The implementation of payday lending rules in Canada has not kept pace with the growth of the industry.
The payday lending sector is one of the only segments of Canada’s financial services sector that is unregulated.
All other countries that have experienced rapid growth in the industry – including the United Kingdom, Australia and the United States – have rules in place to protect consumers.
The United States, for example, has 22,000 retail store outlets. Forty states have put in place consumer protection rules.
In Canada, not one single province has rules in place that are specific to the industry. Many have indicated a desire to regulate, but federal action is needed before the provinces can act.
In Canada, consumer protection is legislated at the provincial level. Interest rates are controlled at the federal level through s. 347 of the Criminal Code. In respect of payday loan regulation, shortcomings in the law at both the provincial and federal levels require changes to s. 347 of the Criminal Code.
To date, no fewer than five provinces have openly called on the federal government to change s. 347 so that they can move ahead with provincial regulation of the industry. These include British Columbia, Alberta, Manitoba, New Brunswick and Nova Scotia.
The federal government must change s. 347 of the Criminal Code so that provinces that wish to regulate can go ahead and do so.
Section 347 of the Criminal Code of Canada
Section 347 (s. 347) of the Criminal Code limits interest charges on loans to 60 per cent per annum. When it was enacted s. 347 contemplated larger longer-term loans. Rules on interest rates do not provide clear direction to provincial regulators.
s. 347 requires the interest on a loan to be calculated annually, even if the loan is for a short term such as only five days. As such, the interest is calculated by compounding daily over 365 days, even if the loan is only held for a few days.
$100 lent for 5 days at a cost of $1 therefore amounts to 107% annual interest. This would be the equivalent of requiring hotels to post their annual room rates at $55,000 per year rather than $150 per night. Payday loans are a short-term product, so annualized rates are the wrong measure of the product’s cost.
s. 347 is an impediment to provinces that wish to implement consumer protection measures specific to payday loan companies. In fact, many provinces are ready to move swiftly if given the authority to regulate. These include British Columbia, Alberta, Manitoba, New Brunswick and Nova Scotia.
s. 347 must be amended to clarify that payday loan companies are exempted from its provisions and to enable provinces to implement necessary consumer protection measures.
There have been substantive federal-provincial-territorial consultations regarding regulation of the payday loan industry.
Starting in 2000, these consultations have been led by the Alternative Consumer Credit Marketplace (ACCM) working group. The ACCM has members from Industry Canada and several provinces. These consultations have included significant consumer and stakeholder input.
Through the consultative process, F/P/T levels of government have agreed that s. 347 is an inappropriate control for payday loans and that it should be amended to enable provincial regulation of the industry.
In recent months, the Governments of British Columbia, Alberta, Manitoba, New Brunswick and Nova Scotia have all indicated their interest in regulating the payday loan industry, pending federal amendments to s. 347 of the Criminal Code that will allow them to do so. This multi-party support underlines the importance of this issue and the urgent need to protect consumers from unscrupulous operators in the industry.
Federal Cabinet decision, October 2005
In October 2005, the federal Minister of Justice acknowledged that s. 347 doesn’t make sense and shouldn’t apply to payday loan companies. The Minister sought and obtained Cabinet approval to amend s. 347 accordingly.
The nature of the amendment would enable provinces to be exempted from s. 347 if they opt to implement a regulatory framework that includes (a) consumer protection elements; and (b) defines the rate of borrowing.
Should provinces NOT choose to take advantage of the proposed exemption in s.347 and implement regulation, they would be expected to enforce the Criminal Code as it exists today.
Status of legislation
A working draft of amendments to s. 347 is now in circulation amongst government departments with Justice as the lead and Finance and industry Canada contributing comments.
It is understood that the proposed amendment(s) would allow a “carve-out” from s.347 for provinces choosing to regulate payday loans. The federal amendment(s) would require that provinces establish consumer protection standards and set a rate of borrowing.
Drafting of the amendments was stalled when the election was called and is now awaiting direction from the new government.
Federal Justice Minister Vic Toews has indicated publicly that he is open to introducing amendments, but there is an issue as to whether there is space on the legislative agenda this Fall. The CPLA argues that this issue must be a priority – as witnessed by 5 provincial governments publicly calling on the federal government to move quickly.