Commissioner's reasons for decision
(Financial Consumer Agency of Canada Act subsection 23(2))
This decision concerns non-compliance with subsection 6(4) of the Cost of Borrowing (Banks) Regulations.
In August 2013, the Director of the Compliance and Enforcement Branch 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 Act). The Notice of Violation stated:
I have reasonable grounds to believe that the bank has committed one violation of subsection 6(4) of the Cost of Borrowing (Banks) Regulations as the information disclosed to consumers in the disclosure statements for the bank’s lines of credit offered through agents in relation to the interest rate charges on the line of credit product is not clear and is misleading to borrowers.
The Director proposed a penalty of $25,000 for the violation.
In September 2013, the bank provided written representations in response to the Notice of Violation.
I have carefully reviewed the file, including the written representations of the bank. I find on a balance of probabilities that the bank has committed the violation 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 I impose an administrative monetary penalty of $25,000.
Cost of Borrowing (Banks) Regulations
6(3) Information disclosed in a disclosure statement may be based on an assumption or estimate if the assumption or estimate is reasonable and the information disclosed by it
(a) cannot be known by the bank when it makes the statement; and
(b) is identified to the borrower as an assumption or estimate.
6(4) Any disclosure that is required to be made by a bank under these Regulations must be made in language, and presented in a manner, that is clear, simple and not misleading.
10(1) A bank that enters into a credit agreement for a line of credit must provide the borrower with an initial disclosure statement that includes the following information:
(b) the annual interest rate, or the method for determining it if it is variable;
In August 2011, FCAC received a self-reported complaint from the bank dating from June 2011. The customer was disputing the interest rate charged on his line of credit. At the beginning of April 2011, the customer applied for an investment line of credit from the bank through its agents. The initial disclosure provided by the agents for the line of credit stated that it was subject to interest at the prime rate of [ ]% plus a [ ]% spread. In signing the application the applicant acknowledged having received the disclosure statement. He also agreed that the agreement was subject to the approval of the bank, at its entire discretion.
In April 2011 the bank sent the customer a welcome letter along with a disclosure statement similar to the one provided by the agents in April 2011; however, this document stated that the line of credit was subject to interest at the prime rate of [ ]% plus a [ ]% spread. Despite this, the bank continued to charge the customer the rate of [ ]% plus a [ ]% spread.
In July 2011, the bank sent the customer an amended disclosure statement that stated that the interest rate was the prime rate of [ ]% plus a [ ]% spread, along with a letter of apology. The bank did not reimburse the customer; however, it corrected its system in August 2011.
Position of the bank
In its written representations on the Notice of Violation to the Commissioner, the bank reiterated the comments it made to FCAC on the draft Compliance Report of July 2013. The bank added that the investment credit line product is not a transactional product that a customer has a choice about using. Rather, as soon as the credit line is authorized by the bank, all of the funds are invested as agreed by the customer with the advisor. Interest is charged on the line of credit immediately at the rate initially disclosed.
The bank explained that the welcome letter was sent by the bank as a courtesy in April 2011, along with the disclosure statement. However, this second disclosure statement contained an erroneous interest rate of [ ]% plus a [ ]% spread. According to the bank, 30 days after the application for the credit line was signed by the customer and the customer’s funds were invested, the bank sent the customer a monthly statement that indicated that the customer was being charged an interest rate of [ ]% plus a [ ]% spread. The bank contends that the customer also received monthly statements indicating the [ ]% plus [ ]% interest rate in June and July. Therefore, the bank claims that the customer had notice of the applicable interest rate not only from the initial disclosure statement he received when he signed the application form but also from his monthly statements.
The bank submitted that there was no intention or negligence on its part. The bank corrected the error as soon as the error was raised by the customer. Only [ ] clients (or 1% of customers with an investment credit line) were affected. These customers agreed to the interest rate of [ ]% plus a [ ]% spread when they signed the application, and they had notice of this rate in the monthly statements they received. Consequently, the bank believes customers suffered little prejudice by the bank’s actions, and that any harm to these customers was minimal.
The bank explained that in signing the application form for the credit line, in its view, the customer was contractually bound by the interest rate of [ ]% plus a [ ]% spread that was initially disclosed. Consequently, the bank did not propose to reimburse the affected customers for the difference in the interest they were charged between April and July 2011.
The bank asked that, if the Commissioner decides to uphold the violation, she refrain from imposing a penalty and from naming the bank.
I - Violation
Pursuant to paragraph 10(1)(b) of the Cost of Borrowing (Banks) Regulations (the Regulations), every bank that enters into a credit agreement must provide the borrower with an initial disclosure statement that includes the annual interest rate or the method for determining the rate if it is variable. This information, in turn, must be made in language and presented in a manner that is clear, simple and not misleading pursuant to subsection 6(4) of the Regulations.
According to the Compliance Report, during the investigation, the bank stated that the information in the initial disclosure document provided by the agents to the customer in April 2011 was an estimate as permitted under subsection 6(3) of the Regulations. “[text omitted ]:
“[text omitted ].”
The credit application also stipulated that the terms and conditions were subject to the approval of the bank.
Based on the initial disclosure received by the customer, a customer could have easily understood that the interest rate of [ ]% plus a [ ]% spread was an estimate or assumption that was subject to confirmation by the bank. The customer received a similar disclosure statement with the welcome letter from the bank in April 2011. However, this second disclosure form set out an interest rate of [ ]% plus a [ ]% spread. As this second disclosure statement indicated that if the borrower was receiving it with the welcome letter the information is disclosed assuming that “the terms and conditions which are confirmed will not change,” it would have been reasonable for the customer to assume that the bank, in approving the customer’s application, had decided to reduce the interest rate spread applicable to the line of credit.
The language in the initial disclosure statement provided by the agents on behalf of the bank leads the consumer to believe that the rates provided therein are estimates or assumptions that will be confirmed by the bank in a forthcoming welcome letter. The disclosure statement provided with the welcome letter that disclosed a different interest rate only served to confuse the information about the interest rate provided in the initial disclosure.
While the bank maintains that the second disclosure statement was provided as a “courtesy”, the customer had no way of knowing that the new rate disclosed was not the final rate approved by the bank since the document stated that if it was being received with the welcome letter “the terms and conditions which are confirmed will not change.” Regardless of whether or not the customer may be contractually bound to pay the rate set out in the initial disclosure, the consumer is entitled, pursuant to the Regulations, to have clear information about the applicable interest rate. The bank is obliged to disclose the interest rate in a clear, simple and not misleading manner so that the consumer clearly understands what rate is being applied to his or her account.
The bank provided the customer with monthly statements setting out the initial (correct) interest rate of [ ]% plus a [ ]% spread. But the provision of monthly statements does not obviate the bank’s obligation to ensure that it provides an initial disclosure about the applicable rate in a manner that is clear and not misleading. Moreover, any documentation provided to the customer that has an impact on his or her interpretation of the initial disclosure, including the disclosure statement provided with the welcome letter, should also be clear and not misleading. This was not the case here. In fact, the language in the disclosure statement provided with the welcome letter led customers to believe that a lower interest rate was being applied.
In the result, I find that the disclosure of the applicable interest rate in the bank’s disclosure statements was not made in a manner that is clear, simple and not misleading. Accordingly, I conclude that, on a balance of probabilities, the bank has committed the violation.
Subsection 28(1) of the 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)).
In its submissions, the bank has not detailed the measures that it took to avoid the commission of this violation. Furthermore, as I have determined below that the bank demonstrated a degree of negligence in committing the violation, I cannot conclude that the bank has taken all reasonable care necessary to establish the defence of due diligence.
Having concluded that the bank has committed the violations, I may impose a penalty taking into account the factors set out in s. 20 of the Act.
I have considered the bank’s written submissions on the proposed penalty. However, in view of the following considerations, I uphold the penalty of $25,000 proposed in the Notice of Violation.
Harm done to customers
The bank has indicated that [ ] of its customers with an investment line of credit received the initial disclosure from its agents disclosing an interest rate of [ ]% plus a [ ]% spread, along with an additional disclosure statement with a welcome letter from the bank disclosing an interest rate of [ ]% plus a spread of [ ]%. According to the bank, these customers represented 1% of its customers with investment lines of credit.
The bank did not reimburse these customers for the difference in the interest rate disclosed with the welcome letter ([ ]% plus a [ ]% spread) and the actual amount charged ([ ]% plus a [ ]% spread) from April to July 2011. However, in July, the bank provided these customers with an amended disclosure statement with the correct interest rate. The bank corrected the system error in August 2011.
I acknowledge that the bank’s customers received notice of the actual applicable interest rate on the initial disclosure statement provided with their application and on their monthly statements. However, I cannot conclude that the bank’s customers have not suffered harm. The Regulations do not simply require that the customer be provided with notice of the applicable rate, rather the rate must be disclosed in a manner that is clear, simple and not misleading.
For three months, at least one customer, and possibly others, believed that the applicable interest rate on his line of credit was the rate set out in the disclosure statement provided with the welcome letter. These customers could have easily relied on the lower interest rate in planning their finances only to actually be charged the higher rate (as set out in the initial disclosure and the monthly statement) by the bank. Without being provided with an amended disclosure statement confirming the correct interest rate (which the Regulations normally require no later than 30 days after the day the amendment is made), this would have been confusing and likely frustrating to these customers. These consumers were entitled to clear, simple and not misleading information about the applicable interest rate in the initial disclosure statement and any subsequent documentation related to that disclosure provided by the bank.
Degree of intention or negligence
I accept the bank’s arguments that it did not intend to violate the Regulations. I also acknowledge that once the bank learned of the complaint it took steps to address the problem and to send amended disclosure to its affected customers. In my view, however, the bank could have taken greater measures to ensure that the initial disclosure provided to customers, along with the disclosure provide to customers with its welcome letter, was presented in a manner that is clear, simple and not misleading. Moreover, the bank should have taken steps to verify that the disclosure it provided to the customer with its welcome letter matched the disclosure statement initially provided by the agents and the monthly statements provided to its customers.
Consequently, I find that the bank demonstrated a degree of negligence with respect to the violation.
In the past five years, there have been six violations issued against the bank. This has been taken into account in my determination.
To conclude, on a balance of probabilities, I find that the bank has committed the violation set out in the Notice of Violation. I impose an administrative monetary penalty of $25,000.
It is not my intention to publicize this case pursuant to s. 31 of the Act.
Ottawa, December 9, 2013
Lucie M.A. Tedesco
Financial Consumer Agency of Canada