Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 3 - Evidence, March 25, 2009
OTTAWA, Wednesday, March 25, 2009
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:05 p.m. to study the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
Senator Yoine Goldstein (Chair) in the chair.
[Translation]
The Deputy Chair: The Standing Senate Committee on Banking, Trade and Commerce is dealing today with issues relating to the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.
[English]
The committee has been charged by the Senate with undertaking this inquiry as a result of a motion put by one of our colleagues, Senator Ringuette, to have our committee study this important issue.
We have scheduled a series of meetings with interested stakeholders to get a better understanding of the landscape in this connection.
Before we proceed to hear our first witness, I want to introduce the people around the table. Senator Ringuette is in the corner there with two boxes, each containing a single question.
Senator Ringuette: With your permission, I have a point of order later on.
The Deputy Chair: Let me finish introducing people and I will be happy to recognize you.
Senator Ringuette: Yes.
The Deputy Chair: Senator Ringuette is from New Brunswick. Senator Moore, from Nova Scotia, is a stalwart of the committee. Dr. Line Gravel is the clerk of the committee, and Senator Harb, who has just arrived, is in the corner there.
I am Senator Goldstein, deputy chair of the committee. Marc-André Pigeon is with the Parliamentary Research Bureau, together with John Bulmer, who is an analyst with the bureau as well.
Senator Fox is from Quebec, as is Senator Massicotte, and Senator Greene is from Nova Scotia.
I understand, Senator Ringuette, you have a brief statement to make.
Senator Ringuette: It is not a statement, actually. It is a point of order, a point of privilege or whatever the members of the committee would prefer.
I have two boxes of letters from members of the Canadian Federation of Independent Business. There are 12,000 letters here in support of what I am aiming to do with my motion.
The original letters were delivered to Minister Flaherty on Monday morning. My question is would the members of this committee like to have copies of those letters or do you take my word that there are 12,000 letters here in support of my motion?
The Deputy Chair: I speak for myself, but I dare say that I represent the unanimous view that we are perfectly happy to accept your word for it.
Senator Ringuette: Thank you.
The Deputy Chair: Not to mention the problems that would arise in the translation of 12,000 letters.
Senator Harb: We expect each and every letter in both official languages.
Senator Ringuette: It would certainly encourage the forest industry from my area.
The Deputy Chair: Without further ado, I would like to welcome Mr. Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch from the Department of Finance Canada.
We are dividing our first hour in two and then we will have a second hour as well. We would ask you if you have a brief statement to make, which I know you do. I would ask my colleagues to tailor their questions as best they can, to make them brief, and to ask you, sir, to answer them as briefly as you reasonably can.
The floor is yours.
Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: Thank you, Mr. Chair.
It is a pleasure to be here to discuss credit and debit card systems in Canada and the existing public policy framework. This is an important area and we look forward to the contribution that your report will make.
As mentioned, I am the Assistant Deputy Minister of the Financial Sector Policy Branch at the Department of Finance Canada. Our branch is responsible for providing policy analysis and advice on Canada's financial sector, including the regulation of those financial institutions that are under federal jurisdiction.
I would begin my remarks by noting that Canadians are avid users of credit and debit cards, and that use is growing. In 1989, Canadians held about 20 million credit cards, which were accepted at 710,000 locations. Today, Canadians have over 68 million credit cards, which are accepted at over 1.2 million locations.
Over the same period, the number of credit card issuers increased by 64 per cent, going from 14 to 23, in part due to reforms undertaken by the federal government to promote greater competition in the financial services sector.
Over the same period, a competing payment system was introduced in Canada, that of debit cards. Less than 20 years ago, Interac direct payment was launched here in the Ottawa-Gatineau area and is now used more often than credit cards in Canada. According to the Bank for International Settlements, Canadians rank among the most intensive users of debit cards.
The policy and regulatory environment for credit and debit cards is somewhat complex. To understand that complexity, we need to briefly review how credit and debit transactions work.
Let me start with credit cards. In Canada, there are generally many parties involved in a credit card transaction. The most obvious are, of course, the consumer and the merchant. Suppose that a consumer and a merchant agree to a $100 transaction. The consumer will owe the financial institution that issued his or her credit card $100. The merchant will receive less. In our example, the merchant receives $98. The $2, which is sometimes called ``the merchant discount rate,'' is shared by two other parties: The merchant's payment processor, sometimes called ``the acquirer,'' which provides payment processing services to the merchant, retains 50 cents in our example; and the consumer's financial institution which issued the credit card retains $1.50 in our example for what is known as the interchange fee.
The 50 cent fee retained by the payment processor is set through negotiation between the merchant and the payment processor. The $1.50 interchange fee is set by the credit card network — Visa, MasterCard, American Express, et cetera — but it is retained by the financial institution that issued the card to the consumer.
The credit card network whose logo appears on the card operates the proprietary network that manages the information systems through which this transaction takes place. They collect franchise and service fees from card issuers and acquirers for access rights to that network. These fees are based on the volume of transactions and on other services provided to these organizations.
The regulatory environment is somewhat complicated because the nature of the various parties differs in ways that are significant for regulatory purposes. The federal government regulates many but not all financial institutions. In a credit card transaction, the credit card issuer is a financial institution. If the issuer is a bank, it is subject to federal regulation. If the issuer is a credit union or a caisse populaire, then it is subject to provincial regulation.
The payment processor might not be a financial institution. Some financial institutions offer payment processing services, but most payment processors are not financial institutions. The credit card network is not a financial institution either. We may regard the credit card companies as lenders informally because we think of owing money on our MasterCard or Visa but the money is owed to the financial institution that issued the card, not to the card network. The consumer has a contractual relationship with the financial institution that issued the card, not with the card network.
[Translation]
To come back to our example, the government of Canada regulates the relationship between consumers and many financial institutions that issue credit cards.
In this regard, the government's consumer protection framework focuses on providing a competitive environment while mandating disclosure of information, so that consumers are able to meaningfully exercise choice.
At present, there are many federally-regulated card issuers and several hundred credit products available to consumers with a range of features and rates. To help consumers pick among this array of choices, the Financial Consumer Agency of Canada, which is a federal agency, maintains a large database of credit card features and an interactive tool on its website to help consumers identify the card products that have the features they are looking for.
As such, federal financial institutions' statutes require that credit card issuers disclose a variety of information to consumers, including the interest rate applicable on the card and all of the fees charged by the issuer before entering into the credit agreement.
While the credit card market is competitive, the government is increasingly concerned about the complexity of offerings and certain business practices of issuers. For example, with introductory teaser rates, it is becoming more difficult for consumers to understand and compare credit products. How institutions collect debt is not a disclosure matter, but it is important as well.
To this end, as part of this year's budget, the government committed to developing several measures relating to credit cards, including improving disclosure to consumers and limiting business practices that are not beneficial to consumers.
Authority for the new disclosure initiatives arises from the government's longstanding legislative powers in this area. Authority for the regulation of business practices in this area was provided by Parliament in the budget implementation bill that was recently enacted.
For example, the government will make improvements in areas such as the provision of clear and simple information on credit card application forms and contracts and clear and timely advance notice of changes in rates and fees. In addition, the government will require a minimum grace period on new purchases made with a credit card and move to improved debt collection practices of federally-regulated financial institutions. With the passage of the Budget Implementation Act, the government is moving quickly to bring forward regulations for public consultation.
While there are elements of the new regulations that remain to be worked out, the government expects to bring forward regulations that are consistent with its overall approach to consumer protection in financial services, which, as I noted earlier, focuses on encouraging competition and mandating disclosure.
The government is of course aware of the controversy surrounding the setting of credit card interchange fees. I will just note at this point that as these fees are set by the card companies, and as these companies are not federally- regulated financial institutions, the initiative that I have just outlined will not have any direct bearing on that issue. That said, other areas of federal law are potentially relevant, notably in the area of competition policy.
In the interest of completeness, I will now make a few brief comments on debit card payments. Debit card payments are structured in a similar manner to credit card payments although there are a couple of notable differences. First, on many transactions, the interchange fee is set at zero. Second, merchants are typically charged a flat, per transaction, fee rather than a percentage of the purchase price. These features may change over time, however, as there are now more firms offering debit payment services, and the dominant provider, Interac, is seeking to restructure.
We would like to thank you for providing an opportunity to address this Committee. I would be pleased to respond to any questions you may have.
[English]
The Deputy Chair: Thank you for the clear and enlightening presentation, Mr. Rudin.
[Translation]
Senator Ringuette: Mr. Rudin, we are most happy that you are here to assist us in clarifying this whole issue.
[English]
I have met with representatives of both the banking community and the credit card companies. Visa and MasterCard say that the banks issuing the credit cards set the interchange fees and the banks say that Visa and MasterCard set the interchange fees. I was hoping that you would clarify the matter for us.
However, on page 13 of your submission, you say: ``I will just note at this point that as these fees are set by the card companies. . .'' You are saying that the credit card companies set the fees, that is, MasterCard and Visa which hold 80 per cent of the market in Canada. Is that correct?
Mr. Rudin: Yes, my understanding is the interchange fee is established by the card network, but it is remitted to the financial institution that issued the consumer the card. There is an involvement by both groups.
Senator Ringuette: In the sketch you have provided, under card holders' financial institution — the issuer, is the interchange fee. Under the credit card network there is no interchange fee there.
Mr. Rudin: That is right.
Senator Ringuette: You have not clarified this issue in your presentation. Who determines the interchange fees?
Mr. Rudin: The fee is set by the card network — Visa, MasterCard, American Express. The fee is remitted to the financial institution that issued the card to the consumer. For example, I might set a price for something without being the seller of the item and, therefore, the one who receives the revenue. That is the notion.
Senator Ringuette: Okay.
[Translation]
Senator Hervieux-Payette: I do not understand: Who keeps the money? Does it go into the bank's earnings or Visa's? I would like this to be clarified.
It is not because you are the one setting the fee that you get to keep the money. This will therefore have to appear in the bank's financial statements as $1.50 in income, just like when I go to the ATM. And you are saying that it is Visa or MasterCard that sets the amount, but who keeps it? That is what interests us.
Mr. Rudin: It is the financial institution of the card holder that retains the fee.
[English]
Senator Ringuette: Visa and MasterCard — we always use these two companies because they hold 80 per cent of the market — remit the fees that have been set by the banks?
Mr. Rudin: No. They establish the fee, but I would not say they remit it.
Senator Ringuette: You just told us that the financial institutions establish the fees.
Mr. Rudin: I hope I did not.
Senator Ringuette: That is what I understood.
[Translation]
Senator Hervieux-Payette: I asked who keeps the fee. I did not ask who sets it. I understood that it is Visa and MasterCard that set the fee at $1.50, but that it is the bank that issued the card that kept the money.
The Deputy Chair: We all agree on that.
[English]
Senator Moore: I have a point of clarification, Mr. Chair. Senator Ringuette mentioned that Visa and MasterCard have 80 per cent of the market. I think it is 94 per cent. Can our researchers confirm if that is correct?
Unidentified speaker: Yes.
Senator Ringuette: In your example that you have given, an interchange fee of $1.50 goes to the financial institution.
Mr. Rudin: The consumer's financial institution.
Senator Ringuette: Yes. BMO or whatever institution the consumer uses.
Mr. Rudin: It may be a bank or —
Senator Ringuette: How much of that interchange fee goes to the credit card network?
Mr. Rudin: The credit card networks collect fees from both the financial institutions that issue cards and the processor.
Senator Ringuette: They get money from both ends.
Mr. Rudin: They have arrangements with them to connect to their network and for the other services they provide.
Senator Ringuette: Okay. It is a very nice manner of organization.
I have a copy that was sent to me of the Cost of Borrowing (Banks) Regulation. In your presentation, you say that the government will clarify some things. It is already clarified in this.
Mr. Rudin: There are existing disclosure regulations in the credit card area, and the government's intention is to enhance those regulations.
Senator Harb: Thank you for your presentation. You mentioned that the use of debit cards is much higher than the use of credit cards in Canada. Would you agree that it is also probably the highest of any other developed country in the world?
Mr. Rudin: I believe, according to the BIS, Canada ranks second in the use of debit cards in the most recent data I have seen.
Senator Harb: Who is first?
Mr. Rudin: I do not know, but I can find it for you.
Senator Harb: How does Canada rank versus other developed countries in the use of credit cards?
Mr. Rudin: I believe we are second or third.
Senator Harb: We are also rather high on the list.
Mr. Rudin: Yes.
Senator Harb: There seems to be a discussion taking place with the Competition Bureau in terms of the Interac associations. There is another debate ongoing between MasterCard, Visa, merchants, et cetera. Amidst the continuing debates, to what extent is the Department of Finance Canada engaged? What role are you playing? Do you interact with the competition bureaus? Do you have a working committee? Are you having a discussion with them?
You mentioned that there are issues of federal jurisdiction and others of provincial jurisdiction. Your hands might be free in one case, but tied in the other.
Mr. Rudin: We have received a number of representations from stakeholders. We had a graphic demonstration of this earlier. We meet regularly with a variety of stakeholders and continue to do so. We are considering what our next steps would be, if any.
The Competition Bureau will be before the committee later this afternoon I believe. They will discuss the particular things in which they are involved and they do that independent of the Department of Finance.
Senator Harb: There is concern in the community on both sides of the issue. It is a rather charged issue and we will hear from both sides. Is it your view that this issue is important enough for a proactive role by the Department of Finance Canada in it or do you see yourself as a facilitator where you will leave it to the marketplace to decide and for the different players to come together and find an agreement among themselves? How do you see that unfolding?
Mr. Rudin: As I said, the department meets regularly with stakeholders and we are certainly looking at the issue. We have not intervened in it to date and we are considering what our next steps should be, if any.
The Deputy Chair: Thank you. We have 24 seconds left and six senators who wish to ask questions.
The questions are important and the witness is well informed. I will go somewhat over our time, but I would urge my colleagues and Mr. Rudin equally to be as brief as possible.
[Translation]
Senator Massicotte: There are two active parties in the process. Is there sufficient competition to ensure that there is no overcharging of services offered? Secondly, are consumers aware of the differences, because merchants are often charged the 2 per cent you referred to in your opening statement? What comment would you have in this regard? Is there sufficient competition to allow the market to dictate supply and demand? Should the government intervene, yes or no, so as to ensure that the services offered are fair, and for that purpose only?
Mr. Rudin: I will more or less repeat what I have just told Senator Harb. We are continuing to interact with the stakeholders and we are continuing to study the matter. For the time being, at least, we are not planning any direct intervention, but we are looking into the next steps.
Senator Massicotte: I was surprised when I heard all of the reports. The credit card issuers' agreement is that they do not charge interest on credit card balances for 21 days. These are promotion costs. But if you miss your payment deadline by just a day, the interest is charged to your account for the 21 days. Their argument was to say that this is a promotion and that they clearly are entitled to charge this interest. The argument is valid, and I accept it. But are consumers aware of the situation and thus in a position to make an enlightened choice? Do you believe that the market is aware of these credit conditions or is it just a gimmick to go after additional revenue without the market being aware of these credit conditions?
Mr. Rudin: There is already in place mandatory disclosure to consumers by those financial institutions that issue credit cards. This accountability framework provides for the disclosure to consumers of the fees paid as set costs only. The framework is in place, and it is a good one, but the government has committed to improving the disclosure process, precisely so as to ensure that consumers are better informed and thus in a position to make better decisions and to understand the contract offered by the credit card issuer.
[English]
The Deputy Chair: A quick clarification: Are there not provincial regulations that also deal with what has to be divulged to the consumer, which would be applicable to credit cards?
Mr. Rudin: There are two types of regulations in this regard. There are regulations by provinces for provincially regulated financial institutions — credit unions and caisses populaires. When it comes to the cost of borrowing, these are regulations which are developed under a federal-provincial agreement.
Senator Tkachuk: I wanted to break up the two sets of consumers. One set of consumers is the retailer. He is buying the services of the credit card company. He is paying a fee to the credit card company — 2 per cent or 3 per cent — whatever the number is; I do not know what American Express charges.
Do you think there is enough competition to the retailer for credit card access? It seems there are really two brand names out there, Visa and MasterCard. No one else is getting in the market and I have no idea why. It seems fairly lucrative and yet those are the only two. AMEX, Diner's Club, et cetera have not really made a big dent in that market.
Is there any way to encourage more competition in that marketplace? That is the only way to get those prices down, I think.
Mr. Rudin: There are two things. You are quite right that there are two sorts of customers. There is the merchant and the end customer, the person buying the product. When I talk about the consumer regime, I am talking about the individuals, not the regime for merchants.
The question as to whether there is sufficient competition among the card networks, and what can be done if there is not, is an important one. I am not in a position to say anything definitive about that. It is not, prima facie, a problem if there are only two suppliers. However, it is something that has obviously been pointed to by many stakeholders as a potential issue.
I am not aware of any obstacles to the creation of a new card network that arise from federal law or regulation. If there were any, that would be something we would be happy to have brought to our attention.
Senator Tkachuk: On the other side, the consuming public, there seems to be a lot of competition — different interest rates from quite inexpensive to quite high, depending on what other goodies they pop on it, like points and all of those other things. That is what really gets the consumer into trouble, trying to get points and other stuff on their card besides the product they buy. The credit card companies charge a higher interest rate for that. You can pay anywhere from 18 per cent to 28 per cent if you fail to make your payment at the end of the month.
However, if you get a credit card that does not have all these goodies but just has the product, you can get them as low as 5 or 6 per cent. Is that correct?
Mr. Rudin: Yes, there is quite a variation.
Senator Tkachuk: So there is a lot of competition there. The problem is, I think, on the other end. Is the retailer getting squeezed on his percentage which is, of course, passed on to the consumer?
Mr. Rudin: I am just looking at the chair. He is asking me to be brief.
Senator Tkachuk: My testimony is correct, obviously.
The Deputy Chair: I was just thinking, Senator Tkachuk, you would make an excellent witness.
Senator Tkachuk: I was just trying to be clear.
The Deputy Chair: Thank you, senator. That was a good observation.
The next senator on the list is Senator Moore.
Senator Moore: Thank you, chair, and Mr. Rudin for being here.
Just to follow up on Senator Tkachuk's question, he mentioned Visa and MasterCard. It is a matter of record now they control 94 per cent of the market in Canada.
Who owns Visa and who owns MasterCard? Do you know? Are they publicly traded?
Mr. Rudin: I believe that they have organized as public companies, but that differs from country to country. I would need to verify that.
Senator Moore: It was mentioned as well about the confusion on the various features that are offered. I notice on page 10 of your brief, you say the government is increasingly concerned about the complexity of offerings and certain business practices of issues. You mention that teaser rates became more difficult for customers to understand and compare.
We have had correspondence from the Canadian Restaurant and Food Services Association saying that their operators are experiencing increased charges for accepting payment in credit cards. They are complaining about unfair business practices by the issuing banks. Are you looking into that? What are you looking into here?
Mr. Rudin: The initiatives that were discussed in the budget that I mentioned in my opening remarks are initiatives that will have new requirements placed on the relationship between the federally regulated financial institutions that issue credit cards and the consumers who hold them — all of us with the cards in our pocket.
Some of the issues that are raised by stakeholders, including the restaurant association, are about the relationship between the merchants, the restaurateurs, and the credit card networks.
Senator Moore: Interac?
Mr. Rudin: Visa and MasterCard, in particular. They are not the focus of the initiatives that were rolled out or announced in the recent budget.
That said, as I have said earlier, we have met with a number of stakeholder groups and continue to do so on the other issues that arise in this context.
The Deputy Chair: Is this your last question, Senator Moore?
Senator Moore: Interac is an important player. You mentioned that it is seeking to restructure. What can you put on record about that? What is its current structure and what is it attempting to do?
Mr. Rudin: You will get better information about that from Interac. My understanding is that they are more or less a cooperative association of financial institutions and they are considering restructuring as a for-profit company.
Senator Moore: They are currently not-for-profit.
Mr. Rudin: Yes.
Senator Fox: I put myself in the position of an average Canadian consumer. The question being asked is: Why are credit card rates so high and there is no price competition that I know of.
The second question is: Why has not the cost of interest come down when the cost of money has come down. Most Canadians ask us those two questions. I have not heard a satisfactory answer to date.
Mr. Rudin: As we were discussing, there is quite a variety of interest rates charged by the various credit cards.
Senator Fox: Stay with Visa or MasterCard, which are at 19 per cent or higher with no price competition.
Mr. Rudin: The interest rate that a consumer faces on their credit card, whether MasterCard or Visa, is neither determined nor collected in this case by MasterCard or Visa. This is an arrangement they have with the financial institution that issued the card, which might be a bank or a credit union or some other institution. In this regard, even within a single financial institution that is issuing cards there can be a considerable range of interest rates charged. Some, but by no means all, of these interest rates are linked to the prime rate. The ones so linked have come down as the prime rate has fallen in recent months. There might be other interest rates not linked to the prime rate that have fallen less or not at all.
[Translation]
Senator Hervieux-Payette: I would like to follow up on my colleague's question. We saw the whole debate about asset-backed commercial paper. Credit cards were part of this commercial paper. The problem was that anyone, from university students to whomever — and I am not saying that students are not solvent —, could borrow, but it remains that when people have very limited income, someone gets stuck with the loss. And we saw the panic that ensued. The chase was on to see who, among the competitors, was going to issue the most cards. No one even asked who was going to pay. In any event, it was going to be the other people paying their credit cards who were going to pay.
The Chairman of our committee dealt a lot with bankruptcies. The situation did indeed throw consumers into bankruptcy. It seems that there is a hole in our system such that anyone can obtain anything no matter what. I put the question to you because 20 years ago, I was required to practically provide the name of my great-grandmother, and today, people do not have to provide anything. The number of questions we were asked back then was unbelievable. Today, there is virtually no credit check. The financial institutions cover themselves and it is the card-holders who get stuck. It is a true free-for-all.
My question is the following: is there a way to get financial institutions to show some moderation in their issuing of cards to people who are not solvent?
Mr. Rudin: Two things: first of all, given your interest in the decision-making practices of financial institutions with regard to consumer credit, if you wish to obtain the most direct information, I would invite you to put your questions directly to the bankers or their representatives. That being said, I would mention that federally-regulated financial institutions are under the supervision of the superintendent of financial institutions, the purpose being to ensure that their practices are prudent in the interest of the continuity of the institution. That aspect is already covered.
[English]
Senator Greene: There is one issue, which Senator Tkachuk spoke about: The lack of competition amongst credit card networks.
There is more of a perception of a problem in this area rather than perhaps a real problem. Has the Department of Finance done any public opinion surveys on what individual consumers and small business owners think about all of these areas?
Mr. Rudin: I am not aware of any public survey work done by the department on this. I would imagine that some survey material, in particular done by stakeholder groups, would be available to us.
Senator Greene: Such survey information might not be trustworthy in many ways.
Senator Ringuette: In the bank regulations, under interpretation, it says that credit agreement includes an agreement for a line of credit, credit card or any kind of loan. I guess the Department of Finance, under the banking regulations, considers a line of credit and a credit card the same.
Mr. Rudin: The disclosure requirements are the same, whether it is a line of credit or a credit card agreement. That is correct.
Senator Ringuette: It is the same thing.
The Chair: That was an informative discussion. I hope we will have the opportunity to consult with you again. Mr. Rudin, If any questions arise in your area of expertise.
I welcome our next witness, Mr. Richard Taylor and Ms. Martine Dagenais, from the Competition Bureau of Canada. Mr. Taylor, please proceed.
Richard Taylor, Deputy Commissioner of Competition, Civil Matters Branch, Competition Bureau Canada: Thank you for inviting the Competition Bureau Canada to take part in the committee's hearing on credit card and debit card issues. Joining me today is Ms. Martine Dagenais, Assistant Deputy Commissioner of Competition, Civil Matters Branch, Competition Bureau Canada.
I will begin with a few words about the Competition Bureau and its mandate. The CBC is an independent law enforcement agency responsible for administering and enforcing the Competition Act. The bureau contributes to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice.
[Translation]
We consider competition to be a valid and creative force in our economy. It encourages innovation, low prices, efficiency and greater choice for consumers.
[English]
In the Competition Act, Parliament has identified and prohibited a number of activities that undermine a competitive marketplace.
As a statute of general application, the Competition Act does not attempt to regulate individual transactions between buyers and sellers. Rather, the act seeks to develop and maintain the conditions necessary for a competitive marketplace by prohibiting a number of anti-competitive practices such as: price fixing, bid rigging, abuse of dominant position, deceptive marketing, and those mergers that would lead to a significant lessening of competition. These practices are likely to have a significant negative impact on competition and are contained in the Competition Act. The act is a piece of legislation that, in one form or another, has existed for over 120 years. It is the job of the Competition Bureau and all those who work there to enforce these provisions at all times.
Let me turn to the issue of credit cards. I want to stress that the bureau takes seriously the possibility of any contravention of the Competition Act. At this time, one of the bureau's priorities is completing our ongoing investigation into the issue of payment card interchange fees to ensure that the act has not been breached. This is more than a $370-billion market and we do not take such markets or matters lightly.
If we find evidence that the act has been violated or is being violated, we will not hesitate to take action. I would also note that Canada is not the only jurisdiction looking at whether the way interchange fees are set is a possible violation of competition laws.
Allow me to explain briefly exactly what the bureau can investigate. It is important to note that, under the act, businesses are generally free to set their own prices at whatever level the market will bear. For the Competition Bureau, high prices or fees are a concern only when they are the result of a contravention of the act, such as price fixing or the abuse of a dominant position. Let me be very clear on this point: The Competition Bureau, as an independent law enforcement agency, does not have the ability to mandate, regulate or decide prices in any industry, including with respect to interchange fees.
I am constrained by the confidentiality provisions of the act from discussing specifics of our investigations. I can confirm to the committee that with respect to how interchange fees are set, we are looking at whether there may have been a contravention of section 79 or other sections of the act. Section 79, Abuse of Dominant Position, prohibits dominant firms from engaging in practices that have had, are having or are likely to have the effect of preventing or lessening competition in a market. If during this investigation we find evidence of a breach of the provisions of the Competition Act, we will act.
[Translation]
In order to apprise itself of the implementation activities, the Bureau followed the various developments within the credit card industry in Canada, including the restructuring of Visa and MasterCard. Furthermore, the Bureau followed very closely the private dispute in the United States as well as Australia's regulatory measures and the inquiries carried out by foreign anti-trust authorities.
[English]
Let me address the Interac issue. It has been widely reported in the media that Interac has approached the bureau. Interac has decided to seek the bureau's consent before it files an application with the Competition Tribunal to be allowed to restructure from a not-for-profit association to a for-profit entity. As this matter is currently under review and likely to go to the Competition Bureau, further comment on this issue is constrained by the confidentiality provisions of the act found in section 29 and enforced by section 64.
I would like to clarify one point that keeps coming up in the media regarding concerns that Interac would be able to start charging interchange fees on debit transactions if it were allowed to restructure. As you are aware, in 1996, the bureau and Interac entered into a consent order that addressed concerns the bureau had regarding the activity of the members of Interac — at that time, mostly the large Canadian banks — who controlled the debit network. The consent order provided for several measures to increase competition in the market for debit products, including easier access to their network.
As my colleague from the Department of Finance said, membership in the network has grown to over 60 firms from the original nine at the time we took action. This is an example of the kind of work the bureau does on behalf of a competitive economy, ensuring there are no illegitimate or artificial barriers to entry. However, the point is that whatever the bureau's position on Interac's desire to restructure as a for-profit entity, restructuring will have no impact on Interac's ability to charge interchange fees. They have that right today. The consent order Interac is seeking to change does not address the level of interchange fees.
Thank you, Mr. Chair. My colleague and I welcome any questions committee members may have.
[Translation]
The Deputy Chair: Do you have anything to add, Ms. Dagenais, or would you prefer to wait for questions?
Martine Dagenais, Assistant Deputy Commissioner of Competition, Civil Matters Branch, Competition Bureau Canada: I will wait for questions.
The Deputy Chair: I will ask my colleagues to limit themselves to one question, and there could always be a second round, if need be.
[English]
Senator Harb: The Competition Bureau wants to increase and improve competition. Interac, as a not-for-profit organization now is a monopoly. The preferable choice of the Competition Bureau is to see more people entering the market. Is that correct?
Mr. Taylor: I think I stated that the act we enforce comes from Parliament, and was strengthened most recently by Bill C-10. It does not make it illegal for a monopolist to charge a high price.
The Deputy Chair: Thank you. Not a very welcome answer, but a truthful answer.
Senator Tkachuk: Have you started or contemplated an investigation for monopoly practices by either of the credit card companies — Visa and MasterCard — over the last number of months or years?
Mr. Taylor: We are currently investigating the credit card companies under section 79 of the Competition Act, Abuse of Dominant Position.
Senator Tkachuk: Is this with regard what they charge the retailer? Is this a result from complaints by retailers or how did this start?
Mr. Taylor: We initially commenced the investigation or examination ourselves based upon things we were observing around the world, particularly in England and Australia. Subsequent to that, we have had complaints from a large number of stakeholders, which has led us to intensify our efforts.
Senator Oliver: Have you had complaints from stakeholders in Canada and if so, who would the stakeholders be?
Mr. Taylor: They would be numerous. Obviously, many of the merchants that have to accept these cards and pay the fees demanded have complained to us at one time or another. I believe they include the Canadian Federation of Independent Business, Retail Council of Canada, Canadian Federation of Independent Grocers and a number of others.
The Deputy Chair: We will be hearing from all of those people as witnesses. We will get more information from them.
[Translation]
Senator Massicotte: You are very familiar with Interac, that wishes to become a for-profit company. Does that concern you?
[English]
Is there a concern that if Interac becomes a for-profit company, given that they have a dominant position, there will be a lack of competition?
Mr. Rudin: We are concerned. The most important thing I could convey to the chair today is that we are not concerned about things that are not in our act. Our act is specific about the types of business practices, structures and circumstances that give rise to potential action before the courts under our act.
We are concerned when a dominant company abuses its dominant position by trying to eliminate or exclude rivals and that leads to a price increase. We are concerned when competitors or companies in the same business agree among themselves to raise prices.
We are concerned about those practices. The current Competition Act as amended by Bill C-10, has about 130 provisions and 30 of them are probably substantive, dealing with specific business practices — bid rigging, price fixing, mergers that lead to a substantial lessening of competition, refusal to deal, resale price maintenance, abuse of dominance and —
The Deputy Chair: Predatory practices.
Mr. Rudin: Predatory practices, yes.
Senator Moore: As I understand it, the 1996 consent order gave Interac the right to set an interchange fee on debit card transactions, and they always set the debit card transaction fee at zero. Is that still the situation?
Ms. Dagenais: It is.
Senator Moore: The interchange fee for ABM transactions is 75 cents, is that right?
Ms. Dagenais: I do not have the exact number but we can find out.
Senator Moore: I am confused with regard to what is called the switch fee and interchange fee. Does the interchange fee include the switch fee? What are those two fees?
Mr. Taylor: The switch fee is the network fee. That is what the card network gets. The interchange fee is below that, and that is what the issuer and acquirer pay each other. I think that the switch fee is a little different fee.
If you look at the chart that the Department of Finance gave you — we have our own version — they have a bunch of parties and the fees. I think the switch fee in the Interac parlance — my colleague will correct me if I am wrong — is what we call the network fee.
Senator Moore: That goes to Interac?
Mr. Rudin: That is right.
The Deputy Chair: Could you provide us with a copy of your diagram? We already have the one from Finance and we would appreciate receiving yours. I assume it is in both languages? Thank you.
Senator Greene: What is the timetable of your investigation and what form will it take? What will you actually do?
Mr. Taylor: We have been concerned by the volume and significance of the complaints we have received. We have put resources on the file commensurate with the level of concern concerning payment cards and interchange fees.
I cannot give you a time frame. The investigations we do are complicated. If there is something that is a potential violation of our act, it has to go to the courts — either the criminal courts or, if it is price fixing or bid rigging, they go to the civil Competition Tribunal. They are very evidence-intensive and complicated, and it can take some time. The last thing we want to do is go off in a half-baked way.
Senator Ringuette: I appreciate the work you are doing and its complexity.
In regard to the debit card system, it is a matter to which the first witness alluded. He said that for the time being, there is a flat charge per transaction but that these features may change over time. There are now more firms offering debit payment service, et cetera.
In your look into the Interac debit card situation in Canada, currently Statistics Canada says that it costs 12 cents per transaction on average. Australian legislation has capped that at 12 cents.
We know that the debit card situation in the U.S. has changed drastically from the time that Star Alliance — which was the counterpart of Interac in the U.S. — started to market the debit card with the financial institutions. It was a transaction-based fee like Interac. When the market was opened up, we had MasterCard and Visa in the market. They hold more than 70 per cent of the debit card market in the U.S., and the debit card fee structure has changed from a transaction fee basis to a percentage of sales basis, just like the credit card structure.
Are you looking at what happened in the U.S. experience in the debit card market before you make a decision in regard to Canada's Interac debit card system?
Mr. Taylor: We need to go back and look at the 1996 consent order that was designed to address a specific problem. The problem was that the nine founding members of Interac, mostly the banks, caisses populaires and Credit Union Central, were not allowing anybody to join. We fixed that and you have now over 60 members. That was the consent order, which is still in place today.
They have to get the Competition Tribunal's approval, which is part of the Federal Court, to release them from that obligation. That is done at a public hearing.
It is very important to know that is not necessarily dealing with the same thing this committee is dealing with. That was a 1996 issue. From what I have read and from what I can understand, you are dealing with the question of fees — whether it is switch fee, network fees, access fees or interchange fees.
That is a different question. All I can say is we are looking at all of it.
Senator Ringuette: You are looking at the American experience.
Mr. Taylor: We are aware of and familiar with the American experience and what happened to Star Alliance upon the entry of Visa and MasterCard into the debit market.
The Deputy Chair: We appreciate your having come to enlighten us on this.
[Translation]
The second part of this evening's session will be devoted to credit cards from the perspective of consumers, a very important aspect of Senator Ringuette's motion.
[English]
Canadians have embraced credit cards more than almost any other country in the world. According to the Bank for International Settlements, there were some 64.5 million credit cards in use in Canada in 2007. I believe that members of my family have significantly increased that number. With the advent of the financial crisis, however, some are concerned that households might be increasingly burdened by rising credit card interest rates and shorter interest-free grace periods.
In times such as these, there is perhaps an increased need for consumers to select the credit card that is best suited to their individual needs. To tell us more about the federal agency whose role includes informing and educating consumers about selected financial issues, including credit cards, we are pleased to have before us Ms. Ursula Menke, Commissioner, Financial Consumer Agency of Canada. We have had the pleasure of hearing from her before on this committee and she is always highly informative and clear, as I am sure she will be this time. Ms. Menke, please proceed.
[Translation]
Ursula Menke, Commissioner, Financial Consumer Agency of Canada (FCAC): Thank you for having invited the Financial Consumer Agency of Canada to appear before you today.
[English]
I believe that a copy of my opening remarks has been circulated, so I will speak to the highlights only.
The role of the FCAC is limited with respect to the specific nature of the present study. The overall effect of our work produces real and widespread benefits for individuals and the Canadian financial sector in general.
The FCAC has two principal roles: First, it promotes and ensures compliance by federally regulated financial institutions with the consumer provisions in the legislation. Second, the FCAC is charged with a complementary consumer education role. Through its consumer education mandate, the FCAC provides objective and timely information to help Canadians understand and shop around for day-to-day financial products and services.
[Translation]
It is worth noting that the compliance and consumer education roles of FCAC's mandate are inextricably linked. They support and complement each other. In essence, the consumer provisions provide consumers with detailed disclosure about the product or service they wish to procure. Our education role is aimed at ensuring that they have the knowledge and confidence to make informed use of that disclosure.
[English]
We do not have a role to play in the setting of interest rates or service fees, so we try to help consumers by providing them with objective financial information and education. As you know, financial products such as credit cards and bank accounts are an indispensable part of everyday life. From our surveys, we have learned that many Canadians are not using their financial products to their best advantage. To take the example of credit cards, many consumers are not using them as a method of payment. Instead, they rely on them, in effect, to borrow money. That is an extremely costly way of borrowing money.
[Translation]
Through our website, we offer interactive tools that allow customers to quickly and easily compare the various financial services and products available to them. For example, our credit card selector tool allows users to compare more than 250 credit cards to find the best product for their needs.
[English]
Beyond information on financial products and services, we promote broader financial education. We have directed our initial efforts at Canadians, in particular at youth. We believe that early exposure to financial skills will serve people well throughout their lives. In conjunction with the British Columbia Securities Commission, the FCAC launched a new course last fall called, The City: A Financial Life Skills Resource, which is aimed specifically at the learning needs of 15 to 18-year-olds. We are excited about the program because it is designed to give all young Canadians a solid foundation of basic financial acumen.
There is no shortcut or magic solution to elevating money smarts. It is a long road but I believe we can make headway through initiatives such as The City. All interested parties, governments, the private sector and the volunteer sector must work together to achieve lasting and meaningful improvements in the financial knowledge and the financial future of all Canadians.
In closing, I would like to thank you for the opportunity to appear before the committee. I look forward to answering your questions.
The Deputy Chair: Thank you, Ms. Menke.
Senator Greene: What are the top three things about credit cards that the average consumer misunderstands?
Ms. Menke: We receive a variety of complaints and concerns that are centered around features. At times, consumers do not understand the features associated with the credit card, such as optional services. Complaints are a different issue.
Senator Greene: Let us talk about complaints.
Ms. Menke: We receive complaints about the interest rates, for example, which is ongoing.
Senator Greene: They understand that.
Ms. Menke: Yes, they do understand.
Senator Greene: They understand but they complain.
The Deputy Chair: Thank you for the brevity of those questions, Senator Greene.
Senator Harb: A little earlier it was mentioned that there are over 65 million cards in Canada. The fact that we have so many cards proves that we have so many choices for people. My question is: Do you collect any information or data on the percentage of people who fail to make their payments? We know about the financial institutions, such as banks. Does the FCAC have such data? If so, could you provide them to the committee?
Ms. Menke: I can provide you with what we have but we do not collect data directly on that, although we have our surveys.
In 2006, we did a survey of the general population. It gave us some very interesting information identifying that about 40 per cent of the population, on average, regularly carries a balance on their credit card.
Last year, we did a survey of younger people. It showed that they tend to carry balances on their credit cards as well. About 60 per cent of them were in debt. Of that number, approximately 65 per cent of them included credit card debt.
Senator Harb: I think it was the Canadian Federation of Independent Business that appeared before us as well as the Canadian Manufacturers & Exporters Association. Both had done surveys. They were explaining what happens in the community and the fact that there are bad things and good things.
Have you done any surveys yourself to inform us, as well as the public, what is happening out there? Are things as bad as they seem? Will they get worse based on trends you have seen in the past? What can you tell us so that we can be prepared?
Ms. Menke: Unfortunately, I can tell you very little because we have not done a survey since the one focused on youth last year.
The information we have is non-survey; it is from the contacts we receive from consumers. I am talking about complaints — people who contact our call centre or correspond with us as opposed to people going to our web site. It is my general hypothesis that those going to the web site are looking for information.
Based on the telephone calls, we have no indication from the trends in the calls that there are increasing concerns. We recently updated the interactive tool I was referencing. We have over 250 credit cards on that. There were some increases in credit card fees and also some low-interest credit cards had disappeared. Therefore, we know objectively that some things are happening. We are not seeing that activity reflected in the comments we are receiving at our agency.
Senator Oliver: My questions are about financial literacy. First, is financial literacy improving? Second, do you work with the Canadian Bankers Association or with Canadian bank branches in helping to promote literacy at the branches of the banks? Third, this committee is looking to develop good public policy for Canadians. What would you recommend for this committee to recommend to the government to help improve financial literacy in Canada?
Ms. Menke: Let me try and go through them one at a time.
Right now, we have a major survey ongoing with Statistics Canada to measure a baseline on financial literacy. That will be the first real survey. We will be surveying about 20,000 people. Therefore, we should get some very solid baseline information.
Senator Oliver: Young or old?
Ms. Menke: Across the spectrum.
Other countries have done that. I suspect our results will not be much different. However, we will wait and see what we get.
Certain indicators within some surveys we have done in the past lead me to believe that our financial literacy is not what it should be. In the credit card example, the fact that people run balances on their credit cards is a sign of the lack of financial literacy for me. I would like to see that disappear.
Second, yes, I work with Canadian bankers and any other partner I can find to improve financial literacy. For example, we have developed a program with the British Columbia Securities Commission.
We also have a specific partnership with the Canadian Bankers Association sending bankers into schools. To say they are teaching would be too strong a word. They spend about 40 minutes creating awareness of the need for financial literacy and promoting our product, The City.
We have a variety of other partnerships. For example, in each province, we have teacher champions to help us promote financial literacy. We take a multipronged approach to promote financial literacy across the country as much as possible.
I am sorry; I have forgotten your third question.
Senator Oliver: What would you recommend to public policy makers?
Ms. Menke: At the end of the day, we need to see financial literacy in the schools. I understand that I am not giving you much help with that recommendation. However, I believe it is a life skill, it should be taught in the schools and it should be taught from a young age. That is when our youth will remember it best. You learn and it stays with you for the rest of your life.
That is my ultimate objective. I would like to see more in the schools. I am trying to work on that in a variety of ways.
As a public policy recommendation, I realize it is not particularly useful for you.
[Translation]
Senator Massicotte: I think that we are all in agreement: the purpose of your agency is to ensure that consumers are aware of the conditions of the options they choose. The trend is not for the government to impose choices on the players in the market, but to ensure that there is healthy competition.
You believe that consumers are not sufficiently aware, the example given to illustrate this being that 40 per cent of credit card holders do not pay their balance in its entirety. You have received comments about the interest rates that are charged. The general impression is that consumers are not familiar with these rather complicated conditions. Is the issue that consumers are not aware of the lending provisions of their credit cards or is it that they are not interested or do not consider these choices to be relevant?
You mentioned your website that offers comparisons between various credit cards. There are those who visit it, but it nevertheless remains that 40 per cent of card holders owe money on their credit cards. Perhaps it is because it is more convenient; it is easier to have a balance on your credit card than to seek out a bank loan. Is it really a matter of transparency or of knowledge or of choice on the part of the consumer?
Ms. Menke: You are asking me to speculate. I cannot respond to your question with facts. Indeed, I do not have any facts in support of an answer.
We might have a better answer once the survey has been completed. But, for the time being, it really is a matter of speculation.
I imagine that it always comes back to the issue of financial literacy, which is important. It is important that people understand that owing money on a credit card is very costly. And if they are unable to regularly pay off their balance, then it would be in their interest to look for something else. What I try to do, first and foremost, is help people understand that this is important.
The youth survey we carried out comes to mind. It was really very interesting to see that young people, though quite well educated, are only paying the minimum amount. They do not seem to realize the cost of the privilege of only having to pay the minimum. It really is a matter of opening their eyes.
Senator Massicotte: If you take your typical consumer, I hear frustrating comments, but not about the interest rates. We think that they are not aware. We hear a lot of comments about the fact that if you do not pay on time, you will pay interest from the very first day.
Based on what you know, are consumers aware of these rather harsh conditions for non-payment of the balance, if you are one or two days late?
Ms. Menke: I am unable to answer your question with facts; quite frankly, it would be pure speculation. It is difficult to say if they are very informed about the rules pertaining to the grace periods or not. I cannot clearly say.
Senator Massicotte: Do you think that we should force the companies to be clear with consumers with regard to these conditions? Should more of an effort be made in this regard?
Ms. Menke: In my opinion, and it is one of the things that I am promoting with all of the financial institutions I am working with, there is a need to make the conditions that apply to all of their financial products clearer, more transparent and easier to understand. Clarity is always a good thing. Am I able to draw a link? I cannot say if I can draw a link, but I presume that if the information were even clearer, it would be easier still for people to understand and make enlightened choices.
[English]
Senator Moore: Regarding your comments and questions on financial literacy, it always makes me feel we are pointing the finger back to the consumer who does not understand. You mentioned on page 2 of your remarks that you ensure compliance by federally-regulated financial institutions with the consumer provisions in their legislation.
Do you do anything like institutional literacy? Are you trying to impress upon the financial institutions, who may issue credit facilities, cards or whatever, the importance of how they frame their marketing and how they must make clear to the consumers what the provisional features are?
Ms. Menke: In my remarks to financial institutions, I am always pressing upon them the importance of clear and straightforward disclosure.
We live in a regime of disclosure, primarily. On the one hand, the financial institutions disclose to consumers; on the other hand, the consumers need to be able to deal with the information they receive from financial institutions.
I am trying to promote clear and more straightforward disclosure all the time. I think it is an important thing.
Senator Moore: Is there legislative authority to do that, to assert your office?
Ms. Menke: Yes.
Senator Moore: There is nothing you need from this committee to recommend for you; you have what you need to do that.
Ms. Menke: There are always ways to improve and we are working on that. We are a relatively new agency, so I am being an apologist now. As we learn, we push further with the legislation and that is one thing we are doing.
In terms of clearness, there is a requirement in the regulations for clear and straightforward language and we are pushing that a little bit harder with the institutions now.
There are other things about the regulations that I would like to see — you wanted recommendations. I would love to see our regulatory framework be more principles-based. It is very directive right now. If it were more principles- based, it would be more supple and adjustable as times change. As we have seen, financial products come and go quickly and it would be useful if we were more principles-based.
Senator Moore: I have a question with respect to your compliance role, With the downturn in the economy — increased late payments, defaults — I have read in the financial papers of the United States that the banks there are increasing fees and rates. Are you monitoring the situation in Canada to ensure that is not happening here and creating a further burden on distressed consumers who are in those situations?
Ms. Menke: We monitor credit card interest rates and credit card fees. We regularly update our interactive tool that I was referring to. We do a lot of monitoring, and every half year we do a major monitoring exercise.
Do I ensure that such action does not happen? No. I have no authority to deal with fees or rates. All I can do is inform.
Senator Moore: Are you paying more attention today than you did six months ago? Are you doing it more regularly than every six months, in view of the economic situation?
Ms. Menke: We are regularly updating when something significant comes in.
We automatically contact the industry every six months, but in between, they contact us, too. They find our credit card tool quite helpful. They are busy telling us when they make changes as well. We make changes whenever we find out, but once every six months we do an update and we go out to them to find out what is changed.
[Translation]
Senator Fox: There is a trade practice that I have always failed to understand. I see that you have a tool that allows users to compare more than 250 credit cards, and these people should normally be drawn to the least costly among them. I do not understand how there can be 250 credit cards with much lower rates.
Have you done comparisons of business practices where the store offers furniture or refrigerators with zero cash down, zero interest, zero fees, and if you pay cash there is no advantage for you? Would you have a comment to make on this type of situation? I find it rather perverse to think that if you pay the entire amount, you are paying in part for those consumers who opt for a 36-month payment plan, and I really do not see that there is any freebee.
Ms. Menke: There is no freebee.
Senator Fox: Have you ever compared this type of thing with credit cards, to see if it is a good practice or not?
Ms. Menke: It is not a practice that we have studied because you are talking about the practices of some retailers and not the practices of financial institutions. I am limited to looking at what financial institutions are doing, and I therefore have never looked at that.
[English]
Senator Tkachuk: As a bit of follow up to what Senator Fox was talking about, you mentioned that people leave a balance on their credit card and do not realize how much it costs sometimes or all the time — I am not sure which.
We spend a lot of money on education in this country. We put most of our kids through university or tech school, and you are telling me they do not know the difference between 19 per cent, 4 per cent, 28 per cent and 6 per cent? Is it because they are buying a package rather than a credit card?
They are buying the credit card, plus the insurance and the trip to Hawaii they hope to get from the points. They are buying all those upload charges with the full intention that they will always pay the credit card at the end of the month and never have to pay the interest. However, they are only human and sometimes they do not. Can we stop people from being human?
Ms. Menke: I hope not.
Senator Tkachuk: That is my point. I do not get that the consumer does not know the difference on these interest rates, especially when they are educated. When you go to university, you get credit cards every day. They know what they are getting; they are not slow. They know exactly what they are getting.
Ms. Menke: Their parents pay.
Senator Tkachuk: Their parents might pay. Nonetheless, if they are responsible, it is a good way to establish credit so they can lease a car when they graduate and all the rest of the good stuff. Do you have statistics to show they do not know? Or is it that they do know and they buy something else and let it slide, make a mistake and get into trouble and do not know how to fix it?
Senator Massicotte: What credit card do you use, Senator Tkachuk?
Senator Tkachuk: I use a 28 per cent credit card.
I never pay any interest because I pay off the card each month. I use an American Express card because it gives me one point, and that is why people do that.
Ms. Menke: You have pointed out what happens, which comes back to what Senator Fox talked about. People make choices. Different cards have different attributes and people make choices on that basis. The information from 2006 is that 40 per cent of people regularly run a balance. With young people, roughly the same percentage regularly run a balance on their card and tend to pay the minimum amount due. That is the information I have.
Why are they doing that? I cannot answer that question for you. My only concern is that if they need to borrow money, there are less expensive ways of doing it that they might not know about. That is where the financial literacy and education come in, to ensure that they understand the differences between the various products available and where they come from. That is why I want to promote financial literacy. I do not know why they are doing it. Perhaps it is a purely conscious decision and they are happy with it. However, perhaps they are just not thinking about it.
Senator Ringuette: I have in front of me a few ad mails that I received last week. Are you looking into the mass marketing by MasterCard and Visa in respect of supplying non-solicited credit cards? The ads say, ``You are guaranteed a new Capital One MasterCard with a credit limit of up to $6,000 and no annual fee and only pay 3 per cent of your balance or ten dollars.''
Senator Tkachuk: You have never done that?
Senator Ringuette: I have not done that. I come from New Brunswick, so I have a different perspective. You are either an eastern politician or a western politician.
Do you look at these ads in terms of educating consumers? Do you talk to your banker friends that you want to assist in educating financially the population? Do you look at these?
Ms. Menke: Absolutely. We have been working with MasterCard to develop a model application form because MasterCard is interested in ensuring that people understand what they are getting into when they sign up for a credit card. Neither MasterCard nor I is in a position to force any particular model of disclosure upon them but we very much encourage clear and complete disclosure.
If you want me to take a look at those, please send them to me. I cannot comment on those because I have not seen them. As a general rule, we have not seen serious problems with disclosure, but whether I like the disclosure and the style is a different story. As a general rule, there are no problems with disclosure. I have not seen the form of mass marketing that you have today, senator.
Senator Ringuette: It is from MasterCard.
Ms. Menke: It is a bank generated ad, I assume.
Senator Ringuette: The credit card companies and the banks work in cooperation.
My second question is: If the default rate on credit cards or lines of credit were at 1 per cent, would you consider that low in your experience with the banking community?
Ms. Menke: I do not look at those kinds of numbers from that perspective, so I cannot comment on that, quite frankly.
Senator Ringuette: You commented that 40 per cent of people run a balance on their credit cards. I thought that because you know that percentage, you might know the default rate.
Ms. Menke: I am afraid I do not know it because I have never asked that question.
Senator Ringuette: The default rate is 1 per cent as of January 31. The information can be found on the Canadian Bankers Association website.
A few years ago, I had a visit from a banking institution with regard to their financial literacy program in high schools. It truly is a good program. I find that it lacks a bit of realism when a person says that a balance on a credit card indicates a lack of financial literacy. I know people in my area who are on fixed incomes of $10,000 to $11,000 per year. They must be financial wizards to live on that little money each year. Many of these people live on such a meagre income because when they go to their financial institution, they cannot get a line of credit because they do not have enough income. What other choice is there? The credit card. During the winter months, the most expensive time to live because of energy costs, they have no other choice but to use their credit cards. When May comes, they begin to be able to pay the interest on the principal and continue on.
I am somewhat offended when, knowing the reality of life for many millions of Canadians, the interpretation given to people with balances on their credit card is that they lack financial literacy. From my perspective, we are not living up to our responsibility to help our peers. They are certainly much more financially literate than I am because they are able to survive on such a meagre income.
Perhaps you are not taking kindly to my comments but when you generalize in speaking about Canadian credit card users, who only have a 1 per cent default rate, and say that there is a lack of financial literacy, I am offended. It does not take account of, for example, the reality of many students living in downtown Halifax. It is pretty tough for them, given the tuition fees they have to pay, to make ends meet until the end of April or early May until they can find a summer job.
When you talk about lines of credit or credit cards, the means is different, but the product is the same. As we can see, one product is also easier to access than the other. Why is that?
I am happy that the Competition Bureau is looking into some of the major irregularities in the system currently. Maybe a few others from our banking community should also be reviewed.
For your information, there is only a 1 per cent default on credit card balances in Canada compared to our neighbour south of the border.
Ms. Menke: If I may —
Senator Ringuette: I think there is a lot to respond to.
The Deputy Chair: I do not think there was a question, but I think Ms. Menke should respond and I have a response as well.
Ms. Menke: I certainly did not mean to offend. The only point I was trying to make when I say that people regularly carry a balance on their credit card are not using their money very efficiently. They would have a lot more disposable income in they managed their money differently. That is the context in which I was discussing financial literacy. That is all. It was not meant to be offensive. On the contrary, our information points to the fact that people are not using their credit cards as well or as appropriately as they should be.
To carry a balance once in a while is fine. However, if they are using it on a regular basis, they are not getting the best from their own money.
The Deputy Chair: Thank you, Ms. Menke. I want to add to what you said. You are constrained to operate within your mandate. I must assume if that mandate were to change, then you would act accordingly.
If there are no other questions, I have three or four, unless somebody else wants to go first.
My first question is, to what extent are the skills you teach in The City transferable to the web so young people across Canada could take advantage of that tool or another interactive tool to gain financial literacy through games? I think, for instance, of a game like SimCity, which many young people — and older people — play. That requires significant financial acumen and thinking.
Could that kind of programming be adapted along the lines of The City and the 40-minute program the Royal Bank — and other banks as well — has been operating voluntarily? Most of our young people are computer literate and would be happy to play that kind of game.
Ms. Menke: The City is in an interactive form on the web and the web address is www.themoneybelt.gc.ca.
[Translation]
Or the money belt.
The Deputy Chair: It is in both languages.
Ms. Menke: And it somewhat varies from province to province, but it is more geared to teachers than to students. Indeed, it has been designed to interest young people aged 15 to 18, it is very accessible on the Internet and we would like to see people take a look at it and educate themselves.
[English]
The Deputy Chair: What are you able to do to publicize that it is available?
Ms. Menke: We have a significant campaign ongoing in each of the provinces through teacher champions trying to reach high school teachers in the business and commerce fields. That is where much of the space is within the curriculum to teach the program and that is where we are primarily focused.
The Deputy Chair: Over the years, the insurance industry, at the instigation of the Canadian Bar Association and its committee on which I sat at the time, developed a program of clear and simple language in an insurance contract. Instead of using a complex contract that requires a PhD in law to understand, they are using language that people who are not lawyers are readily able to understand.
Have you made any attempt to encourage — I know you cannot do more than that — the use of plain language contracts in a typeset that is larger than 4 points?
Ms. Menke: Yes. I was referring to this MasterCard application form. It is very much in that line. We will be pursuing that further with all the institutions to try to get them on board.
I cannot deal with their contracts, but I can deal with their disclosure. We are trying to encourage disclosure, not only in terms of language, but also in presentation.
The Deputy Chair: This is my last question regarding disclosure. All the contracts that I have seen with credit card companies allow the issuing bank to change the terms upon notice at will. This is the only contract in the western hemisphere that can be unilaterally changed by one of the co-contracting parties. Do you have any observations on that?
I ask that because many consumers do not understand when they sign their application that this may happen and when it does happen, it is frequently the case, they do not know it happened.
Ms. Menke: They have to be informed when the terms are changed and they are informed. This is a ``contrat d'adhésion'' you are talking about. Unfortunately, it is not the only ``contrat d'adhésion'' that has that kind of term. There is nothing to stop it. They have to inform consumers and they do that. The effectiveness of that information is a debatable question.
The Deputy Chair: Is that a function of the clarity of the information?
Ms. Menke: Sometimes it is a variety of things. It is presentation and clarity. I will to be working on that to try to improve it.
[Translation]
Senator Hervieux-Payette: In the area of telecommunications, when you subscribe to a service, you can be required to take the entire service or to indicate that you accept the new service. Might the situation not be able to be the same in this instance, in other words that when the rate or the conditions change, you be obliged to subscribe a second time or to give your specific acceptance of the new measures, given that this is already being done in other areas?
Ms. Menke: It is a possibility.
Senator Hervieux-Payette: It is important to look at that because when you receive the notice, it is very wordy, you are told about various clauses et cetera. I think it would be important for people to say: ``We will look at this, we will consult your website and we will find a better deal, because this is just too easy''.
Ms. Menke: This is why we are promoting our interactive tool, because, indeed, there are comparisons between more than 250 cards. They do not all have the same interest rate nor the same conditions attached to them. It is important that people know this when they receive these notices. This is something they do not like. They have a tool to try and find something that would suit them better.
[English]
The Deputy Chair: Thank you Ms. Menke. That was an enlightening and interesting presentation. We always appreciate your presentations because they are always very enlightening.
Ms. Menke: Thank you.
The Deputy Chair: Honourable senators, tomorrow at 10:30 a.m., we will be hearing from the Mouvement Desjardins and the Credit Union Central of Canada, which may provide us with a different perspective. We will also hear from a consumer's group, Option Consommateurs.
Senator Harb: Given what we saw today, I would have personally preferred if the Financial Consumer Agency of Canada, the Competition Bureau and the Ministry of Finance were all sitting together at the same time to allow us to have asked them questions where they could have commented on each other's answers. It is my hope that when future witnesses appear, we can put them together in a panel. That way, at least, we can verify some of the information.
The Deputy Chair: That is a good observation, Senator Harb. In future hearings of this committee on this subject, there will be a significant numbers of round tables. Senator Moore, who has been active in the steering committee in this respect, has encouraged that to take place.
Thank you for the observation and we will do that.
Senator Massicotte: With our first two witnesses, we had little time and they were very important witnesses. We should allow them more time to go more in-depth.
The Deputy Chair: Let us rethink that. People want to be heard on this subject. That is a good observation.
(The committee adjourned.)