Amount of non-interest charges and the date on which those charges take effect

Background

Section 11 of the Cost of Borrowing Regulations requires that federally regulated financial institutions (FRFIs) disclose, at the time of credit card solicitation, the amount of any non-interest charges in connection with the credit card and the date on which those charges take effect.

In light of this requirement, the Financial Consumer Agency of Canada’s (FCAC) Compliance and Enforcement Branch (CEB) undertook an inquiry into the federally regulated credit card industry’s practices in disclosing the date on which the amount of any non-interest charges take effect.

Scope of industry review

CEB reviewed industry practices regarding how fees are disclosed in credit card applications, promotional offers and telephone solicitations. It reviewed documents to identify whether the amount of any non-interest charges and the date on which those charges take effect were present in the required disclosure and the manner in which these items were presented.

The regulations state that, where applicable, FRFIs must disclose the amount of non-interest charges and the date on which those charges take effect

• on the application form
• at the time of solicitation
• at the time of application when it is done over the telephone or any electronic means
• by providing the information at a toll-free number (before January 2010).

During this review, CEB also considered readability: specifically, the ease of understanding when the amount of non-interest charges takes effect.

Disclosure practices

The review findings identified a spectrum of practices used by financial institutions when disclosing the amount of non-interest charges and the date on which those charges take effect. They include:

• full disclosure of the amount of non-interest charges and the date on which those charges take effect
• full disclosure of the amount of non-interest charges but without any mention of the date on which those charges take effect
• full disclosure of the amount of non-interest charges and easy-to-understand identification of the time period during which those charges take effect
• full disclosure of the amount of non-interest charges and an approximate time period on which those charges take effect
• use of toll-free numbers to disclose the amount of non-interest charges; however, in all these cases, there was no disclosure of the date when non-interest charges take effect.

Best practices

The review highlighted several best practices with regard to disclosing the date on which the amount of any non-interest charges take effect.

General

• The number of compliance issues observed was significantly lower when the institution used consistent disclosure information in all relevant documents (for example, cardholder agreements, telephone scripts and promotional offers).

Written disclosure

Several characteristics of disclosure contributed to the readability and clarity of the information disclosed:

• specifying the number of days after which the fees would take effect, rather than using words such as “shortly after” or “soon after”
• providing clear information advising the consumer that the annual fee will be charged regardless of card activation
• using larger font sizes, more white space, detailed headings and tables
• using clear, concise and easy to understand language.

Those documents that appeared to follow FCAC clear language principles guidance often proved to be much more reader friendly.

The guidance can be found at the following link:

FCAC Commissioner publishes Clear Language and Presentation Principles and Guidelines for the Industry and information box examples following amendments to the Cost of Borrowing Regulations.

Verbal disclosure

Verbal disclosure followed by a requirement for the consumer to consent before the institution can proceed with the telephone application enhanced disclosure to consumers, because it allowed the consumers an opportunity to accept or decline the credit card once they became aware of the amount of non-interest charges and the date those charges take effect.

Impact of recent amendments to the Cost of Borrowing Regulations

Recent amendments to the Cost of Borrowing Regulations that came into effect on January 1, 2010 will help improve the credit card industry’s practices in disclosing the date on which the amount of any non-interest charges take effect.

The following highlights the impact the new regulations will have on industry practices regarding how fees are disclosed in credit card applications, promotional offers and telephone solicitations.

Credit card applications including promotional offers

Credit card applications and promotional offers are directly affected by the new regulations. New regulatory requirements will help resolve the credit card application disclosure concerns identified throughout this industry review:

• FRFIs must include, in their credit card application forms, information boxes that include specific information for disclosure.
• FRFIs must disclose the amount of non-interest charges and the date those charges take effect in the information boxes as set out in Schedule 4 for credit cards.
• FRFIs can no longer use a local or toll-free telephone number on the application form or in a document accompanying it as a substitute for providing the information required by Subsection (1).

Telephone solicitation scripts

The amendments to the regulations do not directly impact how fees are disclosed in telephone solicitation scripts.

Conclusion

The Cost of Borrowing Regulations are clear that federally regulated financial institutions have an obligation to specify the amount of non-interest charges and the date on which those charges take effect.

All the financial institutions reviewed refer to the existence of non-interest charges within their credit card applications. However, while some disclose the date on which those charges take effect, this information is not presented consistently in all documents, nor is it always presented in a manner that is clear, simple and not misleading to consumers.

Disclosure provided to consumers in the context of promotional offers was the area where the greatest improvement is needed to meeting the regulatory disclosure requirement. Generally, the promotional offers reviewed disclose the amount of the non-interest charges; however, they do not disclose when non-interest charges take effect.

Similarly, in the context of credit card solicitation by telephone, the credit card telephone scripts reviewed disclose the amount of the non-interest charges; however, they do not disclose when non-interest charges take effect.

Overall, we conclude from this review that there are important improvements that should be made to the manner in which the industry discloses to consumers the amount of non-interest charges and the date on which those charges take effect.

Expected actions by FRFIs

In light of these conclusions, it is our expectation that FRFIs subject to the Cost of Borrowing Regulations will review their credit card practices in terms of disclosing the amount of non-interest charges and the date on which those charges take effect.

Each FRFI is responsible for ensuring full compliance with the disclosure requirements. Where changes are required to improve disclosure practices, it is FCAC’s expectation that all institutions will make all amendments required to their disclosure documentation or processes to ensure full compliance with the regulations.

Please note that FCAC will continue to review any consumer complaints received regarding this issue, in accordance with our complaints review procedure.