There is a limit on the rate of interest that lenders can charge borrowers in Canada. With two notable exceptions, interest rates above 60% annually are not legal.
The Federal Criminal Code, specifically Section 347, establishes a “criminal limit” of 60% interest, and defines the components on which that limit should be calculated.
The first notable exception is in Quebec. Judgments of the Court of Quebec have established that rates above 35% violate Section 8 of its Consumer Protection Act.
The second notable exception is for payday loans. Those products charge significantly higher rates of interest for short borrowing periods, typically less than a month.
When those products grew in popularity, both provincial and federal governments worked to create an exception to the Section 247 provision. Loans that met certain criteria (under $1,500, less than 60 days to repay) would not violate the Criminal Code, provided provinces had passed legislation to limit and enforce those loans.
To date, eight provinces have passed payday loan legislation. Quebec has not, relying on its 35% limit, while Newfoundland and Labrador has announced plans to legislate, but that process is incomplete.
That report notes another complication with enforcement. If a lender charges a rate of interest above the legal limits, how are consumers protected? Most provincial consumer protection offices indicate they have no ability to enforce in that area. The only potential for pro-active enforcement comes from the federal legislation.
Those looking for criminal enforcement are likely to be disappointed. In response to a query from researchers, the Federal Department of Justice indicated that the criminal interest rate legislation was introduced into Canadian law as a means to target loan sharking and was “not intended to act as a consumer protection tool.” The Criminal Code provision has led to “consumer protection” in instances when class action lawyers have mounted cases against lenders – these cases triggered the development of payday loan legislation – but not in instances when loans with rates higher than 60 per cent are offered in plain sight but without immediate evidence of the kind of threats sometimes associated with loan sharks to enforce repayment.
Why do People Fail to Act on Financial Plans, the first published report by the Behaviourally Informed Organizations partnership, takes a behavioural approach to help financial planners address two common issues that prevent Canadians from proper financial planning.
The report identifies two gaps, an inaction gap that keeps some from planning at all and an implementation gap that prevents those who have written plans from implementing them.
The BI-Org partnership includes 18 partner organizations, including the Consumers Council of Canada. The report was produced by the Behavioural Economics in Action Research Centre at the Rotman School (BEAR) at the University of Toronto.
The report presents a number of immediate benefits. It’s attractively designed, not too long with a 30-page “powerpoint-style” presentation format, and well-organized.
The report’s diagnosis and discussion of consumer types and forces that keep them from implementing plans is somewhat intuitive. Financial planners who have been in the practice for any length of time have likely experienced many of those behaviours, and may have altered their own approaches. They may not call them “naive intenders” but they almost certainly have encountered customers who are persuaded to plan but “simply need help in making things happen.” Planners may already have found approaches to turn those intentions into action.
Less intuitive will be the report’s components on the different approaches the planners need to adopt to improve results. The report poses a number of rhetorical questions. On choice architecture: “How do I embed positive choice architecture in the ongoing communication? Specifically, how can I frame my messages to elicit action?” On packaging the plan: “Should the plan be a consolidated detailed plan versus a collection of short-term brief plans?” On timing: “When is the right time to remind the client?”
The report doesn’t provide answers to those questions, which leaves it for the planner to develop. It also directs firms to consider working with behavioural experts. “We also encourage interested organizations to ‘start small’ in their interventions, relentlessly test, learn and adapt their ideas and build out experimentation capabilities over time.”
That will certainly test an industry where growth often comes from more immediate measures such as new products to sell, and new services to provide.
The report that focuses on implementation gaps and behavioural approaches of consumers may be challenged by the implementation gap it leaves for planners.
Canadians enjoy little protection against the high prices and sales practices of instalment lenders, whose loans challenge legal expectations, a just-released Consumers Council of Canada research report found.
Consumers, business, government and elected officials are all strained to know what the law expects and interpretations vary widely, the report found. However, some business practices observed across Canada appeared similar to those that prompted a cease and desist order issued September 13, 2017, by the British Columbia Superintendent of Financial Institutions against Western Life Assurance Company, Venue Financial Lt.d and Cashco Financial Inc.
As part of the research, the Council sent representatives to the premises of 93 instalment lenders across Canada and the websites of leading online lenders to conduct sales practices audits, to determine what takes place in practice.
Lenders engaged in a number of practices which placed consumers at a disadvantage, the research found.
Many lenders embed optional charges in quoted periodic repayment amounts, but leave it out of interest rate calculations. These charges often add 50% or more to the total amount repaid.
The audits identified that lenders frequently choose long loan durations, subtly inflate borrowed amounts, mis-inform borrowers about how interest rates work and can improperly adjust payment amounts for more frequent repayments, resulting in borrowers paying interest at higher rates than disclosed. The effectiveness of required contractual disclosures is blunted by industry practices that often prevent consumers from viewing the contract until they decide to take out the loan.
"Consumers would be better protected if there was some clarity about the Criminal Code usury limit," said Consumers Council of Canada President Don Mercer. "Most lenders price to this limit. Provincial governments should look seriously at licensing lenders, adding a suitability test for borrowers and limiting optional charges."
The report recommends that federal consumer literacy initiatives could address more directly the scenarios that lead to high-interest borrowing, and help consumers identify alternatives.
"The need to help Canadians better understand credit and fair terms for obtaining it is urgent," said Mercer. "The research found reason to fear Canadians are more commonly turning to expensive instalment loans without knowing the associated terms and conditions of agreements."
Consumers Council of Canada has received funding from Innovation, Science and Economic Development Canada’s Contributions Program for Non-profit Consumer and Voluntary Organizations. The views expressed in this report are not necessarily those of Innovation, Science and Economic Development Canada or the Government of Canada.