moved that Bill C-233, an act to provide for the limitation of interest rates, of the application of interest and of fees in relation to credit card accounts, be read the second time and referred to a committee.
Mr. Speaker, I am happy to sponsor this bill entitled an act to provide for the limitation of interest rates, of the application of interest and of fees in relation to credit card accounts.
Since their introduction in 1968 credit cards have been a major source of convenience for thousands of Canadians. Last year there were over 55 million credit cards in circulation which accounted for over 10 per cent of all consumer spending in Canada. They have become more than just another means of payment. Renting an automobile or reserving a hotel room for example can be impossible without a credit card.
Hardly a day goes by when I do not use my cards as identification or for a purchase. However, sometimes convenience has its costs and in the case of banks and retail cards it can be very costly indeed.
I decided to address the more contentious issues surrounding credit cards through legislation because I believe there is a great need to regulate what I and many people consider to be unfair practices for Canadian consumers.
I am fully aware that important players in the financial markets cringe at the mere thought of any legislation affecting their sector. They will be quick on their feet claiming the market should be left alone and in the end everything will be fine.
I will nonetheless try to demonstrate to the House that there is ample evidence to warrant regulation.
This is not the first time Parliament has considered the question of credit cards. During the past eight years, three parliamentary committees have examined the credit card industry in Canada. The Standing Committee on Finance published a report in 1987, and the Standing Committee on Consumer and Corporate Affairs did so in 1989 and 1992. Each study approached the issue from a somewhat different perspective.
The concerns addressed included the size of the competition, obstacles encountered by consumers attempting to obtain information on rates, and the question of how interest is calculated, but the main contention was always the fact that interest rates were high and tended to remain so, despite the level of other types of rates.
The banks repeatedly told the committees that their rates were reasonable, since they did not produce a very high yield. That is hard to believe, especially when we see banks making record profits. Every time committee members asked what their rate of profit was, the banks refused to give the information, arguing that it would make them vulnerable to the competition. Despite this lack of co-operation, committee members found that the banks were collecting interest fees from between 70 and 80 per cent of their customers.
Bankers also argued that because the financial institutions take a high risk on many card holders they need a higher return on the cards than any other kind of loans to cover losses. However the evidence before the Standing Committee on Consumer and Corporate Affairs showed that there were fewer defaults on credit card loans than on corporate loans and on other kinds of consumer loans.
When the issue of capping rates was raised, the bankers threatened they would be forced to deny cards to lower income people. This did not sit well with the committee members since the banks' own figures suggested that lower income Canadians were more likely to pay off their monthly balance than their higher income counterparts.
The 1987 finance committee report states that 83.3 per cent of those they considered low income people would discharge their monthly balances, whereas 41 per cent of the card holders with incomes of over $60,000 or more routinely did not pay off their monthly balances.
Ann Finlayson and Sandra Martin, two investigative journalists, summed up these tactics very accurately in their book entitled Card Tricks . I quote: ``The bankers' insistence that they would have to cut off lower income card holders proved nothing more than that they would cut off lower income earners, a stance that was strikingly similar to their extremely hard line on small business loans at the time''.
Finally, as a result of this exercise in futility, members realized how difficult it was to obtain from the banks the information they needed to make intelligent recommendations. The banks did try to smooth ruffled feathers with a slight reduction in credit card rates. In 1989, the Standing Committee on Consumer and Corporate Affairs revealed that when the Standing Committee on Finance was revising the first draft of its report in 1987, the spread between the Bank of Canada rate and the interest on Visa cards was 11.46 percentage points, while shortly after the report was tabled, the spread dropped to 7.31 points.
I would like to explain what Bill C-233 would do if enacted. The bill has two purposes: it limits the amount of interest that financial institutions and retailers could charge, and it creates a standardized method of calculating interest charges and a mandatory grace period for partial payments on all types of credit cards.
We are told that we should not regulate interest rates in our free market society. There is a federal law dealing with credit card interest rates, section 305.1 of the Criminal Code. However, its applicability to loans advanced under credit cards is remote, given that the definition of criminal interest rate is an effective annual rate of interest that exceeds 60 per cent of the credit advanced under an agreement or arrangement.
Bill C-233 would regulate credit card interest rates in a realistic manner. The ceiling on rates would float with the average of the weekly Bank of Canada discount rate from the previous month. The spread between the card rate ceiling and the average bank rate would depend on the type of credit card. The finance committee's 1987 report concluded that among the different types of ceilings that could be used, a floating limit seems more sophisticated and more practical.
Credit cards issued by financial institutions, which include credit unions, caisses populaires and other co-operative credit societies could not carry interest at a rate exceeding the Bank of Canada discount rate by 6.5 or 8.5 per cent, depending on whether the institution charges entry fees, renewal fees or user fees.
Credit cards issued by petroleum companies could not carry interest at a rate exceeding the Bank of Canada discount rate by 9.5 per cent. Those issued by retail stores could not carry interest at a rate exceeding the Bank of Canada discount rate by 11.5 per cent on any unpaid monthly balance exceeding $400.
Retail cards would use a tiered system instead of a floating limit. The rationale for a tiered system in this instance is that retailers do not have the same leverage that financial institutions enjoy. This system would recognize that operation costs on credit cards is higher for retailers than it is for financial institutions.
I must point out that the retailers have nonetheless abused their credit card practices. Their rates have remained virtually unchanged at 28.8 per cent throughout the 1990s when consumer interest rates were falling to record lows.
The Minister of Industry has already written to the president of the Retail Council of Canada urging council members to cut their rates.
I suggest capping credit card rates, because many people have the impression that credit card issuers are making exorbitant profits.
As I said earlier, the facts appear to confirm this impression. The capping concept is not new or radical. In fact, more than 35 American States have introduced this measure. Once again, this is a precedent for the regulation of financial markets.
In its 1989 report, the Standing Committee on Consumer and Corporate Affairs recommended that the spread between credit card rates and the bank rate should never exceed 8 per cent for bank cards and 16.5 per cent for retail cards.
The 1992 minority report said that when the Bank of Montreal introduced a credit card with a floating ceiling of 5.5 per cent plus prime, it proved that banks have other ways of making money. It also confirmed that floating credit card rates did not fly in the face of the laws of finance and were not a financial disaster for the banks.
The rates I used are based on information provided in the bill tabled during the last Parliament, which was reproduced in the 1989 report of the Standing Committee on Consumer and Corporate Affairs.
As already mentioned, the second component of Bill C-233 would make interest calculation on all types of credit cards uniform and would enact a mandatory grace period for partial payments.
This proposal has been long sought by various advocacy groups such as the Consumers Association of Canada. Furthermore, recommendations to this effect are contained in both the 1987 finance committee report and the 1989 consumer and corporate affairs report as well as a minority report struck in 1992. Clearly there is a great deal of support for the changes Bill C-233 espouses.
I will use an example to illustrate my case. Let us say that you make a single purchase of $1,000 on your credit card and this is the only item on your monthly statement. Once you receive your statement you usually have a 21-day grace period to pay the full amount interest free. However, if you make a partial payment of $700 you will be charged interest in two ways. First you will pay interest on the $1,000 from the date of purchase to the date of the $700 payment. Second, you will be charged interest on the remaining $300 from the partial payment date to the next statement date. In other words, issuers of financial institution credit cards are making their money off the backs of people who, for whatever reason, do not pay their full amount in order to compensate for the grace period they offer people who do pay the full amount.
This is what I refer to as the reverse Robin Hood theory, robbing from the poor and giving to the rich. In effect, the grace period is a marketing device to get people to hold and use credit cards.
Under Bill C-233 the simple distinction between the charge and credit functions of a card would be altered. Hence, the part of a purchase that is paid on the due date, the so-called partial payment, would be treated as a delayed cash payment while the remaining balance would be treated as a loan and would be the only part to bear interest.
The card holder would in effect have a grace period from the date of purchase to the date of partial payment. For example, you make a $1,000 purchase on your credit card and after receiving your statement you pay $700.
Your next statement would show interest charges on the remaining $300 from the first statement date to the second statement date. You would not be charged interest on the $700 payment as is currently done by financial institutions.
We are talking about responsibility and fairness here. It is clear that people who accumulate debts on their credit card must take their responsibilities. However, we should not forget that it is not in the interest of credit-card companies that monthly bills be paid in full. They only take advantage of people who, for one reason or another, can make only partial payments.
As we have seen in the case of banks' cards, partial payments do not reduce the amount on which interest is calculated and, in the case of retailers' cards, interest rates are outrageous.
Organizations such as the Association coopérative d'économie familiale and the Service d'aide au consommateur in Shawinigan deal with hundreds of people who are heavily in debt. They find that it is too simple to obtain a card or to have the credit limit increased and that credit-card companies do not care about the social effects of credit that is too easily obtainable.
In March, the Service d'aide au consommateur in Shawinigan released a study entitled: "Credit cards-Problems for consumers, profits for credit-card companies" which stated, and I quote: "Credit-card companies, being mostly concerned about their profits, have often overlooked the serious effects that credit cards could have on the consumer's life".
Some people feel that Parliament should not legislate the credit card industry if people freely choose to enter into this type of contract. The problem is that this is not a free contract where you can negotiate the terms of the agreement such as a regular bank loan. You either accept the terms offered by the credit card issuer or you do not get a card. For people who are well off, opting not to play by the rules imposed by the credit card issuer is an option. Unfortunately there are many consumers who depend on short term credit to conduct their daily lives in an orderly and efficient way.
The work force is changing and more and more people are becoming self-employed. They do not always have the advantage of receiving a pay cheque every two weeks. In this situation, a credit card becomes essential.
I am always quickly reminded that Canadian banks are not public institutions even though they fulfil a public purpose. The fact remains that Canadian banks are in a very privileged and an enormously powerful situation in Canada. True competition in an oligopolistic market is questionable.
The minority report in 1992 accurately described our peculiar free market arrangement: "Evidence has amply proven that the credit card interest rates and bank service charges in Canada do not respond to the market system but to oligopolistic forces and that oligopolistic forces are by their very own nature, political and therefore only respond to public pressure".
Many people feel that Canadian banks do have a responsibility to be more responsive on issues such as credit card rates, farm loans and small business loans precisely because for the special status they hold in our marketplace.
We must realize that credit-card companies have absolutely not taken into account the many aspects that I have just mentioned. Therefore, I think that the time has come to put some order in the credit-card industry. Bill C-233 is undoubtedly a step in the right direction.
I have in my possession a legal opinion from the legislative counsel of the House of Commons stating that the Government of Canada has jurisdiction to enact the regulations sought in this bill.
In conclusion I would like to thank the many organizations that have assisted me in this very complicated matter. A special thanks to my colleagues in the House and to my constituents who have supported this bill. I hope that our concerns will be addressed soon.
