate change. Nonetheless, those customers who did carry a balance and who also experienced an interest rate change would have received monthly credit card statements that did not disclose the annual interest rate that applied during the period. In fact, the bank provided a misleading lower rate to customers. Without the information required by the regulations, these consumers would have been powerless to corroborate the amount of interest they were charged by the bank.
Also, in spite of a longstanding regulatory requirement, the bank has failed to disclose the date when interest is posted to a customer’s account on monthly statements. Consequently, the bank’s customers, especially those who carry a balance, have not been in a position to validate future interest charges.
Finally, the disclosure provided to consumers by the bank was misleading. Customers were led to believe that they were being charged incorrect amounts of interest. The above-average number of complaints that were received by both the bank and by FCAC is a clear indication that the bank’s misleading disclosure caused confusion and harm to its customers.
On the whole, I find that the bank’s failure to provide the required disclosure resulted in considerable harm to its customers.
Degree of intention or negligence
While I accept that the bank may not have intended to violate the Regulations, it cannot be said that the bank exercised due diligence or reasonable care to ensure compliance with the Regulations and to avoid harm to consumers. In fact, the bank could have done much more to avoid the violations and the harm that ensued.
The Regulations that are the subject of the violations have been in place for more than a decade. The bank informed FCAC in September 2010 that it was fully compliant with the new minimum grace period in the Credit Business Practices Regulations. But the bank was far from compliant with all regulatory requirements.
With respect to the issues related to initial disclosure, the bank contends that it made the necessary system amendments to allow for the mandatory minimum grace period for new purchases, as required by the Credit Business Practices Regulations. But while it conducted performance testing as part of the implementation to ensure that customers received the grace period and that interest was correctly calculated, there is little evidence that the bank took sufficient steps to ensure that amendments to its disclosure were made to reflect the new manner in which it calculated interest. The bank concedes that “additional test scenarios regarding the statement disclosures should have been part of the testing plan in order to avoid the inconsistencies between our system and the disclosures.”
All banks should have effective procedures in place to ensure that they identify any changes in the costs of borrowing and to ensure that, once they implement system changes, they also make the necessary amendments to disclosure. The fact that the bank did not have sufficient procedures and did not undertake such an exercise—when at the same time it indicated to FCAC that it was fully compliant—demonstrates a concerning lack of care to comply with the regulatory regime. It also raises serious concerns about how the bank approaches the implementation of new or amended regulatory requirements generally.
The bank advised CEB in June 2011 that:
- “consumer questions about ADB is one of the most common call types” and
- “it is one of the biggest dissatisfiers as agents don’t explain it adequately and customers get even more confused.”
Yet, in spite of the high number of consumer complaints and confusion in relation to its disclosure on monthly statements, until required by FCAC, the bank did not review its calculations nor its disclosure to determine if there were errors, if the disclosure was sufficiently understandable or if there was an underlying systemic compliance issue. Instead, in response to complaints, the bank offered customers a high-level explanation of the calculation, assured them that there were no errors and closed the files. Had the bank bothered to review the complaints, it may have identified and rectified the issues earlier, minimizing the confusion and harm to consumers.
Moreover, as a general principle, all disclosure that a bank makes to its customers should be accurate and clear to help bridge the gap between the often complex formulas and factors applied and the customer’s power to understand and reconcile the costs of borrowing. Once, for example, the bank decided to use an ADB value in its interest calculations, it had an obligation to ensure that any disclosure related to the use of this value was correct and not misleading, particularly where it had an impact on consumers’ understanding of other required disclosure.
As a final comment, banks are required by section 657 of the Bank Act to provide the Commissioner with information at the time and in the form required for the purposes of the administration of the FCAC Act and the consumer provisions. As soon as CEB made the bank aware of its concerns in December 2010, the bank should have reviewed its disclosure and provided timely and adequate responses to CEB’s inquiries. If it had done so, the identified compliance issues could have been resolved sooner, reducing the impact on consumers.
Overall, the bank’s failure to take appropriate steps to ensure that its disclosure complied with the regulatory requirements and to respond effectively to its customers’ complaints, as well as its lack of cooperation and diligence in responding to FCAC’s concerns, demonstrate an elevated degree of negligence.
The bank has had no violations in the past five years. I have considered this in my assessment.
The bank should have taken greater care to ensure compliance with the Regulations and to avoid the resulting harm to its consumers. Therefore, I am not persuaded in the circumstances that a lower penalty ought to be assessed.
To conclude, on a balance of probabilities I find that the bank has committed the violations set out in the Notice of Violation. I impose an administrative monetary penalty of $225,000.
Ottawa, March 26, 2013
Financial Consumer Agency of Canada
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