Commissioner's Decision #121

Commissioner's reasons for decision

(Financial Consumer Agency of Canada Act subsection 23(2))
 
This decision concerns non-compliance with section 6.1 of the Cost of Borrowing (Banks) Regulations and paragraph 157(2)(e) of the Bank Act.
 
In May 2013, the Director of the Compliance and Enforcement Branch (the “Director”) of the Financial Consumer Agency of Canada (“FCAC”) issued a Notice of Violation to the Bank pursuant to subsection 22(2) of the Financial Consumer Agency of Canada Act (the “FCAC Act”). The Notice of Violation stated:
“I have reasonable grounds to believe that the Bank has committed two violations....
  • One violation of section 6.1 of the Cost of Borrowing (Banks) Regulations, as the information included on disclosure to joint borrowers in the promotional credit card application forms does not reflect the regulatory requirements for the Bank to ensure that all borrowers receive separate disclosure and permit joint borrowers to consent to opt-out of separate disclosure; and
  • One violation of paragraph 157(2)(e) of the Bank Act, as the procedures set out in the Manuals and Guides documents provided by the Bank for disclosure to joint borrowers do not reflect the requirements set out in the Cost of Borrowing (Banks) Regulations for the Bank to ensure that all borrowers receive separate disclosure and permit joint borrowers to consent to opt-out of separate disclosure.” 
The Director proposed a $25,000 penalty for the violation of section 6.1 of the Cost of Borrowing Regulations (the “Regulations”) and a $100,000 penalty for the violation of paragraph 157(2)(e) of the Bank Act, for a total penalty of $125,000. 

In July 2013, the Bank provided written representations in response to the Notice of Violation.
 
I have considered the Bank’s written representations. Nonetheless, I find on a balance of probabilities that the Bank has committed the two violations set out in the Notice of Violation. I have taken into account the Bank’s written representations and considered the degree of intention or negligence, the harm done by the violations and the Bank’s compliance history, and impose a total administrative monetary penalty of $75,000.

Applicable legislation and regulations 

 
Bank Act
157. (1) Subject to this Act, the directors of a bank shall manage or supervise the management of the business and affairs of the bank.

 (2) Without limiting the generality of subsection (1), the directors of a bank shall...

 (e) establish procedures to provide disclosure of information to customers of the bank that is required to be disclosed by this Act and for dealing with complaints as required by subsection 455(1);

(f) designate a committee of the board of directors to monitor the procedures referred to in paragraph (e) and satisfy itself that they are being adhered to by the bank;
450. (1) A bank shall not make a loan to a natural person that is repayable in Canada unless the cost of borrowing, as calculated and expressed in accordance with section 451, and other prescribed information have been disclosed by the bank to the borrower at the prescribed time and place and in the prescribed form and manner.
Cost of Borrowing (Banks) Regulations
6(1) For the purpose of subsection 450(1) of the Act, a bank that grants credit must, in writing, provide the borrower with a disclosure statement that provides the information required by these Regulations to be disclosed.
 
6.1 (1) Subject to subsections (2) and (3), if a bank enters into a credit agreement with two or more borrowers, it must provide the disclosure statement referred to in subsection 6(1) to all of the borrowers.
 
(2) If all of the borrowers have consented, orally or in writing, in paper or electronic form, to the provision of the disclosure statement to one of the borrowers on their behalf, the bank must provide the statement to that borrower.
 
(3) If two or more but not all of the borrowers have consented, orally or in writing, in paper or electronic form, to the provision of the disclosure statement on their behalf to one of the consenting borrowers, the bank may provide the statement to that borrower on their behalf, if it also provides the statement to every borrower that has not so consented.
 
(4) If the consent referred to in subsection (2) or (3) is given orally by a borrower, the bank must, without delay, provide confirmation of that consent to the borrower in writing, in paper or electronic form.

Facts

In February 2012, FCAC’s Compliance Officer identified that the Bank’s approach to co-borrower disclosure in the context of a promotional credit card application required co-applicants (i.e. co-borrowers) to opt in, by checking a box on the application, in order for them to receive separate disclosure statements. Based on the application form, if borrowers did not check the box, disclosure would automatically be provided solely to the primary borrower.
  
This was further confirmed through a review of the Bank’s policies and procedures (the Bank’s Manuals and Guides) and its customer agreement disclosure.  
  
The Bank’s Manuals and Guides indicate that:
“…all primary borrowers must always receive disclosure in relation to their retail lending products….” (emphasis added) 
In addition, these procedures state that:  
“all co-borrowers/co-signors linked to retail lending products must be provided the option to receive a separate mailing…” (emphasis added)  
Moreover, the Bank’s customer agreement disclosure states: 
“When we give notice to the primary borrower, we consider that we are giving notice to all co-borrowers unless you have elected to receive separate cost of borrowing disclosure documents.” (emphasis added) 
When the issue of co-borrower disclosure was raised with the Bank during the course of the investigation, the Bank indicated that it believes its co-borrower disclosure process is compliant with the Regulations, and communicated: 
“The amended Cost of Borrowing Regulations provides that disclosure statements must be provided to all of the borrowers, but that is subject to the ability of a borrower to consent to their disclosure statement being provided to another borrower on their behalf. The Bank meets this requirement with respect to our paper credit card applications by clearly disclosing that each "co-applicant" is entitled to receive separate disclosure, by incorporating the required consent language for the co-applicant to consent to the disclosure being provided to another borrower and by also allowing for the co-applicant to determine that they are not going to provide such consent. Co-applicants may choose to either consent to have disclosures sent to the primary borrower only, or they may choose to not consent (and receive separate disclosure).” 
Furthermore, the Bank indicated that, for mortgage and retail credit products, co-borrowers are asked to choose either to receive or not to receive disclosures for the lending account applied for. All borrowers are then required to sign a system-generated form to confirm their disclosure preference.  
 
The Bank provided comments on the draft compliance report, as per the compliance framework process, in March, 2013. 

Position of the bank

In its written representations to the Commissioner in response to the Notice of Violation, the Bank explained that it never intended to violate the Regulations and set out the steps that it has taken since it was contacted by FCAC to change its disclosure practices on mail-in promotional credit card applications. Moreover, the Bank stated that it has reviewed its Manuals and Guides to ensure that all borrowers receive separate disclosures. 
 
In addition, the Bank explained that its procedures for disclosure to joint borrowers are not limited to its Manuals and Guides, but also include additional detailed procedures for staff and many processes and controls built directly into its systems.
 
The Bank submitted that it believes that the approach for credit cards and other retail credit products sold through its branches and the Call Centre is compliant, as borrowers are required to select their disclosure preference in order for the account to be established. Further, customers are provided with the option of receiving separate disclosure which is generated automatically by its systems, when requested. Customers are also provided with an acknowledgement of their disclosure decision for their signature. For applications via the Call Centre, an acknowledgement letter regarding the customer’s disclosure preference is mailed. Co-applicants who apply online all receive separate disclosure material.
 
The Bank reiterated the comments that it had made to FCAC on the draft compliance report that its approach to promotional credit card applications was based on an understanding of the regulatory requirements developed in working with FCAC through the Canadian Bankers Association in 2006. At the time, the requirements were interpreted to be that banks had to provide co-borrowers with the option to receive separate disclosures. In those comments, the Bank had explained that its understanding was that section 6.1 of the Regulations was introduced to codify that interpretation and was not intended to change a new process that the banks had only recently developed in conjunction with the FCAC.  
 
With its submissions, the Bank provided a copy of the amended “Board Procedures” approved by the Board in August 2012, which include the Board’s procedures to provide disclosure of information designed to ensure ongoing compliance with the requirements of subsection 157(2)(e) of the Bank Act.  
 
According to the Board Procedures, the Bank’s management is commissioned to develop, implement, document and maintain disclosure procedures in relation to its responsibilities under paragraph 157(2)(e) of the Bank Act. The Board is designated to monitor the procedures and satisfy itself that they are being adhered to by the Bank by way of annual reporting by management and a periodic review by the Bank’s audit department. The procedures also state that credit agreements, customer agreement disclosure and other disclosure documents are reviewed by Executive/Head Office department product and service owners in consultation with the legal department on a periodic basis, and are updated as required.
 
With respect to the Bank’s obligations pursuant to section 6.1 of the Regulations, the Board Procedures state:
“The Bank satisfies the requirements of the Regulations by providing customers with various disclosure documents when they apply for and/or enter into an agreement for a credit product. If an application is approved and is a joint application or has multiple borrowers, the co-borrower’s disclosure preference is appropriately documented. The co-borrower must indicate whether they prefer to receive a separate copy of all disclosures or to have them sent only to the primary borrower.”
In addition, the Bank submitted that an annual report is sent to the Office of the Superintendent of Financial Institutions pursuant to paragraph 195(6) of the Bank Act in relation to the activities carried out by the Board in relation to its responsibilities under paragraph 157(2)(e). The Bank submits that this report demonstrates that the Board reviews the Bank’s policies and procedures designed to meet subsection 157(2) of the Bank Act, as well as confirmations from the Bank’s business line and control functions that the Bank’s procedures are suitable to meet the requirements of subsection 157(2). 
 
The Bank requested that, in light of this information, the Commissioner not find the Bank in violation of paragraph 157(2)(e) of the Bank Act or, in the alternative, consider reducing the proposed $100,000 penalty. 
 
Furthermore, the Bank asked that the Commissioner reconsider and reduce the $25,000 penalty relating to the violation of section 6.1 of the Regulations. According to the Bank, there was no intention on the part of the Bank to breach the Regulations, and the Bank had an honest belief that it had established the separate disclosure process in the required manner.
 
The Bank submitted that it has not received any complaints on the issue and that it does not believe that the harm to customers has been significant. With respect to its promotional credit card applications, the Bank estimates that 3,500 accounts would have been affected. This constitutes only 0.29% of all new accounts since January 2010. In the Bank’s view, the potential for customer to misunderstand their ability to receive separate disclosure statements is also reduced by the form and completion process.
 
The Bank stated that the previous violation noted in the Notice of Violation was self-reported, along with many financial institutions, following the implementation of changes to the Regulations in 2010. The issue dealt with the format of disclosure, not whether information had been provided to customers. The Bank indicated that it came into compliance soon afterward. 
 
Finally, the Bank noted that the total penalty appears to be in excess of any other penalty previously imposed by FCAC in similar situations.

Discussion

I - Violations

1. Section 6.1 of the Regulations
Subsection 6.1(1) of the Regulations requires a bank to provide the disclosure statement, not only to the primary borrower, but to all co-borrowers subject to a co-borrower being provided with a clear opportunity to consent to the provision of the disclosure statement to another borrower on his or her behalf. 
 
In the case of one example of the Bank’s promotional credit card application forms examined by FCAC’s compliance officer, the Bank does not indicate that disclosure will be provided to all co-borrowers. Rather, it provides an acknowledgement that the primary borrower will receive all notices on this account, and that she or he has been advised of her or his ability to receive separate notice and has declined such additional information. 
 
An acknowledgement by a co-borrower that the primary borrower will receive all notices on the account, however, does not constitute consent by the borrower for the provision of the disclosure statement to the other borrower on his or her behalf. Unless it is made known to the consumer that she or he has the right to receive separate disclosure, the consumer cannot consent to the provision of such disclosure to another borrower on his or her behalf. 
 
In another example of the Bank’s promotional credit card application forms, the Bank lets the consumer know that she or he is entitled to separate disclosure, but also states that by signing the application the consumer has consented to the disclosure being sent to the primary borrower.
 
However, like the other promotional credit card example, the Bank requires the borrower to indicate his or her “wish” to receive separate disclosure by ticking a box. This “opt-in” approach to disclosure entirely subverts the requirements in section 6.1 of the Regulations. 
 
Consequently, I find that the wording in the promotional credit card applications does not comply with section 6.1 of the Regulations. Therefore, I conclude that, on a balance of probabilities, the Bank has committed the violation with respect to its promotional credit card disclosure. 
 
As a general note, whether a co-borrower consent clause for the provision of disclosure to another borrower is sufficient for the purpose of the Regulations must be examined on a case by case basis. The key requirements however, will always be that the disclosure be provided to all borrowers subject to the borrower clearly understanding and consenting to the provision of disclosure to the other borrower.   
  
2. Subsection 157(2)(e) of the Bank Act
In its written representations to the Commissioner, the Bank has demonstrated that the Board has established procedures intended to meet the requirements of 157(2)(e) of the Bank Act.  
 
But, in the case of the promotional credit card application form set out above, the Bank has failed to meet the requirements of section 6.1 of the Regulations, and consequently has failed to disclose information to its customers that is required by the Act.  
 
The Bank’s interpretation of section 6.1 of the Regulations, however, is not only relevant in terms of the actual disclosure provided to customers. It is also relevant for the purpose of its Manuals and Guides for Retail Lending that were examined by the Compliance Officer and the Bank’s customer agreement disclosure.  
 
The Manuals and Guides state that primary borrowers must always receive disclosure and that co-borrowers are to be provided with the option to receive separate disclosure. However, a co-borrower’s ability to receive separate disclosure pursuant to section 6.1 of the Regulations is not just a “preference” or an “option”, it is a right. Moreover, the wording in the Manuals and Guides does not presume the right of all borrowers to receive disclosure subject to the consent of the borrower for the provision of disclosure to another borrower on his or her behalf. As demonstrated by the promotional credit card application forms discussed above, the wording in the Manuals and Guides creates the risk that the requirements in section 6.1 of the Regulations will be interpreted inconsistently by both those developing product documentation and line staff.
 
The Bank’s interpretation of section 6.1 of the Regulations is further reflected at the highest levels of the Bank in the Board Procedures established by the Directors pursuant to 157(2)(e) of the Bank Act. For example, under the heading, Procedures to Provide Disclosure of Information, it states:

“the Bank satisfies the requirements of the legislation and Regulations (including the amendments to co-borrower disclosure in subsection 6.1) by providing customers with various disclosure documents when they apply for and/or enter into an agreement for a credit product. If an application is approved and is a joint application or has multiple borrowers, the co-borrower’s disclosure preference is appropriately documented. The co-borrower must indicate whether they prefer to receive a separate copy of all disclosures or to have them sent only to the primary borrower.”
The emphasis in the Procedures is not on ensuring that all borrowers are provided with the disclosure statement subject to a co-borrower’s clear ability to consent to the provision of the disclosure to another borrower. Rather, the importance is placed on providing disclosure to the primary borrower and seeking the co-borrower’s disclosure preference to receive his or her own disclosure.  
 
The Board Procedures include an elaborate reporting scheme that allocates responsibility to management and other control functions within the Bank to ensure disclosure procedures are in place that meet the requirements of the Act. However, these procedures were not effective to ensure that the actual information required to be disclosed to customers pursuant to section 6.1 of the Regulations was in fact disclosed. 
Consequently, I find that the Bank has failed to meet the requirement in section 157(2)(e) of the Bank Act that the directors establish procedures to provide disclosure of information to customers of the Bank that is required to be disclosed by this Act. I find that, on a balance of probabilities, the Bank has committed the violation.

Due diligence

Subsection 28(1) of the FCAC Act provides that due diligence is a defence in a proceeding in relation to a violation. In order to establish a successful defence of due diligence, the Bank must show on a balance of probabilities that it took all reasonable care to avoid committing the offence with which it is charged (Mega International Commercial Bank (Canada) v. Canada (Attorney General), 2012 FC 407 (CanLII)). I have determined that the Bank was negligent in my discussion in relation to the penalty below. As negligence amounts to a lack of due diligence, I conclude that the Bank has not exercised the due diligence necessary to establish this defence in relation to the violations. 

II- Penalty

Having concluded that the Bank has committed the violations, I may impose a penalty taking into account the factors set out in section 20 of the Act.
 
In determining the penalty, I have considered the Bank’s written submissions on the proposed penalty, as well as the considerations set out below. I uphold the $25,000 penalty proposed in the Notice of Violation with respect to the violation of section 6.1 of the Regulations. However, I have reduced the penalty with respect to the violation of paragraph 157(2)(e)of the Bank Act to $50,000.

Harm done to customers

I recognize that the Bank has taken immediate steps to remedy FCAC’s concerns with their promotional credit card disclosure to minimize the harm to consumers. I also acknowledge that although the Bank’s erroneous interpretation of the Regulations was replicated in its Manuals and Guides as well as the Board Procedures, the compliance officer did not raise any issues with the Bank’s process for dealing with co-borrower disclosure for mortgages or retail credit products.
 
In spite of this, as a result of the violations, many co-borrowers who, with a primary borrower, entered into a credit agreement for a promotional credit card product with the Bank did not receive the benefit of complete disclosure with respect to their account in accordance with the Regulations. By the Bank’s estimate, 3,500 accounts in relation to promotional credit cards were affected by its interpretation of section 6.1 of the Regulations, constituting 0.29% of all new accounts since January 2010.
  
These consumers did not suffer any financial harm; however, they were harmed by the fact that they were not placed in the same position as the primary borrower to review and question the disclosure in relation to their credit card account. In some cases, this may have put the co-borrower at a disadvantage or resulted in negative financial consequences for the co-borrower. This harm was exacerbated by the fact that the Board Procedures did not ensure that co-borrowers received the disclosure required pursuant to section 6.1 of the Regulations.
  
Accordingly, I find that the Bank’s violation of both section 6.1 of the Regulations and paragraph 157(2)(e) of the Bank Act resulted in harm to its customers.

Degree of intention or negligence

The Bank submits that it never intended to violate section 6.1 of the Regulations or paragraph 157(2)(e) of the Bank Act and that it had an honest belief that it had established the separate disclosure process in the required manner. The Bank states that, in addition to its Manuals and Guides, it had additional detailed procedures for staff, as well as many processes built into its system to ensure co-borrowers were provided with the option of receiving separate disclosure. It also contends that its interpretation of section 6.1 of the Regulations was based on its understanding that section 6.1 was introduced in order to codify the interpretation developed with FCAC through the Canadian Bankers Association in the years prior to the 2010 amendments to the Regulations. 
 
However, according to the Compliance Report, the discussions between the banking industry and FCAC between 2005 and 2007 were related to the industry’s review and implementation of practices in view of the Commissioner’s position at the time that all borrowers were entitled to the same disclosure under the Regulations that were in place at that time. 
 
In June 2007, FCAC sent a letter to the industry that included the type of consent that would be acceptable from borrowers who wanted to receive joint disclosure instead of separate disclosure. However, this letter clearly indicated that the measures outlined should not be construed as being the requirements of any future regulations.
 
The Regulations were amended in January 2010 to include the new co-borrower disclosure requirements. FCAC sent a questionnaire to all banks at the time, asking whether they were compliant with the new Regulations. In its response, the Bank did not identify as a compliance issue the fact that, in certain co-borrower situations, it provides disclosure documents only to the primary applicant and that it requires co-borrowers to indicate their preference to receive separate disclosure. In fact, throughout the investigation of this file, the Bank maintained that it was compliant with the Regulations.
 
The Bank has not demonstrated that it took steps to verify that its interpretation of the regulatory requirements based on its previous understanding continued to remain valid after the amendments to the Regulations in 2010. In my view, it was unreasonable for the Bank to simply choose to rely on industry discussions from three years prior to the amendments to the Regulations rather than to make efforts to either confirm its understanding of the new Regulations with FCAC or undertake its own verification in this regard.
 
It is equally of concern that the process for ensuring compliance elaborated in the Board Procedures only served to affirm the Bank’s erroneous interpretation of the requirements in section 6.1 of the Regulations rather than to effectively ensure the provision of disclosure of information to customers required to be disclosed by the Act pursuant to paragraph 157(2)(e) of the Bank Act. The Procedures contain a detailed scheme for reporting by management, audit and legal functions on the material compliance of the Bank. However, evidently this process was not sufficient in this case to ensure that the Bank’s Manuals and Guides and the disclosure to customers in relation to the promotional credit card application form actually complied with section 6.1 of the Regulations. 
 
The Bank, including the Board, could have taken greater steps to satisfy itself that the requirements in 157(2)(e) of the Bank Act were being met. For example, the Bank did not demonstrate that it had a process for quality assurance testing and reporting of the reports being relied upon by the directors so as to ensure that its procedures were effective in providing the required disclosure of information to customers.
 
As a result, in relation to the violation of section 6.1 of the Regulations, I find that the Bank was negligent in its failure to adequately review its understanding of the co-borrower disclosure requirements upon the coming into force of the amended Regulations in 2010. I also find a degree of negligence on the part of the Bank with respect to the violation of paragraph 157(2)(e) of the Bank Act. 

Compliance history

The Compliance Report stated that within the last five years the Bank has had one other violation. However, I have taken into consideration that this violation stems from the 2010 self-assessment exercise, where, along with many financial institutions, the Bank was found in violation of the new information box format requirements in the Regulations without penalty. 

Conclusion

To conclude, on a balance of probabilities, I find that the Bank has committed the violations set out in the Notice of Violation. I impose a total administrative monetary penalty of $75,000.
 
It is not my intention to publicize this case pursuant to section 31 of the FCAC Act.
  
Ottawa, December 12, 2013 
Lucie M.A. Tedesco
Commissioner
Financial Consumer Agency of Canada