Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 18 - Evidence - Meeting of October 27, 2005
OTTAWA, Thursday, October 27, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:50 a.m. to examine and report on consumer issues arising in the financial services sector.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Good morning. Welcome to the forty-third meeting of the Standing Senate Committee on Banking, Trade and Commerce. The meeting will be broadcast on CPAC from coast to coast and will be on the Internet around the world. We will continue our hearings into consumer issues arising in the financial sector. We are pleased to have witnesses from the Canadian Bankers Association, the Financial Consumer Agency of Canada, the Canadian Payments Association and the Canadian Payday Loan Association. Thank you for responding so promptly to our request to appear before the committee. As some of you are aware, a committee on banking, trade and commerce has been part of the Senate since Parliament first met back in November 1867. The committee is the longest-serving in the Senate, being established several months after Confederation. It is well known to Canada's financial system because of its long history of examining policies, programs and other initiatives affecting the financial services sector as well as other important issues on economic growth and productivity in Canada. As always, we support well-functioning capital markets, a healthy financial services sector and the high economic growth that leads to the prosperity that all Canadians want and deserve.
This year, the committee has been active on key issues that affect Canadians and the Canadian economy. In the spring, the committee completed a study on productivity, which is a topic that currently seems to be on the tips of tongues of every politician, as well as people in the media and in the private sector. A number of federal ministers, business groups, social policy organizations and others concerned about our standard of living in the future are talking about productivity. We were delighted yesterday that the Governor of the Bank of Canada, David Dodge, and the Senior Deputy Governor, Paul Jenkins, appeared before the committee. Mr. Dodge agreed that our study has been helpful to the public debate and to informing the public about the importance of improving productivity in our economy. I thank Senator Angus who inspired us to undertake that study.
Earlier this month the committee heard thought-provoking evidence on demographic changes that will affect all of us in Canada in the next few decades, and how our society should respond to what we call, ``a very serious problem.'' Demographic changes will have a huge impact on Canada's economy and could be disastrous if we do not heed its call to action. The Governor of the Bank of Canada said that we have to act now. We have admonished the government and the private sector to begin thinking about how to respond to what we consider a potential economic time bomb. I thank Senator Massicotte for persuading the committee to undertake that study.
In the next few weeks, the committee will hear from experts on Canada's domestic and interprovincial trade barriers. We have heard complaints for decades that the Canadian economy is too fragmented and lacks the efficiency to be truly productive and globally competitive. We will continue our focus on productivity when we hear from those witnesses, and subsequently report on the barriers to internal trade and the changes that are needed by the federal government, by the provinces and by the private sector to enhance productivity within our economy.
Today, as all our witnesses know, we will continue our examination of consumer issues within the financial services sector — a topic on which we have held hearings for some time. The focus today is cheques, the essence of the banking system: how cheques are handled at our financial institutions; the extent to which consumers may face cheque-related fees; hold times on cheques; and the potential increase in the use of payday loan organizations as a consequence, we believe, of some of these issues. We know that the testimony we receive today will be valuable. We will soon begin deliberations on our report to the Senate on the topic of consumer issues in the financial services sector. We are drawing to a close on this topic and this is part of the last round of evidence to be heard before we deliberate the report. I remind those watching on the Internet or on CPAC on delayed broadcast that the committee wants your input, too. It is important for this Senate committee to hear not only from the experts, senators and staff, but also from all Canadian stakeholders with an interest in our topics. We value that advice and information. The issues we discuss today will have a significant impact on the everyday lives of Canadians, because each of us is a consumer: on the Canadian economy, the impact of consumer protection and on working the economy better as a whole. We urge comments via email sent to banking_banques@sen.parl.gc.ca, or regular mail sent care of the Standing Senate Committee on Banking, Trade and Commerce, the Senate of Canada. That address will be superimposed on our screen a number of times during the course of our discussions this morning.
Before turning to our first panel of witnesses from the Canadian Bankers Association, we will hear from Senator Angus, Deputy Chairman of the Senate Banking Committee.
Senator Angus: I have a word to our listeners and witnesses in respect of the chairman's comments on cheque cashing. The matter has become a preoccupation with the committee because of his personal experience with the banking system when he could not cash a cheque without first depositing it to his account and then withdrawing it. That provides a bit of background on today's supplementary hearing to complete the committee's consumer study.
In the interest of full disclosure, we members of the Banking committee tend to be more sensitive to how the average Canadian is treated when visiting a bank because of the excellent information that we hear from the experts. I too had a bad experience with a bank that I reported to the Canadian Bankers Association. I had a simple cheque that I wanted to cash — nothing more, nothing less. I went to the bank at lunchtime and had to wait in line for 47 minutes before it was my turn at a wicket. I wanted to deposit the cheque only for credit at another branch of the bank. However, the effort became a nightmare. It was only later that I asked to see the manager and disclosed that I was on the Senate Banking Committee. I said that I would phone The Globe and Mail to have a headline story about how the poor consumer gets shafted by banking institutions.
We are here to represent all Canadians, and we are not fooling when we say that we are interested in knowing whether the consumer protection mechanisms in place are working.
The Chairman: All have had anecdotal experiences, although usually senators are given more credence when they walk into a bank. Each of us has had similar experiences. We want to get to the bottom of this important issue because cheque clearing is the essence of banking. If that does not work effectively and efficiently for all consumers, then the system is not working.
You know our concerns. We have talked about that, Mr. Campbell, and I appreciate your concern. I am delighted that you have come back to have another round on this, to focus on this issue.
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: We are both pleased and honoured to be here. These hearings are important. We know that you are interested in the facts and figures and we would like to give them to you.
I am joined by my colleague Louise Bourassa. We have a lot of people to get through so I will keep my opening remarks short.
We appeared before you in April and we had a good discussion on issues of competition. We want to focus on the cheque system today. I would like to set the stage — and I think the other witnesses will probably fill in the picture — by walking through briefly the process of opening a chequing account, cashing a cheque, the cheque-clearing process and why holds may be put on them. I will touch on what the rules are there.
First, opening an account. In 2001, we had the Bank Act changes. One important rule that was changed then was a requirement for banks to open accounts for Canadians. That requirement is set out in the Access to Basic Banking Services Regulations, which set out the requirements for identification and the few and specific circumstances where banks can decline to open an account.
There was also a second set of requirements in the Anti-Money Laundering and Terrorist Financing Regulations, which again require identification as part of the know-your-customer requirements. Here, we are talking about a strong obligation on the banking industry to ensure we know who we are dealing with.
We understand the importance for Canadians of having an account, and we open them for people who meet the criteria. There are only four grounds for a bank to decline to open an account. It is clear that bankruptcy is not one of those grounds.
You can only decline to open an account if there are reasonable grounds to expect that the account will be used for fraudulent or illegal purposes; if the individual has a history of fraudulent or illegal activity in relation to financial services; if there is material misrepresentation; or if it is to protect the bank staff from harm and physical abuse. The rules are specific. Bankruptcy by itself, without any evidence of fraud or any other illegal activity, does not constitute grounds.
One of the major reforms in 2001 was that if people feel there is a problem, they can take their case to the Financial Consumer Agency of Canada, FCAC, represented here today. We hope it does not happen, but the option is there. With 5 million cheques processed every single day, 11 million transactions generally every day, our sense is that the process actually works well.
In terms of cashing a cheque, when a bank accepts a cheque, they are acting on behalf of the customer to deliver that cheque to the paying bank — the bank that will ultimately pay. Cheques are legally an instruction from one individual to pay funds to another individual. As such, banks are responsible to ensure that the funds are paid to the person who is entitled to receive those funds.
We are accountable to our customers and our shareholders — all the people who own shares in their pension plans, et cetera — to ensure and establish that the person who presents a cheque is the individual who should get the funds; and that neither the account holder nor the bank will suffer any negative consequences if it is returned.
Specifically, on federal government cheques — because I know that was an issue — the rules are clear. Banks are required to cash, without charge, federal government cheques up to a maximum of $1,500 for non-customers. The rules allow the cashing of a government cheque for non-customers — that is, people we do not know or have a relationship with — because the federal government provides an indemnification if it turns out there is a problem with the cheque: if it was stolen or there are any other problems. Similar arrangements are in place with British Columbia, Alberta, Saskatchewan and New Brunswick, and we are seeking similar arrangements with other provinces. The idea is to protect the authorized payee — the person who should be getting the funds, the Government of Canada and the financial institutions.
The other thing we are trying to do is encourage governments to move as much as possible to direct electronic deposit of funds. The funds would go directly into an individual's account. Whether it is any kind of federal government or government funds, it goes directly into those accounts, the funds are immediately available and there is no issue about signature endorsements, et cetera.
This is an issue we take seriously. We monitor closely the complaints that go to the FCAC and the FCAC's own activities in mystery shopping. We would like to see 100-per-cent compliance, but we are human beings; there will be problems in a large system, 5 million transactions every day. However, it is fair to say — and my friend at the FCAC can correct me — that the track record on cheque-cashing rules is strong; the complaints are well under 1 per cent. If you actually look at the volume of transactions, 5 million a day, the number is truly minuscule.
I will conclude these remarks, so we can move on to the rest of the witnesses, by talking about the cheque-clearing system and the holds on cheques. When a customer deposits a cheque in their account, the bank is, in effect, providing an unsecured loan to that customer pending the final settlement and payment of the cheque by the home bank, the paying bank. The bank is making a credit-risk decision. They are asking themselves the question: Will this piece of paper be honoured by the other bank?
A bank can determine electronically, relatively quickly from the other bank, if funds are available. However, the paper cheque itself has to physically travel through the system by trucks and airplanes to go back to the home bank. That could be from Corner Brook all the way to Yellowknife. The home bank has to make a decision as to whether to pay or not pay. Is there something wrong with the cheque? Is there a stop payment on it or insufficient funds? Has it been altered? If the home bank decides it cannot honour that cheque for good reasons, that cheque has to find its way back to the original bank to which it was presented.
When it comes back, if the home bank has said, no, we cannot honour it, if the original bank has cashed it or paid out the money, a loss will be experienced.
This is the paper-based system. I will talk in a moment briefly about moving to a digital system, but this paper-based system works efficiently. Out of the 5 million transactions that happen every day, there are few problems; on any given day, less than 1 per cent of accounts have holds on them.
However, it is a paper-based system. Annex 6 to the budget — the government's consultation on amending the federal financial institutions legislation — talks of moving from a paper-based system, where literally planes, trains and automobiles take that piece of paper across the country 5 million times, to an electronic system where there is an electronic capture of the image of the cheque. Then that image is transported back and forth electronically. We think this holds out the promise of greater efficiency and we will see how the discussions with the government go forward.
It is a paper-based system that is pretty efficient as it is. We think it can move forward and we encourage this committee to encourage further progress on that.
In conclusion, we look forward to questions and answers afterwards. Again, senators, we appreciate the opportunity and feel honoured to be here as part of your important discussions.
The Chairman: Thank you, Mr. Campbell, for being brief and cogent. We have many questions so I hope the other presenters will be brief in their comments so we can get at the questions and answers.
[Translation]
Susan Murray, Director, Consumer Education and Public Affairs, Financial Consumer Agency of Canada: Thank you, Mr. Chairman, for including the Financial Consumer Agency of Canada in your discussion this morning. Our Commissioner, Mr. Bill Knight, sends his regrets.
[English]
Mr. Chairman, you have asked for specific information from each of us, so I will address only those areas of particular interest to the committee at this stage in your deliberations.
As witnesses from the Canadian Bankers Association have already addressed the requirements under the access to basic managing regulations, in the interests of time I will not repeat that part of my presentation. It is there for you to look at afterward. I will go directly to the results of our recent mystery shopping exercise designed to identify issues related to the compliance with the Access to Basic Banking Services Regulations, the current regulations and FCAC statistics related to cheque holds. Also, I will present quantitative research FCAC has released with respect to payday loans as well as information on our new consumer education brochure entitled The Cost of Payday Loans, which we have completed and are distributing to Canadians.
FCAC monitors compliance with the access to basic banking regulations, which have been in force since September 30, 2003. To date, we have opened 386 cases resulting in 17 violations with 66 cases pending.
FCAC also monitors compliance with the Bank Act. The Bank Act states that banks cannot charge a fee to cash a federal government cheque or ask for minimum deposit when opening an account. We have opened an additional 11 cases pertaining to fees for cashing cheques. Three of these cases have resulted in a total of four violations relating to these particular requirements under the Bank Act.
Earlier in 2005, we conducted a mystery shopping exercise to assist us in monitoring banks' compliance with the Access to Basic Banking Services Regulations. We released those results yesterday and I have included the news release as well as a summary of the results in the package presented to the committee today.
The objectives of the exercise were to assess the following: The customer's ability to open a retail deposit account upon presentation of proper identification; and second, the customer's ability to cash a federal government cheque for less than $1,500 with proper identification.
Overall, the results of the 17 banks included in the exercise were positive. The banks achieved an overall success rate of 91 per cent on cheque cashing and 84 per cent on account opening.
Despite the overall positive results the commissioner has identified two main areas of concern. The majority of banks included in the study were not providing consumers with written notices of refusal as required by the regulations. In our findings, only one of every 11 consumers was given a written notice of refusal. The written notice of refusal provides the customer with the Financial Consumer Agency of Canada's contact information, a critical component of this regulation. The Financial Consumer Agency of Canada relies on consumers to help us identify potential areas of systemic non-compliance. Non-compliance is difficult to monitor effectively if banks do not comply with this aspect of the regulation and consumers are not informed of our existence.
Second, the shop gave some indication that there is still confusion around identification requirements. In a number of instances, the branches did not accept the identification provided by the consumer, which, according to the regulations, should have been accepted.
In the vast majority of cases where shoppers were refused, branch staff often asked for photo identification or additional identification beyond the requirements of the regulations. Financial Consumer Agency of Canada's compliance team is working with the banks to ensure these concerns are addressed.
I will now address cheque holds.
[Translation]
Pursuant to disclosure regulations on cheque hold policy, financial institutions must provide to consumers, in writing, the policies relating to hold periods on deposits when a bank account is opened or when the client requests the information. This information must include the length of time during which the hold will be placed on cheques drawn on a Canadian institution and the maximum time during which a cheque will be held when issued by an institution outside Canada. If a bank changes its cheque hold policy, it must inform all of its personal account holders.
[English]
We have had 92 compliance cases dealing with the cheque hold regulations and all were closed without violation.
On the general inquiry side, we have had over 12,000 complaints and inquiries about accounts generally since we opened. Of the 12,000 complaints and inquiries, 389 directly related to banks' cheque hold policies, which represent approximately 3 per cent of the 12,000 calls. We have had over 77,000 calls to the agency since we opened so we are talking about the account section here.
This committee has taken a strong interest in the issue of payday loans. Earlier this year Financial Consumer Agency of Canada placed questions on an omnibus survey to learn more about people's experience and motivations for using cheque cashing outlets or payday loan services as well as their experience in the use of financial institutions. The survey was not to be exhaustive or to direct public policy but simply to help guide our work in preparing consumer education material.
The survey involved 5,005 participants and the key findings are as follows: Approximately 7 per cent of those surveyed have used payday loan or cheque cashing services; those that have used these services are more likely to be younger Canadians with lower household incomes, less than $30,000 per year. The reasons cited for using these services are as follows: most often faster; more efficient; needed money immediately — 25 per cent used it for that reason; and 18 per cent used them for convenience.
The Chairman: I am sorry, what was the last rationale for that?
Ms. Murray: That was convenience; 18 per cent was convenience, convenient hours and overall convenience.
Those that used these services because they needed money immediately tended to be younger, 18 to 34 years of age, with some post-secondary education. The group that used the service primarily for convenience tended to be university graduates with higher household incomes, more than $60,000 per year.
We noted that 23 per cent of these respondents underestimated the costs of the cheque cashing service, which was of particular interest to Financial Consumer Agency of Canada from the perspective of our consumer education mandate. Of the respondents, 37 per cent underestimated the cost of payday loans saying that the interest was below or at the same level as credit cards and 48 per cent said it was higher.
Finally, with respect to use of financial institutions, this particular study found that 3 per cent of Canadians do not have a bank account. Those without bank accounts were found to be less educated, have lower incomes, and were more likely to be between the ages of 18 and 34. The main reasons for not having an account were as follows: ``Don't need one,'' followed by, ``I don't have money to save'' or ``Don't earn enough money.'' Note that 32 per cent of that category, that second category, was over the age of 55.
We have seen a variety of other surveys that placed the number of Canadians without an account anywhere between one and three per cent.
FCAC used these results, which are available on our website, to help us complete a new consumer brochure on payday loans entitled The Cost of Payday Loans. The brochure demonstrates in detail the increased costs of using payday loans over other short-term loan options and is available in print and on the website. I brought copies for the committee today.
The Chairman: Is that available to the committee now?
Ms. Murray: Yes, it is here today.
The Chairman: We would like to look at it. Perhaps staff could pass it out.
Ms. Murray: In addition to this brochure we are producing a one-page tip sheet for consumers.
To conclude, I would like to thank the committee for the opportunity to provide additional information to you while you complete your important study. I look forward to responding to any questions.
Doug Kreviazuk, Vice-President, Policy and Research, Canadian Payments Association: Thank you for the invitation to appear here today and for the opportunity to respond to your inquiries regarding Canada's cheque clearing system as you consider this important issue of consumer protection in the financial services sector.
I and my colleague represent the Canadian Payments Association, which is a member not-for-profit organization created by an act of Parliament in 1980.
Under our current legislation, the Canadian Payments Act, membership is open to banks, trust and loan companies, credit unions, caisses populaires, securities dealers, money market mutual funds and life insurance companies as well as the Bank of Canada.
Today, we have approximately 116 active members in our organization.
The operations of the CPA are guided by a 16-person board of directors including the chair who is appointed by the Bank of Canada. Twelve positions are occupied by our various classes of member institutions, and that reflects the diversity of participation. In addition, three directors are appointed by the Minister of Finance.
Simply put, our mandate is to establish, operate and continually seek to enhance Canada's national clearing and settlement system. In the past, many have drawn analogies between the clearing and settlement system with the body's circuitry system, in that it is a system of complex pathways that delivers much-needed lifeblood to the system. That is how critical our role is. We facilitate the flow of funds between financial institutions across this country.
However, the Canadian Payments Association itself does not see or physically touch any individual electronic payment or cheque in our retail clearing system. Rather, we establish a common framework of rules and procedures that governs the exchange of these payments between financial institutions each day.
At the end of the clearing cycle, our operated information systems determine the net positions of our member direct clearers so that they are able to settle across the books of the Bank of Canada. In short, the clearing and settlement system is a necessary element to a well-functioning system but is often overlooked. However, its importance to a healthy and dynamic economy is absolutely critical.
Under our legislated mandate, our role is to provide the underlying infrastructure and establish the rules to facilitate the flow of payments between financial institutions. With regard specifically to the cheque, you have heard that we process 5 million cheques each and every day, which amounts to about 1.1 billion cheques annually. The aggregated value of those cheques is about $2.9 trillion.
As part of our 2001 legislative review, our act was amended to clarify the public policy objectives for the association, namely the promotion of a safe, sound and efficient clearing system that takes into account the interests of users. To complement this objective, the act also enshrined the existing stakeholder advisory council and provided it with a broad advisory mandate to our board of directors. The addition of this 18-person council and the further inclusion of stakeholders on CPA developmental committees have contributed to CPA's enhancements of the payment system, and there have been many.
I have only to look back to the early days of the CPA in the 1980s when paper was king. Virtually every person, and certainly every business, carried around their cheque book. It was as necessary as your driver's licence is today. Back then, Canadians used cheques most of the time to settle payment obligations between themselves and others. In fact, in 1983, 98 per cent of all non-cash, non-credit card payments were made by cheque.
In an effort to respond to the needs of Canadians and take advantage of increased efficiencies and security measures for financial institutions, the CPA continues to promote enhanced electronic payment options. In this regard, the Canadian Payments Association is pleased to report that further to our efforts and those of our members and stakeholders, this figure is now below 23 per cent of total payment volume, by comparison with our neighbour south of the border who still processes at about 45 per cent of cheque volume.
Although the legal underpinnings of our cheque clearing system are more than a century old, we continue to enhance the actual cheque clearing process to reflect the changing environment. In the near future, the CPA plans a transition to an electronic cheque exchange between financial institutions, realizing further efficiencies for our clearings.
Although cheques are a convenient means of payment, as I am sure all of you are aware, other options are constantly being developed and facilitated by the CPA and their member institutions.
The CPA is extremely proud of the system it has developed and pleased by the recognition to the Canadian Payments Association. Routinely we are called upon by our counterparts internationally to offer advice and counsel on payment issues and payment-related issues. Canada's clearing and settlement system has served Canadians well, but it is constantly being enhanced to meet the changing needs of its users.
With that, my colleague will quickly walk you through the current cheque clearing process.
Pierre Roach, Vice-President, Payment Services, Canadian Payments Association: As noted by my colleague, Canada's payment clearing and settlement system is world-class and has been achieved through a continuous effort to look for ways to improve the system through innovation.
Notwithstanding the advances in automation over the last many decades, cheque clearing in Canada, namely the exchange component, continues to depend on the movement of the cheque. This voyage starts at the point of deposit and ends at the financial institution which holds the account upon which the cheque is drawn. If I could draw your attention to the map of Canada included in your materials, I would like to take a minute to walk through the cheque clearing process supported by the CPA.
As I mentioned, the cheque clearing process is based on the movement of the cheque itself from the point of deposit to the point where the writer of the cheque holds his or her account. To manage this process, six regional points are designated by the CPA in Canada where cheques are exchanged between financial institutions: Vancouver, Calgary, Winnipeg, Montreal, Toronto and Halifax. At each of these points, each CPA member is represented, directly or indirectly, and carries out a physical exchange of cheques each business day.
In the example illustrated before you, we have a cheque deposited at a branch of Bank A in Whitehorse, drawn on the account of a client of Bank B whose account is held at a branch in St. John's. The cheque, once processed by the branch of deposit, would be batched with other deposited cheques and sent by plane to the nearest regional exchange point, which in this case is Vancouver. Once received in Vancouver, the cheque is processed through the data centre of Bank A and sorted for delivery to the data centre of Bank B in the same city.
Once received by the data centre for Bank B in Vancouver, it is then flown for delivery to the regional exchange point closest to the branch upon which the cheque was drawn — in this example, St. John's. The cheque then continues its journey by plane. It is reprocessed again in Halifax and the information is provided to the appropriate branch in St. John's.
If the cheque needs to be returned for any reason, it then retraces its journey, coming back from Halifax to the processing centre of Bank A in Halifax back to the processing centre of Bank A in Vancouver, where it is reprocessed again and flown back to the branch where it was deposited in Whitehorse.
This is, quickly, the process for cheque clearing in Canada. There are variations in the transport mechanisms and the exact flows depending on where the cheque is deposited and where it is drawn. Although this process sounds complex and involves numerous steps, it functions well, with close to 5 million cheques exchanged daily between the financial institutions.
Canada is a world leader in this area, and we are continually looking for ways to improve the system through innovation to maintain our status.
The Chairman: Thank you. You have given us a lot of information in a short period of time.
Senators, we have 40 minutes. I hope you will not make long preambles to statements but will get right to the questions. The questions will be sharp and will be responded to, because we have to cover a lot of ground in a short period of time. I want to ensure that all the questions that senators have are dealt with. If we cannot answer them fully, please get the responses to us in writing and we will undertake to look at that.
Senator Angus: I thank the witnesses for cogent and interesting presentations. At the outset, I have been informed, and I have verified, that we seem to be world-class in this area. If anyone has had experiences south of the border or in Europe, they know that our system operates quickly.
I made reference earlier to situations. I assume that the banks have a set of guidelines. Let me address you, Mr. Campbell, or Ms. Bourassa. A bank employee at the point of contact with the consumer probably has a set of guidelines that they follow in terms of whether or not to cash the cheque right there on the spot. Is there a set of standards? I can imagine sometimes the person issuing the cheque is the federal government, say, or a provincial government, or some obviously or apparently solvent entity, whereas a cheque drawn on the account of a Mr. Smith could be something different. Are there standards that vary?
Mr. Campbell: There are the rules and regulations that branch staff know. For non-customers with a federal government cheque, the rules are there and they are made clear. On other cheques, yes indeed, there are processes and guidelines in place. For a whole process, it is not a mechanical kind of thing here. It depends on how well you are known to the branch. Do you have a history of non-sufficient funds, NSF, cheques or problems with cheques? What is the nature of that cheque? What is the nature of the instrument? Who does the cheque come from? How much is it for?
The Chairman: Mr. Campbell, Senator Angus asked a precise question.
Senator Angus: He is answering it.
The Chairman: I am talking about the cheque where there's no question, on the face of it, that it is a valid cheque from an entity that will —
Senator Angus: I did not ask that. I asked, are there a set of guidelines? Frankly, he is saying there is an element of discretion involved. This is what I want to get to.
Mr. Campbell: I will turn to my colleagues.
Louise Bourassa, Senior Vice-President, Administrative Services, Laurentian Bank of Canada, Canadian Bankers Association: A lot of cheques are deposited in automated banking machines, ABMs, and not at branches. You do not see physically who is depositing the money. It is the team that does the processing. The history of the client is known through systems and information. The relationship to the client is important in establishing the whole period.
Senator Angus: You introduced a new element. I had not thought of it. At these bank machines, this activity is anonymous, I suppose. Are there codes or numbers that enable the machine to read and make these distinctions?
Ms. Bourassa: The machine does not read. All the envelopes are brought to processing centres. They are then opened and the cheques are processed manually by a team. They are on computers. They never see the client. They only see cheques.
Senator Angus: You say a lot of cheques. Is it 1 per cent of the five million a day? There's five million cheques processed per diem. Automated teller machines, ATMs, are now involved. Is that a small percentage?
Ms. Bourassa: It will be a big percentage. I cannot tell you what it is, however, because it is different from one institution to another.
Mr. Campbell: In those circumstances, is it an empty envelope in the machine? You put money in and take money out. There are issues there as well. Is it open 24/7 for people to do that?
Ms. Bourassa: You have to open the envelope to make sure there is a cheque in the envelope.
Senator Angus: I can understand the problem. You folks are not in the business of giving out cash. You have to do certain due diligence, and I understand. I want to give you another scenario. If an individual comes in with a cheque and it is drawn by another customer of your same bank, that would be easier for the person to get the cheque cashed, I suppose, because you would know both sides of the transaction.
Ms. Bourassa: It is not as simple as that. The issuing client might have specifics on his account. It is not possible to route the cheques directly from one branch to another. It is too complicated with the volume of cheques. All cheques go through the processing centres. It is the best way for us to operate at a reasonable cost.
Mr. Campbell: In response to your questions, if it is all in the same bank, you can probably determine the clearing more quickly. However, there is still that piece of paper. You must determine, ``With whom am I dealing? Has it been stolen? Has it been altered?'' This is in the context of five million cheques a day. There is a process. Even within the bank, yes, there is an electronic aspect to it, but that physical piece of paper still has to go from the Royal Bank in Corner Brook to the Royal Bank across the country so that the home bank can say, ``No, I cannot do that one. It has to come back.'' The home branch has to make that determination. It is likely quicker if it is the same bank, but there is still a process.
Senator Angus: Now we get to the chairman's specific thing. He is known to the branch. He goes into his branch. He has a cheque for a golf debt or something. It is a cheque payable to Senator J. Grafstein. He says, ``I would like to cash it.'' It is for $300. They know the senator, who is 98. It was a cheque for one of our senate trips. They said, ``You will have to deposit it into your account.'' I can understand that. If it seems to be a bad cheque, later they can take it out of his account. However, other banks cash it and give the money out. In his case, however, they did not. I was wondering if there was a rule, a guideline, or is it just a matter of saying, ``We didn't like the look of that senator that day, tough bananas.''
Mr. Campbell: There are two scenarios. I will talk about them specifically. First, if you are not a customer of that bank, the rules are that you cash it, for free, because there is an indemnification if they do not know you from Adam. If you are a customer of the bank, the rule I just talked about, namely this indemnification, does not apply. You still have that piece of paper to consider. There is no across-the-board rule on that. Different banks have different rules. We are still talking about a risk decision here.
Senator Angus: That teller does.
Mr. Campbell: You have a risk decision here. The sensitivities of individual banks and the process involved are such that some of them would say, ``Okay, we will put that into the deposit so we have a paper trail.'' There is a statute called the Bills of Exchange Act that says, if the institution wants to be seen as the holder of that account for all the rights it has, it must deposit it. Some banks might do that. For other banks, their risk sensitivity might be different. This is probably true in most cases. Even if it does not fit into those rules, they would say, with the proper I.D., ``We will cash it, no charge.'' It is processed. There is not an across-the-board rule.
Ms. Bourassa: You are talking about a government payment, not about a cheque from an individual?
Mr. Campbell: This is a federal government cheque.
Senator Angus: So it is different. His case happened to be that but it could have been, say, from me. What is the case then?
Mr. Campbell: Ms. Bourassa, do you want to lead off?
Ms. Bourassa: If it is not a government cheque, it is the policy of each bank. It might be different. I will not go into details of each bank's policy; I don't know them. It is based on the relationship between the bank and the client. There are maximum hold periods and they are published.
Senator Plamondon: You might add explanations about the transit authorization. If somebody deposits and they want to withdraw money in an ATM, their risk assessment has already been done with their debit card. They may withdraw anything they like, because they have been assessed, evaluated. They do not have to give any I.D. up to $1,000 or maybe more. They just deposit it. Even if it is an envelope with a cheque from someone that nobody knows, they have an authorization. I think it is better than going to a wicket, where they are not known.
Senator Angus: I have made the reference at the outset to how our system seems to work quickly in Canada. I had circumstances in Florida, where I have a home, where you come with the cheque and they say, ``Maybe it will clear in two weeks, so don't write any cheques.'' If you do not have a certified cheque, it does not get accredited to your account right away. Is one of the reasons for this long delay in the states, as opposed to in Canada, the fact that we have only X number of banks and they have 453 banks? Is that part of it? Is it our banking system itself?
Mr. Campbell: I feel like I am hogging all the questions. I invite my colleagues to participate. It is partly the number of banks. It is partly that Canada, from day one — and I guess it is just the nature of our constitution, of our structure — has had a national, coast-to-coast banking system. The United States has never had that and I would argue it does not have that even now. It is highly fragmented.
Senator Angus: They are competing. That is what I am getting at. I go to the Vero Beach Savings and Loan, a local bank. They want the business, so they will be more inclined to cash the cheque. They think, ``The guy has a nice home. He is over here. He looks reasonable.'' Whereas I do not think it works that way here.
Mr. Campbell: I go back to your original comment, senator. I think the experience is more that you want to have the cheque cashed and it will take two or three weeks. It will go here, there and everywhere. In Canada, the banks actually use hold periods as a competitive advantage and will say, ``We have a good hold period, better than the other bank.'' In the United States, because it is deeply fragmented, it always was that way. They did not allow cross-state border banking until 10 years ago.
The Chairman: I appreciate the comparative analysis but we are here to focus on the problems in Canadian banking.
Senator Angus: It goes to the merger issue.
The Chairman: I am focussed on this agenda, which is to determine the facts and statistics on cheques, deposits and holding times, et cetera.
Senator Harb: I was impressed with Ms. Murray's presentation, in particular the survey prepared by the Financial Consumer Agency of Canada. I was struck by the finding that the majority of those using payday loan services are under the age of 34, have a high level of education, and earn over $60,000 per year. It would seem that they are sophisticated enough to decide whether they want to pay that extra money for a payday loan, whether 40 per cent or 45 per cent. You mentioned that of the 43 per cent using the services, 25 per cent of them did so because it was more convenient and 18 per cent because of the overall convenience. We know that banks keep certain hours, generally from 8 a.m. to 4 p.m. or 5 p.m. Therefore, an opportunity was created for an enterprising entrepreneur to set up shop during those after-banking hours to serve consumers until 11 p.m., and there were clients willing to use the service. The committee, from what I have been able to glean, has made the assumption that these clients use such a service because banks do not cash cheques quickly enough for them. However, Mr. Campbell has explained to us that there is a process in place, to which everyone seemed to agree. The issue seems to be, for example, if I have an account with a bank, I can go to that bank and deposit the cheque and take the money out, depending on the relationship established between the bank and me. If I have a government cheque, then I have to deposit it but if I use a different bank, I simply have to provide proper identification with the cheque and I receive the cash. I am puzzled as to how to deal with this issue. Do we need to change the legislation or does Mr. Campbell round up the usual suspects on whom to lay out the concerns and advise of the need for some guidelines in respect of cashing cheques, notwithstanding the inherent risks in cheque- cashing. Do we have to kill this bug with a two-by-four or can it be dealt with through dialogue?
Ms. Murray: There were a number of issues you mentioned, senator, but I will focus on the mandate of the FCAC. This problem is complex. Our survey was intended to give us a sense of the people who use payday loans and cheque- cashing services. I highlight that because they are two separate services. This study focussed on both, not only on the payday loan service. Your next witnesses will focus on that only. A wide range of people use the service, and convenience is one of the reasons. The subcomponent, which we found disturbing, is that when we compared a payday loan or cheque-cashing product to one available in financial institutions, people did not realize the difference in costs. We focussed on that particular problem. We are trying to raise the awareness of people using these services to know the difference in costs. That is the focus of our consumer education mandate and the main finding in this survey.
Mr. Campbell: I have a short response to the senator's question. You said, because it would take too long through the bank to cash a cheque, people use cheque-cashing services. It is important to bear in mind that whatever institution you are talking about, whether a bank, Credit Union, a payday lender or the alternative financial services provider, all of them face a risk on that piece of paper. The difference is how they deal with it. A bank either makes a decision based on the relationship or they have a process solution to deal with that risk. An alternative financial services provider — a cheque casher — faces a risk on that piece of paper too and deals with it through a fee. The risk exists for both.
Senator Harb: You almost add insurance for that amount.
Mr. Campbell: The other thing to bear in mind is that the true direction for greater efficiency is the electronic direct deposit and the electronic imaging of cheques. That is the direction that we want to take in this respect.
[Translation]
Senator Massicotte: I have two questions for you. The first one is for Mr. Campbell. According to the Financial Consumer Agency's recent survey, the banks have a success rate of 84 per cent on account openings and 91 per cent on federal government cheque cashing. You seemed to imply that these results were satisfactory. I have a different take on it. In my opinion, this means a failure rate of 16 per cent and 9 per cent in complying with Canadian government regulations. That seems high to me. If I drive too fast and a policeman stops me, and it was only the first time even though I might have been speeding before, unfortunately, my argument will not wash. I will still end up with a ticket. I have a hard time accepting 16 per cent and 9 per cent. I am surprised that they are so high. Have you something to say about that, Mr. Campbell?
[English]
Mr. Campbell: Absolutely, senator, if I conveyed the impression that I am satisfied with that, I retract those remarks. We want to aim at 100 per cent. When bankers get up and go to work in the morning, they want to do the right thing. They want to ensure that all the rules are complied with and that their customers are happy, but we are human beings working on 5 million to 11 million transactions per day. We aim at 100 per cent; we truly want that. The rules are still relatively new in that the act was changed and the regulations were put into place not many years ago. We value the work of the FCAC because it helps us. The FCAC will work with our individual banks when there is an issue or problem. Our bankers take that seriously because they also want to get those numbers up to 100 per cent. I hear you loudly and clearly, and I agree with you, senator.
[Translation]
Senator Massicotte: This represents five million cheques per day. How many bank accounts are opened on a given day?
[English]
Mr. Campbell: I do not know, senator, but we can obtain that information for the committee.
[Translation]
Ms. Bourassa: The FCAC are not the only ones doing mystery shopping. We attach a great deal of importance to the quality of our service. We hire our own mystery shoppers and we ensure that everything is done properly. This is done every six months and we meet with employees from various branches to ensure that the training is appropriate when problems are encountered.
Senator Massicotte: What is your success rate?
Ms. Bourassa: Our success rate is similar to theirs, but it is improving. The quality of our service and compliance with regulations are something that we do not take lightly.
Senator Massicotte: Can we expect a rate of 98 or 99 per cent within the next year or two?
Ms. Bourassa: To err is human.
Senator Massicotte: My second question is for the Canadian Payments Association. A great deal has been said about cheques, these documents that are typically Canadian. There is a growing trend towards electronic currency and other types of payments, such as Canadian Tire money. Liquidity is extremely important in financial markets; how is it managed? Barclay's Bank had come out with a type of card that it was testing in Canada. Can you tell us more about this type of currency? How can it be managed?
[English]
Mr. Kreviazuk: The Canadian Payments Association remains aware and continues to monitor developments in electronic payments. The statistics that we have shown suggest that Canadians are adapting to and embracing electronic payments more frequently.
However, as I think our colleague said, it is a complex network. There is the involvement of the regulators and the CPA. Ours is the infrastructure and exchange of the payments between the members. The regulators assess whether these products are worthy of coming into the market.
The CPA looks at these particular products, and if we can maintain the safeguard of the safety, soundness and efficiency of the system, we look to clear and settle those items. It is a partnership between the CPA and the regulators.
[Translation]
Senator Plamondon: My first question is about cheques. There is a magnetic strip on cheques. Cheques are not examined until they arrive at the issuer's bank where the signature is verified, and this step is often omitted. Tell us about the magnetic strip and how that might influence decisions. The bankers' associations and other associations as well recommend that one never leave a blank chequebook lying around because it is the same as cash. Cheques must be protected because when the magnetic code is verified, nobody checks the signatures.
My second question is for our three witnesses and it deals with the recommendation to encourage pre-authorized deposits and payments. A consumers' association did a study on rule H1. They discovered that the procedures relating to rule H1 were not properly understood. For those who may not be familiar with this term, essentially, it governs situations where people are unhappy about their pre-authorized debit authorizations, either because too much money is withdrawn or because the withdrawal occurs too early, triggering extra fees; people are unaware of this provision. Consumers who are asked to arrange for pre-authorized payments are not told what to do in case a problem occurs. Also, when a mistake is made, the clients must pay the related fees even if the mistake is not their fault. Financial institutions seem to want to limit their role and responsibilities to that of a simple go-between in rule H1 transactions. The consumer is left to fend for himself and this often results in NSF cheques or cheques being returned because of an error in the pre-authorized debit. I would like to know if you are aware of this study and what you intend to do to correct this situation.
My next question is for the agency's representatives. I know that you were approached about 10 times. I am aware of the lobbying that occurred for Bill S-19. I do not know how much influence lobbyists can have. Did this, in any way, change how you see the payday loan companies?
[English]
The Chairman: Thank you very much for that personal commercial. We will ask for a response to that. We are not adverse to commercials here. This has been an important work of the committee. Please, respond as concisely as possible.
Mr. Kreviazuk: I would like to address one of your first comments with respect to the report and rule H1 of the Canadian Payments Association. I will add a caveat by saying that each month the CPA clears and settles more than 40 million preauthorized debit payments. For the most part, they work well and are extremely efficient for not only the corporations but for consumers.
However, we are well aware of the report that was recently released by Option consommateurs with respect to concerns around rule H1 or the applicability of rule H1. We have looked closely at that; and recently we have made steps to establish a task force where we will invite the consumer agency in. This task force will be staffed not only by CPA but by members of our stakeholder advisory council, which also includes Option consommateurs and the Consumers' Association of Canada. We consider not only the issues that were portrayed in that report, but any other lingering issues that have come to the attention of the CPA since the introduction of rule H1 a few years ago.
Senator Plamondon: Do you consider credit cards too in that task force? More and more people give authorization to have an amount taken out of their credit cards monthly. That practice is a lot like preauthorized payments by any other means.
Mr. Kreviazuk: The difficulty is that the CPA's jurisdiction does not include MasterCard, Visa or other credit card companies. Our jurisdiction is the interchange between members that are drawn on financial institution accounts. Therefore, it is a jurisdictional issue, which is problematic. That is all I can say on that one.
I wanted to make a comment with respect to education. Out of rule H1, we spent a great deal of time and effort putting out notifications, both on our website and through brochures that we make available to all of our member institutions, that really highlight the provisions of our rule. We have worked with the FCAC; when inquiries come in, they periodically refer them to us. We try to explain the rules to the consumers, asking them to go back to their financial institutions with this information in hand. I am not aware of a consumer having to make a second call back to the CPA.
Senator Plamondon: Do you have something in the works with the banks too? Some information should be given to the financial institutions.
Mr. Kreviazuk: We supply plain-language brochures that are made available to the financial institutions, and they make them available in their branches.
[Translation]
Ms. Bourassa: I cannot answer on behalf of the other banks, but immediately after the report appeared on the La Facture television program, the Laurentian Bank of Canada ensured that information was sent to all of its branches to explain how their clients can put a stop on pre-authorized debits. It is extremely complex. There are a number of rules for every method of payment. We ensured that our staff was brought up to speed.
Senator Plamondon: That is good news.
[English]
The Chairman: If any of you have something to add, do so cogently and clearly.
Ms. Murray: I would like to add one thing concerning L'Union des consommateurs report. We are working with them in terms of all electronic payments because it is important that consumers understand bill payment delays and issues such as that. I can talk to you more about that off-line. In terms of the payday loan, I wanted to add that the agency comes at payday loans from a consumer education mandate. It is important for us to understand all the issues around payday loan companies.
Yes, the commissioner and I have met with the association on numerous occasions, not about Bill S-19 but about a survey they have done and about their standards and voluntary codes. It did not have an impact on our brochure. We hired the Public Interest Advocacy Centre to do that research.
[Translation]
Senator Hervieux-Payette: Earlier, Mr. Campbell mentioned risks. I would like you to describe what risks are taken by a bank when a client tries to cash a federal government cheque. What percentage is lost annually on cheques? On what percentage of cashed cheques would a bank be unable to recover the funds?
My next question involves risk versus the new type of processing that you are promoting, namely, full electronic processing of cheques, which means that they would not be transported physically but would be processed electronically.
This type of system would change the risk evaluation. You would still have to determine if there are enough funds to cover the cheque, or if the right person is cashing it. But there will also be risks inherent in the processing.
I must say that I am still not convinced. There are more and more thefts committed with computers and attempts to hack into systems. These offences are committed by computer experts. So we see that the risk increases with the use of computer processing. Banks will never disclose information on amounts people have lost because of computer fraud. That is the biggest mystery in Canada, and banks still do not admit it.
However, we know that it exists, and if brilliant experts hack into CIA computers, we can conclude that banks, too, are victims of computer fraud. If five million cheques are to be processed electronically, I would like to know if there has been an adequate risk assessment of a procedure like that.
[English]
Mr. Campbell: I will ask my colleagues at the CPA to help me out on the issue of cheque imaging.
On your first question about the risk of a government cheque, on the one hand, if it is not a customer, the rules provide that there is indemnification and therefore, there is no risk at all. The risk is on a piece of paper here. Was it stolen? Was someone's wallet and ID also stolen? Was it altered? Has it been amended in any way? Has it been endorsed by somebody and handed over? Who signed that? You have to take into account all these things. Sure, it is the Government of Canada, but for all those other issues, you have to look at that piece of paper. I am not an expert and do not pretend to talk in any degree of detail, but the area where there is greater risk is in processing these pieces of paper.
Mr. Roach: It is important to note that Canadian Payments Association is involved only in the exchange of items between financial institutions. We do not deal with the acceptance at the branch level or the clients on the receiving end.
The cheque imaging project or the electronification of the cheque clearing project will add greater efficiencies to the clearing process and the time frames, the time in transit, for the cheque. I know that we will be back in this committee in a month or two, I am hopeful, to answer more questions directly on that. Because it is such a large project, it is difficult to get into it piecemeal except to say that cheques are cleared electronically today using the micro-information or the code line information. The physical paper has to follow for a lot of the risk assessments to be done properly. We hope to improve the ability of banks to do this risk assessment in financial institutions with the cheque imaging project in the future.
Senator Goldstein: Thank you for your splendid presentations. They were informative indeed. I have three questions that are tied to each other, so it will be easier if I ask all three at once.
First, Mr. Campbell, you indicated that of the five million cheques that are cleared each day or deposited each day, you experience problems with less than 1 per cent. Was I right in that figure? If I was, then you are talking about 50,000 problems a day, and I think that is huge.
The second question is addressed to Ms. Murray. This pamphlet that I have looked at is a splendid piece of work and forthright. Hopefully, it hits people clearly in the face when they see on the first page that a payday loan is an expensive way to borrow money. The brochure is a highly glossy, glitzy but marvellous presentation that is easy for people to look at. My question in this respect is, what are you doing to ensure that this brochure is distributed to consumers who use payday loans?
Collateral to that, I noticed that your mystery shopping survey, which I think is marvellous, does not do one thing that I think would be important for the committee. Although you say that 3 per cent of consumers do not have bank accounts, there is no correlation in the figures you have given us — the figures that you have indicated here or the figures that we got last night — between those who use the payday loan facility, if I can call it that, and the extent to which those people do not have bank accounts.
The third question is a quick one to all of you. The United States has, in fact, started standardizing cheques and cheque books in a way that will permit imaging or electronic transfer of data. We already have that in a primitive form, comparatively speaking. When do you think that project will be completed?
I had the advantage, Mr. Roach and Mr. Kreviazuk, of having Deborah Wilson of your organization as a witness in a case that I did not plead but was settled on the courtroom floor, no doubt because of the fact that Deborah Wilson was to be a witness in our favour. She gave me an excellent set of lessons on what you do and the enormous extent of your operation, which I think Canadians do not generally appreciate. As a result of her lesson, I do appreciate what you do.
When do you think that changeover will take place?
The Chairman: We now have 3.5 to 5 questions. Please respond to them, and if you cannot do it shortly, give it to us in writing.
Mr. Campbell: To your first question, senator, when I said less than 1 per cent of accounts, that was less than 1 per cent have holds on them. They are not problem accounts or empty envelopes. They are holds.
Senator Tkachuk: Can I ask a supplementary question? I have not asked a question. You talked about this cost of payday loans. When you get money from a bank, you have to open a bank account. You cannot have a loan without a bank account. What is the average cost of a bank account with a couple hundred dollars in it?
Ms. Murray: There are low-fee accounts available. Financial institutions have signed on with the government.
Mr. Campbell: It is less than $4 a month, and you get a series of transactions.
Senator Tkachuk: We are talking about $50 a year, plus the cost of transactions.
Mr. Campbell: I have it here, and we can provide it.
The Chairman: Please give it to us in writing. It is an important question.
Senator Tkachuk: I asked that because of the cost of a loan. If a person goes to a payday loan association, he does not need a bank account. Is the cost of that bank account included?
Ms. Murray: They need a bank account to get a payday loan. They do not need one for cheque cashing but for a payday loan, they need a bank account as well.
Senator Angus: Ms. Murray has stated that their surveys indicated that between 1 per cent and 3 per cent of Canadians do not have bank accounts. I question that number. What are Canadians? Does that mean people over 16 or 18, or all Canadians?
Ms. Murray: There are a number of surveys. I spoke to our particular survey of the 5,000 people randomly selected by telephone survey. Ipsos Reid did that survey for us.
Three per cent said they did not have a bank account. Other surveys have shown the number anywhere between 1 per cent and 3 per cent.
Mr. Campbell: It is not our data; it is from the Public Interest Advocacy Centre, an independent consumer group. They say 1 per cent of adult Canadians. We put ourselves in the lead ranks in the world. We are not doing badly.
The Chairman: We will return to Senator Goldstein's questions. We have had several hijacks here. I do not mind. This is a hijacking committee. Everybody is learning under my liberal leadership; but I will be more conservative now with our time.
Ms. Murray: Senator Goldstein, to let you know with regard to the payday loans brochure, it is being distributed through Service Canada. It is one of their highlighted brochures of the next three months. We are distributing it through the credit counselling agencies throughout Canada. We are linking with all types of community organizations that work with people who are in our target group, but we can always do more. It is just a new brochure so we will continue to work.
Senator Goldstein: Are you busy with the Association cooperative d'économie familiale, ACEF?
Ms. Murray: Yes, we had four consumer groups in last Friday and we are talking to them about that.
In terms of the correlation, I will say quickly that I did not give you the full survey. We asked in our survey of 5,000 how many had ever been refused an account and we had 4 per cent there. In terms of making those links, that is a much longer process, I agree.
Mr. Roach: With regard to the cheque standard, the U.S. has implemented its legislative framework, its Check 21 legislation. Part of our submission to the government for changes in the Bills of Exchange Act is to modernize our legislation to allow this progress to be made on the cheque clearing side.
With respect to the cheque standard itself, the Canadian Payments Association has completed a cheque standard, Standard 006, which is on our website. The purpose of the standard is to have a good base document from which clear and clean images can be taken once the project progresses.
The Chairman: With due respect, Mr. Roach, it is not necessary to have legislation. The banks, which already have cooperative organizations, could have done this years ago. They could decide tomorrow without bank legislation to have a standard cheque that can be photosensitive, and include the material. This does not need government legislation. If you want it, we will get it for you and recommend it, but I do not think it is necessary. Is it?
Mr. Roach: It is not necessary for the standard cheque layout, of course. It is necessary for cheque clearing using images and electronic data instead of paper. It is necessary for that component.
Senator Plamondon: There was a time when we could buy blank cheques in a store. The banks have control and you have to buy cheques from them, because they are encoded.
The Chairman: Have we completed the responses to Senator Goldstein's questions? Senator Moore has been waiting patiently.
Senator Goldstein: If he has been waiting patiently, he should be permitted his questions.
Senator Moore: I have two questions. As I understand it, a federal government cheque up to $1,500 may be cashed without charge, with proper identification, in any bank, even if the cheque holder is not a customer of that bank. However, if the cheque holder is a customer of that bank, then the process is different and fees attach to the transaction. Is that right, and why so?
Mr. Campbell: No, the rules specifically cover non-customers and there is an indemnification for the government in case there is a problem with that cheque.
If you are a customer, the rules do not cover that. Different banks may have different approaches. My understanding is that, generally speaking, banks will adopt the same process for cashing with identification. Some may require a deposit because they have different risk sensitivity. Banks still face a risk with that piece of paper.
Senator Moore: I am thinking more about the fee, Mr. Campbell.
Mr. Campbell: There should be no fee. If there is, customers can complain to my colleague Ms. Murray.
Senator Moore: My second question deals with electronic imaging processing of cheques. Looking at the graph of the Canadian Payments Association, how would that work? How would the electronic imaging process work? Would this processing of physical cheques be out the window?
Mr. Roach: No, the principal change is that you get rid of the planes, trains and automobiles to move the paper around, except for the first link.
Senator Moore: Where would the cheque go? Would it go from Whitehorse to Vancouver, and then there would be photographs?
Mr. Roach: The cheque would go from Whitehorse to Vancouver physically and then be imaged in Vancouver at the first data centre. The remaining process is essentially the same but electronic.
Senator Moore: Is that all the way to Newfoundland and the clearing houses on the East Coast?
Mr. Roach: Yes, if it must be returned, it will come back. Some institutions may centralize their process. Because they are now dealing with electronic processing, they may have the images go to a central processing centre.
Senator Moore: What is imaged? Is it the front and the back?
Mr. Roach: The front and back of the cheque will be imaged, yes.
Senator Plamondon: How long would you keep the images?
Mr. Roach: It is the record. The images will be kept depending on the requirements to keep documents and records as they are today.
Senator Moore: As a bank customer with my monthly statement, would I get back a sheet of paper with that imaging on it? What would happen?
Mr. Roach: The exact services would depend upon the financial institution with whom you deal. As there are different service packages today, there are different services.
Senator Plamondon: You have to pay for it at the Royal Bank. If you want to see the image on your computer, you pay for it.
Senator Moore: If this new system is in place, and most of the planes and trains are no longer needed, there should be less cost.
Ms. Bourassa: This part of the process is done by each financial institution. The decision as to what will happen is that you will not get the physical cheques from now on. Some clients do not get any cheques; they get only their statements. They will continue getting only the statements. The ones who get cheques will have different opportunities presented to them, depending on whether they are a commercial client or a retail client, at whatever cost. The Royal Bank now offers the imaging system. If clients agree not to receive their statement by mail, they can click on the Internet and see all their cheques free of charge. The costs and services that will be given to the clients is a decision of each financial institution.
Senator Angus: That is only if they agree not to receive the statement.
Ms. Bourassa: That is the Royal Bank's position. I am not talking about the other banks.
Senator Plamondon: If you receive a statement and want to look at one cheque, then you pay.
Senator Tkachuk: You have a charge.
Ms. Bourassa: This is the Royal Bank's decision.
Senator Moore: Further to what Senator Hervieux-Payette cautioned about security, it could be upsetting if somebody hacked into the system.
I expect the institutions are looking at that with due diligence.
The Chairman: I would like all of you to look at page 11 of The Cost of Payday Loans. I want to talk to Ms. Murray about this, but the others can comment as well.
Thank you so much for this chart. I agree with Senator Goldstein that this booklet is excellent.
On page 11, we have a chart. For those of you that are not watching this or cannot see this in our listening audience, it is a small chart that compares the cost of a $300 loan taken for 14 days. The assumptions are that these figures would represent the percentage of interest in each of those categories. I want to read them for the listening audience.
For that payday loan, with applicable fees, the cost of a $300 loan for 14 days is 435 per cent.
Senator Moore: That is annualized.
The Chairman: Of course: that is the way we calculate interest, Senator Moore.
On the cash advance on a credit card, it is 36 per cent a year; for an overdraft protection on a bank account, it is 21 per cent a year; and for borrowing on an existing line of credit for 14 days, it is 10 per cent.
My question to you, Ms. Murray, is this: Do the banks provide that information to their clients on a monthly basis when they do an advance on a loan? Is their interest as a percentage clearly marked out and not just their cost? People do not look at their costs, but the percentage of their costs is more pertinent because we know about our mortgages and interest rates, et cetera, but this is a surprising document. The only question is: Is this information being clearly communicated to consumers? In your evidence, you told us that in your surveys people have indicated that they do not know what their costs are.
Ms. Murray: Yes.
The Chairman: If it is not communicated by the banks, should it be?
Ms. Murray: Under the cost of borrowing regulations, the banks are obliged to provide the costs of a loan or any kind of product.
The Chairman: In percentage terms?
Ms. Murray: Yes, all fees associated with the account or the mortgage are to be disclosed to the consumer.
We found in our particular study that we were looking at the payday loan industry.
The Chairman: I understand that, so the costs are disclosed.
Ms. Murray: The costs are disclosed. If you notice our consumer education program, we understand that people need more information and they need it in plain language terms. We try to write our brochures at a level two literacy. A majority of Canadians are at level two or level three. There are issues around the ``understandability'' of all kinds of complex documents. The information is divulged to the consumer under the cost of borrowing regulations.
The Chairman: Thank you. If there is anything you would like to add, you can give it to us in writing. If senators have other questions, they can give them to you after we have adjourned. If we have not been fair, give it to us in writing as soon as possible, because we are starting to draft our report.
Thank you all for coming back again and presenting your material so cogently.
I wish to thank the senators for this round of questions. It has been elucidating.
I want to apologize to the witness, Mr. Bishop, who is back for a second time. I apologize for the delay. You notice that the witnesses were animated in their responses, and all senators were equally animated. We are trying to have a deeper understanding of chequing and the chequing process.
We hope to complete this continuing study shortly on consumer protection issues in the financial sector, a topic we have been involved with, as you know, Mr. Bishop, for some time.
The particular focus for today is cheques and how they are handled by our financial systems, the extent consumers face cheque cashing related fees, hold times on cheques and the potential increase on the use of payday loan organizations as a consequence of some of these issues.
We know the testimony we will hear today will be valuable to us and hopefully to our listeners as well as we move towards the completion of our deliberations on our report. Again, we are anxious to get it out. This will be the penultimate round of witnesses on the topic of consumer protection.
With that brief introduction, we can now turn to our most patient witness, Mr. Bishop, who is the head of the Canadian Payday Loan Association. Please introduce yourself and give a short introduction.
Norman J.K. Bishop, Board Secretary, Canadian Payday Loan Association: Honourable chairman, senators, ladies and gentlemen, thank you very much for the invitation today. I am the secretary of the Canadian Payday Loan Association, CPLA. Our president, Bob Whitelaw, is out of the country so I have appeared on short notice.
Since we last appeared before you on Bill S-19 in February, you will note that we have changed our name from the Canadian Association of Community Financial Service Providers to the Canadian Payday Loan Association. Not only is it easier to say, but the primary reason for the change was to reflect clearly the industry our association represents, which is payday loans.
The primary focus of our association is to provide the government and general public with a better understanding of the payday loan industry, to implement our code of business practices and to enforce those practices amongst our members.
The reason I preface this presentation with this information is that, as an association, we have not dealt with the issue of cheque cashing. However, many of our members provide this service. Nonetheless, to the extent I can help shed light on the cheque cashing business, we are pleased to provide whatever information we can.
In summary, from what we understand and have been informed of by our members, the cheque cashing business has been around longer than the payday loan business. It has existed for about 25 years. Our members are not seeing a big growth in this industry. It has levelled off as electronic transactions increasingly replace cheques, which corresponds with what you heard earlier today.
I thought it would be helpful to talk about what a cheque cashing transaction looks like. It is a simple process. When customers enter the store, they present their cheques to the teller together with identification to establish their identity. The teller then verifies the cheque. Each company has its own verification process to confirm the identity of the individual and the accuracy of the cheque, and to make sure as best it can that there are funds in the account.
Once again, you have heard today from Mr. Campbell and others all the issues one faces when inspecting a cheque to make sure it is valid.
When the teller completes the verification, customers receive their proceeds less the cheque cashing fee. The key factor here is convenience. The entire transaction takes less than two minutes if you are a regular customer. The cheque then enters the clearing system, and the store recuperates the money in due course from the banking system.
I think there is a misconception about the fees involved in this transaction. The average fee for this service is in the range of between 2.5 per cent and 3 per cent of the face value of the cheque plus a transaction fee that may be $2 or $3.
Senator Angus: Do you dispute the figure that the chairman pointed out from the brochure?
Mr. Bishop: Yes.
Senator Angus: That was based on a $50 fee for a $300 loan, which comes out to about 400 per cent.
The Chairman: It is on page 11 of the brochure. It was 435 per cent based on a 14-day loan for $300.
Mr. Bishop: This is an important point. You are talking about the difficulty people have cashing cheques at banks. If you have an expense reimbursement cheque and you have difficulty at the bank, you go to Money Mart or a business like that. You do not get a payday loan; you cash the cheque there. If you just cash the cheque there, there is a 3 per cent fee applied.
If I have a $200 cheque, I work at Starbucks, I am off at 9 p.m. and I would like to cash my cheque, I pay for the convenience. I pay $6 and an item fee, that is $8, and I get my cheque cashed. That is the service people use instead of banks that we have been hearing about today. It is not payday loans they get. That distinction is an important one to make.
Senator Massicotte: Of the total number of people looking for funds, how many of them are cashing cheques as opposed to getting payday loans? You give the impression that payday loans are decreasing in importance and cheque cashing is the predominant service. Could you give us a perspective on that?
Mr. Bishop: Based on the knowledge that I have, once again, our association represents people who provide payday loans. A number of those companies also provide cheque cashing services, but a number of them do not. My knowledge is restricted to what our members inform us about.
The cheque cashing business is not a growing business. The reason is because people get their money by direct deposit and electronic funds transfer. To the extent they do that, they then have their money in their bank account. They do not have the issue of getting a paycheque when their shift ends at 9 p.m. and then trying to find a place to cash it.
Our members provide that service in response to the example that Senator Angus gave earlier today. If you wanted to save 45 minutes, you would not get a payday loan; you would cash your cheque at a cheque cashing store. If it was a $2 cheque, you would pay $8 for that convenience.
Senator Angus: The 45 minutes was not to get a loan or to cash a cheque; it was to deposit money. That is my criticism of the banks. The poor consumer waits 45 minutes, gets a big hassle and cannot even put money in the bank. More privileged or wealthy citizens sit in their office and never even go to the bank. They use these private wealth management places and they are not charged fees. It is a two- or three-tier system. That is what Senator Plamondon is particularly critical of, and I have become a believer.
The Chairman: I am allowing this hearing to turn into more of a round table because a few of us here truly want to get at it. Please continue, Mr. Bishop.
Mr. Bishop: It would also interest the committee to know that when this business first developed in the early 1980s, those involved were new at it and the fees they charged to cash a cheque were 6 per cent to 7 per cent. Through economies of scale, competition and better expertise at making risk decisions, that fee has decreased to about 3 per cent. It is adjusted by the competition, the industry and the deficiencies. The members of the CPLA indicate that the majority of cheques cashed are from companies in the form of payroll cheques, as opposed to government cheques. Government delivers many of their payments via direct deposit.
Why do Canadians use cheque-cashing services, given the additional cost? We heard today from Ms. Murray that through her study commissioned by Ipsos-Reid they do so because of the convenience of later hours, locations and quick turnaround time. Convenience is high on the list of reasons. One of our members, Money Mart, prepared some studies, but not for public release. They have been doing them over the years for their internal operations to understand their customers. For today's meeting, they provided information from a study done in 2002. You will find —
The Chairman: Mr. Bishop, will that private study be made available to the committee's public record?
Mr. Bishop: I believe it has been provided today. Senators will be able to compare the two studies — FCAC and Money Mart — and find the conclusions similar. Money Mart has determined that its customers use the service mainly for convenience. You will note from the Money Mart survey that their customers are satisfied with the service they receive. We have provided the committee with a survey on the payday loan service prepared by the CPLA to determine who uses the service and the consumer satisfaction rates. The experiences are similar to those in the other surveys.
I have touched on most of the elements of the payday loan service, which has been around for a number of years. Although it is not a growing service, it generates a great deal of customer satisfaction with the product. I reference the fact that we understand the Minister of Justice has announced his intention to amend section 347 of the Criminal Code to allow provinces to regulate the payday loan industry. We are in favour of and support the proposed changes. We believe that these changes will ensure that all payday loan customers will benefit from a higher level of consumer protection. The changes will allow provinces to regulate our industry, specifically, which will be good for consumers because there will be strong consumer protection to ensure a viable industry. We hope that the Senate sees this as well.
The Chairman: Are you suggesting that the Minister of Justice has tabled proposed legislation or plans to table proposed legislation?
Mr. Bishop: They are proposing that.
The Chairman: It would be the norm for such a piece of legislation to be brought to the attention of the committee as soon as possible. We are delighted if the minister is moving on that front because that was the thrust of our earlier hearings on this subject. We were anxious to see what his deliberations would be. We will look at that proposed legislation when it comes before the Senate from the other place. Thank you for bringing that to our attention. Do you have further comments, Mr. Bishop?
Mr. Bishop: I am sure senators have a number of questions. Perhaps I will conclude my remarks so that I might try to answer questions on the topic.
The Chairman: All senators here are fascinated with this topic.
Senator Angus: I noticed that the name change has taken place. Is that recent?
Mr. Bishop: Yes, it was effective September 1, 2005.
Senator Angus: It is a good move on your part to be more transparent and up-front. Did anything specific drive you to change the name? Did it have anything to do with these committee hearings?
Mr. Bishop: No, when we said the name before, your response was, ``What the heck does that mean?'' Now, you know exactly what it means.
Senator Angus: Mr. Bishop, you are the Board Secretary and Mr. Whitelaw is President and CEO. How many members are in the CPLA?
Mr. Bishop: We have approximately 35 members that own approximately 750 outlets across Canada. Recently, we prepared an in-office study that determined there are approximately 550 outlets that are not members of our association. That gives you an indication of the balance.
Senator Angus: There are 750 outlets on your member list and another 550 outlets that are not on that list.
Mr. Bishop: That is correct.
Senator Angus: How much does it cost to join the CPLA? Is it a percentage of business or is it a fee?
Mr. Bishop: It is a fee but I could not tell you what it is.
Senator Angus: Does each member pay the same amount?
Mr. Bishop: Yes.
Senator Angus: What percentage of your members are beneficially owned outside of Canada?
Mr. Bishop: I could not answer that. Money Mart is owned outside of Canada.
Senator Angus: How many outlets do they have?
Mr. Bishop: There are approximately 320. Of the other companies, I could not tell you.
Senator Angus: We are all accustomed to colloquialisms and buzzwords. Is it a growth industry in Canada?
Mr. Bishop: That is an interesting question. There is a perception that they are ``springing up like mushrooms.'' We have seen that the business has grown from west to east. A study that came to our attention at the beginning of September was released by the City of Vancouver, and we will provide it to the committee. The City of Vancouver wanted to look at the payday loan industry in Vancouver. Their city department did a study in which they found that over the past three years, the growth was relatively stagnant. Their 46 outlets had grown from 43 outlets over a three- year period. It looks like the growth is tapering off, at least in some parts of the country.
Senator Angus: It is an industry that clearly grew up quickly in response to a need that is levelling off.
Mr. Bishop: That is correct.
Senator Angus: When we first heard about it, most committee members had seen some of the outlets and had a kind of awareness of the service. Then, we became interested in the business. Initially, when it was presented to the committee it left a kind of pejorative overtone.
Mr. Bishop: I understand.
Senator Angus: How have you addressed that? Do you think it was an unjustified kind of painting with the wrong brush?
Mr. Bishop: It was a natural reaction and simply outlines the big job we have ahead of us to educate people about the services, who uses them and why they use them. As we heard from Ms. Murray today, a broad range of people use the service, and they are likely not who you think they are. They use it because they like the service, and for many other reasons.
Senator Angus: Is it worth $8 to save 45 minutes of your busy day?
Mr. Bishop: It is worth it to me and so I would do that. There is a true service aspect to it. If, for example, you are a young adult working part time at McDonald's and going to school, is it worth it to have a bank account and pay a monthly fee to have that bank account open when you have no money in it? Should you simply pay $6 to cash your cheque? You receive your cheque on Friday night after work and you go and cash it. It makes more sense than having a bank account. There are different reasons why people use the service.
Senator Angus: I defer to the next questioner.
[Translation]
Senator Plamondon: You could perhaps give me the figures, but there are certainly more automated tellers than there are Money Mart stores and others. When you open a bank or a credit union account, you can ask for a line of credit and a debit card. With a debit card, you have 24-hour-a-day access to your account and your line of credit. So why would people go to a Money Mart when they have access to their account at all times with the automated teller?
My other question deals with payday loans. I obtained the list of lobbyists, and there are approximately 30, in accordance with section 347. So it appears that the stakes are rather large and many come from your association.
In a Small Claims Court decision last March, Justice House took — I will give you the conclusions —
[English]
Mr. Bishop: I am not getting the translation.
The Chairman: Would you repeat the question slowly to allow Mr. Bishop an opportunity to hear the question?
Mr. Bishop: I heard the first question but not the second question.
Senator Plamondon: A judgment from Judge G.C. House in a small claims court decision in March, 2005 reads as follows:
I had had occasion to review... all of the files referred to above. They are identical in terms of the findings with respect to the calculation of an annual rate. Amounts, terms and penalties may differ but to a file they all violate the provisions of s. 347 of the Criminal Code in that the rates are unconscionably usurious. The Plaintiff in all of these actions has displayed an organized deceptive pattern designed to exploit the vulnerable.
The Chairman: Are you referring to a judicial decision? If so, perhaps you might table it for us.
Senator Plamondon: I will table it, yes. Here is my question. I will say it in French.
[Translation]
You had contracts stipulating that consumers could not have recourse to the courts. The clause in the contract whereby the borrower must accept recourse to arbitrage and relinquish the right to go to court was deemed illegal and not in the public interest. Do all Money Mart and payday loan contracts still contain this clause that the judge has declared is illegal?
[English]
Mr. Bishop: I cannot comment on that because I believe you are talking about contracts of specific members. Each member's contract is up to them. The Ontario government has recently passed legislation that requires a much more rigorous disclosure of the cost of borrowing where you have to disclose the percentage rate. You have to disclose, as a percentage, all the costs and charges of advancing credit as well. We have urged our members to comply with those regulations. Consumers are well informed. Members of our association must set out clearly all the fees and charges so consumers understand, in dollars and cents, what it costs them.
Senator Plamondon: My question was: Do your customers agree not to go to court and go only to arbitration?
Mr. Bishop: You are talking about the contracts of different members of our association. I do not have information on members' contracts.
Senator Plamondon: My last comment is on what was said about the minister wanting to table an amendment to article 347 so that the provinces could exempt themselves or set their own conditions. Although the article sets a rate, I do not think it prevents the provinces from doing anything, do you agree?
Mr. Bishop: I am not sure what legislation they are looking at.
Senator Plamondon: Let us suppose it is 40 per cent or any percentage. Any province would be able to decide whatever it wants, is that what you said?
Mr. Bishop: Yes.
Senator Plamondon: It does not affect the article in question?
Mr. Bishop: Are you referring to section 347?
Senator Plamondon: Yes.
Mr. Bishop: I think we will see in the next couple of weeks what the legislation looks like and how the government chooses to deal with that issue. The federal government's responsibility is for the interest rate, and the province's responsibility is for consumer protection.
Senator Plamondon: Suppose a province does not do anything? Would you be free to do anything you like?
Mr. Bishop: My understanding is that section 347 would apply only if the province regulates. If the province chooses not to regulate, then there would be no change to the law. Once again I am only speculating.
Senator Plamondon: That answers my question.
The Chairman: It is interesting. I am delighted to get that information on our record. We in the committee are not familiar with that information. We are most interested obviously in dealing with this. If you recall, Senator Plamondon, we asked the minister to attend, and we tried to arrange our affairs in such a way as to allow him to attend. Unfortunately his schedule did not allow him to attend. We are delighted to hear from Mr. Bishop with information about the minister's intent. Thank you, Mr. Bishop. It helps us plan our work in the future. No doubt we will have an opportunity to talk to ministers or their representatives again to probe at this information.
Senator Tkachuk: If an advance is made on a cheque, a loan of some kind from a money mart, does the money mart require that customer to have a bank account at a bank?
Mr. Bishop: If you are talking about payday loans as opposed to cheque cashing, yes, they need a bank account.
Senator Tkachuk: Why do they go to you rather than the bank?
Mr. Bishop: Are you asking about a payday loan?
Senator Tkachuk: Yes.
Mr. Bishop: I expect they go for convenience. The fact they have a bank account does not mean they have money in the bank account.
Senator Tkachuk: That is right.
Mr. Bishop: It is a short-term loan until the next payday. Our studies find it is usually for an unexpected expense or something that they need for necessities until the next payday.
Senator Tkachuk: Is this because if you went to a bank and asked for a $300 loan, they would refuse you?
Mr. Bishop: To use an analogy, we are like the 7-Eleven or Mac's Milk of financial services. That does not mean that banks do not have lines-of-credit services. Surveys we have done say many members have credit facilities. They like the quick convenience and they would go for many different reasons. They all have a bank account.
Senator Tkachuk: If we go to page 11 of the brochure that we were talking about. Human behaviour is always interesting to me. Everybody wants everybody to be the same.
Everybody does different things and some do things we might not consider normal but they are free to do them in this country.
The payday loan on page 11 had a fee of $50 for a loan of $300, but would the fee be the same if the loan was $600?
Mr. Bishop: It varies from company to company. The way the industry talks about us, it costs per hundred dollars lent and could vary from $13 or $14 at one company to $25 or $30 at another company.
Senator Tkachuk: You could pay $20, $100 or $500?
Mr. Bishop: That is correct, yes.
Senator Tkachuk: That seems like a lot of money.
Mr. Bishop: There are costs to offering these products. When we met with you the last time we presented a study we had undertaken. Industry Canada had input into the study and they determined the cost to the lender to offer a loan of $100. This cost amounted to 70 per cent as operating cost, 20 per cent as bad debt cost and the balance is cost of capital. These costs have to be recouped. It works out to high interest rates when you work in the fees because it is a small amount and it is short term.
Senator Tkachuk: Would you have any data as to the combined outstanding loans of the money marts.
Mr. Bishop: I could see if data is available.
Senator Tkachuk: It would be interesting to see how much business there is. People are paying $20 or $25 per hundred or $13 per hundred and that would be for two weeks, or could it be for a month or a year. Would it be for a year?
Mr. Bishop: No, that would be the minimum. It is called a payday loan because it is a loan until your next paycheque.
If you are paid in 10 days and you need the money you go in and get the loan. It may be five days before. It may be 10 days before. The cost does not vary with the time because it is so short though the interest rate would vary significantly.
To give you an example, if I loaned you $100 and charged you one dollar and I loaned it to you for seven days, you would think that was a low fee. Well, that is 107 per cent. If I lend that to you for four days, it is probably getting up to 130 per cent. That is why an annualized percentage rate, APR, does not work well with this type of industry, with small, short-term loans.
When you read the studies of the Public Interest Advocacy Centre, PIAC, they come to the same conclusion. It is difficult to apply an APR. It is not really a relevant figure. Our members disclose the cost of borrowing but it is also important that they make it clear to the borrower all the fees and costs and charges that the borrower pays, in dollars and cents, because that is what is important for them to understand.
Senator Tkachuk: It was revealed that you take a lot of personal information. This practice is always a concern of mine, not only with your industry but with the banks and everybody else who asks for these things. What steps do you take to guarantee the security of this information? What steps does your association, or the your businesses that belong to your association, take to protect the security of customers?
Mr. Bishop: In that respect, our members are no different from financial institutions and other institutions that take this information. The provincial legislation is rigorous. Financial institutions require a privacy officer, they require processes be put into place to guard the information. It is a big issue. The large companies in this industry have to take it responsibly and seriously.
Senator Tkachuk: Do you have a code in the association that you follow?
Mr. Bishop: We have a code and it mentions privacy. However, we sum up by saying that you have to comply with the privacy laws because, frankly, those laws and regulations are extensive.
Senator Tkachuk: They are stringent.
Mr. Bishop: Yes.
The Chairman: We are trying to understand. We do not want to dampen the public's interest in your business because obviously you are fulfilling a need. I notice in your survey — and this information will be of interest to our colleagues from Quebec — that two-thirds of the people in Quebec surveyed by Environics want the legislation to be changed to permit payday loans to operate in their province. That figure is an extraordinary number of people dissatisfied with the service they are not getting in a province.
I am trying as best as I can to understand, related to Senator Tkachuk's question, the reason why the established banks have not provided a more competitive model for you to build up your business in this country. I have no objection if the banks do not provide a service. We have a free economy. There is no reason why this service, which is obviously a useful service in many ways, is not provided at a more cost-efficient basis because of lack of competition with the established banks. Let me get my numbers straight to see if I am correct.
We have been told by your organization that this business has grown to a $5 billion business. We heard last time that it was growing at the rate of 20 per cent per year and you have now told us that the rate of increase is dampening. I assume the curve is sliding but it is still going up and more power to you.
You have told us that based on your risk model, you have a problem with recovering about 20 per cent of your in- effect loans; we shall not talk about collection for the moment.
Mr. Bishop: That is correct.
The Chairman: You have told Senator Tkachuk that while you cannot tell us what the margins are overall for your members, costs range per $100 from a low of $13 to upwards of $20 to $30.
If I take a mean average of somewhere between $13 and $25 that would give us 21 per cent or 22 per cent as the mean average. If I apply a number to the $5 billion and I take the average and if it is, say, 20 per cent, to be fair, 20 per cent of $5 billion is a lot of money. I realize this amount is in gross terms. That would be, I think, $200 million. Then if I subtract 20 per cent from that, I am down to about $100 million in terms of gross margins. Am I doing this correctly or not?
Mr. Bishop: To start with, I am not sure where the $5 billion dollar figure —
The Chairman: We got it from you, I believe.
Mr. Bishop: Was that the volume of loans granted or gross revenues.
The Chairman: I think it was gross revenues, was it not?
Mr. Bishop: It would not be gross revenues.
The Chairman: Is it total volume?
Mr. Bishop: Yes.
The Chairman: Give us some insights as to what gross revenues would be, or is that private? By the way I said $200 million: 20 per cent at $5 billion would be $1 billion.
Mr. Bishop: I would have to get back to you on that. I do not have any expertise with numbers. We could look into what the loss rates are.
The Chairman: We will do some modelling. I suggest you do some as well. I understand this is private information, company by company. I will understand if you choose not to give us that information. We are trying to get insight as to why this service has not been provided across the board by what we consider to be an efficient and productive financial services sector. We are not quarrelling with the service. We think it is filling a need, obviously. In terms of fulfilling our mandate to deal with the consumer, we are trying to get the underpinnings of this. I hope Senator Tkachuk has some supplementary questions.
Senator Tkachuk: I understand your 7-Eleven analogy. That is why they are doing so well.
Do any U.S. or Canadian banks own, or have large investments in, any of these institutions in Canada?
Mr. Bishop: They do not, to my knowledge.
Senator Tkachuk: Are they all private? Are none owned by public companies?
Mr. Bishop: There are two public companies.
The Chairman: We had evidence earlier on that.
Mr. Bishop: The banks are not in this service now because there is, frankly, a cost to provide the service quickly and with a minimum of identification. There are customer service factors.
If you want a payday loan at 9 p.m. and you do not want to wait in line, there are costs to operating a 7-Eleven store. This industry has become good at customer service. That is why the customer comes. Banks cannot, for the fees charged, offer that service on a viable basis.
If the laws are changed, all sorts of financial institutions will get involved in this area. Banks, trust companies, credit unions and other U.S. institutions will come in. We expect there will be real competition.
Senator Tkachuk: Money Mart might become a bank.
The Chairman: You ended on an area in which we are interested, Mr. Bishop, which is how to make our economy more productive and competitive so that the consumer has cost-efficient choices available on a cost-efficient basis.
I want to thank you very much for being so open and candid with us. You know our concerns. We are trying to come to grips with this in a way that is fair to you and your industry, which we commend for stepping in to fill a need, but also to consumers, who are paying a great deal of money for this service. We want to ensure that they understand and know not only the costs but the risks entailed.
Unless senators have any further comment, I want to thank you again, Mr. Bishop. It has been helpful and useful for our deliberations when we come to our report.
The committee adjourned.