Decision #42416-644Q203

File: 42416-644Q203

Compliance issue

Cost of Borrowing — Failure to disclose manner in which interest is calculated/Failure to disclose information concerning any grace period that may apply
Bank Act, s. 452(2)(c)
Cost of Borrowing (Banks) Regulations, ss. 10(1)(f), 12(1)(a)

A bank did not accurately disclose in all cases how it calculated interest for its credit card accounts in its cardholder agreement. In some cases, the bank was using Method 1 to calculate interest on its customers’ credit cards, while the cardholder agreement disclosed that the bank was using Method 2.

For Method 1 the interest-free period for credit cards apply to new purchases only if the consumer pays their current month’s balance in full by the due date.

For Method 2 the interest-free period applies to new purchases only if consumers pay their current month’s balance in full by the due date, and have also paid their previous month’s balance in full by the due date (i.e., they are not carrying a balance from the previous month).

Paragraph 10(1)(f) of the Regulations provides that a bank that enters into a credit agreement for a line of credit must provide the borrower with an initial disclosure statement that includes the date on and after which interest accrues and information concerning any grace period that applies. Paragraph 12(1)(a) of the Cost of Borrowing (Banks) Regulations provides that a bank that enters into a credit agreement for a credit card must disclose to the borrower in an initial disclosure statement the manner in which interest is calculated. The manner in which the bank calculated interest charges did not correspond to the method disclosed in the credit card agreement.

Compliance measure(s) taken

Letter of Reprimand^{Footnote 1}  noting one violation against the bank.

Compliance considerations

The Financial Consumer Agency of Canada (FCAC) does not regulate the interest rates charged on credit cards. It does, however, ensure that there is proper disclosure of the interest rate and of the calculation. In this case, the disclosure was not accurate. However, no cardholder was charged interest not provided for in the cardholder agreement. There were no previous violations noted against the bank.

Corrective measures taken by financial institution

• At the time the Letter of Reprimand was issued, the bank was already in the process of changing their internal procedures to ensure they properly disclosed the way they charged interest and to inform their customers of the change.

Outcomes

By making certain that interest is calculated in the same manner as is described in a consumer’s cardholder agreement, the banks ensure that consumers have the correct information to understand the terms and conditions of their cardholder agreement. Informed consumers are in a better position to choose the financial institution and financial service or product that best suits their needs and banking habits. Facilitating comparison-shopping encourages healthy competition between financial institutions and promotes growth and innovation in the marketplace.