Banking & Financial Services Law : Canadian and U.S. / Cross-Border Credit Market Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm

This entry is based on a recently published E-Review on www.osler.com. 

On June 7th, 2011, An act to combat consumer debt overload and modernize consumer credit rules (Bill 24) was tabled in the National Assembly of Québec.

If enacted in its current form, Bill 24 will affect a broad scope of businesses, but predominantly those which provide consumers with contracts of credit such as contracts for: money loans, open credit, instalment sales, and debit cards.

General Measures Counteracting Consumer Debt Overload

Bill 24 introduces a new obligation for merchants to provide a consumer not only with a copy of the contract that is executed by the consumer but also with a duplicate of any other documents signed by the consumer.

A consumer will then have seven days following the day on which the consumer is in possession of a duplicate of a contract of credit to cancel it and 30 days to cancel any accessory contract not required as a condition to obtain a contract of credit (unless shorter notice is provided in the accessory contract). In the later case, the consumer will be entitled to a refund of any amount paid for any portion of the services that has not been provided at the time of the cancellation.

Merchants will also have:

• the obligation to deliver a discharge and to return any object or document received as an acknowledgement of, or security for, the said discharged obligation; and
• if applicable, to request the cancellation of the registration of any right or hypothec securing the performance of the consumer’s obligation.

Court Intervention

According to Bill 24, as long as a consumer is not in default, such consumer will have the right i) to ask the court to modify the terms and conditions of payment under a contract of credit if such consumer cannot meet those terms and conditions by reason of a superior force and ii) to request the court to order suspension of repayment of outstanding balance until final judgement is rendered.

Verification of Consumer’s Capacity to Repay

If Bill 24 is adopted, merchants will have the obligation to verify a consumer’s capacity to repay the credit requested or any increase of credit requested before entering into a contract of credit or extension of credit. A merchant who fails to fulfill that obligation will lose its right to the credit charges and will have to refund all credit charges already paid by the consumer.

Bill 24, as it is written now, does not provide merchants with any insight on how the obligation to verify consumer’s capacity can be fulfilled.

Open Credit Contract

If Bill 24 is enacted, merchants will be prohibited from:

• granting a consumer with a higher credit limit than what he or she requested or increase the credit limit already granted except if requested by the consumer; and
• increasing the credit rate of a credit card issued at a promotional rate before the expiry of a period of six months.

Merchant’s Disclosure Obligations

Bill 24 lists all the information that merchants will have to disclose in various types of contracts including contract with a variable credit rate, contract for the loan of money, open credit contract and its application form or the accompanying documents, instalment sale contract and any other contract involving credit.

Liability in the Event of an Unauthorized use of a Credit and/or Debit Card

Pursuant to Bill 24, debit card contracts will be regulated by the CPA. Consumers will be liable for losses resulting from the use of their credit/debit card by a third person before the card issuer is given notice of the loss, theft and fraudulent or unauthorized use of the card. However, in any case such liability will be limited to $50.

Business Practices

If Bill 24 is enacted, new prohibitions will be established in relation to common business practices. Among others, it will be prohibited (i) for any person and by any mean, to represent to consumers that credit may improve their financial situation; or (ii) to state or imply that “no credit charges are payable during a certain period following a transaction, unless the applicable credit rate at the end of that period, if the net capital has not been completely repaid, is clearly specified”. It will also be prohibited to offer a premium to incite consumers to apply for a credit card or to enter into an open credit contract with a non emancipated minor without the written authorization of a person having parental authority.
 

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The Honourable Jim Flaherty, Canadian Minister of Finance has announced a scheduled review of legislation governing financial institutions that are regulated by the federal government.   According to the announcement, this review is scheduled to occur every five years.  In soliciting comments, the Minister noted that "some fine-tuning to the system may be required, but wholesale change is not necessary."

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which in various iterations has been the subject of intense debate on Capitol Hill for much of the past year. The Act will bring about a major revamping of the U.S. financial regulatory landscape, including the creation of a new consumer protection bureau within the U.S. Board of Governors of the Federal Reserve System (the Federal Reserve), restrictions on the ability of banks to invest and trade in securities for their own account and new regulations governing derivatives.

While the Act represents sweeping financial reform, it also contains many provisions that are applicable to non-financial industry companies.

Kevin D. Cramer, James Lurie and I have published an Update regarding certain provisions of the Act that we believe may be of particular interest to our clients relating to:

• Corporate Governance;
• Executive Compensation; and
• U.S. Federal Securities Laws.

When reviewing this Update, please note that critical details remain to be addressed through the rule making process at various federal regulatory agencies. Thus, the full scope of the reforms contained in the Act will not be known for some time.

 

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On June 18th, 2010 the Minister of Finance announced the launch of the Task Force for the Payments System Review. The Task Force is to make recommendations to the Minister by the end of 2011. This is an effort to have public policy keep pace with the rate of change in payment methods.

The Task Force will try and balance innovation and competition in payment systems with the issues of payment security and industry oversight. Specifically, the mandate of the Task Force is to:

• Identify public policy objectives to be pursued in the operation and regulation of the payments system.
• Identify and assess the regulatory and institutional structures best suited to achieving those public policy objectives.
• Assess and report on the safety and soundness of the Canadian payments system.
• Assess the competitive landscape for current participants by identifying any potential barriers for new entrants and mechanisms to improve the competitive landscape of the domestic payments system.
• Assess the degree of innovation in the domestic payments system and report on the challenges and opportunities to bring new and innovative products to market in Canada.
• Assess and report on whether consumers and merchants are well served by the domestic payments system.
   

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As reported in Bloomberg Businessweek, on June 5, 2010, the G-20 finance ministers failed to agree on a proposal to impose a global tax on banks, settling instead for a common set of guidelines. G-20 finance ministers and central bank governors said in a statement in Busan, South Korea, that governments will take account of each nation’s “circumstances and options.” The result allows nations such as Canada, China and Brazil, whose banks suffered less during the global financial crisis, to skip introducing a tax. European countries and the U.S. have advocated the levy. This statement by the G-20 finance ministers leaves in place an initiative to seek tighter global standards for capital levels at banks. The Ministers said they now recognized that there are a “range of policy options” open to countries and agreed instead to adopt “principles” that protect taxpayers and reduce the risks of further crises.

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On April 7, 2010, the U.S. Securities and Exchange Commission (SEC) proposed new rules that would revise the disclosure, reporting and offering process for the issuance of asset-backed securities (ABS) in the United States. According to the related press release issued by the SEC:

“The proposed rules are intended to provide investors with more detailed and current information about ABS and more time to make their investment decisions. The proposed rules also seek to better align the interests of issuers and investors by creating a retention or “skin in the game” requirement for certain public offerings of ABS.”

There is a 90 day window in which to provide comments on the proposal to the SEC.

The proposals being considered include, among other things:

• new disclosure requirements for issuers to provide specific data for each loan in an ABS asset pool at the time of securitization of the assets and on an ongoing basis (there may be an exemption from “loan-level” disclosure for credit card securitizations, though more detailed information would be required);
• the filing of a computer program that would show the effect of the cash flow payments, or “waterfall”, in a proposed securitization transaction;
• revised filing deadlines to provide potential investors with more time to review information about the transaction;
• new shelf eligibility criteria for ABS which would include:
  • a repeal of the requirement for an investment grade credit rating, and
  • require the ABS sponsor to retain a portion of each tranche of the ABS issued.

 

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On February 24^th, 2010, the U.S. Securities and Exchange Commission (SEC) released a “Statement in Support of Convergence and Global Accounting.” This is the first statement of the SEC considering the transition from U.S. GAAP to International Financial Reporting Standards (IFRS) since November of 2008. 

In its statement, the SEC:

• supports the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards;
• encourages the convergence of U.S. GAAP and IFRS;
• attaches a “Work Plan” for its staff to lay out the work that must be done to support the decision of the SEC (to be taken in 2011) on the appropriate course to incorporate IFRS into the U.S. financial reporting system for U.S. issuers, including the scope, timeframe, and methodology for any such transition;
• indicates that if the Commission determines in 2011 to incorporate IFRS into the U.S. domestic reporting system, the first time U.S. issuers would report under such a system would be approximately 2015 or 2016, such timing to be considered further under the Work Plan;
• states that it will provide public progress reports on the Work Plan beginning no later than October 2010 and frequently thereafter until the work is complete.

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