John Turley-Ewart: Police chiefs are right to worry about Ottawa's proposed cap on lending rates

Some Canadians will be pushed to payday lenders and higher interest costs or to loan sharks

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Lesson one when regulating Canada’s financial system is ensuring the cure isn’t worse than the disease.

In modern times, the Canadian financial sector has benefited from the pragmatic vetting of Ottawa’s policy proposals in discussions between industry participants, the Office of the Superintendent of Financial Institutions (Canada’s bank regulator), the Financial Consumer Agency of Canada (FCAC) and policymakers in Canada’s Finance Department, including the finance minister.

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When this process is followed, policymakers, regulators and financial institutions typically identify unforeseen and unwanted outcomes and the end policy is reworked to mitigate the unseen risks embedded in the original policy proposal. In some instances, proposals are quietly dropped.

If this process isn’t followed, you get outcomes like the Feb. 5 announcement by The Ontario Association of Chiefs of Police, which took the extraordinary step of publicly calling out Ottawa’s proposal to reduce the maximum amount of interest alternative lenders can charge for loans, a move the chiefs warned could reduce the safe supply of credit and lead to a “dangerous rise in criminal activity.”

Certified alternative lenders are legitimate businesses subject to interest rate rules under Section 347 of the Criminal Code. The federal Liberal government has introduced legislation that will reduce the maximum amount of interest alternative lenders can charge from 47 per cent to 35 per cent.

These lenders play an important role within Canada’s financial ecosystem, taking on consumers who are “de-banked” due to their credit history, or business borrowers whose risk profile is outside what a Schedule 1 bank would serve. The size of this market may be surprising to many, but some estimates indicate eight million Canadians have credit scores too low to borrow from Schedule 1 banks (think Big Six).

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Alternative lenders serve this market, providing high-risk loans and charging higher interest rates that cover the associated losses this kind of lending entails. This ensures the lender remains solvent, profitable and stable despite such losses.

Moreover, that 47 per cent maximum interest rate that currently exists (which only the riskiest of clients pay) is a bargain compared to paying as much as 442 per cent charged by payday lenders, businesses that are exempt from Section 347 of the Criminal Code and which the FCAC cautions against using.

In short, the unintended consequences of the Liberal government’s legislation to cap interest rates of certified alternative lenders will push many to payday lenders and higher interest costs or to loan sharks, the scenario that police chiefs want to avoid.

And this isn’t the only example of ill-conceived financial policy proposals coming out of Ottawa.

In her Fall Economic Statement, Finance Minister Chrystia Freeland said Ottawa “will take action to reduce the non-sufficient funds (NSF) fees charged by banks.” NSF charges usually run between $40 and $50 and are charged when a customer purchases goods or services using a cheque without having sufficient funds to pay for those goods or services in their chequing account. Freeland calls NSF charges “junk fees.” Canada’s Criminal Code, Section 362, calls knowingly writing NSF cheques criminal, an indictable offence that is punishable by imprisonment. Avoiding NSF charges isn’t complicated: Ensure you have funds in your account to cover your cheques.

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Canada’s banks process about a billion cheques annually according to the Canadian Bankers Association, a method of payment, notes Statistics Canada, that 70 per cent of all businesses accepted in the third quarter of 2023, well above the acceptance rates of debit cards, Interac e-transfers, credit cards, cash and electronic funds transfers.

Cutting an NSF cheque isn’t a “victimless” crime. It can compromise the payee’s ability to cover cheques they have written on their account not to mention the work involved in tracking down the cheque writer to try and get paid. For the bank itself, processing an NSF cheque isn’t a simple, automated process. It takes manual work and time to process and document given the potential criminal nature associated with writing bad cheques.

And here is the unintended consequence. Freeland will be calling on Canadian banks to produce an action plan on NSF fees this year, and some consumer activists (who appear to have the minister’s ear) are suggesting NSF fees should be as follows: $10 for the first NSF cheque, $10 for the second and $0 for the third.

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Given that banks have a duty to protect the integrity of the payment system, the more likely outcome is banks closing chequing accounts belonging to clients who write a second or third bad cheque because they can’t balance a chequebook and have little incentive to learn.

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Rather than making financial services more affordable, these proposals will make credit less available and affordable for a large swath of Canadians, invite increased criminal activity to fill the credit void and incentivize banks to close chequing accounts (de-bank) sooner as opposed to later when NSF cheques are written in error.

How to explain this contradiction?

“Lesson one” in Canadian politics is too often to ignore “lesson one” when regulating the country’s financial sector.

John Turley-Ewart is a regulatory risk management consultant and Canadian banking historian.

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