Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 16 - Evidence - Meeting of February 28, 2007
OTTAWA, Wednesday, February 28, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-26, to amend the Criminal Code (criminal interest rate), met this day at 4:07 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: I welcome our witnesses and audience today to Standing Senate Committee on Banking, Trade and Commerce. This hearing will be broadcast from coast to coast to coast in Canada and around the world on the internet. All testimony will have global reverberations. Our job is not only to review this bill as thoroughly as possible but also to inform consumers and taxpayers as to the content of the bill.
Bill C-26 was introduced in the House of Commons on October 6, 2006, and received first reading in the Senate on February 7, 2007. It proposes to amend section 347 of the Criminal Code, which criminalizes the charging of usurious interest rates. The bill received second reading today in the Senate and, therefore, was referred to this committee for further consideration. There is a huge lacuna in the law dealing with this issue.
I will introduce our committee members from across the country: Senator Baker, from Newfoundland and Labrador; Senator Meighen, from Ontario; Senator Fitzpatrick, from British Columbia; Senator Moore, from Nova Scotia; and our august deputy chair of the committee, Senator Angus, from Quebec.
The provincial and territorial governments are free to regulate any lending industry within their respective jurisdiction consistent with the limits set out in section 347 of the Criminal Code. However, an exemption under this bill in the section permits the provinces to allow legal lending transactions that exceed the limit in the Criminal Code.
Bill C-26 arose as a result of the work of this committee on consumer protection issues surrounding the excess interest rates being charged for small loans, according to some participants. Ultimately, to deal with this issue, the committee approved the amendment to the Criminal Code. That was in our report in June 2006.
According to section 347 of the Criminal Code, it is a criminal offence to enter into an agreement or arrangement to receive interest at a criminal rate exceeding 60 per cent per annum or to receive a payment of interest at criminal rate. The consent of a provincial attorney general is required to prosecute an offence under this section and, to date, provincial governments have not prosecuted any payday lenders. As well, this section has not been used in a Criminal Code context with respect to the activities of payday lenders. There is shared federal-provincial-territorial jurisdiction over payday lenders. That means that these lenders essentially have been unregulated. The Province of Quebec has exempted itself because, to our understanding, payday loans are not allowed in the province of Quebec. Other provinces and territories are unable to regulate the price of a loan since attempts might conflict with section 347 of the Criminal Code and, therefore, would be challenged as ultra vires in the courts of the provinces or territories affected. Nevertheless, the Constitution provides the provinces and territories with competence over consumer protection through their authority over property and civil rights. Federal competence exists with respect to criminal law, which is obviously the pith and substance of section 347 of the Criminal Code.
In the absence of regulation, the future of the payday loan industry could be determined by civil actions proceeding through the criminal courts. These actions are complicated and difficult and I will not speak further to that.
Bill C-26 proposes that section 347.1(2) would exempt a person who makes a payday loan from criminal prosecution provided the loan is for $1,500 or less and the term of agreement lasts for 62 days or less. The person must be licensed in the province to enter into the agreement and the province must be designated by the Governor in Council, by the federal cabinet, under proposed section 347.1(3). According to section 347.1(3) of the Criminal Code, these provisions would apply in provinces or territories designated by the Governor-in-Council — the cabinet — at the request of either the province or the territories. The designation would depend on the province or territories enacting legislative measures that ``protect recipients of payday loans and that provide for limits on the total cost of borrowing'' under the lending agreements. The proposed section 347.1(4) would permit the Governor-in-Council to revoke the exemption if requested by the province or if the legislative measures in the province are no longer in force.
That summary provides a thumbnail description of the situation. I am delighted to welcome our first witnesses, Rob Moore, William Bartlett and Matthew Taylor, from Justice Canada.
As well, we will hear from Colin Carrie, Michael Jenkin, and David Clarke, from Industry Canada. Gentlemen, please proceed with your opening remarks.
Colin Carrie, M.P., Parliamentary Secretary to the Minister of Industry, Industry Canada: Thank you for the opportunity to appear before the committee to speak to Bill C-26 and the issue of payday lending. As you may know, the bill is informed by extensive federal, provincial and territorial discussions on the issue of payday lending. The Government of Canada has led those discussions through the work of Industry Canada and the Consumer Measures Committee. In my remarks, I want to provide you with an overview of the issue at the centre of our discussion today — payday loans — and concerns associated with the industry that offers them. As well, I will provide background to the federal-provincial-territorial, FPT, deliberations on this subject. A payday loan is a short-term loan for a relatively small sum of money. A typical loan might be for $300 for 10 days to two weeks: the loan is repayable on the borrower's next payday. Loans are often provided in cash, although a number of lenders provide the money on a debit card that can be used on the normal automatic bank machine networks. The industry, which originated in the United States, emerged in Western Canada in the mid-1990s and rapidly spread eastward. Today, it is a major presence in many urban areas with more than 1,350 retail outlets and estimates of $1.7 billion in lending annually.
A number of concerns have been raised with regard to the industry. Concerns include the high cost of borrowing. Allow me to focus on only that issue for a moment. The borrower, taking out a loan of $300, can incur fees that run a wide range from $40 to $75, or even more depending on the lender. Various lenders will divide the cost of a single loan into different categories. One part of the fee might be explicitly the interest and another might be a processing or brokerage fee. At times, there might be an insurance charge or a combination of the above charges. Of course, if the loan amount is loaded onto a debit card, as I have just described, then simply accessing the cash can result in yet another charge. In short, the high cost associated with these loans has been a major focus of critics of the industry. At the end of the day, the cost of borrowing $300 for one week or ten days can be well over one quarter of the amount of the loan.
Other concerns that observers have seen in the industry include inadequate disclosure of contractual terms, and a debt spiral and compounding fees that can result when consumers are forced to roll over a payday loan. The protection of consumers has been the focus of extensive federal-provincial-territorial discussions that have taken place and that have led us to where we are today.
The issue of alternative credit market, such as payday lenders, was first raised by British Columbia in discussions with federal-provincial-territorial consumers affairs officials. It was there that the appearance and growth of payday lenders was first observed in Canada. The Consumer Measures Committee, CMC, of federal-provincial-territorial officials took on the task of learning more about the industry and its clients. Michael Jenkin, who is with me here today, is the federal co-chair of that committee.
A number of studies and round-table discussions have been carried out. In 2000, officials from Industry Canada and the British Columbia Ministry of Attorney General commissioned a report that helped to provide the basis for subsequent discussion about the alternative consumer credit market. A round table on the issue was also held in 2000. Public consultations were carried out by CMC in 2003 and in 2005. The ultimate outcome of this work is Bill C-26. All this work has helped to form the development of the legislative proposals that are before you today.
The CMC study of payday lending has permitted officials in all governments to learn more about the problematic practices in the industry and to consider the variety of possible solutions, including the potential elements of a consumer protection framework. The study has contributed to the development of this bill and to the development of provincial legislation as well.
Mr. Chairman, Bill C-26 is designed to provide the provinces with the flexibility to regulate the payday lending industry in a manner that best addresses the realities of their jurisdictions. It is a product of extensive discussions. As you might be aware, Ontario has expressed the view that the federal government should undertake the specific element of regulating the cost of borrowing in this industry. However, other provinces are anxious to move forward and begin to regulate all aspects of consumer protection concern, including the cost of borrowing, as evidenced by the recent passage of legislation in Nova Scotia and in Manitoba. The full implementation of these pieces of legislation will depend upon the passage of Bill C-26. It is important to remember that those two pieces of legislation are also a key product of the FPT work that has been undertaken. I think it is safe to say that the governments of those two provinces representing opposite ends of the political spectrum, await the outcome of this committee's deliberations.
At the same time, Bill C-26 does nothing to force any jurisdiction to modify its current consumer protection regime. Notably, the bill fully accommodates the position of Quebec, which has not permitted high-cost lending, such as payday lending, for a number of years. The bill is a short and straightforward one and is the result of a significant amount of effort and cooperation.
For more detail on the text of the bill, I turn to my colleague, Rob Moore.
Rob Moore, M.P., Parliamentary Secretary to the Minister of Justice, Justice Canada: Thank you, Mr. Chairman, it is a privilege to appear before the committee to speak to Bill C-26. To date, the bill has received the support of a significant majority of the House of Commons, which, in my opinion, demonstrates the importance of the measures proposed in this bill.
Indeed, these measures cut across partisan lines, and the passage of this bill will ultimately be a good thing for consumers in Canada. As we are all aware, the amendments contained in Bill C-26 deal with the payday lending industry and will result in increased protection for consumers by facilitating greater provincial and territorial regulation of the payday lending industry. I am pleased to spend my time today walking the committee through the amendments contained in Bill C-26. As we have heard, in the 12 years or so that the industry has existed in Canada, a relatively short period of time all things considered, it has grown steadily to the point where it now lends an estimated $1.7 billion annually through approximately 1,350 storefront operations. We are all familiar with the stores. They operate from high-traffic public spaces on our streets in cities and towns across Canada. They open early and they close late. They have flashy advertising and operate with catchy business names. The payday lending industry continues to flourish. What is remarkable about this industry is not that it has grown so quickly, but rather that it has done so in the absence of an industry-specific regulatory framework. Bill C-26 will assist in remedying this absence and facilitate industry-specific regulation at the provincial and territorial levels. The bill will do this by carving out a limited exemption from section 347, the criminal interest rate provision of the Criminal Code. It is important because we know that section 347 is a barrier to the effective regulation of the payday lending industry by the provinces and territories. Indeed as my colleague, the Parliamentary Secretary to the Minister of Industry has already pointed out, consensus has emerged from longstanding federal, provincial and territorial consultations that payday lenders need to be regulated. For this to happen, a limited exemption from section 347 is necessary and that is precisely what Bill C-26 proposes. As you are aware, section 347 of the Criminal Code makes it an offence, punishable by a maximum of five years imprisonment on indictment, to enter into agreement or arrangement to charge interest at a rate of more than 60 per cent on an annual basis. This provision was enacted in the early 1980s and designed specifically to combat loansharking, which as you know has links to organized crime. Bill C-26 would add a new section, section 347.1, to the Criminal Code, which would set out the scheme by which payday loans could be exempt from section 347. The first thing to notice about this proposed new section is its definition of payday loan. For the purpose of the exemption, a payday loan would be defined as follows:
. . . an advancement of money in exchange for a post-dated cheque, a pre-authorized debit, or future payment of a similar nature, but not for any guarantee, suretyship, overdraft protection or security on property and not through a margin loan, pawnbroking, a line of credit, or a credit card.
This definition will facilitate the objectives of Bill C-26, which include bringing the payday lending industry within the purview of an effective industry-specific regulatory framework. At the same time, this definition ensures that other forms of credit are not captured inadvertently.
For a payday loan to be exempt from section 347, the following additional conditions must be present. First, the loan must be for $1,500 or less and for a term of 62 days or less. Second, the lender must be licensed or otherwise authorized under the laws of a province to enter into a payday loan agreement. Third, the province must be designated for the purpose of the exemption. I will briefly explain why these conditions are necessary.
First, requiring that the lending agreement be for $1,500 or less for a term of less than 62 days is important because it provides the provinces, the industry and consumers with flexibility. At the same time, these limits reflect the typical payday loan scenario of a loan for a small amount for a short duration.
The second requirement is particularly important. Indeed, the requirement that the lender be licensed or authorized is ultimately what will result in greater consumer protection because it necessarily implies that the province has consumer protection legislation in place applicable to payday lending. It also guarantees, for the purposes of the residual criminal law, that the exempted regulated lenders are clearly identified. The exact nature of the legislation will be left, of course, to the provinces and territories to determine in almost every respect. The only requirement regarding the provincial consumer-protection legislation for an exemption to apply will be that the province in which the lender operates has set a limit on the total cost of borrowing. In all other respects, the provinces and territories can legislate in a manner they feel is most appropriate, and which they feel provides the most consumer protection. This provision makes obvious sense as the provinces and territories are the best place to decide what components are necessary to provide protection to consumers within their jurisdiction.
The final requirement for an exemption to apply is that the province be designated by the Governor-in-Council. To seek such a designation, a province would need to demonstrate in a letter to the Minister of Justice and Attorney General of Canada that the province has legislative measures in place that set out consumer protection measures for those who seek payday loans, including a limit on the total cost to consumers for payday borrowing. If, upon the recommendation of the federal Minister of Industry, the Minister of Justice is satisfied that the province meets the requirements for the designation, a recommendation to grant the designation will be made to the Governor-in-Council. Importantly, this designation can be rescinded at any point at the federal level in instances where the province no longer meets the requirements for the designation, or where the rescission has been requested by the province.
The amendments proposed in Bill C-26 are not extensive but they will play a critical role in enabling greater consumer protection in relation to the payday lending industry in Canada. I should also point out that bill C-26 does not apply to federally regulated financial institutions such as banks. The federal government has responsibility for banks under Canada's Constitution and the proposed amendments in Bill C-26 are targeted specifically at the provincial regulation of the payday lending industry.
I will conclude my remarks by saying that Bill C-26 proposes much needed legislative reform. There is widespread agreement on the need to bring the payday lending industry within the purview of an industry-specific regulatory framework. This bill will allow for this measure. The approach is an appropriate and sensitive solution that addresses the needs of all provinces and, importantly, the millions who use the services of payday lenders each year. Canadians are eager to see this legislation passed and I look forward to our continued collaboration to ensure that happens.
Senator Angus: I am not sure who to address my question to. As the chair has said, you are all aware that we have had extensive exposure to ``payday'' loans. This industry has grown up and as best we can tell, it grew up because the banks either vacated the field or found it too expensive in their structures. Those poor banks cannot afford to deal with these types of loans. In other words, a vacuum occurred for this type of small loan to be granted by other than the main financial institutions that we knew before.
When we conducted a study of consumer aspects of the financial services industry more than a year ago, we heard enough evidence about this industry to have serious concerns: not only about the potentially usurious aspects of the interest charges or service charges that are involved but by the potential possibly for abuse by the people in the industry. We are in an area where we have a specific statute in Canada for money laundering and terrorist financing, so we are all sensitive to this area.
We were pleased in a way to see this legislation, but on the other hand, we became concerned again. If we understand the bill well, the federal government also appears to be vacating the field and handing off the responsibility to the provinces and territories. They seem to be saying, ``Okay, we may have jurisdiction to regulate, but the area is one of concurrent jurisdiction, perhaps, and therefore we suggest that it be regulated by the provinces. Yet, we want to retain a certain oversight.'' That is where I would like to start my questioning.
Let us say this bill did not pass, or let us say we do not have this bill. How would regulation work right now? Would the provinces still have the right to set a regime of regulation, or would they not?
Mr. Moore: Some provinces, both Manitoba and Nova Scotia, have put a regime in place. Other provinces have indicated that they are not prepared to put in place a regime until the issue of section 347 is addressed. Section 347 was never intended to address consumer interaction in what has really become a phenomenon over the last 12 years of the payday lending industry, as witnessed by its remarkable growth. Section 347 was designed to combat what we know as loansharking.
We feel that putting this exemption in place will allow all provinces to proceed. The framework in place, the limits, will be the $1,500 and the 62 days. That definition will provide some limitation on what happens. Anything outside that definition is not covered by the exemption from section 347.
We have seen different provinces address this issue in different ways, such as Quebec, which basically has banned payday lending in its province.
Mr. Carrie: Payday lending is a reality across the country, and people are demanding these services and using them to the point of $1.7 billion per year in lending, so it is significant. The payday lenders, the companies that provide this service, want to be regulated, so regulation is something that everyone wants. The industry is looking for leadership from the federal government to move forward.
As my colleague said, Nova Scotia and Manitoba already have legislation. They are ready to go. British Columbia is on record as supporting regulation, as is Alberta, and Saskatchewan. Quebec wants to opt out. New Brunswick and Nova Scotia are on record, and Prince Edward Island has a limited payday industry now but will watch and see what everyone else does.
Senator Angus: To set the jurisdictional elements of this straight, I perhaps misspoke when I said ``concurrent jurisdiction.'' I believe in the case of the Criminal Code, jurisdiction is exclusively federal, and therefore the provinces could not operate in the regulatory area until they deal with the exemptions from the 60 per cent or whatever the Criminal Code number might be. Is that correct?
Mr. Moore: The evidence that the provinces do not want to treat this matter as a criminal one is that no prosecutions have been brought against what we consider a payday lending scenario. Yet, when we look at section 347, which was designed to combat loansharking in the traditional sense, technically, the operation, if it charges interest over 60 per cent per annum, is outside the law.
The Chairman: Mr. Moore, I want to correct the record. We had an intensive hearing about this, and we were upset to discover a gap in our consumer protection with respect to payday loans. We were instrumental in passing the criminal law, because we wanted to put some pressure on the provinces to undertake their responsibility to protect the consumer. I want to make it clear on the public record that this committee took leadership on this matter because we were concerned, having heard the evidence.
By the way, we are not here to criticize the payday loan organizations. They provide a service, and some of them asked for ``regulation.'' The Province of Quebec had opted out completely.
The criminal power was a blunt instrument, and we were looking for the provinces to show leadership to protect the consumer. If any senators disagree with that analysis, I hope they will make the record straight, but I thought it important for the public to understand how this happened.
Senator Meighen: Also along the line of clarification, it may have been clear to my colleagues, but it was not clear to me: When the witness indicated support from various provinces, was it support for this bill or support for legislation, generally speaking?
Michael Jenkin, Director General, Office of Consumer Affairs, Industry Canada: Those references were to provinces that have indicated that they support the bill in principle as it stands now and the formula that was worked out in the course of federal-provincial-territorial discussions, which was to have the federal government allow the provinces both to regulate the cost of borrowing and to pursue their normal course of business practices regulation in this area.
In the course of the discussions on this issue, provinces were reluctant to regulate in this area when the activity was de facto covered by the Criminal Code. They requested the lifting of the criminal sanction so they could proceed with a civil regulatory system and a rate-setting system. Fundamentally, if payday lending was to be regulated at the provincial level, they needed some dispensation from the Criminal Code to proceed, because many of them felt that they could not do otherwise. In effect, the explanation that we were provided with was that provinces felt they would be regulating a criminal activity, and that would be inappropriate.
That is why, in essence, this process of designation has come about. It allows us to have a regime where, for those provinces that do not wish to regulate and wish to rely on the Criminal Code and perhaps prosecution, that is available to them. For those that wish to proceed with a regulatory regime, that is available to them. Those provinces such as Quebec that already have prohibitions against high-cost lending are able to continue with that process. It allows us, in effect, to respond in a way that satisfies virtually any approach the provinces wish to take in this regard, either regulate or not regulate, as the case may be, or proceed with a previous and existing process of licensing, which excluded this kind of lending.
Senator Angus: When Senator Grafstein said we passed a law here to send a signal to the provinces, I do not believe he meant that it ultimately passed. It was a private member's bill that passed through this committee and was reported back to the House of Commons, but then it died on the Order Paper in the House of Commons. Senator Plamondon, who has since retired from the Senate, sponsored that bill, and she will come to the committee as a witness again. I believe the gentlemen from Justice Canada and Mr. Jenkin are familiar with that bill. I understand you all had problems with that bill. Would it be fair to say that, in your minds, Bill C-26 addresses what Bill S-19 tried to address, and accomplishes what Senator Plamondon had in mind? We received feedback from, I think, the Minister of Justice at the time — Minister Toews, I think, but he may have been the critic — saying the idea is good, your hearts are in the right place, but we have a better mousetrap. Am I right that Bill C-26 is designed to do what we thought Bill S-19 did, and more?
Mr. Carrie: That is the intention, and the bill is to focus specifically on payday loans, whereas Bill S-19 would have affected a number of consumer lending banks in regards to bridge financing and consumer lending — companies such as Leon's and The Brick that have credit card and trust companies. The idea here was to be specific for payday loans.
There was a lot of discussion with the provinces, for five or six years, to come up with this specific bill that deals with this specific issue, and to do it in a way that there is, as Mr. Jenkin said, consensus around the country.
The Chairman: I take it that there was more response from the provinces after they understood that the blunt instrument was available. I do not suggest that the provinces were laggards, but a couple of provinces stepped up to the mark while others were not prepared to move on this front. We are where we are today, but I want to ensure that we all understand that we are trying to solve a problem that obviously is a service that consumers want. Having said that, we want to ensure that we protect the consumer in the process. I take it that is the purpose of this exercise at the provincial level.
Mr. Carrie: Absolutely.
Senator Angus: Many senators here have boned up on this issue. I know the sponsor of the bill, Senator Eyton, has a lot of questions.
Mr. Moore, I think you mentioned $1 billion-plus being the order of magnitude of this industry. We have had evidence here that it is in the order of $5 billion. Have you an issue with that? Is there a consensus on the panel that the problem is much larger than $1.7 billion?
Mr. Jenkin: Senator, there is no definitive statistical information on this industry yet. It has not been regulated, obviously, so there is no central gathering of information. Frankly, most of the available data is based on either industry estimates or guesstimates. It is difficult to say whether the figure is $1.7 billion, $2 billion or $3 billion. The estimates come primarily from the Canadian Payday Loan Association.
Senator Angus: That association has only 40 per cent of the players.
Mr. Jenkin: Yes: I gather that earlier on they surveyed all the companies that they knew were in the business. In some of their initial surveys, they managed to reach — although you should speak to them about this — a good portion of the industry. The fundamental problem is that because this industry is informal and because there is no regulation or formal statistical gathering, the extent of what is going on is unclear. Indeed, it is difficult to know what the boundaries of this industry are.
Senator Angus: Being from Quebec and having had many people come through the office talking about this legislation, invariably the question comes up: What do you mean it does not happen in Quebec, senator? Why not? If it is such a legitimate industry, why would Quebec ban it?
So far, I have been able to find out only that Quebec has an alternative solution called the pawnshop business. I do not know how it is a substitute, but perhaps you could give us a reference. Perhaps Mr. Bartlett from the Department of Justice would know the law in Quebec. Where is the industry banned?
William (Bill) Bartlett, Senior Counsel, Department of Justice Canada: I am not sure of the exact name, but it is an unconscionable transactions act in Quebec, which effectively limits the rate to 35 per cent. The 60 per cent limit really does not allow for payday lending: 35 per cent brings the rate down to a point where it is clearly impossible. The province enforces that limit.
My colleagues from Industry Canada can probably give you more information on how the consumer accesses that kind of service. Quebec has a much broader secondary financial sector in the form of co-operatives and minor banks, if you will. I believe that is one avenue they have, but their provincial legislation simply sets a rate at 35 per cent and the province enforces it.
Mr. Carrie: The reality is that some people demand this type of service, and always. Senator Grafstein eloquently explained the issue of loansharking. People were being taken advantage of. With this legislation, the hope is that there will be regulations and rules, and people will know what to expect when they take on this type of transaction. It is a high-cost loan, but there are people who like this type of service.
Senator Angus: You have not fully answered the question on Quebec. I am told, anecdotally, that many of these payday loan shops are across the river in Hull and Gatineau. I may be wrong. This was told to me in my office within the last 24 hours.
Mr. Jenkin: We have no information on that. The Quebec law is clear. Payday lending operations are not licensed. They charge more than the limit, so they are not granted a money-lending licence.
In terms of the alternatives, yes, pawnbroking is a big industry in Quebec, but we do not have at our disposal any data on what businesses operate outside of that kind of lending. Frankly, I am not sure there is any information on that.
The Chairman: One could go to downtown Montreal and find out in 15 minutes. It is not difficult to find out.
Senator Angus: Before Craig Street became St. Antoine Street, it was ``Pawnbroker Avenue.'' Where is your watch, by the way, Jerry?
What is an interest rate, what is an administrative fee and what is a charge? In terms of regulation, we are told in the literature that there is a concept called capping. When a province, be it British Columbia or Manitoba, brings in their regulatory regime, should they have a cap in it?
You have probably seen the study where a focus group — I think it was one of the networks, CTV — took out three loans. They kept the loans for eight days. In one case it was about $24. The cost of another loan was a little higher, and another was about $60.
If there is to be a cap, what would be a reasonable cap?
Mr. Moore: Within the parameters we have set out in the exemption, the provinces would determine the total cap.
Mr. Taylor, would you like to explain the interest and fees?
Matthew Taylor, Counsel, Justice Canada: Essentially, the legislation, as it is proposed, leaves that question to the provinces, and that reflects the reality of individual jurisdictions within their consumer protection legislation. This bill does not propose what that limit should be. The provinces determine that. They are best placed to do that.
Senator Angus: This information has been handed to me by the person who told me the business was alive and well in Quebec. Perhaps, they say, the interest is 10 per cent or 34.5 per cent, and the rest is ``other.'' Here it is: Money Mart cheque-cashing centre, 414, boul. St-Joseph, Gatineau.
The Chairman: I notice the clock. I understand our colleagues from the other place have a vote at 5:30, which means they must leave here at approximately 5:25 to go across the street. The witnesses who are scheduled at 5 p.m., we will hear later. We will conclude today at 6 p.m., but we will allow time tomorrow morning to ensure that the witnesses have ample time to make their case. I think we have not allotted enough time to our witnesses. This situation is complex. You can see that all senators are mightily interested in the detail as well.
Senator Baker: Mr. Chairman, the last time I had the pleasure of having William Bartlett before a committee, I noticed in case law about eight months ago, he was quoted in this committee by the Supreme Court of British Columbia. The court cited his entire quotation on his interpretation from the Department of Justice on a particular term as it relates to organized crime and law enforcement. Perhaps he will answer these two technical questions I will ask, and perhaps we might see this issue in the first case to be tried under this particular bill.
I think I will ask all my questions right off the bat and leave the witnesses to answer because I know many senators want to ask questions.
First, there is a wealth of case law concerning this bill. The case law is in civil law and in class actions. It is in some cases of recent vintage — about a month ago, in Smith v. National Money Mart Company Co., which was a certification for a class action, and less than a year ago, in Kilroy v. A OK Payday Loans Inc., which gave a fairly good synopsis of the law in each province.
There is a wealth of case law and, in addressing the civil question, they address the criminal question. They address the criminal question as to whether these companies violated the Criminal Code. In each case that I looked at prior to coming to this meeting, the answer was yes. Then judgment was given and, in some cases, special damages were awarded — not only the repayment of interest beyond the allowable limit, but also special damages. I make that point initially.
When it comes to payday loans, one witness said that financial institutions are not covered. They are covered under the proposed section 347.1(2), ``financial institution within the meaning of paragraphs (a) to (d) of the definition ``financial institution'' in section 2 of the Bank Act. . . .'' However, the Bank Act includes not only paragraphs (a) to (d) — it includes paragraphs (a) to (h).
I would like you to address that in one of the answers, as to what would be the impact if we exclude a foreign bank in a bank or a trust and loan companies act, but we do not exclude trust, loan or insurance corporations, credit societies or foreign institutions under the definition under section 2 of the Bank Act.
My second question is this: When the bill defines payday loans, it says that it is a ``means of advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature. . . .''
Then the sentence finishes by saying, ``but not for any'' and it lists seven instances of guarantee for the loan. When we look at the Bank Act, and at what is excluded or included, it is almost like an inclusive act, where we cannot do anything outside of the act. The authority is specifically empowered within the act. This bill excludes five or six instances where a guarantee for payday loans will not be permitted. Are you sure that the bill covers the entire field here? For example, does the bill cover someone's fishing licence? It is an interesting question.
Would it not be better to say ``'payday loan''' means an advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature,'' period?
My third question is this: When I look at the case law, it is absolutely fascinating. Throughout Canada and every province, many class action lawsuits have been judged in favour of the claimants.
I recognize what you are saying is right — some of the cases have not been — but the ones of recent vintage have and the reason is that they now use the Supreme Court of Canada interpretation of the word ``interest'' to include all other forms of payment on top of the actual principal.
In all the cases you see here in case law, the interest rate charged was only 20 per or 21 per cent. Then there was a 19- per-cent late fee; then another charge on top of that. In all these class action lawsuits that I have before me now, which is several, the courts have said that these charges are interest, as defined by the Supreme Court of Canada in Garland v. Consumers' Gas Co., and that definition will apply to these companies — which will have to cough up the money to all these people presumably when this is over.
What great change will take place with the new legislation? Will all these extra charges be covered in the provincial legislation to spell them out explicitly? If they are not covered, are we then leaving the civil standard that we have now in case law to what happens in the provinces upon adjudication?
Mr. Bartlett: The only quarrel I have with what you say about success for the plaintiffs is that most of these cases, I think, are still working their way through the courts. Those that have resulted in a judgment — and, in particular, the B.C. case, which actually resulted in a decision by the court — have indeed ruled in favour of the plaintiffs, using an interpretation by the Supreme Court and the definition of interest in section 347, which is a broad one.
It includes, ``'interest' means the aggregate of all charges and expenses.'' It is a broad definition — ``but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge'' — so a few charges are specifically exempted from that broad definition. However, it starts out with a definition that is broad; and I have no quarrel with the decision of that court or any other court that has applied the definition of interest in section 347. I agree that they appear to have properly applied the definition, and therefore section 347, to the facts before them in terms of the kinds of charges involved in the payday lending class action lawsuits.
The issue of the definition of financial institution in section 2 of the Bank Act — I apologize that I do not have that definition with me.
Senator Baker: Can you pass this to the witness?
Mr. Bartlett: I am not an expert in that definition from the Bank Act.
The Chairman: Mr. Bartlett, not to interfere with your flow of thought, but this was a highly technical and articulate question. If you give us your answers and you do not have the complete answer, please feel free to respond to us in writing. I think Senator Baker and all of us want to get at some of these problems and therefore it is a little unfair that we have not given you notice of a complex question. Give us what you can, and if you cannot answer thoroughly, please come back with a written response.
Mr. Bartlett: I can state briefly that paragraphs (a) to (d) of section 2 of the Bank Act incorporate all those entities that are subject to the full range of regulatory measures under the Bank Act, whereas paragraphs (e) to (h), which include foreign institutions, trust, loan and insurance companies incorporated under the laws of a province, are subject only to certain provisions of the Bank Act and are not those institutions that are subject to full regulation. Those institutions are banks or other financial institutions that are regulated in the same way that banks are regulated. The activities of those institutions that are subject to the full range of regulation, as referred to in paragraphs (a) to (d), based on advice from the Department of Finance are extensively regulated. Therefore, they are not being invited to participate in this exempted payday lending industry. The ones that are left out are entities that are subject to some provision of the Bank Act, such as foreign institutions. For obvious reasons, they are not subject to the full range of rules set out under the Bank Act for what we would normally call a bank or other financial institutions.
The definition of ``payday loan'' is based on extensive advice from the provinces that have looked into this issue for some years now in terms of how the payday lending industry actually operates. The particular matters that are exempted — guarantee, surety, overdraft protection, lines of credit, et cetera — are products more commonly offered by financial institutions, insurance companies and so on. Payday lending companies do not do business this way. Rather, in exchange for the money that they lend, they ask for a post-dated cheque, preauthorized debit or future payment of a similar nature. That provision has been crafted to describe what they do but to exclude those products that they do not now engage in as part of their loan operations to ensure that we have captured the industry as we understand it, and not open up a much broader area in terms of what will be exempted from the Criminal Code.
Your third question was about how we ensure that the provinces will regulate the same range. The bill provides that the provincial legislation, in addition to other measures, provides for limits on the total cost of borrowing. Again, in terms of our consultations, it seemed clear enough that the term, ``the total cost of borrowing,'' would cover all fees and charges currently covered under the definition of ``interest'' in section 347 of the Criminal Code and perhaps some other kinds of fees and charges that might be involved in the payday lending situation that might not be covered specifically here. Although this definition is broad, I do not know exactly what that might involve. Rather than box it in with the same kind of definition, we use a term that should be broad enough for the provinces to ensure that the limits they set will cover all the applicable fees and charges under the meaning of the words ``total cost of borrowing.'' Those words will be interpreted clearly enough to ensure that all the charges that should be covered will indeed be covered.
Senator Baker: Mr. Chairman, when one crafts a sentence and one wants to exclude certain things, one must be careful. Inserting the word, ``only'' in the first part of the sentence would restrict it to only that. That is just a suggestion.
Senator Eyton: When I arrived, you were talking about the support in principle. I heard some of the discussion between Senator Angus and the witnesses. I understand that the support refers to the broad support by the provinces and territories on the rationale, the general thrust of the bill and the exemption that was to be made to the Criminal Code. What reaction have you had from the provinces and territories to the specific drafting of Bill C-26, as passed by the House of Commons?
Mr. Bartlett: Perhaps I can address that briefly, senator, and pass it over to my colleagues from Industry Canada for their comments. We have had discussions with the provinces and territories on the specific drafting of the bill. Some issues were clarified and dealt with in the course of those consultations and, at the end of that process, it can be said fairly that the provinces and territories were reasonably satisfied, perhaps not in each and every case but with the final wording that was worked out to cover concerns they had raised. The concerns were not about the concept but rather about the specific drafting of the bill. I believe that Manitoba has written to support the bill since it was tabled. We dealt with officials who raised some concerns earlier drafts. The final wording addresses many of their concerns so they were satisfied in that most of their concerns have been dealt with.
Senator Eyton: To your knowledge, Bill C-26, in its present form, has the support of the provinces and territories that you consulted with?
Mr. Bartlett: For the most part, yes, it has their support.
Senator Eyton: Were there any substantive differences?
Mr. Jenkin: Ontario has had a long-standing position. The province made it clear that they would prefer the federal government to regulate the cost of borrowing. As best we understand, that is still their position. They might reconsider that if Bill C-26 passes. At this time, they would prefer the federal government to undertake setting the cost-of- borrowing limits. Excepting Quebec, of course, most of the other provinces have either indicated their support or have been neutral. As you know, two provinces have already introduced and passed legislation in anticipation of the passage of Bill C-26. We are waiting to hear more specific reactions but that is where things stand.
Senator Eyton: Have you had representations from the payday loan industry? If so, what comments have they made?
Mr. Bartlett: We have had some representations from them, more along the lines of how the parliamentary process was proceeding. They have expressed concerns about how the designation process might work. At Justice Canada, we have not experienced specific representations from the industry on the wording of the bill, as such. I do not know if industry has received that kind of specific representation. Our contacts were mostly along the lines of how it was proceeding and how it might actually work in practice at the end of the day.
Mr. Carrie: Senator, we had federal-provincial-territorial consultations between December 2004, and January 2005. I could make a list available to you of people we consulted. It is a full page.
Senator Eyton: From that, do I take it that you are satisfied that the payday loan industry would also support Bill C- 26 in its present form?
Mr. Carrie: Some do and some do not. For more detail, Mr. Jenkin could respond.
Mr. Jenkin: I believe, senator, you will hear directly from some of these people later on. My understanding is that the Canadian Payday Loan Association, which is the only organized industry body, has indicated in the past, its support for regulation in this legislation. Others, as you are probably aware, at least one other company, has made representations with respect to this bill. I believe it had an advertisement in The Hill Times the other day.
We have not had any discussions with the industry since the bill was introduced at the officials level.
Senator Eyton: Turning to the designation process, the bill provides that the Governor-in-Council may designate, at the request of the province, on the premise that the province requesting has enacted ``legislative measures that protect recipients.'' It goes on to say that it ``provides for limits on the total cost of borrowing'' under lending agreements. Again I emphasize the word ``limits'' there.
Both terms beg the question, what protection, and to what extent is the level of protection taken into account in the designation process, or what limit is taken into account? I am talking here at the federal level.
My question relates to that general observation. Does, or should, the designation process take into account the nature and adequacy of the regulation that the province proposes? A subset of that is: should the designation take into account the level of disclosure of contractual terms? Should the process of designation take into account the transparency of the transaction with the borrower on each of those loans? Finally, should that designation process take into account the consistency between the different jurisdictions? Is some value attached to having comparable regulation across the country in the different provinces and territories?
I recognize that there is a facile argument that we are leaving the provinces and territories to make those decisions. If we use the words ``protect recipients'' and that is part of what the Governor-in Council must take that into account, or some level of limits, it also gets into these other value judgments in terms of what is going on.
My question is a four-part question. Does it take into account the nature and adequacy of the regulation; does it take into account the level of disclosure of contractual terms; should it take into account the transparency of the transaction in the marketplace; and should it take into account some need for consistency across this country?
Mr. Moore: On the issue of consistency, there is reason to believe there will be a fair degree of consistency with the legislation that will be adopted by provinces that chose to participate. We see great similarities between what Manitoba and Nova Scotia are doing, for example. The consensus that seems to be growing, with the exception of Ontario, which has already been mentioned, is that this matter is best regulated by the provinces. Therefore, other than the framework of defining what a payday loan is and limiting the exclusion from section 347 of the Criminal Code, limiting that exclusion to amounts of money advanced of $1,500 or less for a term of 62 days or less, it would be up to the province to provide for the limits on the total cost of borrowing. The provinces are best equipped within the framework of the definition of what is a payday loan — we are setting that out — to put in place those limits and terms. We suspect there could be a great deal of consistency in the approach the provinces take.
Mr. Jenkin: I might add, senator, that the items you referred to before with respect to transparency, level of disclosure and so forth are typically within provincial jurisdiction because they cover the regulation of business practices under consumer protection law. It would not be appropriate for us, as the federal government, to tell provinces what to do with respect to their own area of jurisdiction. We felt that the manner in which this jurisdiction is divided up, as it were, provinces are traditionally the authority for determining the appropriate standards for consumer protection and business practice regulation, and in terms of contractual law with respect to consumer contracts. That approach has been the traditional one. We leave it to the provinces to determine the appropriate practice in their area of jurisdiction.
Mr. Bartlett: I must just add, senator, the intent here is to ensure the province has ``applicable consumer protection legislation.'' We considered using those words earlier. Some provinces suggested, however, in our consultations, that they might deal with the industry, not through what is called their consumer protection act, but in other legislation to apply appropriate measures to this industry. The nature of the legislation might vary from one province to the next, in terms of the vehicle they choose and the exact form it takes. The intent is not that the federal government would seek to impose on the provinces any particular form that they should follow, or make value judgments about the adequacy of the level of protection, as long as legislation is in place that arguably protects recipients of consumer loans. All the legislation that has been passed so far and all the legislation that we have heard about that is under development by other provinces has indicated they want to take advantage of this intent. I think it is fair to say clearly it would fall within the simple meaning of those words that it is legislation that is designed to protect the recipients of these loans.
Senator Eyton: Somehow, okay. Thank you.
The Chairman: Mr. Carrie and Mr. Moore, Senator Goldstein has a number of questions. You might listen to the questions and then respond quickly, because I am mindful of the clock, knowing you have a vote at 5:30. Perhaps you can get the flavour of his questions and we can leave it to the officials, with your consent, to complete this round of questioning. A number of other senators want to ask these questions as well. We have asked the other witnesses to defer their evidence later today or tomorrow.
Senator Goldstein: Let me first commend you on the quality of your presentation today. Let me commend you a fortiori on your apparent ability to step your way through potential constitutional battlefields by putting together the legislation in the manner in which you did. We are mindful that interest is essentially of federal jurisdiction. We are mindful that consumer protection is essentially of provincial jurisdiction. Trying to find a balance between property and civil rights that would have the effect of protecting people is something for which I commend you, and I have not been terribly commendatory of government legislation in the past year. This bill is an exception.
We understand that payday lenders are proliferating because there is a demand for them. The quantum is the subject of some discussion but, in any event, it is significant and it will become more significant with the passage of this bill and the reaction of the provinces. Because consumer demand is of significant proportions, there had to be some way in which the proliferation of lawsuits and criminal prosecutions could be stopped. As was correctly put by you, the provisions of section 347 dealing with usury were never meant for this kind of activity. These provisions were meant for other kinds of activity of which we are well aware.
However, it is also true that there is a public interest, a general interest, in uniformity across the provinces to the extent that that is possible, recognizing, as you correctly put it earlier, Mr. Jenkin and Mr. Carrie, that provinces know best how to deal with the particular and specific situations and constellations in their provinces. Nevertheless, a number of basic concerns are universal: The designation process does not appear to indicate any set of criteria, except for cost of loans — any set of criteria dealing with various other conditions attached to these loans that will cause or permit the Governor-General-in-Council to either designate or de-designate. I am thinking about things such as rollovers, which are familiar to you and, I assume our audience; the encouragement of credit counselling; the assurance that there is clear and readily understandable language used; the back-to-back lending; and the discounting up front. All these things are, or may be, abusive.
There appear to be no guidelines or criteria for the designation, as a result of which provinces can chose, and provinces can chose to ignore these particular issues. We will find ourselves with Canadians of different provinces subject to different kinds of payday loan activity. I want your reaction to why there should not be minimal criteria set forth either in the act or, better still, in regulations, being mindful of the constitutional issues, that will guide the Governor-in-Council with respect to these particular forms of abuse.
Mr. Moore: As was mentioned earlier, we put parameters in the definition, being the maximum amount of the loan as well as the maximum amount of the term. There is uniformity there. Something going beyond either of those two requirements is not therefore protected under this legislation and could be subject to section 347 criminal prosecution.
In the other aspects, consultations with the provinces lead us to believe that they will bring forward a framework that addresses your concern. We use as an example the two provinces that have put a regulatory framework in place on this issue, and the similarities between those two frameworks. There will be unique experiences, just as there are in other areas of law when we go from one province to another. For example, Quebec has made the decision at this point to have a maximum interest rate of 35 per cent. They have chosen to take that approach. Because the original intent of this law was to address something different than the phenomenon of payday lending, we feel that lending is best approached with a regulatory framework. The rest of the framework we are leaving to the provinces to put in place. From what we have seen so far, we should take comfort in the approach the provinces are taking.
The Chairman: Mr. Moore, if you want to take your vote, the two of you better scatter. If you will allow us, we will continue with your officials. We thank you for your time. This matter is ongoing. The hearings will continue tomorrow and possibly after our break. We wish you well on your vote across the street. Meanwhile, we will continue with the questioning.
Senator Goldstein: My second question generically deals with the reaction of Ontario. We are told, partially by you and partially elsewhere, that Ontario is lukewarm to the legislation and would have preferred that Canada legislate for Canada as a whole, setting aside for the moment the extent to which that could create constitutional difficulties of which we are all aware. Was it the constitutional difficulties or your perception of the constitutional difficulties that precluded your legislating uniform criteria across the country, or were there other considerations which, from your perspective, mandated this kind of delegation of legislative ability?
Mr. Bartlett: I will let my colleagues from Industry Canada amplify this answer. I think it was essentially three things. The first one was our sense of the constitutional limitations here in terms of what the federal government could legislate on and what the provinces can legislate on.
The second was the appropriateness of the federal government legislating on issues that are more appropriately left to the provinces, in addition to the issue of strict limitations. The provinces are the ones that are best placed to come up with detailed regulatory schemes to regulate these industries. In addition, the federal government is not the appropriate level of government, even given that there may be some element of shared jurisdiction here, but it is a relatively narrow element of shared jurisdiction.
The third issue, as Mr. Moore indicated, is simply that the many years of consultations by the federal, provincial and territorial governments on this issue gave a great deal of comfort that the provinces and territories that wanted to regulate this industry in the interests of the consumers of these loans have put an incredible amount of energy and expertise into looking at the industry and all of the issues that you have set out. They have addressed those issues, and they have the expertise. We have seen the expertise at work. It would be only appropriate to defer to them in confidence that they will deal with the issue appropriately and leave them the flexibility to have some differences that reflect the different circumstances in place in each province.
Mr. Jenkin: I think Mr. Bartlett captured the issues. We worked for five years with the provinces on this legislation. We had detailed discussions about precisely what should be regulated and how.
There was, I think, an emergent consensus among the provinces that if they were to implement a regime, it would be composed broadly of a number of elements, such as disclosure and transparency.
I reiterate the fact that we see two pieces of legislation already passed by provinces that are virtually identical. This legislation reflects, I think, the substantial amount of work that was done over the five years to come to a broadly common view about what is the appropriate way to deal with this industry.
Senator Goldstein: Would you be comfortable if all provinces, leaving aside Quebec for the moment, come up with legislation similar to that of Manitoba and Nova Scotia? I will put the question in the inverse. If a province or territory were to come up with legislation that was not satisfactory, although it complied with the requirements of Bill C-26, how on earth would the Governor-in-Council be able to refuse designation, from a practical, political perspective?
Mr. Jenkin: I cannot predict what the provinces would bring forward, nor would I dare to speak for them. I think that the track record so far looks good. Second, I think that a province that went to the extent of passing legislation and then petitioning the Governor-in-Council would do that with great care, because this issue is obviously a difficult and controversial one in the public domain. I am certain the provinces would want to ensure that they have a well- thought-out and rigorous approach to this industry. Any government that decides to take this route will not take it without serious consideration.
Mr. Bartlett: Each jurisdiction that sets out to legislate will be accountable to their constituency. While we are confident that their legislation will be entirely adequate, I suggest that any legislation that reasonably regulates this industry in a lawful environment will be much preferable to the rather blunt instrument of section 347 of the Criminal Code. The federal government has legislated in the criminal law area using section 347, with the intent of capturing loansharking. The section has become a consumer protection tool. The intent of this bill is to essentially step aside where provinces want to take up their responsibility for, and their jurisdiction over, consumer protection, to allow for the industry to operate outside that limit but to do so in a regulated environment.
[Translation]
Senator Massicotte: Paragraph 347(1) of Bill C-26 proposes a maximum $25,000 fine if it is a summary conviction offence or a criminal act liable to a maximum of five years of incarceration.
As a result of other studies made by our committee, some of us think that we are being slack with regard to criminal offences in Canada. This has also been observed on the stock market and throughout most of Canada.
Given that the bill will always apply to cases of fraud, which are criminal acts, why should there be only a $25,000 fine? I think that it is too little. Huge amounts are often involved in fraudulent transactions; there is mention in mafia circles of millions of dollars. To me, this amendment seems extremely small with regard to the amounts of money that are usually involved in the criminal acts committed in Canada. Why should there not be a more severe penalty?
[English]
Mr. Bartlett: Senator, the $1,500 is not a penalty provision. It is part of defining those loans that could be subject to an exemption.
[Translation]
Senator Massicotte: Perhaps I did not state my question properly. Paragraph 347(1)(b) mentions a maximum $25,000 fine.
[English]
Mr. Taylor: I think your question is, why is the penalty $25,000 and imprisonment for six months, or both. The amendments here are not amendments per se to the penalty but are updating the drafting. The question of the adequacy of the penalty of section 347 more generally is not something that is within the purview of this specific bill. When we amend legislation within the department, our legislative drafters take the opportunity to update and modernize the legislation, which is what they had done in that case.
[Translation]
Senator Massicotte: In other words, these new provisions were introduced to update the bill. However, someone decided that a $25,000 fine was enough. Why should we not increase this penalty? I know that this is not the part of the bill, but it is in one of the proposed amendments.
[English]
Mr. Taylor: Technically, you are correct. It is part of the package of Bill C-26. The penalty itself has been on the books as long as the offence of section 347.
The Chairman: I think Senator Baker may assist you here.
Senator Baker: There is a distinction there. One is summary and the other is indictable. You will note that the indictable offence for the serious ones carries a jail term. There is no fine. The summary conviction offence is the $25,000.
Mr. Taylor: That is right. To reiterate, the penalties have always existed. The question as to whether the penalties are adequate is not within the purview of the legislation. It is a fair question to ask, but the bill specifically pertains to the payday lending industry.
[Translation]
Senator Massicotte: If I understand correctly, the provisions are the same, word for word?
[English]
Mr. Bartlett: Currently, senator, the provision says exactly the same thing, but drafters have simply changed the reference from ``twenty-five thousand dollars'' in words to ``$25,000'' in numbers. That is the purpose of that particular amendment, which is simply a technical drafting matter that our drafters take up whenever a section is opened up like this. Senator Baker is right. In both cases here, there is the possibility for imprisonment if the offence is indictable, and a fine, for that matter. Fines can be applied in addition to imprisonment even for indictable offences, though rarely they are. Indictable offences are of such a nature that the court will impose usually a term of imprisonment.
This bill sets a limit on the fine that can be imposed if they decide not to resort to imprisonment in the case where they pursue it as a summary conviction matter. That choice will be made by the prosecution and is based on a determination that this case is less serious. The more serious cases will be dealt with as indictable matters, whereas the less serious cases will be dealt with as summary conviction matters. The $25,000 amount is the level that is commonly used in the code as a limit for summary conviction fines and summary conviction matters.
[Translation]
Senator Massicotte: There is no reason for updating this figure which has existed for a long time.
[English]
Mr. Bartlett: The figure has been updated over the years, but that figure has been the one used for some time now, certainly in section 347 and in other comparable sections where a limit is set on the fine.
[Translation]
Senator Massicotte: After hearing several witnesses before our committee, we understood that many financial institutions have problems with paragraph 347(1).
Let me give you an example: if a bank lends you $500 and wants you to pay $12.50 in interest for a period of two weeks, because there is an average cost of two dollars for drawing up the documents, we are looking at a 90 per cent interest rate, which is already an offence. This does not make sense.
Moreover, the amendments to Bill C-6 do not help, with the currently existing usury rates. Have you provided for some way to encourage banks to get involved in payday lending, or at least in current business practices so that they do not commit offences pursuant to the legislation on usury?
[English]
Mr. Bartlett: As has been noted, section 347 is a criminal offence. It was not intended to be a regulatory measure, although it has assumed a sort of consumer protection role and, as Senator Baker said, has been invoked most frequently in civil class-action lawsuits.
The basis upon which section 347 is built is a limit on what is called interest; but interest is defined extremely broadly and it is defined as an effective annual rate of interest. This is where we often have the differences between a rate that is quoted and what it turns out to be, if we look at it as an effective annual rate of interest that presumes a compounding and reinvesting. The difficulty faced by the payday lending industry is because we are talking about small amounts for short periods of time, even what looks like a relatively manageable rate for the 10 days, for example, if you compound that for 365 days as an effective annual rate of interest, it is well above the 60 per cent.
Banks are in the business of lending for longer periods of time, where the rates they quote are more likely to be inconsistent with an effective annual rate of interest.
Senator Massicotte: You made the effort to come up with a revision to the criminal act to regulate payday loans; but when we looked at this provision, we also noted — as did the banks and many other financial institutions — that the criminal act as currently worded is such that a venture capital play easily can be an infraction of the criminal rate. If you look at typical commercial loan documents, there are usually many pages that lawyers draft up to worry about this provision. Why did we not take the measures and precautions at this time to resolve this other issue also, given that we are trying to deal with the payday loans per se?
Mr. Bartlett: This bill is directed at dealing with the concerns the provinces and territories raised about the payday lending industry, and their desire to regulate it. We are aware that there are other concerns about section 347 and, indeed, that issue is being looked at. A working group is being set up under the Uniform Law Conference of Canada, involving the criminal and civil sides to look at exactly the issue you raised and other issues. We are aware that other problems need to be addressed with the way section 347 works.
The Chairman: If I may interject, we have apologized to the other witnesses and have asked them to come back tomorrow. We will made adequate time for them tomorrow, but the subject matter is much more complex than some of us initially thought. Therefore, I think it is important that we try to air our views about this.
Senator Moore: Following Senator Massicotte's questions, clause 347(1)(a) deals with indictable offence and clause 347(1)(b) deals with summary conviction. What sorts of circumstances are envisioned? It is quite a swing here, so under what circumstances would you see a payday loan justifying an indictable offence, and anything else would be a summary conviction?
Mr. Bartlett: I do not envisage them prosecuting payday lending as an indictable offence. Indeed, the provinces have not — and it is up to them to apply these provisions. It is their jurisdiction under the administration of justice to do so. Provincial auditors general have generally chosen not to apply section 347 to the payday lending industry. A couple of charges were laid in Winnipeg some months ago. Whether or not the provincial AG has weighed in on those charges at this point, I do not know.
In general, the structure of the Criminal Code provides for what is called this hybrid option, for at least most offences that are created these days that are considered to be serious but not the most serious. The most serious offences under the Criminal Code are reserved as indictable offences only.
Senator Moore: I understand that. How would the payday loan be indictable? Someone must have thought of something before you put this law on the books. Why do you not take it out if it does not apply?
Mr. Bartlett: We were not looking at payday lending, senator. We were looking at criminal loansharking, which commonly involves coercion, intimidation and sometimes violence. The provision applies to the back-alley kind of clearly criminal activity where money is loaned under circumstances where a number of other factors are present. The mechanism that was chosen was to set a maximum interest rate, which I think was presumed at the time to be so high that only that kind of criminal loansharking would breach it. We are now running up against the fact that that is not the case.
The section was not designed to deal with storefront operations, operating openly and providing a service that consumers seem to want. That situation is exactly why we are here with this bill today.
Senator Moore: That does not answer my question. We are dealing with payday loans here, and it looks like you have them lumped in with the loansharking provision.
Mr. Bartlett: Unfortunately, because section 347 is so broadly phrased, as it presently stands, it covers pretty much all loan transactions in Canada. That is the problem. This bill provides for an exemption from section 347. We are not adding them to section 347; we are taking them out of section 347 where a province decides to take advantage of the designation, puts in place legislation with alternative limits and seeks a designation. The payday lenders who are then regulated under that provincial legislation will not be subject to section 347.
Senator Moore: I realize that — or if you are a bank under sections 2(a) to (d) of the Bank Act.
Does someone have a list of what the protection measures should be and what the limits on the cost of loans should be? I think Senator Goldstein asked the question — are we not concerned about consistency? Some provinces might be more lax than others. The bill says that the provinces will grant the designation. What will that lead to in terms of people in the business? Is it possible that some provinces might end up with one or two companies in the business and other provinces with 10 or 12 companies? What does that do to the competition? You made a comment about some provinces waiting for this legislation. The committee raised this issue out of its own interest, and the only people I heard asking about it were from the industry itself when they appeared before us to provide evidence.
I am concerned about consistency in terms of the legislation. To say that we will leave it up to the provinces is one thing but someone at the federal level somewhere must have a list of what you anticipate as the minimum measures and limits that you will insist upon. Do you have that list? Who has that list?
Mr. Jenkin: Senator, the kinds of practices subject to provincial regulation have been subject to considerable discussion over a long period of time. Public consultations were held in 2004.
David Clarke, Senior Analyst, Consumer Policy, Industry Canada: It was 2004-05. A couple of public consultations were carried out by the provinces, territories and the federal government first, in 2002-03 and a more substantial set in 2004-05. The second one dealt with all kinds of issues including the elements of a consumer protection framework. We received many responses from various stakeholders. Consultations dealt with such issues as limits on additional fees on rollovers, how cost of credit disclosure rules should apply, and whether plain language warnings should be incorporated into the contracts. We gleaned a great deal of information from those consultations and the provinces discussed among themselves and with us what should be included in a consumer protection framework, based on what we learned from the consultation. Much of that can be seen in the legislation in Nova Scotia and Manitoba. For example, on the issue of disclosure and transparency, the Nova Scotia list of requirements to be disclosed in a contract is extensive. I see a list from (a) to (m) in the Nova Scotia legislation and it is close to the Manitoba legislation.
The federal government does not require that information in the law. It is a question of the provinces and territories having worked together with the federal government and coming to an understanding on the requirements. As Mr. Jenkin said, if there is intent within a province to proceed to regulation, then we can well expect to see many of these requirements set out their legislation.
Senator Moore: Do you have a checklist of the minimum elements that you will ask to have included in draft legislation before you will grant a designation?
Mr. Jenkin: We do not have a specific list. In effect, these kinds of issues are in the provincial legislation because this area is provincial jurisdiction.
Senator Moore: I understand that. I am coming to you for the designation requirements because Industry Canada must say yes or no to the applicants. You are telling the committee that you do not have a list for the designation and that you are counting on the provinces to give the information to Industry Canada, who will then accept or deny applications. That is what I am hearing.
Mr. Jenkin: We have a considerable level of consensus about what should be in a protection regime. You have seen two pieces of provincial legislation and they are similar with respect to the approach to regulation. We felt that because it is not appropriate for the federal government to tell the provinces what they should do within their sovereign jurisdictions in the area of consumer contracts, then the best alternative was to proceed with a considerable period of time for consultation and discussion to develop a consensus about what might be in the appropriate regulatory package. We do not have an agreed Ottawa list of what would be in every package. Indeed, I cannot say to you that the next province that introduces legislation will not have some variance in the package that you have seen so far in the two that have become law within their own jurisdictions. I can tell you that there is a good sense amongst the provinces about what these packages should be. It is a product of a long period of discussion and public consultation.
The Chairman: The hour is late and I have a number of questions. First, please clarify the view of the Province of Ontario on this matter. Senator Angus and I heard you a little differently and we want to ensure on the record that we are clear. I understood you to say that the Province of Ontario believes that the better way to proceed would be for the federal government to regulate the cost of these contracts. Is that right? We asked the responsible provincial officials to give information about this subject. To date, we have received two representations: two letters on the record from Nova Scotia and Manitoba. We have heard from the two provinces that already have legislation in place but we have not heard from the other provinces. For us to conclude that this piece of legislation is appropriate, it is important for us to hear from you, because that is the only testimony we can take at this time, about exactly what the Province of Ontario said. It strikes me that they do not agree with this approach.
Mr. Jenkin: Senator, I can tell you only what has been reported in the press. I believe that in October 2006 a spokesperson for the provincial minister was quoted as saying that the provincial government preferred that the federal government regulate the cost of borrowing.
The Chairman: You have responded by saying you think it is inappropriate because that would be an appropriation in effect of a provincial area of responsibility. Is that your response?
Mr. Jenkin: No: There are two aspects to the regular industry structure. The first one is business practices, which is incontrovertibly provincial jurisdiction. The second one is that, as you are well aware, the federal government can legislate interest and so on, but in the pursuance of a consumer protection objective, the provinces can regulate the cost of borrowing, as an ancillary power. It is within the provinces' capacity to do so in this instance.
The Chairman: I will not belabour that point.
Senator Angus: Either Ontario is comfortable with this proposed legislation or it is not comfortable.
The Chairman: I have heard that they are not comfortable.
Mr. Jenkin: It is fair to say that Ontario has expressed a preference for the federal government to regulate the cost of borrowing. That preference is apart from the question of the province regulating business practices, which they have not been clear about, to the best of my knowledge. That area would be clearly within their jurisdiction. I do not have anything else on the record.
The Chairman: We will hear from other witnesses about this question. My next question is on the definition of the term, interest, and I want to thank Senator Baker for looking at the question of definition. Our own researchers state: ``The definition of the term interest in Bill C-26 would mirror the definition of the term in section 347(2) of the Criminal Code.'' This is Senator Baker's position.
The Chairman: Some view this definition, as Senator Baker seems to imply, as problematic. It is alleged by our staff that some payday lenders have disguised interest charges as other types of fees or charges, including insurance charges. Some believe that if the insurance charges argument were accepted by a Canadian court, it is unclear whether the exemption proposed under Bill C-26 would apply, and could result in jurisdictional challenges of provincially imposed limits on the cost of borrowing.
Is that a problem for you, or do you accept that as an issue. In other words, the question is whether the definition extends to insurance, which is not explicitly covered by the exemption here. Is your definition an exempting definition?
Mr. Bartlett: Mr. Chairman, a genuine insurance charge is not included in the definition of interest in section 347 of the Criminal Code. I will not comment on whether payday lenders are disguising insurance charges as interest. I frankly doubt that, because at this point, they do not have much incentive to disguise anything as anything else. Their charges are based on an amalgam of fees and charges. I do not think an effort is being made to disguise whether they fall within the definition of interest in section 347.
The Chairman: Let me put it more clearly, as I understand it. If, in fact, a particular payday lender decides to charge an interest charge, would this charge be excluded from the exemption? The definition brings interest under the exemption and, therefore, if insurance charges are outside the definition would that be outside the exemption?
Senator Goldstein: Do you mean, would insurance constitute an escape?
The Chairman: That is another way of putting it.
Mr. Taylor: In the definition of section 347 in the Criminal Code, as Mr. Bartlett has already said, insurance charges proper would be excluded. You can take comfort in the Supreme Court's decision in Garland which, we heard from Senator Baker, talks of the concept of interest, that interest in its form, in and of itself, by title, is contextual. We need to look at the transaction in itself and not become caught up on form, necessarily.
Mr. Bartlett: The other thing I note is that the provinces are being asked to provide for limits on the total cost of borrowing. The term was chosen to ensure that when the provinces legislate limits, they can go beyond, where appropriate, the definition of interest in 347 and not be bound by it. Rather, they can look at the overall issue of the total cost of borrowing, which would include insurance charges that were not insurance charges properly, but rather were simply part of the cost of borrowing. Indeed, I think the kind of jurisprudence that Mr. Taylor has noted would guide any questions of interpretation as to what was covered appropriately by the total cost of borrowing. I do not see that there will be any escape clauses based on calling something insurance when it is not.
The Chairman: I think we have your answer. I want to put it on the record so we can have a better understanding and so can our staff.
Let me deal with two other subjects quickly.
Mr. Jenkins indicated that the reluctance of the federal government to come up with a set of minimum standards, national in scope, was due to a reluctance to interfere, or to poach, if you will, in province jurisdiction in this complicated field.
The Americans have a way of dealing with this subject matter. My hope was to deal with it the same way as the Americans and we would present a model act to the provinces. The model act would be prepared in consultation with the provinces and would be non-binding, but establish best practices, so there is consistency across the country. The Americans did that with the Corporation Act. The Uniform Law Commissioners have not come up with a model corporation act yet that all provinces adopt.
Has that approach been tried here to satisfy the senators, so at least a proposal of a model act is on the table accepted by the provinces that would set out best practices for consumer protection? It is a different way of approaching this problem.
Senator Goldstein: In Canada, setting aside Quebec which has the civil law tradition and would not participate, we have some uniform laws. I am talking specifically about the Personal Property Security Act, PPSA, which although passed by each province, essentially with some minor exceptions, is mirrored in every common law province.
Mr. Bartlett: Essentially, it has occurred with this bill in the sense that these years of federal, provincial and territorial consultations have been developing exactly that common approach. I do not think it has taken the form of a model act, as such, but I will ask my colleagues in Industry Canada to comment. The whole purpose of those years of consultations was to develop the greatest degree of consensus possible on about the elements of an appropriate regulatory framework.
The Chairman: The short answer is, two provinces have presented acts but we do not have, in effect, the other provinces buying in at this moment to that work. I do not care how we arrive at the model act. It could be a province that has best practices, but at the end of the day, we have a lacuna, in terms of the provinces. This legislation, hopefully, will goad them into faster action.
Mr. Jenkin: It is indicative that two provinces already have followed one another in close lockstep with similar legislation. Often provinces take the lead from their colleague jurisdictions. They look carefully at what other jurisdictions have done and produce legislation that is remarkably similar. I would not be surprised if this approach is taken in this case too.
The Chairman: We are not there, despite four or five years of hard work on your behalf.
Mr. Jenkin: We did not set out with the intention to write a harmonized act. That was not the point. The goal was to come to some view about how to regulate the industry.
The Chairman: Please be brief, Mr. Bartlett.
Mr. Bartlett: I briefly note that I think a number of other provinces are waiting for Bill C-26 to be in place. The Manitoba and Nova Scotia legislation is not in force. They have passed their acts. They are waiting for Bill C-26 to be put into force. Other provinces have indicated clearly they want to regulate these areas and are waiting before they put the time and energy into engaging the legislatures and ensuring the door is open to do so.
The Chairman: I have two other short questions. Let us assume for the moment that we end up with the dire consequences suggested by a number of senators, a terrible patchwork quilt of standards across the country. Some provinces do their good duty and protect the consumer while others do not. Under this legislation, once we have given an exemption we cannot take it back. Is that correct?
Mr. Bartlett: No, legislation that a province puts in place to get the designation remains in place.
The Chairman: Yes, in other words the province comes up with —
Senator Angus: And then changes it.
The Chairman: No, I am not suggesting that. We have a good province that comes in with a high standard of consumer protection that would satisfy the consumer interests in the country. Another province for various reasons chooses not to accept that model and comes up with a passive piece of legislation. Once they come up with any type of legislation, as I understand it, the Governor-in-Council applies, and, as Senator Moore has said, the Governor-in- Council shall designate. Mr. Jenkins, your dream, your aspirations, and our aspirations are to have a model standard of relatively equal standards across the country. These standards cannot be enforced because once we have given the designation, we cannot take it back. We cannot nudge the provinces again without changing this legislation, and then that would be almost a retrospective legislation. Is that true? The question is, why did you not do that, to take the designation back?
Mr. Bartlett: The intent of the legislation is to take it back only if the initial qualifications for having the designation have been removed.
The Chairman: It is simple. Correct me if I am wrong. It says we can revoke the designation if requested by the province or if the legislative measures are no longer in force. That is it.
Mr. Bartlett: Exactly: The intent was not that the federal Governor- in-Council, acting as a delegate under this legislation, would review the provincial legislation to make value judgments as to whether this legislation is the best or not the best, or to ensure uniformity. Rather, they were looking to the federal-provincial-territorial process that has resulted in a high degree of consensus, two provinces that have already operated —
The Chairman: We have heard that, Mr. Bartlett. I am trying to get at another topic.
We had a situation in Canada where a number of the provinces, at the time, had their own, in effect, bank, and then in came a uniform Bank Act which, in effect, utilized the federal power to establish common banking standards, principles and costs of lending across the country, and hence our whole structure of a centralized banking system. In a way, is this lending not banking by another word?
Mr. Bartlett: It is a kind of financial service within a narrow set of parameters in that we are talking about small amounts for short terms, yes.
The Chairman: Senator Angus wants to give evidence on this. I will not quarrel with him, if he wants to, but I would like an answer to that question.
Mr. Clarke: The provinces regulate credit unions, which are more similar to a bank than a payday lender is. Is this banking? Are credit unions banking?
The Chairman: I will conclude with this point. A question mark was raised initially when we dealt with this issue as to why the banks have not provided this service. It is obviously a service. I commend the payday lenders for providing a service that the banks are not providing. We will look at that issue when we review the Bank Act as to why this lacuna of service is not available to people that cannot afford to have a bank account or whatever. We will be interested in that topic. This committee will be seized of a review of the Bank Act within days. I raise that item as a particular issue. I am sure that this topic will be a matter for our deliberation. There is a high intensity of curiosity amongst a number of senators about that particular question.
Senator Angus: We all have our own ways of giving evidence, but we are trying to elicit the truth. On the Ontario situation, obviously the chairman has unearthed an important matter. What I heard you say, gentlemen, is that whereas Ontario may have expressed its druthers, and if it had its druthers it would prefer that the feds occupied this field. They have not said that they will not legislate if Bill C-26 passes, nor have they said they will ban payday lending, as Quebec has. Am I correct? Ontario is the largest province where many payday loan operations go on, maybe the majority, and the fact that we pass this law here in Ottawa does not mean that Ontario will suddenly not be in the game and that they will not seek designation. Do I have it right? You are the ones who have had these negotiations and consultations. We have asked the provinces to come here, by the way, and they have shown little interest in coming, so I think it would not be a reason not to pass the bill. Many provinces and many people have their druthers, but we do not always get what we want. What I have heard you say is that Ontario has expressed a preference, but tough bananas. They will not necessarily have their preference here.
Mr. Jenkin: Senator, we have not had a long and extended conversation with the province. The province at the officials' level has indicated to us that they prefer that the federal government regulate the cost of borrowing. I believe spokespersons for the Ontario minister said much the same thing. I would not possibly wish to comment on what the intentions of the Ontario government are in the passage or not of this legislation. It would be most improper of me to speculate in that regard.
The Chairman: We appreciate that, Mr. Jenkins. You can understand our concerns. I do not question my deputy chairman on this, but the question is a crucial one because we do, in fact, represent the regions of this country. I am from the province of Ontario, as is Senator Eyton.
Thank you very much, gentlemen. I apologize to the other witnesses. We will start sharply tomorrow morning at 10:45 a.m. to give you ample opportunity to respond to everything we have said here. We hope you, gentlemen, will stay tuned as well and be present, if you choose to do so. Otherwise, a transcript will be available. If you have any further questions, comments or clarifications, please send them to the clerk. We have open minds on this question.
The committee adjourned.