May. 27, 2009 - Issue #710: Messages Matter
Credit Card Regulations: ‘Too little, too late’
Credit card regs won't stop gouging: coalition
The package of proposed new regulations governing the credit card industry
announced by Finance Minister Jim Flaherty will do little to protect
Canadians consumers when it comes to getting a fair deal on their credit card
bills, says the head of a coalition of citizen groups focused on bank
Flaherty unveiled the long-anticipated set of regulatory changes in Toronto on May 21. New disclosure rules will require credit card applications and contracts to have a "summary box" containing clearly stated information on interest rates and fees, and consumers will have to be told how long it will take to pay off an outstanding balance if they make only the minimum payment. Companies must also give advance notice of any fee increases and get customer consent before increasing credit limits.
Despite calls from the NDP and other groups to introduce a cap on card interest rates, which average around 19 – 20 per cent for bank-issued cards and higher for retail cards at a time when the Bank of Canada rate is at an historic low of 0.25 per cent, Flaherty refused to introduce a rate ceiling, saying there was enough choice in cards to protect consumers. He did announce the requirement of a minimum 21-day grace period on new purchases, along with other changes which tinker with how payments are allocated, apply new restrictions on holds placed on cards by merchants and place some limits on debt collection activities.
But Duff Conacher, the chairperson of the Canadian Community Reinvestment Coalition, says that most of the changes won't make any difference at all for the vast majority of the 25 million Canadians who have a credit card.
"What the Conservatives have done is too little, too late," Conacher says. "It's actually eight regulations they've proposed, and three of the eight are only about disclosure. Another proposal only addresses consumer consent for increasing their own credit limit and another only limits debt collection practices in one way. So none of those five regulations do anything to protect anyone from gouging. The three that do will only protect a few people from a few charges. The proposed 21-day interest-free period? Four of the five banks already do that. The regulation about advance notice of credit card interest rate changes? The banks have already increased interest rates unilaterally for a whole bunch of people in the past year since the credit crisis started, and they’ve increased fees. So I don’t think the banks want to increase anyone’s credit card interest rate now, they’ve already done it. So we need further action to actually protect financial consumers from being gouged."
While Conacher argues that there should be a limit on the amount of interest card issuers can charge—one that brings card rates more in line with historically low lending rates—he doesn't support the government arbitrarily setting a rate, as the NDP have advocated.
"The problem is how do you set the cap? You want to set it at a level where the banks can still make a profit and the retail companies can make a profit or they won't offer credit cards anymore," he says. "But you don't want them to make an excessive profit. So what you have to do is what we're proposing, which is to do a independent audit of the banks and retail companies' credit card divisions to determine what their profit levels are. Then you'll have the information you'll need to set a cap."
Conacher says that such an audit should ideally go back to the end of the recession in the early '90s, when the gap between the prime rate and card rates started to significantly widen.
"The audit we're calling for should go back at least 10 years, really 15, to look [at] how much profit the banks and the retail companies made from their credit card divisions, and every year that they made excessive profits the federal government can then take further actions, like requiring them to rebate all customers for gouging them before, as well saying, 'I'm sorry, you can't have these interest rates at this level anymore. You have to lower them to a level where you're just making a reasonable profit.'"
Conacher argues that access to banking services and credit are essential services and need to be regulated by the government, similar to utilities, in order to better protect consumers.
"We have it for other industries—energy utilities, water utilities, we even have it for telecom, and cable TV is not an essential service compared to banking," he says. "We're just calling for the same for banks." V
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