December 3, 2013
Canada’s Financial Consumer Protection Framework: Consultation Paper
Note: A consultation is not a poll. Please do not send multiple or duplicate submissions.
- News Release: Harper Government Better Protecting Prepaid Card Users, While Launching Cross-Country Consultations on New Consumer Code
- Consultation Questions at a Glance
This consultation paper seeks views from all Canadians on elements that could strengthen Canada’s financial consumer protection framework and seeks input on key policy issues. Respondents are encouraged to respond directly to the proposed questions highlighted in the consultation paper.
The federal government will provide a summary of views gained from this consultation process in summer 2014, and input from Canadians will be used in developing consumer protection policies.
Invitation for Comments
Comments should be received by February 28, 2014. We encourage readers to send comments electronically to email@example.com. Written comments should otherwise be submitted to the following:
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance Canada
15th Floor, East Tower
140 O’Connor Street
Ottawa, ON K1A 0G5
By submitting a response to this consultation, you consent that all or part of your response may become public and may be posted on the Department of Finance Canada website, to add to the transparency and interactivity of the consultation process. Where necessary, submissions may be revised or redacted to remove sensitive information. Should you post all or part of your response on your website, you consent that the Department of Finance Canada may post either all or part of your response on its website, or provide a link directly to your website.
As the Department of Finance Canada may wish to quote from or summarize submissions in its public documents and post all or part of them on its website, we ask persons making submissions to clearly indicate whether they wish us to keep all or part of their submission or their identity confidential. If you make a submission, please clearly indicate if you would like the Department of Finance Canada to:
- Withhold your identity when posting, summarizing or quoting from your submission; or
- Withhold all or part of your submission from its public documents.
If you wish for all or part of your submission to remain confidential, you must expressly and clearly indicate this when submitting your document. However, persons making submissions should be aware that once submissions are received by the Department of Finance Canada, all will be subject to the Access to Information Act and may be disclosed in accordance with its provisions.
1. Introduction and Context
In its Economic Action Plan 2013, the federal government proposed to develop a comprehensive financial consumer code. The government’s goals are to create a code that will:
- Better protect consumers of financial products and ensure that they have the necessary tools to make responsible financial decisions;
- Be adaptable to suit the needs of consumers of today and tomorrow in a rapidly evolving and innovative financial marketplace;
- Respond to the realities of a digital and remote banking environment and the needs of vulnerable Canadians;
- Provide the exclusive and comprehensive consumer protection regime that applies to products and services offered by banks, and be the basis for consumer protection for federally regulated financial institutions that offer similar products and services, replacing a currently dispersed mix of legislation and regulations;
- Be simple and clear in providing expectations for the accountability of financial institutions; and
- Be enforceable and provide criteria by which actions can be assessed.
The goal of this consultation paper is to seek public input on the appropriate elements of the financial consumer protection framework. The results of this consultation will inform the process of shaping this framework.
2. The Existing Landscape: Canada’s Financial Consumer Protection Framework
The current federal financial consumer protection framework is set out in the Bank Act, regulations, voluntary codes, sector commitments, and Commissioner’s guidance by the Financial Consumer Agency of Canada (FCAC). This framework applies to financial products and services provided by banks, and extends to non-bank federally regulated financial institutions, such as insurance companies and trust and loan companies, where applicable.
The consumer provisions in the legislation provide the government with broad authority to make detailed regulations that help protect consumers. The Minister of Finance is responsible for recommending legislative changes to Parliament and regulations to Cabinet.
The federal financial consumer protection framework:
- Prescribes disclosure requirements for various financial products and services, such as the requirement for using clear and simple language in disclosing charges for deposit accounts and costs of borrowing for credit agreements;
- Prescribes requirements to have access to accounts and consumer funds;
- Limits business practices such as negative option billing and unsolicited credit card cheques that are not in the consumer’s interest; and
- Prescribes expectations and mechanisms for consumer complaints handling, including the need for banks to have dedicated procedures and personnel in place to handle consumer complaints, and recourse to an external complaints body.
See Appendix A for a list of actions taken by the Federal Government since 2006 to strengthen consumer protection for financial consumers.
In addition, the Minister works with the industry to develop voluntary codes and sector commitments. The FCAC administers the consumer provisions according to the Financial Consumer Agency of Canada Act. The FCAC also provides guidance and monitors compliance with the codes and commitments. Details on the existing consumer protection framework are provided in Appendix B.
The consumer protection framework as it applies to federally regulated financial institutions is one element of a broader federal policy framework to support a sound and stable financial sector. The framework includes a robust prudential framework, policies that support healthy competition in the marketplace, and a deposit insurance system that provides protection for depositors. This framework provides a foundation for consumers to make responsible financial decisions in their own best interest.
3. Establishing a Comprehensive Set of Principles for Consumer Protection
To achieve a framework that is more adaptable to changes in the financial marketplace, products and technology, the government is considering the merits of adopting standards or principles to anchor the financial consumer code. Standards and principles would set out general expectations and offer a degree of flexibility in implementation. They can be supplemented by rules and guidelines that would give more detailed requirements to allow an objective assessment of whether the principles are being met.
Principles should be meaningful, measurable and fair to both consumers and financial institutions. They should empower consumers to make responsible financial decisions and help financial institutions understand the requirements and expectations for compliance.
Should the government adopt a set of principles to govern financial consumer protection that would be applicable even where specific regulations have not been enacted?
If so, how should a set of principles be administered?
In considering specific principles to underpin the consumer code, the government could draw on the experience of other countries. The Organisation for Economic Co-operation and Development (OECD), in close cooperation with the Financial Stability Board and after extensive consultations, developed G20 High-Level Principles on Financial Consumer Protection. These principles, which are designed to assist G20 member countries in enhancing their domestic financial consumer protection regimes, build on and complement policy developed by the World Bank and other international organizations, standard-setting bodies and individual jurisdictions. The principles were endorsed by ministers and central bank governors in October 2011. In addition, some financial regulators around the world have attempted to make rules simpler and clearer for consumers by expressing financial regulation and policy in terms of key principles.
Based on examples of principles that have been adopted internationally, the government could consider the following:
- Financial institution stewardship of the consumer’s interest: Financial institutions should consider the needs of, and impacts on, the consumer when developing, marketing and delivering a financial product or service. Based on information provided primarily by consumers, the financial institution must have a robust understanding of the consumer risks and benefits of the financial product or service and have policies in place to ensure that employees are sufficiently trained and have access to adequate resources to address consumer needs. Financial institutions should make consumers aware when products or services may be inappropriate, given the risks and benefits.
- Access to financial services: Consumers should have access to financial products and services that are affordable and appropriate for their needs and have timely access to their funds. Consumers should have clarity on the type of identification that is sufficient to ensure that an account can be opened.
- Disclosure: Consumers should be provided information on the benefits, risks and features associated with the product or service being offered by financial institutions. The information provided should give the consumer the ability to make an assessment as to the suitability of the product or service.
Information should be presented in a manner that is clear, simple, not misleading and appropriate for the specific delivery channel, and should be available at appropriate times in the life cycle of the product or service. This includes a responsibility to provide clarity of costs and impacts for the consumer over the lifetime of the products and services. The most salient risks and benefits of the product or service should be summarized and provided in a standardized format with a view to facilitating comparisons across financial institutions.
- Responsible business conduct: Financial institutions should develop products and adopt practices that are in the interests of consumers. Consumers should not be unduly influenced to accept a product or service, and express consent should be obtained prior to providing a product or service or changing its terms unless such changes are clearly in the consumer’s interest. Consumers should be free to exercise choice based on a competitive marketplace and should be made aware of barriers or constraints to changing or exiting products prior to entering an agreement.
- Redress: Consumers should have timely access to mechanisms for complaints handling and redress that are affordable, independent and accountable.
What should be included in a set of principles that would form the basis for financial consumer protection?
What elements should be set out under each principle to ensure that the principles are meaningful, measurable and fair to consumers and financial institutions?
4. Possible Enhancements to the Existing Framework
In the context of developing a comprehensive consumer code, the government is interested in hearing from Canadians with respect to enhancing protection for consumers.
The current framework includes a number of consumer protection aspects that address disclosure requirements, prescribe access to basic financial services such as deposit accounts, limit business practices that are not in consumers’ interest, and requirements for handling consumer complaints by banks and external complaints bodies.
The following sections seek input from Canadians as to the need for further consideration in certain areas of the existing framework.
4.1 Addressing the Needs of Seniors and Vulnerable Canadians
Some Canadians may face particular challenges in accessing financial services and in assessing the most appropriate financial products for their needs. Geography, cultural and financial literacy, or capacity to process information may pose obstacles to some groups.
Seniors and other vulnerable populations can be susceptible to financial fraud, mis-selling and poor financial outcomes due to limited capacity, knowledge or education when making financial decisions. Statistics Canada projects that the number of seniors in Canada will double in the next 25 years to reach 10.4 million seniors, and that Canada will receive nearly 334,000 immigrants per year by 2036. Seniors are a diverse group of individuals, some of whom face unique challenges related to financial literacy and interactions with financial institutions. For example, some seniors may face financial decisions and challenges related to transitioning from work to retirement, understanding the complexities of the retirement income system, managing and liquidating accumulated assets and savings in retirement. As seniors age, due to physical or cognitive impairment, they may rely on the help of others to act on their behalf in financial matters, including through the use of powers of attorney. This will be particularly pronounced among seniors who have limited financial literacy.
Accessing financial services and advice from remote locations can be challenging, although this can be mitigated where alternative service delivery channels are available.
What are the unique challenges faced by vulnerable populations?
How should the consumer code address these challenges?
4.2 Responsibility of Financial Institutions to Consumers
The existing consumer protection regime is detailed and prescriptive in nature and does not contain a general expectation for the degree of responsibility financial institutions should have to consumers. This can lead to uncertainty regarding financial institutions’ obligations to consumers when new products or services are developed, including an assessment of the risks these products or services may pose to consumers.
Some jurisdictions have developed principles that set out an expectation of how financial institutions should treat consumers, such as a requirement for institutions to act in the best interests of consumers or to treat consumers fairly. These are supplemented by rules about what “fair treatment” entails or specific obligations that financial institutions must fulfill in order to act in consumers’ best interests. Acting in the best interests of the consumer could include evaluating and assessing the needs of the consumer, including their financial situation, attitude to risk and the needs of consumers at all stages of the relationship with the financial institution, and using that information to ensure that appropriate products and services are presented and discussed.
In an effort to better protect consumers against mis-selling, some countries have applied rules on certain business practices to ensure fairness and responsibility to consumers. Financial institutions in Ireland, for example, are required to know their customer and conduct an assessment of whether certain products or services are suitable for the consumer. Australia has regulations on responsible lending that require credit providers to make an assessment on whether the credit contract is suitable for the consumer. As a principle, the UK requires financial institutions to treat consumers fairly, with some rules and guidance to clarify expectations.
Some jurisdictions have specific rules that address business practices that are not considered to be in the best interest of consumers. In Australia, financial institutions are required to avoid possible conflicts of interest. In the UK, supervisors have the power to intervene and prohibit or set limits on the product design or marketing of certain risky or complex financial products that could harm consumers. Other jurisdictions have rules that require staff and agents of financial institutions to be properly trained and qualified.
The current Canadian framework focuses on prohibiting certain business practices of financial institutions such as negative option billing and unsolicited credit card cheques that are not considered to be in the best interest of consumers and requiring banks to have dedicated procedures and personnel in place to handle consumer complaints. However, it does not have a broad standard for how financial institutions are to treat consumers.
Would it be useful to have in legislation a broad standard of responsibility for financial institutions to consumers and, if so, what level of care should consumers expect from financial institutions?
How should this standard be administered or enforced?
How should financial institutions’ business practices be evaluated to ensure that they are meeting their responsibilities to consumers?
4.3 Supervisory Powers for Accountability and Enforcement
The FCAC was established to strengthen oversight of consumer issues and expand consumer education in the financial sector. The FCAC derives its mandate from the Financial Consumer Agency of Canada Act, which gives the FCAC administration and enforcement powers. The FCAC’s objectives are to:
- Supervise federally regulated financial institutions for compliance with federal consumer protection measures;
- Promote the adoption by financial institutions of policies and procedures designed to implement consumer protection measures, voluntary codes of conduct, and financial institutions’ public commitments to protect the interests of customers;
- Monitor federally regulated financial institutions’ implementation and compliance with voluntary codes of conduct and respect the public commitments to protect the interests of consumers;
- Promote consumer awareness of the obligations of financial institutions to financial consumers and of all matters related to protecting consumers of financial products and services;
- Foster an understanding of issues related to financial services; and
- Monitor and evaluate trends and emerging issues that may have an impact on financial consumers.
The FCAC has powers to examine and inquire into all matters connected with the administration of the Financial Consumer Agency of Canada Act and of the consumer provisions of the other Acts, including broad powers to collect information, review voluntary codes of conduct, and conduct any activities necessary to further its objectives. Where there is non-compliance with the legislative consumer provisions that the FCAC oversees, the FCAC can seek a compliance agreement from the financial institution to remedy the issue, or impose an administrative monetary penalty (up to $500,000).
Some jurisdictions allow the supervising agency to direct the financial service provider to provide for a scheme of redress, which could include compensation to consumers. A supervisor with the ability to take action on behalf of affected consumers could provide a basis for early intervention and an alternative to class action suits.
The supervisory agency plays an important role in consumer protection using its administration and enforcement powers. The government is considering whether changes are needed to the legislative framework in order to allow the FCAC to better supervise and enforce consumer protection provisions.
What tools and authorities will the FCAC need in order to effectively supervise and enforce the implementation of a principles-based financial consumer protection framework?
Should consumers have greater access to recourse, beyond the FCAC, in the federal consumer protection framework?
Banking products and services have evolved significantly over the last few decades as financial systems have grown and the number and variety of financial products in the marketplace has expanded. Digital innovation has also led to an increase in consumer choice for accessing financial products and services.
Over time, regulations have been put in place to address product-specific innovations as well as new ways of interacting with consumers. For example, the consumer provisions of the Bank Act originally addressed banking when it was conducted through face-to-face transactions. Regulations were introduced to protect consumers when banking transactions began to be conducted over the telephone. As banking moved online, voluntary codes and public commitments expressed consumer protection obligations for online banking transactions. New and innovative service delivery channels are emerging in the age of mobile devices, highlighting the need for the financial consumer protection framework to be technology-neutral in its approach so that no matter how the service is offered to consumers, consumer protections continue to apply.
If the consumer protection regime is overly cumbersome, it could slow the development of innovative products and services. However, consumers who are confident that the consumer protection framework applies to new products and services will have more confidence in these products and services, which could support further innovations by financial institutions.
How should the consumer protection framework accommodate emerging technologies and financial products?
4.5 Disclosure About Financial Products and Services
The government has used disclosure requirements as a key tool to provide Canadians with information to make responsible financial decisions. The current framework contains multiple regulations that set out mandatory information disclosure requirements, e.g., interest rates and fees to consumers for credit products such as credit cards, fixed or variable loans, or lines of credit before entering into the credit agreement. Disclosure requirements under the Cost of Borrowing Regulations are to be done in a manner that is clear, simple and not misleading. In addition, there are certain requirements for disclosure in advertising (e.g., prominently disclosing interest rates), ongoing disclosures (e.g., itemized monthly statements of account), and advance notice of changes in terms and conditions (e.g., 30-day advance notice).
In an effort to be comprehensive and enable consumers to make responsible financial decisions, the government is seeking views on what key information elements are needed and what are the most effective forms of disclosure to help consumers to understand and compare products.
What key information do consumers need and how should it most effectively be presented to allow consumers to make informed financial decisions?
Are there particular products or circumstances in which disclosure is not sufficient to provide consumers with the information needed to make responsible financial decisions? What enhancements to disclosure would provide Canadians with information to make responsible financial decisions?
4.6 Access to Financial Services
The government continues to be committed to facilitating affordable access to basic banking services for all Canadians. The Bank Act requires banks to open retail deposit accounts and cash government cheques for any person who meets the requirements, as set out in the Access to Basic Banking Services Regulations. Some banks have committed to a memorandum of understanding on low-cost bank accounts. In 2011, the government reduced the maximum cheque hold period for retail depositors and small and medium-sized enterprises and provided retail depositors with timelier access to the first $100 deposited by cheque. In the 2013 Speech from the Throne, the government further committed to protecting consumers from paying more to receive paper bills instead of electronic ones and from paying more for basic banking services. Measures to implement these commitments will be incorporated into the consumer protection framework.
How could the code ensure reasonable access to basic banking services for all Canadians?
Are there examples where access to financial services is difficult or constrained? How could these situations be addressed in the consumer code?
The financial consumer code should comprehensively protect consumers of financial products and services. In addition to addressing the elements described above, the government seeks views on any other elements that could be considered in order to achieve the objective of a comprehensive consumer code.
What needs to be included in order to achieve the objective of a comprehensive financial consumer code?
5. Continuing the Conversation: Engagement
By working together we can continue to position Canada as a leader in financial services regulation, including financial literacy, financial inclusion and financial consumer protection policy. To do so will require the active engagement of all stakeholders, including individual Canadians, financial institutions and consumer groups.
Many jurisdictions have created mechanisms to promote engagement with groups that represent the interests of consumers as part of their dialogue on consumer protection. The government sees the use of an advisory group as a potential approach to facilitate ongoing collaboration between the public and private sectors, including consumer groups. This would be an important resource for financial institutions in developing products, services, and for policy makers in designing consumer protection policies and procedures. The government intends to consider ways to enhance the effectiveness of stakeholder engagement in financial consumer protection issues.
Should the government consider mechanisms for enhancing engagement among stakeholders in regulatory, supervisory and compliance processes related to consumer protection?
How could consumers and consumer groups best contribute to these processes, and what might their role be?
Stakeholders seeking further information regarding Canada’s financial consumer protection framework are invited to consult the websites of the following organizations:
Appendix A: Consumer Protection Measures Implemented by the Government since 2006
Since 2006, the federal Government has taken many steps to enhance consumer protection, including:
- Sweeping credit card reforms: summary boxes for credit card statements; a mandatory 21-day interest-free grace period on credit cards; ban on unsolicited credit card cheques; consent for credit limit increases;
- Targeted reforms: increased access to funds by reducing cheque hold periods; ban on negative options billing, Code of Conduct for the Credit and Debit Card Industry in Canada;
- Strengthening disclosure through improved mortgage pre-payment fees disclosure and pre-paid card rules;
- Strengthening complaint handling mechanisms to help Canadians resolve complaints with their banks in a more timely, independent and transparent way and formalize a number of requirements in the process, including that external complaints bodies must be approved by the Minister and will be overseen by the FCAC;
- Strengthening supervision by expanding the mandate for the Financial Consumer Agency of Canada (FCAC), and by increasing the maximum fine on financial institutions that violate consumer provisions from $200,000 to $500,000; and
- Taking a leadership role on financial literacy by passing the Financial Literacy Leader Act, engaging in roundtables with stakeholders on the prevention of financial abuse, and designating November as Financial Literacy Month with a robust agenda of education and awareness sessions.
Appendix B: Consumer Protection Framework for Banking
- Paras. 157(2)(e) and (f): Directors and officers required to establish procedures to provide disclosure to customers
- s. 273.1: Prohibition on distribution of securities of federal credit union, except in accordance with regulations and regulation-making authority
- s. 413.1: Notice before opening account or providing prescribed product
- subs. 418.1(3): Regulation-making authority for disclosure for insurance or guarantee against default on loan by bank
- ss. 439.1 to 448.2: Accounts and charges—Disclosure upon opening and of charges, advertisements, right to close account, increase or new charges, deposit accounts, regulation-making authorities for disclosure relating to accounts, point of service, low-fee retail deposit accounts and registered products
- s. 448.3: Disclosure for registered products
- 22. 449 to 454: Borrowing costs—Disclosure, calculation, credit cards, other loans, advertising and regulation-making authorities for borrowing costs
- ss. 455 to 456: Complaints procedures and complaints body
- ss. 457 to 459.5: Miscellaneous—Prepayment, government cheques, restriction on tied selling, notice of branch closure, public accountability statements, affiliates and regulation-making authorities
- subs. 540(2) and (3), 545(4) and (5) and (6)(b) and (c), 552(3): Authorized foreign banks and regulation-making authority
- ss. 559 to 576.3: Authorized foreign bank accounts, borrowing costs, complaints and miscellaneous (mirrors 439.1 to 459.5)
- ss. 992 to 1003 as applied to any notice, document or other information required
Financial Consumer Agency of Canada Act
Regulations Under the Bank Act
Access to Basic Banking Services Regulations
Access to Funds Regulations
Cost of Borrowing Regulations
Credit Business Practices Regulations
Deposit Type Instruments Regulations
Disclosure of Charges Regulations
Disclosure of Interest Regulations
Disclosure on Account Opening by Telephone Request Regulations
Electronic Documents Regulations
Mortgage Insurance Disclosure Regulations
Negative Option Billing Regulations
Notices of Deposit Restrictions Regulations
Notices of Uninsured Deposits Regulations
Notice of Branch Closure Regulations
Prescribed Deposits Regulations
Prescribed Products Regulations
Principal Protected Notes Regulations
Public Accountability Statements Regulations
Registered Products Regulations
Voluntary Codes of Conduct
FCAC monitors the financial industry’s compliance with voluntary codes of conduct.
Code of Conduct for Federally Regulated Institutions: Mortgage Prepayment Information
CBA Code of Conduct for Authorized Insurance Activities
Consumers and Debit Cards: Canadian Code of Practice for Consumer Debit Card Services
Code of Conduct for the Credit and Debit Card Industry in Canada
Canadian Bankers Association (CBA): Model Code of Conduct for Bank Relations with Small- and Medium-Sized Businesses
Principles of Consumer Protection for Electronic Commerce: A Canadian Framework
FCAC monitors several public commitments by financial entities.
CBA: Commitment on Modification or Replacement of Existing Products or Services
CBA: Guidelines for Transfers of Registered Plans
CBA: Online Payments
CBA: Plain Language Mortgage Documents
 In the Financial Consumer Agency of Canada Act, “consumer provision” is defined in section 2.
 Ideas for the proposed principles are sourced from G20 High-Level Principles on Financial Consumer Protection; the United Kingdom Financial Conduct Authority; the Financial Conduct Authority’s handbook on high-level standards, Principles for Businesses; and the Consumer Protection Code of the Ireland Central Bank’s Consumer Protection Directorate.
 Population Projections for Canada, Provinces and Territories: 2009 to 2036, Statistics Canada, 2010.