Financial Products and Services Subject to New Regulatory Requirements

Three new regulations promulgated by the federal government impose restrictions affecting financial institutions, specifically to address the hold period for cheques, the use of credit card cheques, and the requirements relating to certain optional financial services.

These regulatory measures, enacted under various statutes including the Bank Act, the Cooperative Credit Associations Act, the Trust and Loan Companies Act, and the Insurance Companies Act, augment other recent, government-imposed consumer protection and disclosure initiatives aimed at enhancing consumer awareness and decision-making in connection with products and services offered by financial institutions.

Credit Business Practices Regulations
These regulations focus on “credit card cheques,” which are essentially cash advances by which credit card companies allow funds to be withdrawn directly from a cardholder’s credit card. Because they are considered to be cash advances, they bear higher interest rates and fees, and do not qualify for an interest-free grace period.
In order to educate consumers, the new regulations mandate that federally-regulated financial institutions must first obtain a borrower’s express consent before issuing credit card cheques to him or her, and – if the consent was given verbally – must give the borrower written confirmation of that consent in paper or electronic format within a certain time-period.
These regulations are specifically aimed at preventing the use of unsolicited credit card cheques by borrowers, thereby reducing the likelihood of increased debt levels for Canadians. The regulations were published by the government on March 10, 2012 and will be effective as of that date once a 30-day comment period has expired.

Access to Funds Regulations
These new regulations make changes to the rules relating to cheque hold periods, specifically for paper cheques drawn in Canadian dollars from Canadian financial institutions.  
First of all, the maximum cheque hold periods for consumers and “eligible enterprises” (defined as a business with authorized credit of less than $1 million, fewer than 500 employees, and annual revenues of less than $50 million) have been changed as follows:

  • cheques of $1,500 or less that are deposited in person with a branch employee of the financial institution: — four business days;

  • cheques of $1,500 or less that are deposited in any other manner (e.g. through an Automated Banking Machine): — five business days;

  • cheques greater than $1,500 that are deposited in person: — seven business days; and
  • cheques greater than $1,500 that are deposited in any other manner: — eight business days.

  • Financial institutions must disclose these maximum hold periods in writing, and must also display them on their websites and make them available at each branch that offers personal deposit accounts.
    Next, in connection with eligible enterprises, a financial institution can use its discretion to not comply with the maximum cheque hold periods if it has reasonable grounds to believe that there is a material increased credit risk, or that the deposit is being made for fraudulent purposes.  
    Also the maximum hold periods can be deviated from if: 1) the account has been opened for less than 90 days; 2) a cheque has been endorsed more than once; or 3) the cheque is deposited at least six months after the date of the cheque. A financial institution that relies on one of these grounds to apply a different hold period must provide the person making the deposit with written notice, together with a statement that he or she may contact the Financial Consumer Agency of Canada (FCAC) with any complaints.
    These regulations, which come into force on August 1, 2012, essentially codify the “Voluntary Commitment on Cheque Holds” published by the Canadian Bankers Association.
    Negative Option Billing Regulations
    Under these new regulations, federally-regulated financial institutions are required to obtain the express verbal or written consent of consumers before providing them with any new “optional product or service” (which is defined as a “product or service that is offered or provided to a person by an institution … for an additional fee and is available only with an agreement for a primary financial product or service provided by the institution”).
    Effective consent by the consumer is contingent upon him or her first receiving from the financial institution a summary of the key information relating to the product or service. Also, once consent is received and the agreement is entered into, the financial institution must provide the prescribed information within 30 days of the agreement being signed, and must include: 1) a description of the product or service; 2) the term of the agreement; 3) the charges for the product or service (or else the method for calculating them, together with an example of that method); 4) the conditions under which the product or service may be cancelled by the consumer; 5) the date on which the product or service commences; and 6) the steps required for the consumer to use the product or service.
    The regulations also stipulate certain procedures to be followed by a financial institution that intends to make changes to the terms and conditions, and mandates a pro-rated refund of charges in the event of cancellation. The new regulations come into force on August 1, 2012.