The cost of consumer credit in Canada: What protections do consumers have?
“Is the fifth time the charm?” This question has been on the minds of many Canadians since the Bank of Canada increased the overnight interest rate in September, marking the fifth rate hike this year. Despite these hikes, inflation continues to surge at around 8 percent (still nearing its 40-year-high).
The Bank of Canada’s overnight interest rate now sits at 3.25 percent, up from 0.25 percent at the beginning of the year. Canada is not alone in its approach, as most advanced economies have taken a similar approach of increasing the rate and frequency of interest rate hikes in an attempt at fighting inflation. For example, the U.S. Federal Reserve increased its interest rate to a 14-year-high in September of this year, while Sweden saw its rate hiked by a full point just last month.
As the Bank of Canada continues to follow other G7 countries by increasing its overnight rate, consumers may be wondering what legal protections they can rely on in the face of increasing rates.
Legal framework
Canada’s approach to interest rate regulation is comprised of both federal and provincial aspects. The Federal Government sets a 60 percent cap on permitted interest rates through section 347(2) of the Criminal Code, which applies Canada-wide. In addition, each province is left to enact various consumer protection laws that vary nationwide.
As inflation and interest rates continue to go up, attention is being increasingly focused on the efficacy of Canada’s interest rate laws, both federally and provincially.
Changes to Canada’s Criminal Code
On March 22, 2022, Bill S-239 (the “Bill”) went to second reading in the Canadian Senate. The Bill seeks to amend the criminal interest rate (the “Criminal Rate”) from a fixed rate of 60 percent, to 20 percent plus the Bank of Canada’s overnight rate. In other words, if this amendment were passed today, the Criminal Rate would be 23.25 percent.
Introduced in the 1980s, section 347(2) of the Criminal Code created the Criminal Rate to prevent predatory lending practices and loan sharking. The Criminal Rate makes it an offense to (1) enter into an agreement or arrangement to receive an interest rate exceeding 60 percent or (2) to actually receive interest at a rate exceeding 60 percent. It applies to all lending products in Canada. The Criminal Rate is an annual rate of interest that includes compound interest, and for the purposes of the Criminal Rate, “interest” is broadly defined as including all fees, fines, penalties and commissions received in relation to the loan.
However, the Criminal Rate was set when the Bank of Canada’s overnight interest rate was 21 percent, making for a spread of only 39 percent. While the overnight interest rate has since fallen by 95 percent, the Criminal Rate has remained fixed at its 1980s level, leading to calls for the Criminal Rate to be lowered to better reflect current market conditions.
While the Bill seeks to address this issue, and has passed to second reading, it is far from certain that it will become law. After second reading, the Bill would then be subject to public hearings, studies, and views, during which amendments may be suggested.
While there have been several previous attempts to amend the Criminal Rate, none has been successful. For example, while Bill S-237 made it to third reading in 2018, it was defeated by a large margin and also included lender-friendly amendments that the current Bill does not have. Those amendments included exemptions from the Criminal Rate for loans of over one million and for those with a business or commercial purpose.
Nonetheless, the Federal Government published a consultation on August 9, 2022 seeking feedback to better understand the risks and benefits of amending the Criminal Rate. Specifically, the consultation seeks information as to whether the interest rate pricing set by high-cost alternative lenders is a reflection of borrowers’ actual credit risk, and whether the rate should be fixed or be linked to prevailing market conditions. The outcome of this consultation will likely indicate the Federal Government’s willingness to amend the Criminal Rate.
Provincial regulations: High-cost credit and consumer protection laws
In addition to the Criminal Code’s fixed interest cap, federally-regulated banks are subject to the strong measures in the Financial Consumer Protection Framework Regulations, made pursuant to the Bank Act, which aim to ensure the use of clear, simple and not misleading information disclosures.
Provincially regulated credit unions are also subject to consumer protection provisions established by the provinces. Many provinces have also enacted consumer protection legislation relating specifically to high-cost lenders, including payday lenders, though the strengths of these protections vary provincially. These provisions relate to business practices, information disclosure, and complaints handling procedures.
Provincial regulatory landscape
While Ontario does not have legislation dealing specifically with high-cost credit agreements, many provinces do, including Alberta, British Columbia, and Quebec.
“High-cost credit agreements” are defined as those bearing an annual percentage rate of over 35 percent in Alberta and British Columbia, and 22 percent in Quebec. Lenders of high-cost credit products are required to obtain provincial licenses, and their agreements must include a series of mandatory clauses. These include cancellation rights and “cool-down” periods in each of the provinces, as well as requirements regarding the advertising of high-cost credit products.
Additionally, borrowers in British Columbia must initial specified clauses for the agreement to be enforceable, and in Quebec, lenders have an obligation to evaluate the borrower’s ability to borrow. Quebec is also the only province to have enforced an interest rate ceiling of 35 percent, in addition to the Criminal Rate.
Next steps
The results of the Federal Government’s consultation will be indicative of its future policy direction on interest rates, including whether the Bill passes, along with any amendments. Given the broad definition of “interest” in the Criminal Code, a change to the Criminal Rate could impact a broad range of products for both lenders and borrowers.
As interest rates and inflation continue to impact the lending market, lenders and borrowers should also stay up-to-date with legislative developments, both provincially and federally.
This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.
