On December 3, 2013, there were two significant developments relating to financial consumer protection: the release of Canada’s Financial Consumer Protection Framework: Consultation Paper (the Consultation Paper) and the publication of the final Prepaid Payment Products Regulations (the Regulations). The Consultation Paper and the Regulations are both outgrowths of commitments made by the Government of Canada in Economic Action Plan 2013 relating to enhancing protection of financial consumers.
The Consultation Paper seeks views on elements that could strengthen Canada’s financial consumer protection framework and related policy issues. A number of the proposals outlined in the Consultation Paper could, if adopted, have significant implications for federally regulated financial institutions. Comments on the Consultation Paper are to be provided by February 28, 2014.
The Regulations introduce a number of consumer protection measures relating to prepaid products and will come into force on May 1, 2014.
The Consultation Paper states that the Government’s goal is to create a financial consumer code that will:
- better protect consumers of financial products and ensure that they have the necessary tools to make responsible financial decisions;
- be adaptable to suit the needs of consumers of today and tomorrow in a rapidly evolving and innovative financial marketplace;
- respond to the realities of a digital and remote banking environment and the needs of vulnerable Canadians;
- provide the exclusive and comprehensive consumer protection regime that applies to products and services offered by banks, and be the basis for consumer protection for federally regulated financial institutions that offer similar products and services, replacing a currently dispersed mix of legislation and regulations;
- be simple and clear in providing expectations for the accountability of financial institutions; and
- be enforceable and provide criteria by which actions can be assessed.
With respect to the fourth point above, it is not clear to what extent the proposed code would streamline/rationalize the current regime as opposed to adding an additional set of requirements.
Establishing a Comprehensive Set of Principles for Consumer Protection
The Consultation Paper states the Government is considering the merits of adopting standards or principles and asks whether the Government should adopt a set of principles to govern financial consumer protection that would be applicable even where specific regulations have not been enacted and, if so, how a set of principles should be administered.
Referencing international developments, including the G20 High-Level Principles on Financial Consumer Protection, the Consultation Paper discusses potential principles relating to the following: (a) financial institution stewardship of the consumer’s interest; (b) access to financial services; (c) disclosure; (d) responsible business conduct; and (e) mechanisms for redress and complaint handling.
Canadian financial institutions are used to principles-based regulation, but may have concerns about what any new principle that is adopted will entail and whether it could increase the potential scope of liability to customers.
Possible Enhancements to the Existing Framework
The Consultation Paper addresses a number of possible enhancements to the existing consumer protection framework, including those noted below.
- Seniors and other vulnerable Canadians - The Consultation Paper states that seniors and other vulnerable populations can be susceptible to financial fraud, mis-selling and poor financial outcomes due to limited capacity, knowledge or education when making financial decisions. The Consultation Paper asks about the unique challenges faced by vulnerable populations and how the consumer code should address these challenges.
- Responsibility of Financial Institutions to Consumers - The Consultation Paper notes that the existing consumer protection regime is detailed and prescriptive and does not contain a general expectation for the degree of responsibility financial institutions should have to consumers. The Consultation Paper notes that other jurisdictions have adopted principles such as a requirement for institutions to act in the best interests of consumers or to treat consumers fairly and asks whether it would be useful to have a statutory standard of responsibility for financial institutions to consumers and, if so, what level of care consumers should expect. The adoption of a “best interests” or similar standard has the potential to significantly alter the relationship between financial institutions and their customers, and raises questions about a potentially expanded scope of liability.
- Supervisory Powers for Accountability and Enforcement - The Consultation Paper discusses the existing powers of the Financial Consumer Agency of Canada (FCAC), including the powers to seek compliance agreements and impose administrative monetary penalties. The Consultation Paper notes that some jurisdictions allow the supervising agency to direct the financial service provider to provide for a scheme of redress, which could include compensation, and states that the Government is considering possible legislative amendments to allow the FCAC to better supervise and enforce consumer protection provisions. Empowering the FCAC to require financial institutions to provide compensation or other forms of redress would be a major change to the current regime and a significant expansion of the FCAC’s mandate.
- Innovation - The Consultation Paper observes that banking products and services have evolved significantly over the last few decades, including because of digital and mobile technology innovations, and that this highlights the need for the financial consumer protection framework to be technology-neutral.
- Disclosure About Financial Products and Services - The Government is seeking views on what key information elements are needed and what are the most effective forms of disclosure. The Consultation Paper also asks whether there are products or circumstances for which disclosure is not sufficient to provide consumers with the information necessary to make responsible financial decisions.
- Access to Financial Services - The Consultation Paper asks how the code could ensure reasonable access to basic banking services for all Canadians.
Continuing the Conversation: Engagement
The Consultation Paper discusses the potential use of an advisory group to facilitate ongoing collaboration between the public and private sectors and asks how consumers and consumer groups could best contribute to these processes and what their role might be.
Prepaid Payment Products Regulations
The Regulations address prepaid payment products, which are defined as physical or electronic payment cards that can be loaded with funds and used to make withdrawals or purchases.
The Regulations set out a number of requirements in relation to prepaid payment products, including the following:
- disclosure of certain key information in any document the issuing institution prepares for the issuance of the product, including any exterior packaging of the product;
- disclosure regarding fees must be presented in an information box that appears prominently on any exterior packaging and other documentation issued prior to issuance;
- information pertinent to continued usage must be available, including where to access the full terms and conditions and a toll-free number to access the remaining balance;
- all disclosure must be clear, simple and not misleading;
- expiry of funds is generally prohibited. There is an exception for promotional products;
- maintenance fees may not be imposed for one year after activation of the product. There is an exception or promotional products. As well, in response to comments on the draft Regulations, the final Regulations allow for maintenance fees on reloadable products with the express consent of the product holder; and
- fees and interest charged with respect to overdrafts are prohibited without express consent of the product holder.
The Regulations apply to all federally regulated financial institutions that issue prepaid payment products.