Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence - Meeting of February 2, 2005
OTTAWA, Wednesday, February 2, 2005
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill S-19, to amend the Criminal Code (criminal interest rate), met this day at 4:08 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: We are here to consider Bill S-19, a private senator's bill, to amend the Criminal Code with respect to the subject matter of criminal interest rates. We are delighted that a member of our committee has seen fit to bring this bill as quickly as she has to our committee for its deliberations.
This meeting is being televised for CPAC for distribution across the country. For the second or third time in Canadian history it is also being televised on the Internet live around the world. Your words will not only ring across the far corners of Canada from coast-to-coast-to-coast but from sea-to-sea-to-sea-to-sea.
Senator Harb: I think Toronto is a great city.
The Chairman: I appreciate that and thank you very much for hearing that accolade from my colleague, Senator Harb. We are delighted to welcome as our first witness the sponsor of this very interesting bill, the Honourable Madeleine Plamondon. Senator, the hearing is yours. We hope you complete your remarks in a reasonable period of time to allow the senators an adequate opportunity to cross-examine you on this bill. Senators, if you look at your schedule you must terminate this hearing by 6:00 sharp, which allows the senator an ample opportunity to present her bill and for us to cross-examine her. We then hope to hear from representatives of the Department of Justice and Industry Canada, but all before 6:00.
So without further ado, Senator Plamondon, the table is yours.
[Translation]
The Honourable Madeleine Plamondon, Senator, Sponsor of the Bill: Mr. Chairman, if you will, I will speak in French and begin by giving you a definition of usury. It is important to define the word “usury” as I see it in order for you to understand why I want to amend section 347 of the Criminal Code.
Usury occurs when a lender charges an excessive rate of interest compared to normal practice. A rate is excessive or abusive when it markedly differs from the usual practice. Long ago, money was considered as being a means of exchange and there was no interest. No community or culture charged interest. We may well wonder whether today there are still such communities left. You will probably hear from witnesses who will tell us whether this is the case since they will be experts in their field.
At one time in Canada, and throughout the 20th century, lawmakers never hesitated to intervene in order to protect borrowers who were being taken advantage of through abusive and excessive interest rates. As did its predecessors in 1906, 1939 and 1980, my bill invites the Senate, and then the House of Commons, to follow suit. We need to promote healthy competition, stop abuse, avoid excessive interest rates and take all fees into account.
What is the object of my bill? Its object is to amend two parts of section 347 of the Criminal Code. The first part is to reduce the usury rate to 35 points above the prime rate, and also to reflect today's reality. By using the floating rate formula, the usury rate will follow the fluctuations of the prime rate, and will therefore not become unrealistic if the prime rate changes. Today's prime rate is 2.5 per cent. Maintaining the usury rate at the level of 1981 is completely unacceptable and an invitation to abuse, of which I will provide you with some examples.
The choice of the number 35 reflects what is reasonable given the various fees which must be taken into account when the interest rate is calculated and given the various rulings handed down by Canadian courts in the area of criminal interest rates. Reporters have already told me that it should be at least 20 per cent, but 35 points above the Bank of Canada's base rate. According to my calculations, that number covers the risks which certain lenders may want to take.
In fact, by making this comparison, Quebec's Office de la protection du consommateur adopted a policy with regard to licensing lending institutions. According to the people we spoke to, the Office does not license any institution which charges interest rates over 35 per cent, including insurance fees. For the Office, it is a matter of public interest.
Legal decisions have pointed to the necessity of the Criminal Code reflecting today's economic reality. Indeed, common law courts have turned to the Criminal Code, as well as to other consumer protection laws, to protect borrowers from abusive conditions. In Quebec, the Civil Code and the Consumer Protection Act have been used to avoid excessive interest rates even when they were under 60 per cent.
It is important that the Criminal Code contain a section on usury rates. The code must reflect the values of our society. The second part the bill seeks to amend is the definition of the word “interest” as it reads in section 347. As it now stands, the definition excludes, when interest is calculated, the insurance fees paid by the borrower. But we know this is done automatically: insurance fees are calculated and interest is charged on those fees.
Nothing in our research has explained why insurance fees paid by the borrower are not taken into account when the interest rate is calculated; this is a paradoxical situation.
In short, there is a risk. The interest rate is to cover the risk. It is like saying: We will cover it twice, by requiring insurance on the balance of the loan, and we will lend you money for that insurance and charge interest too.
I knew when I accepted my appointment to the Senate — I have not been here very long, just over a year, and I have just over a year left — that I would ask to be a member of the Committee on Banking, Trade and Commerce. Why? Because for my entire life, I have defended ordinary citizens from abuse, and more specifically, in the financial system. There was the battle over bank fees. This battle that has begun must put an end to usury.
What else motivated me? A person in my region took out a loan from a finance company in September 2002 at an interest rate included in the contract. If I may, I will use a chart that explains the situation. You can see it here. The net amount is $4,468.09.
Senator Angus: It is a real example.
Senator Plamondon: It is a real contract, and I have brought a copy of the contract. It is taken from a real contract signed in 2002.
The net amount is $4,468.09. The interest charged is 35.99 per cent. That represents $4,018.68. The payment is spread over four years. The insurance premium that the borrower is required to take out is $1,055.37, divided as follows: the credit insurance for the loan is $232.85. That has nothing to do with life insurance that a consumer can keep and take home afterwards.
Senator Angus: It is credit insurance?
Senator Plamondon: Credit insurance on the balance.
The disability insurance is always on the credit; if our consumer were to become disabled, the insurance is $822.52. In all, that makes a total of $949.22, the interest on the $1,055. So, the total of the credit charges for the entire loan period is $6,023.27. The consumer, if he never makes any late payments — we know that with rates like those, people whose backs are against the wall can be late and cause these to increase — will have to pay back a total of $10,491.36, which is a real credit rate of 50.63 per cent. In Quebec, it is mandatory to record that as a credit rate. I want the credit rate to become the interest rate, since it is there to cover the same thing, the same risk.
That is why the first part of my bill is designed to reduce the criminal interest rate, and the second part is to include insurance.
Section 347 of the Criminal Code in its current form is outdated. When section 347 came into force, in 1981, the Bank of Canada rate was over 20 per cent. I do not know if you remember — generally, senators are old enough to remember that. That led to a very high credit rate. The direct result is that levels of debt are even higher. People cannot cope with the hardship and are forced to lengthen the period of a loan like that. In reality, they end up paying out amounts that are much higher.
What can you find in the market today? I would say that when I began my career defending consumers' rights, I was already battling finance companies. I am once again battling these companies. They are like weeds. In addition, a new industry is emerging, the alternative credit industry, which goes beyond finance companies. One of your witnesses is an association that represents finance companies, but that also includes all types of alternative credit. So there are finance companies lending money at exorbitant rates. Citizens' backs are against the wall and they must collectively turn to the courts. That is why there are so many class action suits in Canada, because people are fed up with this type of industry.
We might wonder why there has been such growth in credit of this type. The system we are in does not provide ready access to credit for small amounts. It is not profitable for a conventional financial institution to lend amounts of $100, $500 or $1,000. However, solutions become possible because of computerization. And the Canadian Bankers Association, which will be appearing before us, could tell us about some of them.
There was a time when welfare recipients could not open a bank account. Governments, together with the conventional financial sector, found ways and set certain conditions to increase the accessibility of bank accounts for everyone. Now we must find some solutions which do not put people further in debt, but rather help them out.
My bill is also based on what I have seen in other jurisdictions. In my speech at second reading of the bill in the Senate, I gave a few examples. I would remind you that in California, the criminal interest rate is 10 per cent; in Florida, 18 per cent; in Texas, 18 to 28 per cent; in New York, 16 per cent for civil cases and 25 per cent for criminal cases; in France, 20.85 per cent; in Italy 19.28 per cent; in Germany, 17.40 per cent. And our rate is 60 per cent. I think something needs to be done to reduce this rate and bring it more in line with reality.
In conclusion, I think we must do what the legislators of the previously mentioned countries did. We need to look at what constitutes usury, bring the rates down to a reasonable level, and include insurance in the definition of interest, because insurance is not taken out before a loan or after a loan, but rather as an integral part of the loan.
[English]
The Chairman: We will take questions, beginning with Senator Angus, Deputy Chair of the Committee.
[Translation]
Senator Angus: I would like to welcome you as a witness and congratulate you on this impressive initiative, Senator.
My question is quite simple. I just want to be sure that I understand correctly. At the moment, the criminal interest rate in Canada is 60 per cent. As you said, this provision is included in the Criminal Code.
Senator Plamondon: Yes.
Senator Angus: Is that the highest criminal interest rate in the world? You have done some research on this and mentioned a number of examples.
Senator Plamondon: I do not know if there are higher criminal interest rates. I did not look at all of them, but there are definitely some that are higher. I did not find a figure higher than 60 per cent in legislation.
Senator Angus: You chose a figure of 35 per cent above Canada's prime rate. You mentioned that some journalists asked you why you did not set it at 20 per cent, for example. Can you tell us that? I think your arguments are very impressive, but why were you satisfied with 35 per cent?
Senator Plamondon: It is true that 35 per cent is high. Some consumer groups also said that 35 per cent plus the prime rate is high. Once the prime rate goes up, the rate will be even higher. In order to be realistic and to make the market fair, I am trying to cover the real risk. So, for people who may need a loan and who cannot find one at a rate that more well-off people could negotiate, I think the figure I have chosen covers the real risk. I am not saying that this figure might not be considered excessive in some circumstances, but we are talking about a criminal interest rate. We must be careful here. So I preferred to lean toward safety and to use the rate of 35 per cent.
We contacted the Quebec Office de la protection du consommateur, which told us that licences are no longer granted to those who would provide loans to people at rates of over 35 per cent, including the insurance.
However, in order to determine that the rates are excessive, the lenders will have to be sued.
Senator Massicotte: Thank you, senator. I have read your reports and the submissions, and you have my support regarding the objective you are seeking.
However, the problem is with all the complications surrounding this objective. Let us assume that I am a usurer, and that someone wants to borrow $100 from me. I would say that to compensate for the loss of time spent filling in forms and the risk of non-recovery, for a $100 loan, I might ask for $10 in interest. So I would ask that that $110 be paid back to me in two weeks. That is not unreasonable for all the problems such a loan causes me. However, $10 for two weeks works out to an interest rate of 260 per cent.
My problem has to do with the business side of things, the participation cost, the convertible debentures, and in this case, depending on the success of the stock in question, the interest rate could exceed 50, 60 or even 70 per cent.
I would like to understand how this can be defined, if we exclude all these things, if the cost of the loan is $10 or $15, how can we achieve the objective without doing injury to these companies? We cannot force these companies to provide loans and to charge less interest than the cost of the loan. What is the solution?
Senator Plamondon: Some reports show that the interest was $15. Let me give you an example. A month ago, an Ottawa consumer told me that he paid $461.49 for a $350 loan for six days. That is far from the $15 figure. The trick is to impose the rate of 59 per cent, so as to be below the 60 per cent rate, and charge brokerage fees of $91.41. So much for your argument.
Senator Massicotte: I agree that this is excessive, but there are many cases where it would not be excessive. My example of a loan of $100 and an interest charge of $10 does not seem very high, but it is very high when you calculate the interest rate.
Senator Plamondon: We are never talking about $10 in the case of these companies. The brokerage fees are much higher.
Senator Massicotte: You say that it would be reasonable to charge $10, but in this case, the interest rate would be 260 per cent.
Senator Plamondon: I am opposed to the 260 per cent interest rate. Robbery is robbery. The punishment varies depending on the amount, but the fact remains that this is robbery. If you drive drunk, where the threshold is set at 0.8 mg/ml of alcohol in the blood, the situation varies depending on whether your blood/alcohol rate is 0.9 mg/ml or three times 0.8 mg/ml.
Senator Massicotte: If you are telling me it is illegal to lend $100 with brokerage fees of $10, I will stop doing that.
Senator Plamondon: You will stop doing that.
Senator Massicotte: But for consumers who need the money and who borrow against their future pay cheque from all the Money Marts of this world, which do offer a service after all, who is actually going to suffer?
Senator Plamondon: What service? You call that a service? It is not a service. The service could be provided in conventional banks if they could offer better access to credit, either a line of credit, overdraft protection or something else. You should not worry, financial institutions are very imaginative and would be able to recover these loans.
Senator Massicotte: You say that, but the manager of the caisse populaire is not interested in providing loans of less that $5,000 because of the administrative charges. This is something that has to be discussed.
Senator Plamondon: There was a time when some people could not open a bank account because it was not profitable. The departments consulted consumer groups and established a list of criteria for opening a bank account, and now everyone has access to a bank account. We must come up with solutions. And allowing loan sharking is not a solution.
Senator Hervieux-Payette: To clarify the interest rate, it appears that other costs are being added in.
In principle, to buy a car or something else, I take out a personal loan and I am told that the interest rate is 8 per cent, and I pay 8 per cent. It seems that the smaller the amounts, the more of a risk the consumer represents. The interest rate is a certain amount, and other charges are added and not calculated in the interest rate. In this case, we are talking about insurance. Does this insurance continue after the loan has been paid off? Is it directly linked to the loan? Does it ensure the lender or the borrower?
Senator Plamondon: That is the question we asked in making the proposal. The insurance provides coverage solely for the borrower's life and potential disability, for the term of the loan; so it covers the risk.
Moreover, in France, a European directive now states that insurance that is taken out at the same time as the loan must be part of the cost of the loan. Ideally, a consumer would go into a financial institution with his own insurance policy, use it to guarantee the loan, take it back after, and remain insured since he has paid the premium. In this example, you are taking out a loan, and at the same time, you are being told that the high interest rate is not enough. The 35.99 per cent rate is not enough. They are going to make you take out disability insurance on the loan and insurance on the balance. You obviously do not have money, since you have come to me for a loan at 35.99 per cent. So they will lend you money for the insurance at 35.99 per cent. That adds to the costs. It is like having a belt and suspenders.
Senator Hervieux-Payette: Apart from the insurance, are there other related costs or administrative fees that you want to include in the interest?
Senator Plamondon: I did not change the section 347 definition, I just added insurance. I did not invent section 347. The Criminal Code already includes certain fees in the definition of interest. I am adding insurance, because I consider it part of the fees related to the loan.
Senator Harb: What you have explained would probably not apply in Ontario, as we are required to indicate the total cost of the loan to the consumer, including administration fees, and insurance, etc. Have you done studies in all of the provinces?
Senator Plamondon: In Quebec there are contracts, and there is a disclosure requirement.
[English]
The Chairman: Senator, would you table the document to which you are referring? It is not part of our official record and it is important that we have it available to us. With your agreement, we will make it part of the official record.
[Translation]
Senator Harb: What we are discussing here is the loan shark market. We are not talking about the bank markets that we know or about micro-credit banks.
It is not a question of 4, 5, or even $10,000, because banks do not charge those amounts. We are talking about something that is outside the system. In developed countries or under-developed countries, European banks charge interest rates of about 40 per cent for micro-credit consumers.
According to your bill, that is criminal. But frankly, from what I have seen, it is not feasible for banks to lend such amounts at rates of less than 40 per cent, and they will not grant those loans because of the administrative costs. Moreover, what will happen is that the people who are benefiting will be affected negatively. Are you aware of that?
Senator Plamondon: When the Quebec Consumer Protection Act was first adopted, I was there, and we successfully asked for and obtained disclosure of all credit costs in real terms and in terms of rates. That is what I showed you, and that is what is contained in the contract that I will pass around.
We know that the interest rate is 35.99 per cent, but with all of the other costs, it goes up to 50.63 per cent. Saying it and not including it in the interest rate is the next issue that I want to address. There is disclosure, you are right, but if at some point the rate exceeds the criminal rate, what good does it do to disclose it? In that regard, if all I ask for is disclosure and I remove the notion of criminal interest rate, you can say that you are charging 400 per cent and that everything is just fine and dandy, but is that what we want for Canadians?
[English]
Senator Fitzpatrick: Thank you very much for presenting this to us. It raises many questions in our minds, and I am not sure we will get to all of them today. On the surface, 35 per cent seems high compared to some of the numbers you gave us for other jurisdictions such as California. California was 10 per cent. In other jurisdictions, for example, France, it goes as high as 85 per cent for small loans. It would be helpful if you could provide us with a more in-depth comparison of what rates are in Canada compared to some of the other jurisdictions, or we could do some research.
I also want to talk about the insurance costs, which seem to be a major part of this total cost. They represent 25 per cent of the interest that must be paid. Can you tell me if that insurance rate goes down if this is a term policy as the principle is reduced over a period of time, or do you have to buy one time for a four-year term? I think it was Mark Twain who said that it was the return of his money that he was interested in, not the return on his money. It seems to me that this is something you might pose to some of these organizations that are making these loans.
Can you provide information on a comparative basis that is more detailed than this? Can you also provide more information on how the insurance works?
[Translation]
Senator Plamondon: I can tell you right now that the amounts that are lent for insurance are always lent at a 35.99 per cent interest rate, since the money is a loan. It is part of the loan; there is a loan for the insurance. So the rate is 35.99 per cent. But if you count everything that has been lent, the total cost of the loan brings it up to a rate of 50.63 per cent. The insurance is a loan, you take out a loan to get insurance.
Senator Angus: It is added to the amount?
Senator Plamondon: Yes, it is added to the amount.
Senator Hervieux-Payette: It does not decrease.
Senator Plamondon: No.
[English]
Senator Fitzpatrick: It does not reduce as the loan reduces. It is a fixed cost which is part of the service for the loan.
[Translation]
Senator Plamondon: It decreases over time, and that makes it a decreasing annual rate. Rates are always annual. So it is always calculated on the balance. I have often showed this to consumers: when you do not pay one month, your balance will increase, so it is always the same rate, but you owe more in the end. If you wait three months before making a payment, you owe even more, because the interest is added to the balance.
[English]
Senator Fitzpatrick: I think I understand that, but I am not sure it answers the question on the insurance cost.
My question was: Do you have to buy the insurance for the four-year period of time based upon the loan amount at the time that you make the loan? The cost of insurance is not reduced as the principle of the loan goes down, as you are making payments for it.
The Chairman: Is it fixed?
Senator Fitzpatrick: Yes. Is it a fixed amount?
[Translation]
Senator Plamondon: It is a set amount. You will see it in the contract that I am going to pass around.
[English]
Senator Fitzpatrick: My other question is whether you can provide us with more definitive statistics on what loan costs are and a larger sample of countries for small loans and for large loans.
[Translation]
Senator Plamondon: If you are talking about small loans, are you talking about the traditional network or the alternative network?
[English]
Senator Fitzpatrick: Our concern here is for small loans. I will not put a number on that. Let us use the number that you used to define a small loan. How much do you pay in, say, France, California or other areas, for a loan of only $1,000 or $1,500, which you indicated people cannot get loans for? What are the interest rates for those types of loans in some of these other jurisdictions?
[Translation]
Senator Plamondon: You need to make a distinction between alternative credit and credit that exists in the banks or the traditional financial industry. For example, not long ago, the Chase Manhattan Bank, one of the largest banks in the United States, was concerned with the increase in alternative credit and offered money to credit unions for initiatives to offset the increase of all kinds of alternative credit with rates at 300 or 400 per cent. So it is not a question of monitoring the 400 per cent rate; that rate must be denounced and we must come up with solutions to prevent loan sharking. It is not a question of saying that some that will charge more than that. Do you see what I mean?
[English]
Senator Fitzpatrick: I think so. I am trying to compare apples to apples. If you are using other jurisdictions as a guide, then we need to have more information as to what actual costs are for loans at different levels in different jurisdictions so that we can then compare to see if what we are doing now is fair or if it is similar to what is happening in other countries.
[Translation]
Senator Plamondon: I gave you the research I obtained from the Library of Parliament. I could ask them to take a closer look at what you have asked for.
[English]
The Chairman: Some of this evidence might come up with other witnesses but as the sponsor of the bill, if you could direct your attention to that it would be helpful.
Senator Moore: Thank you, senator, for being here for this initiative.
With regard to your example board, what is $949.21 as a per cent of the total amount? What is included in other components?
[Translation]
Senator Plamondon: That is the interest that you pay on the insurance.
[English]
Senator Moore: That is the interest charged on the insurance?
[Translation]
Senator Plamondon: Yes, senator.
[English]
Senator Moore: I am stunned by that. I am speechless.
The Chairman: A brief question by Senator Angus.
[Translation]
Senator Angus: Are you satisfied with the wording in the second paragraph of your bill, and do you feel that the insurance is included? It is understood, in the summary, that the interest rate calculation would include the charges paid by a person to obtain insurance coverage. That is clear and unambiguous. But the current wording of this clause does not mention insurance. The clause deals with costs, but you have no doubt taken a close look at this part of the bill.
Senator Plamondon: What I prepared includes insurance.
Senator Angus: Why not use the word?
Senator Plamondon: In the bill itself?
Senator Angus: Yes.
Senator Plamondon: Well, of course, it is mentioned.
Senator Angus: I do not see it.
[English]
The Chairman: Turn to the explanatory notes. I think Senator Angus raises an important question.
Senator Angus: As a lawyer it is not covered.
The Chairman: It is dealt with in the explanatory notes. If you turn not to the bill itself, but to the explanatory notes.
Senator Angus: I read them. They are not part of the law.
The Chairman: It says, “...but does not include any repayment of credit advanced or any insurance charge....” It is excluded.
[Translation]
Senator Plamondon: We will put it back into the text of the bill.
Senator Angus: In clause 1 of the explanatory notes, which gives the definitions, it states that “The definition does not include any repayment of credit advanced or to be advanced.” I read the clause carefully and neither the word insurance, nor the cost of insurance, nor even brokerage is mentioned.
Senator Plamondon: The insurance charges.
Senator Angus: In my opinion, the explanatory notes and the summary are not part of the bill.
Senator Plamondon: In clause 1, in the text of the definitions, the term insurance charges is mentioned. It is written here.
Senator Angus: I do not see it in the bill that I have in front of me.
[English]
The Chairman: This is an important drafting question. I have a drafting question as well.
Senator Massicotte, maybe you might ask your question. By the way, Senator Plamondon, you will have an opportunity to respond in writing between now and the end of it or in the concluding comments. Do not take any question here that you cannot answer fully. We can receive your comments in writing or your verbal comments.
[Translation]
Senator Massicotte: The aim of the bill is to recognize that there is a segment of the population that does not have the means, or the education, and is not on equal footing with the lender, and therefore cannot truly understand the actual interest rates that are applied. I assume that we have this clientele in mind. Would you agree to having the larger lenders, the corporations, exempt from the criminal rate? If a company lends $10 million, an equity loan, and if the share value increases and they make a 75 per cent profit, would that disturb you or should we exclude these corporations from making personal loans?
Senator Plamondon: It is because we have the Charter of Rights and Freedoms. How can you justify asking someone to pay less than 60 per cent or more than 35 per cent, which is what is being put forward, and yet someone else might not have to pay the same rate?
Senator Massicotte: I have the honour of having taken a number of loans. I do not know if that is a good or a bad thing. From time to time, one signs an equity loan. One lends oneself money, a convertible debenture, if you will, and this can be converted to shares in the company if things go as planned. The value of the share increases, and the lender converts the loan into shares. He would therefore make 75 per cent on his money. I am very happy, as well, since I have made a lot of money. I shared my future profits. That does not offend me. I was aware of the loan, and of the condition. This bill will not apply in my case. I am aware of the interest rates. I assumed the risk. I knew that, at worst, I would be paying 8 per cent and not 75 per cent. In that case, people who knowingly take these risks should be excluded, along with the power to negotiate a transaction that is fair.
Senator Plamondon: I had the finance companies in mind when I introduced the bill. That is where people run up the greatest amount of debt. I honestly did not consider corporations at that time. I wanted to prevent the little guy from becoming involved with finance companies. That is the aim of the bill.
[English]
The Chairman: I have several questions. Obviously, this bill is targeted to the most vulnerable in our population and we, as a Senate have the responsibility to ensure that the most vulnerable in our society are equally protected as those who can protect themselves. Could you give us any sense however about the scope of the problem? Do you have any statistical information or can we get any statistical information that will give us some sense of the scope of the problem as it pertains to a percentage of the population? Is it large? Is it small? I am not suggesting that if it is a small but important number that we should not be concerned. Again, our responsibility is to protect not just the rich but also the poor. It would be very useful for us to have some indication of what the scope of the problem is in Canada.
[Translation]
Senator Plamondon: I could forward these documents to the committee. In my experience, when people turn to a finance company, it is because they have no other way of getting a loan. You said that, for amounts under $5,000, financial institutions are reluctant to analyze a loan application. I am trying to find some way to encourage financial institutions to grant loans, overdraft protection or lines of credit. We know that, if there is money to be made, then these institutions will find a way to do it.
There are full-time students who can get credit cards with a $5,000 limit, even though they do not have a job. When the banks want someone's business, they are ready to advance the funds. We could find solutions, and what is dangerous is the fact that they do not seem prepared to do so. Will the large institutions end up serving only the segment of the population that is profitable? They have another role to play. We can begin by teaching school children about the cost of credit.
We do not tell someone who is having a hard time making ends meet to go to a convenience store to buy tomatoes that are three times more expensive than they would be at the supermarket. We show him how to shop. He should learn how to shop for credit. We should not say that we are not interested in that customer and direct him to a finance company. I want to avoid having people strangled by debt.
[English]
The Chairman: I appreciate that. I hope other witnesses will give us some assistance about the nature and scope of the problem. I think we believe there is a problem. You have satisfied the onus on that. The question is, what is the nature of the solution to deal with the problem and you have presented one.
Let me deal with the bill as you presented it, with two small questions.
I know that interest rates are calculated daily, monthly, yearly and semi-annually. When I take a look at the definition, the definition says the criminal rate means an effective annual rate. Is that an effective cumulative rate taking into account as to whether or not it would be calculated daily, monthly, semi-annually or quarterly? When you do the calculation, as many of us have done in terms of amortizing a mortgage, the nature of the calculation, the compounding, makes a huge difference in terms of the ultimate cost of the loan.
When you say in your bill, “effective annual rate,” I take it you mean, and I am leading you here, I might be wrong, the aggregate cost of the loan based on interest rates over an annual period. Is that right?
[Translation]
Senator Plamondon: We have to use the same formula, the annual rate. If I understand correctly, when the Consumer Protection Act was drafted, the annual rate was the only one that applied.
[English]
The Chairman: Finally, let me deal with Senator Angus's problem, which is mine as well. When I look at section 1, the second paragraph, the third or fourth last line, it talks about “'interest” means the aggregate of all charges and expenses” which may cover insurance or not, even though the explanatory note seems to be at odds with that. Let me just go down and say you exclude in your definition “...does not include any repayment of credit advanced or any official fee, overdraft charge, required deposit balance....” The question is, what do you mean by the “official fee”? I do not know what that means. Second, “required deposit balance” — it may very well be that for a $100 loan, to use Senator Massicotte's example, you can get a $100 loan but you need a $20 deposit. It could be at 35 per cent, but automatically that would throw it up to 45 or 50 per cent. When you exclude that, how can we satisfy ourselves from a question of certainty, because this is a criminal offence and we have to be satisfied that we provide certainty to the courts, that this is what we intend? Can you deal with these issues? These are complicated questions. If you want time to consider them and give them to us in writing or later on, that is okay as well.
[Translation]
Senator Plamondon: I simply added insurance to the definition of interest; clause 347 of the Criminal Code remains the same, with insurance added.
[English]
The Chairman: I think you understand the other questions I have and maybe you might come back with counsel and give us assistance on that.
If there are no further questions, we will now suspend the hearings for a minute or two to allow a new set of witnesses. Thank you so much for bringing this to our attention. We are seized of this matter and you can tell by the questions that all senators are vitally interested in the subject matter.
We are delighted today to have representatives of the Department of Justice and Industry Canada. I assume that you understand that our time is limited. We will take briefs today or briefs in the future. Any information you wish to give to us, either verbally or in writing, will be accepted.
I apologize for the shortness of time. We have now learned after our first round of questions that this is quite a complex issue, and we want to welcome you here. Perhaps the representatives of the Department of Justice, Mr. Jenkin and Mr. Scromeda might introduce themselves, and we can proceed.
Mr. Shawn Scromeda, Counsel, Criminal Law Policy Section, Department of Justice Canada: I am a counsel to the criminal law policy section of Justice Canada. Beside me is Michael Jenkin from Industry Canada. I will start first and talk about general issues in relation to the bill and the criminal interest rate. Mr. Jenkin will speak afterwards on particular issues with respect to consumer matters.
The Chairman: Would it be fair, because we did start late and we allowed the sponsor of the bill a little bit more time because of the lateness of the hour, to conclude your testimony — both your presentation and questions and answers — by 5:30? That will allow the next group an equal amount of time. Please try to curb your presentation and keep the responses to our very difficult questions as short as possible.
Mr. Scromeda: We are grateful for the invitation to appear before this committee today. This legislative initiative raises questions of considerable importance in relation to the criminal interest rate at section 347 of the Criminal Code.
Based on remarks made by the sponsor of this bill, the Honourable Senator Plamondon, I understand that a policy impetus for this bill is to address the issue of charges levied for loans offered by certain finance companies. These companies sometimes charge rates in the upper end of the range under the maximum set by the Criminal Code on loans extending over a few years, leading to high total credit charges on the term of the loan.
There is the separate but related issue of the alternative consumer credit market, a largely unregulated financial sector, including payday lenders, cheque cashing services and pawnbrokers. With the recent visible growth of the payday lending industry — the Alternative Consumer Credit Market, ACCM, as it is sometimes called — has been a matter of considerable public commentary and has been subject to policy discussions within and between federal, provincial and territorial governments.
Other issues arise in relation to certain forms of complex commercial transactions, for the most part, between large and sophisticated commercial enterprises. In this regard, I note that a Uniform Law Conference of Canada report by Mary Ann Waldron, professor of law at the University of Victoria, indicates that the present criminal rate of interest is having perhaps an unforeseen negative effect on such commercial transactions. A copy of that report has been submitted to the clerk of the committee.
A number of complexities underlie the criminal rate of interest and should be considered in any initiative to change it. Section 347 should be considered in its entire context. At first glance, the criminal interest rate appears to be a somewhat unusual provision. While governments in Canada sometimes choose to regulate prices and markets through legislation, they generally choose to do so through more comprehensive regulatory schemes rather than through the insertion of offence provisions. I am not aware of any other provision of the Criminal Code that controls prices.
From the Justice Canada perspective, however, the criminal rate of interest is not a provision aimed directly at economic price regulation, but rather at the criminal extreme of loan sharking. While the section is set out in terms of general applicability to interest agreements and arrangements, with narrow exceptions stipulated in the provision itself, the original policy impetus for the introduction of the provision was loan sharking and its attendant practices of threats and violence such as that engaged in by organized crime.
As the Department of Justice and other federal departmental representatives stated before this standing committee when the insertion of section 347 was being debated in Parliament in 1980, the section was put forward because proof of actual extortion in relation to high interest loans was difficult. It was thought advisable, from a policy perspective, to make a specific reference to a criminal rate. The police and prosecution at that time were calling for such a provision to help control this activity by organized crime. A section was added immediately adjacent to the extortion provision of the Criminal Code, and the two sections can be seen as being related.
It is notable that at the time section 347 was added to the Criminal Code, the amendment was done together with the repeal of the former federal Small Loans Act, an act administered by the superintendent of insurance under the Minister of Finance. That act had addressed interest charges on loans from a more economic, regulatory perspective, including licensing of moneylenders subject to that act.
I understand, however, that in 1980 the Small Loans Act was no longer seen as being viable in Canada. Instead, what remained after its repeal was a generally free market approach to interest in Canada, together with a new criminal sanction, ostensibly to address loan sharking, expressed as a general limit applicable to interest arrangements and payments in Canada.
It should be noted that there was some concern expressed at the time these legislative changes were made, about high rates of interest, and fears that some consumers could be charged near the criminal maximum established by section 347. Perhaps, however, the underlying theory, as it generally is in our market economy, was that market competition would lead to reasonable rates. Also, it was suggested at the time that courts would have the power, under unconscionable transactions provisions of provincial law, to relieve against individual instances of high rates, depending on the circumstances.
For many Canadian consumers, it may be argued that the market has worked. For many individuals, loans at reasonable rates are available. However, we must recognize that some have put forward strong arguments that markets have not worked for all Canadians in this regard.
One area of particular debate is that of payday loans. I understand that my colleagues from Industry Canada will offer a detailed assessment of this area of the market in their own comments before this committee. In addition to the issue of short-term payday loans there is the issue of the medium-term consumer loans that Senator Plamondon highlighted in her remarks before the Senate. We certainly understand the issues that these kinds of loans raise. From another perspective, however, there is a concern that section 347 is having an unwanted effect on certain areas of commercial law, as highlighted by the Uniform Law Conference of Canada's Waldron report submitted to the Minister of Justice for consideration and adoption. Professor Waldron's report describes in some detail how section 347 affects certain forms of complex commercial transactions where the return on loans is expressed as a percentage of the borrowers' profits. The negative effects are occurring in a variety of ways forcing commercial entities to structure transactions between themselves to avoid running afoul of the section, leading to complex civil litigation when companies fail to avoid it. These effects of the broad scope of section 347 were unforeseen when it was first drafted.
Indeed, it appears that much of the case law, certainly the reported case law, involving section 347 has not involved criminal prosecution at all but rather civil proceedings between commercial entities. The Supreme Court has recognized that section 347 is “deeply problematic in this effect,” but has noted that the interpretation leading to that effect flows from the plain terms of the section. A point that I must make is that a reduction in the criminal interest rate, such as that proposed in Bill S-19, has the potential to multiply the negative effects of the section in this regard. Instead, the Uniform Law Conference of Canada has called for a substantial increase in the criminal rate, among other changes.
An underlying point in all of this is that there are complexities with respect to section 347 and initiatives to change it that do not relate to the section's ostensible policy origins of addressing criminal loan sharking. Bill S-19 apparently seeks to lower interest rates charged for certain consumer loans. It may be argued that section 347 of the Criminal Code is a blunt instrument for this purpose. If it is concluded that government legislative intervention is appropriate with respect to interest rates in order to provide relief for vulnerable consumers, the underlying context and the complexities should be considered in choosing the appropriate legislative approach.
Mr. Michael Jenkin, Director General, Office of Consumer Affairs, Industry Canada: I will speak briefly to the federal-provincial dimensions of this issue. I am directly involved, with others in my office, in federal-provincial- territorial discussions that are underway in respect of the alternative consumer credit industry, in particular payday lenders. These lenders are controversial, at least in part because of the high cost of borrowing from them. The bill, addressing as it does the issue of the costs of borrowing money, is relevant to the work we have been engaged in with our provincial and territorial colleagues in the field of consumer protection. I would like to explain how this federal- provincial work intersects with the bill.
We serve as the secretariat to the Consumer Measures Committee, which is a federal-provincial-territorial committee of officials that answers in turn to a federal-provincial-territorial committee of ministers responsible for consumer affairs. These committees are established under the agreement on internal trade.
In January 2004, consumer ministers expressed “their concern about the costs and abusive practices in the short- term credit market.” This quote is from the communiqué that ministers released at their meeting; and we have provided copies to the Clerk of the Committee. Among other things, ministers asked officials to examine options for a consumer protection framework that would be applicable to the industry, to look at best practices for the industry and to examine what mainstream lenders can offer to consumers in this marketplace.
There is much that we do not know about this industry in terms of its size and its customer base. We do know, largely from industry sources, that it appears to be rapidly growing. It is thought that there are about 1,000 payday lending outlets throughout Canada. There were few, if any, in the early 1990s. These payday lenders are probably providing over $1 billion in payday loans per year, although it would be difficult to obtain solid figures. The industry's association says there are up to one million Canadians using payday loans. I must admit that the data are not necessarily very comprehensive in this area either but, by comparison, finance companies are said to have about 1.7 million customers with assets of about $6.3 billion. That figure includes business as well as consumer loans. As you can see, it seems that payday lenders constitute a significant part of the marketplace.
Officials at both levels of government have been working hard to follow up on ministers' concerns. In respect of a consumer protection framework, the Consumer Measures Committee recently released a public consultation document. The deadline for submissions was Monday, January 31, 2005. Currently, officials are reviewing the responses to the document. The consultation document, which we have also tabled with the clerk, represents some degree of consensus among provincial and territorial officials on the various practices that are of concern in terms of the way in which some actors in this marketplace operate. It solicits public comment on proposals for addressing these issues of concern. If you have an opportunity to look at the document, you will note that it covers such issues as cost- to-credit disclosure, debt collection, plain language contracts and rollovers. A rollover describes a situation in which a borrower cannot pay back the loan on the due date and, therefore, is forced to incur steep fees to roll over, or continue, the loan. This practice can lead to a debt spiral, once it starts, because the costs begin to compound. If it was difficult to pay back a loan when it was originally due, it will be all the more difficult once further onerous charges are added to it.
The consultation also touches upon the issue of costs and the relationship of cost-to-borrowing caps to the industry. This is a particularly complicated issue because it hits upon a federal head of constitutional power over entities that would otherwise be provincially regulated. It should be said that the provinces are not of one view on the effectiveness of the interest rate cap of 60 per cent that is currently found in section 347 of the Criminal Code. I urge this committee to consider the viewpoints of the provincial consumer protection regulators and attorneys general as these deliberations move forward.
This brings me to what I understand you were interested in: the specific question of the effect on consumers of Bill S- 19, which includes our revision to the current cost-of-borrowing cap. The payday loan industry commissioned a study on the cost of lending small sums of money over short periods of time. Their conclusion is that the cost of actually providing the loans in the way that they do far outstrips the current Criminal Code limit. Our independent analysis of those findings is that the claim is pretty convincing, despite any flaws that may be present in the industry's report, which may overstate the cost of doing business.
If the new limit proposed in this bill were strictly enforced, a decision that each province would take because a provincial attorney general's permission is required to launch a prosecution under section 347, it would likely shut down the payday lending industry because making short, small-sum payday loans would not likely be commercially viable at a rate of 35 per cent plus prime.
The question then is: where would consumers go for short-term loans? We do not know why they go to payday lenders in the first place. Are consumers simply not aware of the costs or have they exhausted all their cheaper alternatives — friends, family, lines of credit or credit cards? The fact that the industry is growing rapidly right now indicates that there is a strong demand for these services, despite the fact that they are the most expensive way to access credit in the marketplace today.
I would like to leave the committee with a key comment: the provinces have a variety of views about the industry in terms of whether and how it should be regulated, whether it should be allowed to exist at all, and, specifically, on the influence of section 347 on a regulatory structure for the industry.
I welcome your questions.
The Chairman: Thank you. Mr. Scromeda, I want you and committee members to know that I have advised the Deputy Chair that we have written to all provincial and territorial attorneys general and we are awaiting their response. This bill came up quickly and so we will allow them a reasonable time to respond and possibly come before the committee. If they do not, we will proceed with our work. This is a notice to them and to you that we intend to proceed with this bill expeditiously. We hope that we will hear from the various attorneys general. If they have an interest in this bill, as you suggested, they should respond.
Senator Angus: Thank you, gentlemen, for your presentations. I may not have understood what you both said. The impression I have is that you would prefer that this bill be withdrawn. You recognize there is probably a serious problem but this is not the solution to the needs of small consumers. The studies you have underway in the industry and the reasons for the Criminal Code provision have nothing to do with what Senator Plamondon is trying to deal with and if we are patient the government itself will ultimately come forward with legislative measures to solve the problems.
That is the impression I gained from listening to you. Am I anywhere near the mark, or am I out in left field?
Mr. Scromeda: The government is very concerned about this issue. Industry Canada, with Justice Canada, has been looking at it. The government is assessing its position. I cannot make a specific commitment at this time in that regard.
With respect to this particular instrument, it is an open question whether the reduction in the criminal interest rate suggested by Bill S-19 is the appropriate instrument to achieve the objective that underlies the bill. It certainly is an option, but I think it is a very open question as to whether it is the appropriate way to go about that.
Mr. Jenkin: The government has not taken an official position on this issue. We are here simply as officials to provide you with information, and we are trying the best we can to do that. It clearly is a very complicated issue, and, quite frankly, the manner in which section 347 intersects in the consumer protection realm in the marketplace is problematic.
Senator Angus: I will have to draw my own conclusions from your answers.
Payday lending is a new cottage industry in Canada. There are thousands of these businesses. You said that it costs them way more than 60 per cent. How does it work?
Mr. Jenkin: To borrow money from a payday loan outlet you usually need to present evidence of an income stream such as a paycheque or a pay stub to prove that you are currently employed. You also have to have a bank account, because you have to write a cheque post-dated to your payday to cover the cost of the loan, including all the fees, interest and so forth. One typically asks to borrow a certain amount of money for a short-term period. It is typically $200 to $500 for between 7 and 14 days.
Senator Angus: That is to tide them over to the next payday?
Mr. Jenkin: That is the purpose. This is very short-term lending of relatively small sums of money. It is people who, for whatever reason, believe that they cannot manage until the next income inflow to their bank account and they need to borrow money. That is how it works.
Senator Angus: I think you said that the charge is more than the criminal rate, or at least the cost to them is more. It is certainly more than 35 per cent.
Mr. Jenkin: Effectively what is being charged today in the marketplace is well beyond the Criminal Code rate. Typically at a payday loan outlet you pay $30 to $40 on $300 to $400 for something like ten days. I cannot authoritatively quote you figures, because the charges and structure varies with each outlet.
Senator Angus: That Criminal Code legislation was brought in for loan sharking — a whole different beast than payday lenders, and I guess that is why they are not being prosecuted.
Mr. Scromeda, you deal with the Criminal Code legislation and the administration of that act, so the consumer protection area is not your area of concern.
Mr. Scromeda: Yes, I do work on anti-organized crime matters in the Criminal Law Policy Section of the Department of Justice. I cannot speak to specific law enforcement prosecution decisions, nor is it appropriate for us to pronounce guilt on any industry or to comment on any ongoing criminal or civil litigation.
There is civil litigation ongoing involving section 347 as well in the payday lending sphere. There are currently class- action suits underway. A number of consumers have banded together to get repayment of the excess fees, and there is a principle of law.
The Chairman: Can you give us statistics with respect to the scope of those class-action suits?
Mr. Scromeda: I do not have that with me, but I can get those for you.
The Chairman: If you would, please.
Mr. Scromeda: I will not comment in any way on that litigation, although I take it that the position of the companies involved is that they are not violating the law, but until allegations are disposed of by the courts they remain allegations. There are a number of reasons why more allegations are not being pursued. This is mainly a matter of the provincial attorneys general, and I think that is why the provincial attorneys general have been called. We have heard about the small sums of the loans, the sheer number of such loans, the consensual nature of conduct and the general question of whether the criminal law is the appropriate tool in this area.
Mr. Jenkin: With regard to the rates, it would appear that they exceed the criminal rate. Obviously, this is contested.
Senator Angus: These are Justice-Gomery-like observations.
Mr. Jenkin: I can only say that they appear to be very high and to exceed the rate.
Senator Harb: This was an enlightening presentation and I thank you for it.
You brought up a very interesting point when you stated that there are problems with section 347 of the Criminal Code on the issue of lending. I thought I heard you say that, the other way around, we should increase the percentage from 60 per cent to 90 per cent or 100 per cent.
Mr. Scromeda: That is not the position of the Department of Justice at the moment. I was referring to a recommendation from the Uniform Law Conference of Canada, ULCC, which is a well respected body comprised of some of the most prominent jurists in Canada. They considered it largely from the commercial law perspective.
I tabled Professor Waldron's report with this committee and invite you to read it, and perhaps to hear from her or similar witnesses in this area.
Part of the argument in this case is that this section was directed at loan sharking. We are talking about organized- crime-type loan sharks, and they do not stop at 60 per cent. Arguably, we could raise it significantly more than 60 per cent and still attack the criminal law purpose of this in loan sharking.
Reducing consumer rates is another matter. Professor Waldron has suggested, and the ULCC has agreed, that we can continue to attack the underlying purpose of this and still raise the rates, and perhaps have less of a negative effect on certain complex commercial areas. I think no one really anticipated section 347. We are not talking about small consumers; we are talking about two big companies trying to arrange their transactions. Sometimes they have complex loans between them and they get caught up in section 347. They do not even know what the interest rate will be beforehand because it is expressed in terms of future market performance. It is a very complex area and there is no easy solution to that.
The Chairman: I think you have convinced us that it is a complex area, but we can work our way through complexity.
Senator Harb: Perhaps this committee could propose amending Bill S-19 in order to repeal the elements of the Criminal Code that are problematic. The committee could recommend also that the government make appropriate amendments to the legislation so that corporations conducting proper transactions do not have to practice avoidance in order not to be prosecuted. Under section 347 as it currently is they may be prosecuted.
Mr. Scromeda: First, that does not usually come up in prosecution but rather in civil litigation between parties.
The Chairman: Criminal Code standards are used to apply civil penalties.
Mr. Scromeda: Yes. Second, how you could avoid that effect under the current section 347 is still an open question. I am not sure that we have necessarily come up with a solution. Professor Waldron has suggested one. One of the challenges in that area, when you start to put exceptions in, is that those exceptions can be used by other persons, unless they are not carefully worded, to defeat the actual purpose of the legislation. You have to be very careful. It is something that requires further study.
Senator Massicotte: The observation I make from your presentation is that one, it is complicated. We acknowledge that. Our job on behalf of Canadians is to find a solution to the problem. There is a problem where by some consumers of debt are probably ill informed or not in a good negotiating position to strike a fair deal, so our objective is to find something to protect their interests, but again something very simple.
We also heard that there was a meeting of responsible officials and therefore, there may be some progress on legislation. However, in all the meetings of ministers a couple of years ago where they actually agreed to a concept paper, if you look at all the meetings that occurred in the last ten years, they met many, many times and we have no amendment or no proposed law. I can appreciate Senator Plamondon's interest in saying, Let us get the show on the road here; let us get some concrete actions.
Having said that, from the meetings in the past couple of years, it looks as if where they are going with this is more full disclosure to ensure that the person borrowing the money knows exactly the full cost of the loan. It looks as if they are not going with the maximum interest rate — if you wish — from the conferences I have seen so far.
If the objective is to find a solution to the problem, I appreciate that it is complicated. Where are we going? How could you help us to find that solution? We seem to be saying that in the circumstances of risks and in the circumstances of cost of doing the transaction, it appears that in some case we should get more than 35 per cent. Is there not a way to use that? What is the solution? They say we are studying it and that it is complicated, but that is not good enough.
The Chairman: Please give a short answer to this. I apologize to everybody because we are running out of time and two other senators have questions. Please respond to that.
Mr. Scromeda: I cannot say more than that the government is very urgently assessing this issue and there are a number of options being considered. I hope to be able to update this committee or other representatives as soon as possible. I do not have a specific solution today for you.
The Chairman: Senator Oliver has not had a chance to ask any questions.
Senator Oliver: I have one brief question following on Senator Massicotte's. You mentioned on two occasions, Mr. Jenkin, something called a Consumer Measures Committee that you are working with and charged to deal with. Can you put before this committee some of the findings of the Consumer Measures Committee in relation to payday lending? What things are that specific committee recommending with respect to payday-lending problems?
Mr. Jenkin: We presented the consultation paper, which is the first result of our work, an assessment of practices that the committee regarded as questionable from which we are seeking input from the public on whether they would form an appropriate business practice as regulation framework for the industry.
We have one or two other items on our website from the Consumer Measures Committee updating the public on our work. However, we have been charged by ministers to come back to them at their next meeting, which is tentatively scheduled in June with some proposals. At this stage of the game we do not have firm proposals to present to them. They are in the process of being elaborated and worked on.
[Translation]
Senator Plamondon: As to the first question, I would like to refer to Ms. Waldron's report. At one point, she drew from the Appeal Court's New Solution case. The decision was overturned by the Supreme Court, which confirmed the application of clause 347. Can you tell me a little more about that?
[English]
Mr. Scromeda: Professor Waldron makes reference — if I understand it and I am not going to comment on the new solutions case because I am not up on that case — to a number of cases, and to the Supreme Court's own statement that this section is causing the majority of the litigation and in relation to it is civil litigation between large commercial entities. The laws in fact are deeply problematic in this area. There are numerous cases.
The new solution case may be one. I can not say what the ultimate disposition of that case is, but there are numerous cases, including cases that have gone to the Supreme Court of Canada, such as the decision in Garland v. Consumers' Gas Co. where this section was applied with respect to late payment penalties by a regulated industry, Consumers' Gas. Late fees they were charging were found to be in technical violation of 347.
The point I would make is that it is a long way from the criminal impetus of loan sharking.
[Translation]
Senator Plamondon: The last consultation was better than the first. I have a letter addressed to Mr. Cotler, dated January 28, 2004, which says that the consultation process had been undertaken but there were few participants. Was there a greater attendance during the latest consultation process?
[English]
Mr. Scromeda: I think that is an Industry Canada question.
[Translation]
Senator Plamondon: This letter was sent to Mr. Cotler.
[English]
Mr. Scromeda: I do not have that letter.
The Chairman: Perhaps, you do not have to respond fully. You can read it. You can respond fully now, but we would like a full response to her question in writing and we will present that document as part of the written record of this hearing.
Mr. Scromeda: They were talking about the ULCC.
The Chairman: What is the ULCC?
Mr. Scromeda: The Uniform Law Conference of Canada.
[Translation]
Senator Plamondon: Was there a greater degree of participation in the latest report that you tabled? Is it the same report?
[English]
Mr. Scromeda: The same one, yes.
The Chairman: Just a couple of brief questions.
It appears — and I think you have confirmed — that there is a serious problem that a number of agencies are dealing with. We should say to you that if there is a serious problem, we will be proceeding with this bill with reasonably due dispatch to send it back in some form to the Senate. I do not want to prejudge what my colleagues are going to do here, but the senator has made a point that this is a problem. It is a festering problem and because of the overlapping jurisdictions, this seems to move slowly. I am very familiar with the uniform law reform commissioners. It moves — and I say this to them — like molasses. Obviously, the public interest is not well served when the agencies like that move like that.
I have this question for you, but I think I have the answer. In our notes from our researcher, it appears that under section 347 there is a consent — as you have indicated in your evidence — of the provincial Attorney General before a case is prosecuted on 347. Thus far — and I do not know if this research is correct or not — there have been no prosecutions of demand loans or convertible debentures. If that is correct — and please correct our notes in our research material — if there have been no prosecutions, it seems to me that we would like to know more precisely why this section, in its current form, let alone in its amended form, has not been enforced, keeping in mind that we have received evidence from you that there appears to be some alleged offences. Why have the Attorneys General of the various provinces not pursued this problem that the senators brought to our attention? You cannot speak for the Attorneys General, but if they come here, we will ask them that question.
Mr. Scromeda: In respect to prosecution under the section, I did take the opportunity of getting some information with respect to prosecutions. The adult criminal court survey does indicate that there have been prosecutions under the section. Regarding the total number of cases in 1994-95 to 2003-04, 129 cases were disposed of in provincial court, for which the major charged offence was section 347. That might not account for all the charges. That is for the major charges, and that is about 90 per cent of the provincial caseload in Canada.
The Chairman: What is the number of successful prosecutions? You have given us the caseload, but how many prosecutions?
Mr. Scromeda: Fifty-seven per cent of those led to sentencing. Forty-three per cent were not sentenced, which means they were acquitted, stayed or charges withdrawn.
The Chairman: I appreciate that correction in our own material, and that is very useful. If you could let us have that material, that would be interesting for all members of the committee.
We will now hear from the witnesses from the Province of Quebec.
[Translation]
Ms. Louise Rozon, Director, Option Consommateurs: Mr. Chairman, we would like to thank you for giving us the opportunity to tell you how we feel about the bill. Bill S-19 was introduced and prepared by Senator Madeleine Plamondon.
I am Director of Option Consommateurs. With me today is Jacques St-Amant, a consultant analyst with Option Consommateurs.
I would first like to briefly explain who we are. I will then present some data on the state of the market and more specific comments relating to the bill. Option Consommateurs is an association whose aim is to protect the rights of consumers. We have a business office in Montreal. We have been a non-profit association since 1983. We serve an average of 10,000 consumers each year.
We offer a number of services, including providing legal and budget advice. Through these services, we meet with people who are struggling with debt and who are directly affected by the amendments that this bill seeks to make to the Criminal Code.
We are involved in various areas, including financial services, agro-food and energy. We have produced a number of studies relating to financial services. Since 2002, we have been cooperating with the Desjardins Movement to provide consumer micro-credit to the economically disadvantaged. These are people who require small loans to purchase specific items. We provide small loans at favourable interest rates to low-income consumers.
As to the state of the market, we can clearly see, on a daily basis, that there are lenders who provide credit at an annual rate of 40 per cent. Pawnbrokers are also doing quite well in Quebec as well as in the rest of Canada, as are long-term leasing companies. There may be few pawnbrokers operating in the Quebec market today, but they were here for a brief time. We are well aware that the industry would love to get a foothold there. The annual lending rates that are currently charged by payday lenders elsewhere in Canada — and we have checked, we are sure of our facts — often exceed 300 per cent. It is much higher than the criminal rate of 60 per cent.
We are not talking about the mafia or loan sharks, but large-scale undertakings that will appear before you to try to convince you that they cannot cover their costs unless they charge 300 per cent or more. These services are responding to a real demand for consumer micro-credit but there is a very clear reason for this demand.
The large financial institutions have essentially withdrawn from the micro-credit market, as Senator Plamondon explained earlier. Other than through a credit card, these institutions no longer provide loans of less than about $5,000. Loan sharks have sprung up to fill the void that has been left by the banks. We have this to say to those who feel that the payday loans respond to a need and that the criminal interest rate should be increased: a business model based on short-term credit and exorbitant interest rates has no place in the Canadian society nor in our economy.
Our experience in Quebec has shown that it is possible for large, community-based financial institutions and the government to bring about solutions that will provide consumers with reasonably priced credit with fair terms.
As to the legal framework, and more particularly, section 347 of the Criminal Code, we should go back to 1980, to a time when this provision was adopted and when Parliament repealed the Small Loans Act. That is when section 347 was adopted. The House of Commons passed the bill in two days. Only your committee was wise enough to hold public hearings at which the ACEF, our predecessor, had appeared to express its grave concerns about the consequences of the bill. History has shown that our predecessors were right. The 1980 act has solved nothing. We are happy to see that you are consulting and you are attempting to begin to correct the mistake that was made in 1980.
Finally, section 347 has almost never been used in a criminal law context. It has mainly been used in an effort to control the practices of the lenders we were speaking about a few moments ago. The Supreme Court has qualified this section with some very problematical provisions, and it has often been difficult to enforce.
Moreover, the 1980 legislation set the criminal rate at 60 per cent. This is much higher than the rate in most other jurisdictions, such as our immediate neighbour, New York State, or a number of countries in the European Union. We can provide you with further information on this if you wish.
While Canadian civil courts have frequently held that interest rates of 30 per cent or more were abusive, we fail to understand how Canada can have such a high criminal rate as that set out at the moment in section 347.
So what should we do? One thing must be done urgently. We must reduce the criminal rate in effect in Canada. That is what Bill S-19 would do. So we support without reservation this fundamental objective of the bill. However, we would prefer that the criminal rate be lower than that proposed in the bill. We would add 25 per cent, rather than 35 per cent, to the target for the overnight rate. We think this would probably be enough to ensure that these lenders of last resort could make a profit.
We also support the proposed amendment to the definition of interest so that in future insurance costs would be included. This amendment would harmonize the definition of interest with that of the cost of credit, which appears in other legislation in Canada.
However, passage of the bill is merely a first step, and that may be one of the important messages we would like to convey to you today. At the federal, provincial and territorial level, the Consumer Measures Committee has made a timid start to an overall review of the consumer credit issue. This is not enough; we must go further.
We will not be able to correct abuse by lenders by means of the Criminal Code, but rather through regulations or the introduction of civil remedies. In the case of issues related to interest that come under federal jurisdiction, Parliament will have to play a key role in the efforts required to correct this problem.
At the moment, the traditional credit market excludes hundreds of thousands of consumers and increasingly throws them into the hands of lenders who force them to pay annualized interest rates of 50, 100 or even 300 per cent.
In one of its reports, the association that represents most of the companies offering short-term loans mentioned that it had dealt with over one million Canadians in 2003. So this service is used by a considerable number of people, not all of whom are necessarily in the low-income category.
Parliamentarians must assume that this is not the direction Canadians want to take. They must look for ways of responding fairly to consumers' legitimate needs. We hope to play an active role in this process, and we will be pleased to answer your questions.
[English]
The Chairman: Thank you for abbreviating your brief. The brief is much fuller and it has some very interesting comparative information that was raised earlier with different jurisdictions and we thank you for that. I would like to turn to Monsieur Villemure and we will go to questions.
[Translation]
Mr. René Villemure, President, Institut québécois d'éthique appliquée: I represent an organization that reflects on ethical matters in the social, government and organizational context.
We have been doing that for a number of years now. We are interested in the management of large organizations. Today, we are presenting an ethical perspective on the subject of legal or illegal, criminal or usurious interest rates.
Before presenting a viewpoint on this, we should clarify what we mean by an “ethical perspective” and how it can be linked to legal, illegal or usurious interest rates.
Ethics is related to good conduct, it is a desire to do the right thing. It is the behaviour that would be appropriate in a particular situation, rather than a general situation. Ethics raises the question “What should one do in order to do right?” That is to say that the ethical analysis of a problem considers the particular characteristics of the situation as well as its complexity. This requires thought, and the purpose of ethical consideration is to deal with the complexity of the situation.
Ethics also consists in the search for a solution, and a moment of reflection in order to act correctly. Ethics is related to values and resides in both an understanding of the values involved in a given situation and in the search for solutions. In such a case, we cannot dissociate the purpose of the legislation from the State, because the State has responsibilities as regards these elements.
An ethical decision may potentially violate the rule. Today we are proposing a rule and two provisions within the framework of this bill, and we will see if we must limit ourselves in some way. Ethics is the necessary complement to the insufficient nature of the rule. This is generally the case when the rule does not apply to the situation at hand or where there is no rule. A rule may exist but not deal with this reality.
Ethics concerns the fact that the rule, when applied to the letter, is contrary to the spirit in which it was stated. It may also consist in the fact that applying the rule simply does not make any sense. This would represent the beginning of an ethical examination.
Ethics implies the unprejudiced understanding of the issues involved in a question, of its consequences, of the evaluation of all possible actions and non-actions. Ethics also implies the deliberation and justification in argument form of a decision. Ethics does not consist in evaluating if we should have done something after the fact, but rather in evaluating the issues involved before any action is taken. Ethics is related to prudence, caution and prevention. It is destined to help the legislator and public servant make the correct decision in the uncertainty of the moment.
What is a value? It is what a community considers beautiful, good and desirable. It is something which is valid on its own, a morally positive element. A chair is not a value. Here, we are discussing morally positive elements that are admitted by a broad segment of the community because this bill affects a great many people.
As a general rule, when we are discussing values, there is no need to explain why a superior value is attached to values. They embody their own reason for being which is understood by the community. Values are fundamental beliefs which inform our decisions and may even instigate the action of the individual, the organization or the state by imparting meaning, direction and purpose. From society's standpoint, values are related to the common good.
Our bill today is related to the common good. This then is where the concepts of ethics, values, and lawful or unlawful, usurious or normal interest rates meet. Values aim to answer the question as to why we should be concerned about these rates. A potential definition of a usurious rate, whatever it might be, would answer the question as to how we will deal with this.
The Senate's job, at the outset, is to focus on this why. Our thinking is therefore based on the insufficiency of the rule, and on the concepts of respect and fairness which are words that we use every day.
Few people can give a definition of respect and fairness. People often think that respect is politeness and that fairness is equality. They are two words that are etymologically similar. In fact, the word “respect” comes from the contraction of two Latin words, res and spect meaning “re-examining the issue”. In the ethical, philosophical and etymological sense, it means to take a second look in order to avoid acting needlessly.
Second, equity, which is at the heart of government and the common good, would be defined as meaning a fair appreciation of what is owed to each person. In this case, it concerns the lender as much as the borrower, as both have the right to something.
Respect implies concern for others. Fairness and respect are both therefore necessary to our thought process. Relying on these concepts, we assert today that any interest rate is ethically acceptable only if it is consistent with the improvement of the socio-economic situation of both the borrower and the lender.
Any other interest rate, by enriching the well-to-do to the detriment of the less well off, who will be impoverished to the point of ruin, shall be considered usurious. Any other interest rate, by virtue of the principle of respect, if it needlessly causes prejudice to the borrower, shall be considered usurious. Any other interest rate, by not making it possible to achieve a fair assessment of what is owed to each person, shall be considered usurious.
Today, the purpose of our reflection is to show that within the legislative framework of Bill S-19, we should not confirm that might is right by giving it a legal foothold, but rather protect the most vulnerable from the predatory practices of those who are stronger.
[English]
The Chairman: Again, your paper is much broader than your comments. I thank you for limiting it in a very complex area. It is a fascinating paper and I urge all senators to read it with great care, as I have. Senator Massicotte is first, followed by Senator Plamondon, unless there are other senators that wish to ask questions or make comments.
[Translation]
Senator Massicotte: We are all well aware of the fact that there are abuses in society insofar as usurious rates of interest are concerned. However, I am troubled by the complicity of the law.
There are complications, indeed, but we must find solutions. It would perhaps be best to exclude corporations that grant loans of over $1 million, because people who contract such loans are generally very well informed and probably have their own reasons for paying interest rates that can reach 50 or even 60 per cent.
Secondly, if a lender can show that his transaction cost is on the average $15 or $20 — this cost was determined in a KPMG study — would you agree that the lender should nevertheless have the right to be reimbursed for these transaction costs and perhaps also to charge an additional interest rate of 15 to 20 per cent?
In other words, there may be exceptions to the rule that demonstrate that it may be justifiable to charge a very high rate if the transaction costs range from $15 to $20. You say that there are solutions to this problem and that the caisses populaires or other institutions can do something, but the reality today is that there is no solution. The caisses and the banks got out of that market because it was not profitable. And I don't think that simply prohibiting these people from making loans is the best way to serve their clientele.
We must find a solution that protects these people, but that does not kill the industry in the process.
Mr. Jacques St-Amant, Analyst, Option consommateurs: The short answers to your two questions are “maybe” and “no”. We clearly have to rework section 347. Even the Supreme Court, that has seen just about everything, considered it very problematic. And exceptions will probably have to be provided for transactions such as equity loans. The challenge is to find legal mechanisms that will allow for the exclusion of certain kinds of transactions such as the latter, without opening the door to people who would want to use them in order to make usurious consumer loans.
It is possible, but there is no proposal currently on the table and we have not drafted one. We will be pleased to give you feedback if there is one one day.
As to your second question, if there are so-called business people who are proposing a business model whereby they cannot cover their costs without demanding interest rates of 300 to 400 per cent per year, with all due respect, I do not think they should be allowed to do business. There was already a ban on interest in Judaism, as for example in Deuteronomy, and I quote: “Do not charge your brother interest, whether on money or food or anything else that may earn interest”.
In the Jewish tradition, in the Christian tradition, in the Muslim and Hindu traditions, the issue is one of morality. And it is, precisely, the inherent nature of criminal law to regulate a society that is both moral and amoral.
Does Canadian society consider it to be morally acceptable, and by extension permissible, to apply interest rates of 300 or 400 per cent per year? Our answer to that question is an unequivocal no.
Senator Massicotte: The question of morality is always an interesting one. You are speaking from a consumer's point of view. Let us look at the situation from a lender's point of view. If I have costs of $15, and if I recoup my $15 plus 10 per cent interest, based on your calculations we could be talking about 300 per cent, but I do not consider myself to be acting immorally. That calculation is based on my costs plus a reasonable sum. This is all in the realm of the theoretical.
Mr. St-Amant: I am quite sure that the industry does not consider itself to be immoral, but we do not subscribe to the industry's opinion. It is as simple as that, and that is basically what the debate is about. Is it acceptable, here in Canada, to allow a business model which requires transaction costs of 300 to 400 per cent on the principal amount in order to be profitable? We believe that to be unacceptable. There is no room for such a business model in Canadian society. It is entirely possible to offer small personal loans at 15, 20, 30, or 40 per cent. Forty per cent is not insignificant, but it is possible, for example, were the loan to be over six months or a year. It is a different business model which allows consumers who require such services to be provided with the services they need in a manner which is socially acceptable. However, we feel that a business model offering a 10-day loan with an annualized rate of 300 per cent is unacceptable.
Senator Massicotte: You are citing moral arguments but, in reality, there are no banks or institutions providing such a service at an interest rate of 18 to 20 per cent. The transaction cost is 15 per cent. You are saying that if that is the case, and if based on your calculations that brings us to a figure of 300 per cent, then that is morally unacceptable. But the result of this could be that there is nobody willing to lend money to these people. It could well be that, given the choice, people are prepared to pay this very high amount because it is providing them with real service. Were nobody to provide this service, I do not know whom we would be helping, exactly.
Mr. St-Amant: But that is not the case, and morality is not simply theoretical. For example, the Small Loans Act was adopted in Canada in 1939, at a time when many similar pieces of legislation were adopted in the United States, with a view to dealing with serious social problems. It aimed to deal with the problem of excessive debt loads, a problem which is linked to practices which are reappearing today. It aimed to deal with problems that caused numerous bankruptcies and had consequences for all creditors. We are talking here about practices which have economic consequences not only for those consumers who are directly affected, and these are often serious social and economic consequences, but for the whole economy. This has been clearly shown in a study that Ernst & Young carried out for the payday loan sector. This sector considers a profitable client to be one who returns 15 times. In other words, a client who repeatedly gets into debt. A client who is in debt and paying interest levels like that all year long. Such a situation has considerable long-term impacts on society.
I would reiterate what we said earlier: there are alternatives. In Quebec we are currently working to implement an alternative. It is still at the pilot project stage, but it is working well. We have an excellent collaborative relationship with the Mouvement Desjardins. We have had some preliminary discussions with at least one bank, and it is not at all beyond the realm of possibility that once these businesses have been rooted out, other competitors may appear.
Something very odd is happening at present. In Canada, competitors on the market are allowed to act in a way that is criminal, pursuant to the Criminal Code as it now stands. We are very far from having fair rules of the game, here.
Senator Massicotte: I wish you good luck. If there are other options following your project with the credit union, then all the better. This will force others to compete and the winner will dominate. That would solve the problem indirectly, would it not?
Mr. St-Amant: You are assuming that we will have perfect results in a perfect market. But markets are generally imperfect, unfortunately. What really happens in society is this: one day, or one evening, someone with a gambling problem or a drug problem makes the mistake of borrowing $200 or $300 he should not borrow, and gets caught in a circle of debt overload. This is the kind of loan we would not agree to make because we look at people's circumstances before lending the money. However, if you tolerate companies like those that now exist, you open the door to a great many things.
Incidentally, I should point out that Quebec eliminated payday lenders two years ago. Yet the market works quite well. We have not seen anyone in really drastic circumstances. There are other ways to get out of a difficult situation, with affordable interest rates, rather than going to a payday lender — a payday loan might be a simple and immediate solution, but costs consumers a great deal.
Senator Hervieux-Payette: It's good to hear someone waxing philosophical once in a while, even at the Senate Standing Committee on Banking, Trade and Commerce. As to your philosophical statements on justice and equity, I wonder whether I should be remorseful. In 1980, I was a member of Parliament and a member of the Justice Committee, but I don't remember in what context the bill was discussed. As for Bill S-19, would coming back to a new version of the Small Loans Act be a solution? You didn't mention that specifically. You said that it was a complex issue, and that even the Supreme Court recognized it was a complex issue. This is one way of allowing the federal government to act in a given sector, but financial institutions retain a broad area of jurisdiction. I do see that there is a need—there could not be 1,000 or so of these outlets in existence if the need for them was not there. What do you recommend as the best measure that would be fair both to lenders and to borrowers?
Ms. Rozon: The Criminal Code provision we are discussing here still needs to be amended, because — as Mr. St. Amant pointed out — it is a question of ethics, of principles, of morality. What we are putting into the Criminal Code is a reflection of what we as a society are prepared to accept, and, in the case of payday lenders, what we are not prepared to accept. So we do support the bill in that we need to bring down this criminal rate, but, as we have already pointed out, the bill is inadequate. We need to consider the broader issue, the issue of micro-credit as a whole. That process of reflection might lead us to conclude that we need to bring back and adapt the Small Loans Act of 1980. We may come to that conclusion, but we have not yet considered the issue in detail.
[English]
The Chairman: Very briefly, if there is another option please tell us that.
[Translation]
Mr. St-Amant: The Consumer Measures Committee is in fact now considering the issue, and we are involved in the proceedings. I hope that tangible proposals will flow from their deliberations. Just to prevent you from feeling too remorseful, I should add that, at the time, the bill — and its section 347 — was passed by the House of Commons in two days. The bill was introduced, then passed the next day. You probably had no chance to examine it in committee.
Senator Plamondon: I would like to thank all three of you for your presentations. I know that Option consommateurs is also involved in budget consultation and that you are currently looking at levels of debt and the detrimental side of loans that are close to being criminal.
In Quebec, the Mouvement Desjardins is involved in initiatives like that, but there are others as well, including Cash and Save, with the Royal Bank, in Toronto, Four Corners Community Savings, by the provincial government in Vancouver, VanCity Credit Union, in Vancouver as well, and Assiniboine Credit Union West Broadway Branch, in Winnipeg, and in Winnipeg again, other initiatives called Individual Development Accounts, Learn and Save and Saving Circle.
It is important to look for other solutions, not just section 347. We see that communities are working on finding solutions, because at present, leaving people in need to grapple with criminal interest rates is unthinkable.
[English]
The Chairman: Do you have a brief comment to the Senator's comments? We do have another committee that wants to step in as quickly as possible.
[Translation]
Mr. Villemure: You must be careful and make a distinction between an interest rate and a criminal interest rate. The origin of the word usury dates back to a time when people used gold coins to pay. The lender wanted to receive as much gold as he had lent, but the coins wore down from being handled so much. It came to be considered fair or even extraordinary compensation.
Perhaps we should go back to the initial meaning. The person should earn an income, not below his costs, but if the action contributes to impoverishing only one person, it is probably unfair.
[English]
The Chairman: Thank you for your submission which I hope you will give us in writing. Your brief on page 11 talks about the evolution of the American framework. You indicate that in New York State the loan rate is 25 per cent a year, is guilty. You suggest that the difference between the criminal rate in New York State may be a means of allowing people to set up in Canada to avoid the lower and more punitive interest rates in the United States. If you can give us any supporting documentation or evidence with respect to the differential between interest rates in the various states in the United States compared to Canada, and the impact that would have of driving this unfortunate business to Canada, it would be very, very useful.
I really want to know whether or not you have that information as well.
[Translation]
Mr. St-Amant: Our comment on the cross-border impact was deliberately mischievous, but I am sure that police services will be pleased to let you know who the various criminal groups are teamed up with in certain provinces, Quebec among them.
[English]
The Chairman: Again, I apologize to our witnesses from Montreal for cutting you short, in particular Mr. Villemure. I urge everyone to read your papers in full.
The committee adjourned.