Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 16 - Evidence - Meeting of March 1, 2007
OTTAWA, Thursday, March 1, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-26, to amend the Criminal Code (criminal interest rate), met this day at 10:45 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
The Chairman: Honourable senators, we have a tight time frame and I want to make another brief introduction to this matter. We are dealing with Bill C-26, to amend the Criminal Code (criminal interest rate). I want to welcome our colleagues. In addition, I want to warmly welcome our former colleague Senator Madeleine Plamondon, who is, in a way, the godmother and godfather of this initiative. This initiative might not be the solution that she considered, but we will hear from her in a moment.
Bill C-26 was introduced in the House of Commons on October 6, 2006 and received first reading in the Senate on February 7, 2007. It received second reading yesterday, which allowed it to come to this committee. It is an Act to amend section 347 of the Criminal Code, which criminalizes the charging of usurious interest rates.
The provincial and federal governments are free to regulate any lending industry within their jurisdiction consistent with the limits set out in section 347 of the Criminal Code. An exemption of that section would be required for them to allow legal lending transactions exceeding that limit. That is the view of the government as it relates to this bill.
This bill arose out of the efforts of this committee and, essentially, out of the leadership efforts of our former colleague Senator Plamondon, when we looked at the whole question of small loans and consumer protection. She will recall that her bill was approved by this particular committee to deal with this matter. It died on the Order Paper, but it was a wake-up call to governments, federally and provincially, that this gap in consumer protection had to be addressed. The objective of this bill is to fulfill this gap in the way that it proposes.
According to section 347 of the Criminal Code, it is a criminal offence to enter into an agreement or an arrangement to receive interest at a criminal rate, at a rate exceeding 60 per cent, or to receive a payment of interest at a criminal rate. The consent of a provincial Attorney General is required in order to prosecute an offence under this section and to date, according to our information, the provincial governments have not prosecuted any payday lenders. This section has not been used in a criminal context with respect to the day-to-day activities of the payday lenders.
Obviously, this is a sought-after service because of the gigantic growth in this industry. We will look at the question of how this industry has grown by subsequent witnesses. Shared federal-provincial jurisdiction over payday lenders has meant that these lenders are essentially unregulated other than in the province of Quebec, where they are excluded. Provinces and territories are unable, they say, to regulate the price of a loan, since attempts might conflict with section 347 of the Criminal Code and, therefore, could be challenged as ultra vires in a province or territory.
The Constitution Act provides provinces and territories with competence over consumer protection through their authority over property and civil rights. Federal competence exists with respect to criminal law. In the absence of the regulation, the future of the payday loan industry would be determined by civil suits. Obviously, this is not a satisfactory way to proceed, either. It seems that the payday loan industry is seeking a form of regulation. We want to see, in this bill, whether or not this approach is an adequate one. We are delighted to invite as our witness for today's session the Honourable Senator Plamondon, a former colleague of ours and a distinguished consumer advocate for the province of Quebec, whose reputation exceeds the boundaries of Quebec. Welcome.
Hon. Madeleine Plamondon, as an individual: Flattery is like chewing gum: Savour it while it lasts and never swallow it.
The Chairman: You have not lost your wit.
Ms. Plamondon: In my opinion, Bill C-26 is just a smokescreen because, as Quebec has shown, we do not need this bill to regulate or prevent the practice of loan-sharking. All you had to do was to give operating licences to companies that did not exceed 35 per cent. And as this was not profitable for the payday loans industry, they decided not to set up shop in the province of Quebec. This proves that they were looking for more than 35 per cent and, yet, with this bill, we are getting ready to give them permission — if the other provinces agree — to exceed 60 per cent. This flies completely in the face of Bill S-19 adopted both by this committee and unanimously by the Senate. Now, given that a bill was unanimously adopted by the Senate stating that 60 per cent is too high and now a year later it is being suggested that the rate may be in excess of 60 per cent on the proviso that ``safeguards'' are in place, the Senate will look like a puppet or like it changes its mind depending on which way the wind is blowing.
I cannot fathom how the provinces — as it states in the preamble — ended up agreeing with this. The provinces do not need the federal government's consent to protect consumers. It is a province's prerogative to do so. And it is exactly what Quebec did without seeking the federal government's permission. So why is the federal government interfering now by saying: ``We are going to assess your methods to determine whether or not you are protecting consumers and then decide whether to give you accreditation. If we find out that you are not protecting consumers, we will take away your accreditation?'' The provinces will never agree to this, especially Quebec.
The proof as to why Bill C-26 is unnecessary is the fact that Quebec was able to keep out the payday loans' industry without any such bill. The other provinces could do likewise. Why am I convinced of this? Well, I read extracts from the House of Commons' proceedings. Everyone said that if we are to regulate, we should look at what is happening in Quebec because Quebec is a very good role model. I read the testimony and that is what they are saying.
Once again, Quebec managed without Bill C-26. It is not the consumers' fault that the provincial Attorney Generals have never prosecuted. They just have not have the backbone to prosecute, under section 347 of the Criminal Code, companies charging over 60 per cent. Based on the testimony we heard when Bill S-19 was being considered, charges can sometimes exceed 1,000 or even up to 2,000 per cent.
When there are fewer Royal Bank of Canada branches than there are payday loan outlets, it starts to make you wonder. Rather than adopting Bill C-26, the Senate should address the microcredit issue in relation to the disadvantage and the role the banks have in all of this. If you start accommodating payday loan companies by making them exempt from the Criminal Code, you are sending the wrong message and saying to the poor: ``You are going to dig yourselves in even deeper hole; and these companies will never be prosecuted.'' That is a very bad message to be sending and it is not at all in line with the findings that came out of the study on Bill S-19. I just cannot fathom how they could possibly want to do this.
Rumours are floating around that there will be an election. I wonder what people will think of the fact that you are meddling in provincial areas of jurisdiction. And I am wondering which committee or which individual in the federal government is going to decide whether or not the provinces are providing adequate safeguards. And what would the condition be? This sort of approach encroaches on provincial areas of jurisdiction, in my opinion.
I prefer answering questions, but the real problem is that 60 per cent is just too high. Anything above 60 per cent should be considered a crime, especially since the Bank of Canada rate is very low. It was agreed that anything in excess of 35 per cent — which still remains within the prime rate — would be considered criminal. And now, we are getting ready to do the exact opposite. The Senate will really look like it changes its mind depending on which way the wind is blowing, if this bill is agreed to.
Let me conclude by saying that your committee would be well advised to carry out a study on microcredit and low income consumers.
The Chairman: Thank you, Senator Plamondon. I listened carefully to what you say. Since I have been in the Senate for 22 years, I have never felt that I was a puppet of anyone. I do not feel this committee, in any way, shape or form, as best as I understand it, has been a puppet of the government or has taken partisan positions on interests that affect the consumer. I welcome your testimony. I believe it is important and cogent. All senators want to ask questions. However, the implication that this committee or any senator is a puppet of anyone is not appropriate, fair or acceptable to me.
Ms. Plamondon: Allow me to respond to that. I said that if the Senate came to different conclusions within a year, it would look bad; it would look as if you were answering to others.
The Chairman: I appreciate that. This committee has previously been pressed by the government to take a particular position on short notice. The committee has always pushed back, on a non-partisan basis, to ensure that we represented what we believed to be the best interests of the consumer and the economy, which is what we intend to do in this case. That is why we are delighted to receive your evidence and that of the payday lenders, who we will hear from later.
If you have any comments or criticism about any of the evidence you hear today, we would appreciate that in writing. I say the same to our witnesses from the payday loan industry. We will take all representations into account.
We are open-minded on this question. You have raised an important issue that we must address, that being our previous position on your bill. Many of us were not happy with that bill, as you recognized. However, there was a collective decision that it was very important to press the governments, federal and provincial, to deal with this issue from a consumer perspective. That is why we were prepared to put some water in our wine and accept your measure, which we thought would be a trigger that would pressure provincial and federal governments to do the job they were supposed to do: to protect the consumer, while allowing the payday loan association to provide a service that consumers obviously need and want that our banks are not providing.
This is a difficult situation and we will try to wend our way through it. We appreciate your evidence.
Senator Angus: Good morning, Ms. Plamondon, and welcome. It is a pleasure to see you again. As you know, the committee has always tried to understand and accommodate your point of view and your attempts to prevent exorbitant rates from fleecing Quebec consumers and consumers from elsewhere. And in this respect, we have not changed our approach. We have an open mind and are prepared to do whatever it takes to protect the interests of Canadians. You began your presentation by stating that Bill C-26 was unnecessary, am I right?
Ms. Plamondon: Yes, that is right.
Senator Angus: Based on the testimony, we heard from officials from the Departments of Industry, Trade, and Finance yesterday, illegal interest rates and the Criminal Code fall exclusively under the federal government's jurisdiction. Now, if the authority to control interest rates is granted, the federal government would have to make exemptions to give provincial governments the jurisdictional authority to regulate consumers' rights.
Ms. Plamondon: Any exemption granted would be to permit charges in excess of 60 per cent on loans of up to $1,500 for 60 to 62 days.
Senator Angus: And even higher.
Ms. Plamondon: That is right, and even higher. Different classes will be created. Some people will be subject to the 60 per cent rate while others will be able to call for rates in excess of 60 per cent, should a province request this. I went to Halifax last year when I was a senator. I stationed myself outside a ``cash store.'' I interviewed the people coming out of the store and asked them how much money they had borrowed. One woman told me that in order to borrow $100 for one week, she would have to pay back $130. You do not need a calculator to see that this is in excess of 60 per cent. This rate was set in 1981 when the Bank of Canada posted a rate of 20 or 21 per cent and everybody was losing the shirts off their backs, not to mention their homes. It was quite normal for the rates to be brought down. Now, with Bill C-26, you are advocating rates in excess of 60 per cent for some loan categories.
Senator Angus: I understand your example. Now if I am right, you are saying that this legislation is unnecessary. You cited Quebec where the payday loan industry has essentially disappeared. Am I right in understanding that you are against this industry? You do not agree that this is a legitimate industry. The big banks are not part of this market which is not profitable for them as they would have to be prepared to basically give handouts to the little people. The payday loan industry took advantage of this and scooped up this part of the market by providing small loans between $100 and $150. Based on the testimony we have heard, there is no profit margin if you cannot charge high interest rates. However, Canadians need the small loans and are prepared to pay the fees it takes to get them.
Here is my question: If you accept the premise this industry is legitimate — and I do not think you do believe it is a legitimate industry or that it should even exist —, even that payday loan companies will charge a certain amount to cover costs and ensure they enjoy a small but legitimate profit margin what, in your opinion, would be an acceptable amount, $34, $17, some other amount?
The television network CTV investigated this. They borrowed $100 from three different payday-loan branches. The first charged $17 on the balance, the second $34.02 and the third $59. The third one certainly overcharged and it is for this reason that the industry must be regulated. But perhaps this industry is not legitimate based on what you are saying because the rates charged to cover costs, whether or not there is much profit involved, are excessively high in your opinion, regardless of consumer demand.
Ms. Plamondon: I suggested that a more in-depth study be carried out on microcredit and its relationship with Canada's disadvantaged populations. You are right when you say that microcredit fulfils a need that banks are not willing to address, but it is a far cry to say that interest rates in excess of 60 per cent are okay and that that is a solution, because it is not.
Moreover, your committee's report which I was involved in, stated that a more in-depth study on alternative means of credit needed to be carried out. And yet, no in-depth study on alternative credit was carried out and Bill C-26 was introduced. In my opinion, this is putting the cart before the horse.
This study must be carried out and perhaps the banks which make billions of dollars should be forced to get involved in microcredit. Microcredit is not just for the populations of African countries. It is also for Canada's disadvantaged populations. The solution to meeting the needs of Canadians living under the poverty line is certainly not payday loans, as is currently the case.
If this practice were allowed to continue, poor Canadians would, with our blessing, dig themselves into a much deeper hole called poverty.
Senator Angus: But not all poor people have to use microcredit. In my opinion, Canadians still have not reached the point where you have to give them a $100 handout every week. The other parties, like the NDP, might have a different vision of things, along the lines of what goes on in socialist regimes.
Banks are there to do business. We are not prepared to force an industry into losing money. This industry came about in order to meet the needs of the little people and people who are willing to pay. I know references have been made to interest rates of 150 per cent, but appearances are not always reliable.
All things, as one says in English, are not as they seem. It looks like 150 per cent, but people are sometimes ready for whatever.
Our testimony indicated that many of these institutions' clients include people with an annual income of over $50,000. This information was included in documents provided for our hearings. In any event, let us change subject.
Ms. Plamondon: The people I saw in Halifax, believe me, did not earn $50,000 a year. I can swear to that. I do not believe it is a good idea to charge more than that. There should be a study examining the needs of poor people. If they do not have enough money to wait until the end of the month, how can they have enough money to pay $30 for a $100 loan? They cannot do that.
Senator Angus: I think we are getting into philosophical questions. I have said on several occasions that if, by chance, I was to be elected Prime Minister, I would delay foreign aid and attend first to Canada's homelessness problem. This is a terrible scourge.
We are here to help and we do a lot. But we are not prepared to force an industry into losing money.
Ms. Plamondon: When I left the Senate, I received a medal from the credit union movement — this is a common practice. There was an inscription on the medal indicating that the credit union movement came about a long time ago as a result of the high rates little people were charged who, at that time, could not get bank loans.
Senator Angus: In Quebec, instead of having payday loan outlets, we have pawn shops. Many poor people lose their jewellery and other property to such places. In my opinion, this practice is far worse than regulated payday loans.
Ms. Plamondon: By the way, you made them exempt from Bill C-26.
The Chairman: I want to thank the honourable senator for that exchange. We have only 15 minutes left for this witness, and I would hope that the other senators will restrain themselves. I have allowed my vice-chairman a bit more leeway, because it is important we get a rounded picture of the problem. I thank him for that.
Senator Goldstein: Ms. Plamondon, we understand your point of view. You have, and have always done a good job, at defending your position. You did so when you were still a senator, and you are still doing so now. You are known throughout Canada and elsewhere on the strength of your strong desire to protect consumers, and we are behind you on this.
Here is the problem we are dealing with. Millions of Canadians, for all sorts of reasons, use the services of payday loan companies. The need is there. Whether it is fair or not, the fact is the population is demanding it.
Now, it is true that this practice is banned in Quebec. People have the habit of using pawn shops in Quebec, or even borrowing money from criminals in the street. These practices are not regulated but they fill a need that exists.
We need to face facts, the Canadian public needs this tool, for a number of reasons. As a result, we must ensure that this industry, which exists and which will continue to exist, is regulated objectively and on an ongoing basis throughout Canada, with the caveat that the provinces are in agreement, so that people can access these loans.
You suggested that the banks should take over. I am not a bank and I could not force them to make these sorts of loans available. In your opinion, how can we address the need being expressed by the Canadian public?
Ms. Plamondon: Here is my take home message. The study on alternative credit never occurred. You are pretending to give powers to the provinces that they already have. Quebec used this power to deny licences to payday loan companies with rates in excess of 35 per cent. Every other province could follow suit without Bill C-26.
The only other thing you would have to do is ensure that the Attorneys General are sufficiently on the ball and prosecuting companies that charge rates in excess of 60 per cent.
In the meantime, if it is true that this need exists, then a more in-depth study on microcredit should be carried out. Making exemptions is simply not enough.
Harley-Davidson tattoos do not a criminal make. Criminals may also be wearing three-piece suits, have a going concern, and be violating section 347 of the Criminal Code. We have to get this stereotype out of our head.
I do not want to use terms which may come across as anti-Semitic — I have already been criticized for using the word ``shylock.'' And yet, people in Quebec who do not know what the word ``shylock'' means know full well that we are talking about someone who goes around ripping people off.
I watched the movie The Merchant of Venice, based on what you said last year. I remember Shylock saying: I want my pound of flesh. Bill C-26, as it turns out, indeed gives them their ``pound of flesh.''
Senator Goldstein: It is a bit more complicated than all that. I do not want to get into a debate over Shakespeare or about the word ``shylock'' that is something that we could discuss in private. You will understand that we do not share your point of view on this issue.
You did not, however, answer the question. A study on credit will not achieve much.
If the people using payday loans have credit cards and they are maxing them out, well then that too is a form of credit. It is also a way of borrowing goods and not necessarily money. And that begs a number of questions about consumer protection which is a provincial, and not a federal, area of jurisdiction.
Ms. Plamondon: When the representatives of the Canadian Bankers Association appeared before the committee last year they said that the credit line rates were nowhere near the rates that were charged by the ``payday loans'' companies.
You have to be working for pay if you want a payday loan, and you also need to have a bank account; so all you would need is a line of credit against your bank account to tide you over until payday. That is what a line of credit is for. Perhaps the banks should be encouraged to grant a minimum line of credit, perhaps $200 or $300, to small wage earners so that they can cover unforeseen occurrences with their line of credit in order to avoid having to turn to payday loan companies. That is what the Bankers Association told you. And I am not usually in the habit of defending the Canadian Bankers Association.
Senator Eyton: Thank you for appearing here today. I am sorry I came a little late. I missed your opening remarks, but I got the gist of what you were speaking about.
Do you not have any sympathy or support for an industry that has developed so rapidly that today it services more than a million Canadians and, although we are not sure of the number, dispenses about $2 billion or $3 billion? This has all happened within just a few years. It seems that this speaks about an industry that is flexible and has come onto the scene in a short period of time, which would be difficult for many institutions. It has been welcomed by Canadians because they have been going to them and making use of the credit afforded to them.
I have difficulty with your suggestion that, somehow, the industry is not deserving or should not be permitted to exist or carry on business as they do. I will put that, as well, in the context that the economic case is that we are looking at a 60 per cent interest rate as a limit. If I applied that to, say, a $100 loan for two weeks, then that would permit a total cost of $2.50. It is the equivalent of prohibiting that kind of transaction, so that people would not have the ability to borrow $100 for a couple of weeks, and $2.50 will not cover the clerical cost for that transaction.
We all know sending a letter today has an inherent cost of about $3 or $3.50. If I was a man on the street in need of money for a couple of weeks and the charge was $5, representing 120 per cent interest, I would feel that is fair enough. Therefore, I have trouble with your criticism of the entire industry, one which meets the needs of all citizens.
Ms. Plamondon: If I accept your reasoning, it is opening the door, so that — whatever the need — you can ask for up to $1,500. If you request a loan of $1,500, then why not ask for $2,000 or $10,000? If it is not criminal to borrow under $1,500, why should it be criminal over that amount? When do you stop?
I believe it is a bad message to send to Canadians. As people from government and people who care, we should look at solutions that will help those people who are in need of $100 until their payday. There should be compassion for them instead of compassion for the industry. That is why I would have welcomed a study on micro-credit with a special look at people who are poor. That is what I would have preferred. I feel this bill is premature.
Senator Eyton: Maybe my understanding is wrong, but micro-credit has come out of the less developed countries. Generally, it involves borrowing circles for a particular short-term enterprise.
Ms. Plamondon: There are some experiences in Quebec as well. The Caisses Populaires have put a certain amount of money into non-profit groups, which they cannot use unless they want to lend it, with no interest or very low interest, to people who are in need.
When I referred to cooperation with the banks, that is what I meant. I did not mean someone going to the bank and saying, ``I want $100, and I will give you $1 after.'' I was referring to them going to specialists, who will help them create a budget, save money and follow-up with them, so that they can get back on their feet; instead of telling them, ``You have the payday loan industry. Why not go there and pay 1,000 per cent?''
Senator Eyton: We have all sorts of programs for people who clearly have no money at all and cannot get along. Our tax systems are skewed to assist those individuals as well. I will leave that line of questioning.
We have before us the result of years and years of discussions. You talked about a study. We have had four or five years of discussion by industry players, admittedly; by the federal government and our officials; and by the provinces, I suppose with the exception of Quebec. This bill fits within the constitutional constraints or enabling provisions. People have come together and said, ``We see the problem. We have come up with a solution that will afford locally imposed requirements.'' The requirement for designation involves the province itself taking steps to protect borrowers and to limit the cost of those loans.
It is difficult to be critical of a process that has gone on this long by many proficient and thoughtful people, who have come up with a scheme that will allow British Columbia, Nova Scotia or Manitoba to put in appropriate limits for particularly the cost of the loans and the way in which they are administered. In that context, it does not seem helpful to call for another study. There has been so much work completed with a solution arrived at, and I feel we are in a position to move forward.
Ms. Plamondon: Bill C-26 sends the message that Quebec does not have the right solution. At the same time, the people in the other place said we should all look at what Quebec does. However, Quebec decided that if someone wants to charge over 35 per cent interest, then he or she does not get a licence. How is that seen as an example? You are looking at Bill C-26 to provide permission to the rest of the provinces. At the same time you are saying, ``Look at what Quebec does and do the same.'' That is contradictory.
Senator Eyton: However you cut it, I am not sure I would use Quebec as an example. It may work there, but I can assure you there are significant subsidies. Somebody is paying for it; it may not be the person who is borrowing, but somehow you and I and others are paying for it. I am not sure it is an appropriate standard.
Activity of this sort, when it comes down to it, should have rational business purpose and mechanism. Without it, I am not sure where you go. When does the subsidy stop? When do the programs for small borrowers stop?
Ms. Plamondon: There is no special subsidy from the province of Quebec and from the government. The lobby must have been very strong. I remember, for Bill S-19, there were more than 20 lobbyists on that bill. I believe the lobby won.
The Chairman: I have two other senators who have been very patient. What I intend to do is give our senators another six or seven minutes to ensure we amply explore The Honourable Madeleine Plamondon's views on this, which are interesting and informative. It is important because we want to have a full understanding of her views as they apply to this particular bill and also the views of the various senators.
Senator Biron: The number of payday loan companies has increased to fill the vacuum created by the banks. There is no doubt that most of the consumers who deal with this type of company have no choice because of their poor credit record. For their part, the payday loan companies make money on the loans. They are the lenders of last resort.
When people have no other choice but to borrow, they are ready to agree to any kind of condition. The greater the number of payday loan companies, the less interested the banks will be. Someone who takes out a bank loan thinks that if he cannot pay back the money, he can always turn to a payday lender. Since there will always be a place to get a loan, the number of payday loan offices is on the increase.
In Quebec, the legal interest rate is 35 per cent. There is also an exemption in section 347 of the Criminal Code that provides for an interest limit of 60 per cent. That allows the provinces to set a limit not exceeding 60 per cent. Is the interest rate limit 60 per cent?
Ms. Plamondon: No, that is not the case. That relates to an amount up to $1,500 within a limited period of time. If the provinces can demonstrate that they provide a certain level of protection, the interest rate can be higher than 60 per cent while being exempted from section 347 of the Criminal Code.
Senator Biron: In Quebec, what financial institutions have a rate that is lower than 35 per cent? Would it be the Caisses Populaires?
Ms. Plamondon: In this type of discussion, it is a given that the money will run out before the pay check comes in. The Standing Senate Committee on Banking and Commerce found that the savings rate was zero. And now we are trying to find some way to allow people to borrow and pay a higher interest rate. That makes no sense.
Section 347 of the Criminal Code that provides for a higher rate than 60 per cent applies to amounts under $1,500 repayable within a limited number of days. This section is supposed to offer some protection, but the province must request the federal government's approval.
Since consumer protection is a provincial jurisdiction, Quebec did not wait for the federal government's approval to do something that is within its jurisdiction.
Senator Biron: Did the number of high interest rate loans increase in Quebec after the act came into force?
Ms. Plamondon: No. The fact is that there will always be an underground market, whether it is the grocer who charges you for the use of a cheque, or a VLT location where you can get a cash advance.
It would have been preferable to lower the 60 per cent rate in order to make provincial attorneys general more proactive. Now, not only are we maintaining the 60 per cent rate, but the payday lenders are allowed to go up to 60 per cent as long as they implement certain measures. I do not agree with that provision.
Senator Biron: The payday loan companies say that there is a real need for their services. You say that in Quebec they can manage to operate with a 35 per cent interest rate?
Ms. Plamondon: Yes, they still manage to operate.
Senator Biron: That is why I was asking if you had noted an increase in usurious loans.
Ms. Plamondon: I find it interesting to hear witnesses appear before House of Commons committees and suggest that the provinces take a closer look at what Quebec is doing. That goes against the provisions in Bill C-26.
Senator Biron: Would you say that it is mainly the Caisses Populaires that have interest rates of 35 per cent and lower?
Ms. Plamondon: Today, even students can get a $300 line of credit. I am not defending the banks or the Caisses Populaires, but I agree with what the Canadian Bankers Association said about a wage earner requiring a bank account in order to be eligible for a payday loan. Since that is the case, it would be easy for him to apply for a line of credit from his bank and, in so doing, benefit from a less onerous interest rate. Maybe that is the way to increase the negative savings rate in Canada.
Senator Biron: Is that what is happening in Quebec now?
Ms. Plamondon: Yes.
Senator Massicotte: I would like to thank Honourable Senator Madeleine Plamondon for being here today. She will always be welcome to enlighten us on subjects of great interest to all Canadians.
Financial institutions in Canada can always do more, of course, and could perhaps be more charitable in order to serve payday loan customers.
If we accept the premise that we do not exist and that we must depend on market forces to serve our customers, then we have a dilemma: Those who provide short-term loans support rates that are more or less equivalent to $18 per transaction for fixed costs — $12 or $15. One would generally tend to accept a reasonable rate of interest, something that is certainly lower than 60 per cent, and the market can decide what is reasonable if there is enough competition in a given sector.
Do you accept the premise that, at the outset, the lender must at least be able to recover his fixed costs and, after that, be compensated for his risks? In other words — and it is probably not reasonable to ask him to take all of the risks without any reward — would you agree that the interest rate should be calculated separately from the costs, if we rely on the rules that govern the market place?
Ms. Plamondon: No, because section 347 of the Criminal Code implies — and the Consumer Protection Act also has an entire list, which I have already read to the committee — anything that relates to interest. That is why so many fees have been added, in order to circumvent the 60 per cent rule.
If you look at Quebec's Consumer Protection legislation, as it applies to credit, you will see a list of fees including the cost of credit and the rate. I have already shown you a contract with a 50.63 per cent interest rate; if you say that asking for 50.63 per cent in interest meets the rules of the marketplace, and that it helps consumers, then that is your problem, but I think that lending at that rate comes very close to exploitation.
And now we are ready to allow them to go beyond 60 per cent because they will be providing services to one segment of the public. The payday loans companies are growing up like mushrooms, banks are allowed to close their branches and in some regions people have to fight to keep their automatic teller machines. We must keep a close eye on the financial sector and, as the Standing Committee on Banking, Trade and Commerce, you are required to take a close look at how the Canadian public is being served.
Senator Massicotte: I am very much aware that interest includes all the costs, even the life insured portion, but you know as well as I do that an amount of $15 can be charged on a $1,000 loan for a two- or three-day period; even if the institution is not recovering its costs, the amount can easily be higher than 60 per cent. And one of the objectives of this bill is to allow the provinces to determine the fairest rate for both parties.
Ms. Plamondon: For one party!
Senator Massicotte: And the reason why the banks are not in this market is probably because of the 60 per cent interest rate, since they are afraid to be called usurious if their calculation method, for a given term, can easily go beyond 60 per cent without even being profitable. If there is no institution charitable enough to provide loans, if there is no other alternative, if we must depend on the current market, then we have a problem. They are not in this business and it is probably because they see no way of making a reasonable profit under the conditions as they now stand. We must find a solution to this problem, and that is one of the reasons why we have this bill.
I fully understand what you mean about delegating this without any point of reference. We have a problem now. Neither the person who provides the service nor the one who requires it is satisfied with the status quo; it is neither profitable nor desirable.
Ms. Plamondon: What bothers me about this bill is that the consumer ends up loosing while the industry has all of the advantages. Moreover, the amount of $1,500 and the number of days open the door to something even broader. You may remember the debate on Bill S-19, which had a limit of $100,000, because we were aware that people with money, like yourself, for example, can easily borrow one million dollars from a bank and pay it back five days later. They have their lawyers on retainer and they are in the business of making money. Both parties know what they are getting into. But the person who borrows $100 to buy groceries because payday is three days away and who must then repay $130 is not in the same league. You are thinking like a banker and not like a consumer who is in need of ready cash.
Senator Moore: I want to be clear about the situation in Quebec. It does not permit payday loan businesses, but it permits pawnshops to charge a maximum of 35 per cent interest. Is that correct?
The Chairman: There is no limit.
Ms. Plamondon: It does not say that it forbids payday loans. It just says that if to get a licence, the lending rate cannot be over 35 per cent. They eliminated themselves because they do not make money.
Senator Moore: Is the 35 per cent interest over the period of the loan, or is it annualized?
Ms. Plamondon: It is always annual.
The Chairman: My understanding, senator, is that pawnshops are licensed, but are essentially unregulated for the terms of credit they might give goods.
Ms. Plamondon: I have not made a study on pawnshops; you should.
The Chairman: That is my understanding. I leave you with two thoughts. First, we will be reviewing the Bank Act shortly. It is now wending its way through Parliament. It should come to this committee within the next week or so. We hope you will come back as a witness to raise your concern about micro-lending and the study, because we believe it is a valid point. We can study this, but it is up to the banks to come forward. We can use our moral suasion to interest them in this question, and we share that interest. We have a serious question in our minds as to why the banks have not been able to deal with this part of the business. We accept that view.
Could you give us any indication of the size of the unregulated loan business in Quebec?
Ms. Plamondon: I do not know. I will have to ask.
The Chairman: Have any studies been done in Quebec about the unregulated loan business?
Ms. Plamondon: Do you mean pawnshops?
The Chairman: Pawnshops are unregulated. According to anecdotal information I have received from senators, there are many ways to lend money on the black market. Do you have any indication of the size of that market in Quebec?
Ms. Plamondon: No. That is a good question. I do not believe it is seen as much as the payday loan industry is seen here. They are everywhere.
The Chairman: The black market is below the surface. Back to Senator Eyton's point, there is obviously a demand for a service of this kind.
Ms. Plamondon: Does that mean there are no pawnshops outside of Quebec?
The Chairman: Of course there are.
Ms. Plamondon: You should look at the other provinces as well. To consider the payday loans, one must have a job and a bank account.
The Chairman: We understand that. We are trying to look at this from a macro- as well as micro-standpoint. If this is a large area that has not been served, that is something. If there is no study, we must bear that in mind. Thank you for appearing. We will invite you to come back for our bank review.
Ms. Plamondon: I would have to receive the documentation.
The Chairman: We will ensure you receive them. We thank you for your efforts with consumers.
We want to welcome Mr. Norman Ayoub and Mr. Robert A. Whitelaw. If your opening comments can be brief, that would give ample time for the senators to ask questions.
Norman Ayoub, Senior Vice-President, Chief Operating Officer, Alterna Savings: We would like to thank the honourable senators for the opportunity to speak today. Alterna Savings welcomes the opportunity to speak on this particular subject. I have with me Mr. Robert Whitelaw, Director of our Convenience Loan Project, who can answer the technical questions you may have with respect to what Alterna is doing, as well as several of our product and pricing people. We have been looking at this seriously with respect to how we might provide an answer for, particularly, our members.
We have been watching closely the growth of the short-term loan requirements in our own operation at Alterna Savings. We have some solutions for that, but certainly not a long-term solution, and that is exactly why, in May of 2006, we launched this particular project. We discovered, as a result of that launch, a number of reasons why our members were using this and have tried to include those in the brief.
We are looking today at whether we can offer unsecured loans at reasonable expense to our membership and those who need such loans for short-term coverage until payday or until pension cheques arrive. The project had three phases, the first of which we have completed an analysis and developed a business case. We are in business, obviously, so there must be a good profitable reason for doing this, but one that also fulfills the role that we feel the credit union has here in the country. That is to provide the accessibility to financial services to the communities that we work in in general.
We recognize that Bill C-26 provides the regulatory structure. While we will not be directly participating with respect to setting the fees, nevertheless it makes sense for us to be prepared once this has been completed.
The project has been extremely well received. We have had encouragement from government, consumer groups, the other credit unions in our system and the media. We, however, appear to be alone in the conducting of this particular analysis at this time. We never like to be a leader, but we also never like to be a follower. From that perspective, we have learned much and are open to any questions the honourable senators may have.
I hope you have read the brief. I will turn it over to you in the interests of time.
Senator Angus: We have had a discussion amongst ourselves. This industry that you gentlemen represent is slightly different, if I understand well, from the payday loan industry. Am I correct?
Mr. Ayoub: We represent the credit union system.
Senator Angus: Could you give us a sense of the magnitude of the loans of your organization, for example?
Mr. Ayoub: We are a $2-billion organization with hundreds of millions of dollars of loans; to a great extent, competing with the large banks across the country. We are talking about a system with about $90-billion worth of assets under administration, and considerably well established in smaller communities across the country. In our own case, we have 24 branches; mainly in Toronto and the Ottawa region, but we are located in Pembroke, Kingston and North Bay and serve those particular communities directly.
Senator Angus: Is this project you have described to try to fill the gap, which the payday loan people are trying to fill also?
Mr. Ayoub: We have found that anywhere from 10 per cent to 15 per cent of our members actively take advantage of short-term loans, or what we would call convenience loans. They need it for coverage of a week or two while they are waiting for a paycheque. We deal with many pensioners, obviously. The same thing applies to pensioners.
We did have a number of services that took care of this. We have something called a skip-a-payment plan, which allowed people to literally skip a loan payment and cover them for that one- or two- or three-week period, or month, if the loan was repayable on a monthly basis. We discovered that they actively took advantage of them, and, in many cases, went to the payday loan stores. Therefore, about a year or so ago we decided that we would employ Mr. Whitelaw to look at this whole area to see if there was some way that we could serve, first, our membership.
Senator Angus: Is Bill C-26 acceptable from your point of view? Should it be passed?
Mr. Ayoub: You are asking that question directly. It is hard for us to give a direct answer to that. However, we would be pleased to come back to the senators with additional comments about that particular bill, unless my colleague, Mr. Whitelaw, has a comment.
Robert A. Whitelaw, Director, Alterna Convenience Loan Project, Alterna Savings: We took an interest in the legislation; it is before Senate. We accepted your invitation to be here. Apart from the bill, we are looking at an extension of a loan product that has several parts: It is simple and convenient for our members; it is risk-tolerant; it is priced in a socially responsible way; and it is a product to break the cycle. This product includes an effective forced savings program, which is so important, we believe.
The product is parallel to the legislation, but it is very public now that Canadians are increasingly using small, short- term loans. That is why Alterna took some leadership by saying that we, among the banks and financial institutes, should be looking at this situation. I recall being here about a year and a half ago, and senators asked the question: Why are credit unions, caisse populaires and banks not providing the service?
Senator Angus: To do what you are doing and to do this project and operate in parallel, you do not need the bill, I take it. It is legal to do that now.
Mr. Ayoub: Yes, exactly.
Senator Meighen: Mr. Whitelaw, I remember that question, and the answer, at least with respect to banks, was that risk-based loans — in other words, loans that reflect the risk — put the banks up into, albeit legal area of interest charging, an area in which the banks felt that they would be subject to public criticism for charging too much. They felt it was not worth the criticism and the effort to do so.
Have you found any evidence of this? What is the answer to the questions you have raised about why this service is not being provided?
Mr. Whitelaw: I have turned over, as of yesterday, the phase one fact-finding analysis business case to Mr. Ayoub and the staff. There are some issues identified in there that may respond directly to your question now.
Mr. Ayoub: To a great extent, the process of traditional credit processing, as all of us do in either the credit union system or the banks, is quite expensive.
Senator Meighen: It is extensive and expensive.
Mr. Ayoub: If we were to do it in a traditional manner, I believe we would come back with the same response as the banks would today. It is just too expensive for us to conduct it in the traditional way and not be charging something to cover our costs and make a profit — but not necessarily at an interest rate of 60 per cent. We are talking something north of what the traditional lending values are today, certainly north of 9 or 10 per cent.
However, if it is being done, as Mr. Whitelaw says, simply and without much extensive research — as the payday loan stores are doing today — then it can be efficient. We must remember that there are 1,300 payday loan stores, and they are growing. From the processing standpoint, they have found a method to do it in an efficient manner. That is what we have been investigating.
The first phase included such questions as: Is there a market out there? What is that market? How quickly is it growing? Do our own members require that today? We do have an obligation to them, first and foremost. That is the phase that we are in today. We are looking at our processes and trying to examine whether or not there is a way to do this efficiently; and effectively provide, in a socially responsible way, what the public demands and of which our members take advantage — but not with us.
Senator Goldstein: Mr. Ayoub and Mr. Whitelaw, thank you for coming back to speak with us and to enlighten us. I have had the advantage of having correspondence with you as well, so I have become more familiar with the excellent service you provide to your members.
I take it that the viabilities that you have are restricted to your own members.
Mr. Whitelaw: At this point, yes.
Senator Goldstein: If that is the case, to what extent can your model be extended more generally, so that other people can take advantage of loans at a reasonable cost? I recall, from your excellent written submission, that over eight per cent of our population lives from payday to payday. You will recall that that segment of the population has no assets with which to create or maintain credit. The only asset that population has is its future earnings.
For many years, that segment of the population mortgaged, assigned and hypothecated its future earnings to obtain credit. That was eventually outlawed by the Bankruptcy and Insolvency Act; it is not applicable in bankruptcy matters. What kind of technique do you feel could be available to more traditional institutions to induce them to want to be in this field, which requires different kinds of assessments and an evaluation and assumption of risk in which they do not want to be become involved? To put it a different way, if they were to be told, in the upcoming amendments to the Bank Act, that they must provide this kind of service, would they be in a position to do so? That is, if they charge more for it — which they must — will they say, to whatever public criticism arises from that enhanced cost, that they are performing a mandate that is imposed upon them by the Canadian people at a charge that is reflective in the legislation?
Mr. Ayoub: There is something in what you say in terms of us being in a position where we are developing a model that others can use. That is certainly our intention, first and foremost for our membership, but subsequently, if we are doing it profitably, other institutions will follow.
We have been in the micro-lending business for many years. The credit union system, generally, in Canada has looked at that as an obligation in terms of providing something back to the community. Our experience in micro- lending, although these are very small loans, has been very good. The interest rates that we charge are not modest; they are 15 per cent, 16 per cent or 18 per cent, depending on what the proposal is from the individual borrowing the money. We discovered that we were able to help not only Canadians, but also immigrants coming to Canada to establish small businesses. If we are doing it there successfully, then we feel there might be an opportunity to develop a model that will serve our members in other areas, such as short-term payday loans or pay-to-pay loans — convenience loans is what we like to call them.
Senator Goldstein: Have you done an analysis of your cost on the micro-lending model?
Mr. Ayoub: I will turn that over to Mr. Whitelaw, because he has been more involved with it. I believe the answer is, yes.
Mr. Whitelaw: We have developed 15 models that we were costing out. Five of them deal with full compliance with existing federal/provincial/territorial laws in Canada today. The other elements anticipate what might happen with Bill C-26 and have put a dollar per $100 cost billing. Each of those have been analyzed from the point of view of, first, the cost of obtaining money; second, the cost of delivering the money; and, third, the return on profit or return to the bottom line, which credit unions or banks are looking at socially responsible monies to carry on. The fourth element is to build in what we call an incentive savings account. The best way of describing that is if a member takes $500 out, we hold back on a plan or proposal five per cent, or $25. That goes into an incentive savings account, which is building a savings to break the cycle. At some point, the member will have the $200, $300 or $100 to go into more traditional products.
Those are the models that we constructed during the last year in anticipation of change and in response to all existing Canadian federal/provincial/territorial consumer laws.
Senator Goldstein: Have you priced them?
Mr. Whitelaw: From a business assessment point of view, that is part of the analysis that was finished in phase one and has now moved into the area of review at Alterna. We have indeed priced them.
Senator Goldstein: Could we have access to that? I do not want to put you on the spot. I know it is proprietary, but I feel it would be important if we could somehow know, generically, what kind of costs you incur; bearing in mind that you have a unique situation and people, by definition, who are well-employed in your credit union.
Mr. Whitelaw: This involves one step. To look at a traditional financial institute loan, the process can take two to three hours, $200 to $300, staff time and information technology, IT, time. We have had to carve out of that a process that is simple and convenient and cost it on that basis.
Mr. Ayoub: If we were to take a look at traditional costs as the banks might, certainly we cannot be as efficient as the banks. We are simply not as large. We attempted to break the mould and say, ``Let us stop looking at this as traditional bankers. Let us look at this as if we are starting from scratch and in the context of the requirements for our membership.'' I say ``membership'' because we have restricted it to our membership. We have an obligation to them, first and foremost. Beyond them, I am not unconvinced that we could offer it to the general public.
Senator Goldstein: That is very enlightening, Mr. Ayoub. Thank you. I may want to talk to you about that in another context.
Senator Eyton: Can you tell me a little more about Alterna Savings? It seems to me your background and support comes out of credit unions. Your membership may, by themselves, provide a distinct class from the ordinary guy in the street, who wants a $100 loan. You will have some history and some knowledge. How do you become a member or a participant in Alterna? I assume there is a defined category of individuals.
Mr. Ayoub: Our origins, senator, are well steeped here in Ottawa for the former Civil Service Credit Union, which was one of the founding members of Alterna.
We have about 100,000 members here that are former or presently civil service employees. Metro Credit Union in Toronto is the other founding partner of Alterna. These two organizations came together a little over two years ago to form Alterna Savings. It was founded primarily in the university, college and school boards in Toronto from a number of other smaller credit unions that have been amalgamating over the years.
We are open to any resident of Ontario. Any resident of Ontario can enter any one of the Alterna Savings branches and become a member of that credit union.
Senator Eyton: My guess is that in general it is a fairly closely defined group of people. There may be walk-ins. You have talked about the 100,000 employees in Ottawa. You would have some history.
Mr. Ayoub: We have, but that mould was broken a number of years ago when we became not a closed credit union, but open to the general public. Today, I would say we have a number of members who have nothing to do with our former organizations, were not affiliated with the credit union.
Senator Eyton: If I wanted to, could I walk in and borrow money from Alterna?
Mr. Ayoub: Yes. We have an application for you.
Senator Eyton: You talked about examining this opportunity perhaps in the context of Bill C-26. I am a little confused. You talked about what you call micro-credit, which I believe means small loans to existing members. I gather you have been doing that for some years.
Mr. Ayoub: Yes.
Senator Eyton: What we are talking about is something that is referred to in your material as convenience loans. This is different than small loans that you have been administering for some years. Is that correct?
Mr. Ayoub: Yes.
Senator Eyton: Bill C-26 talks about a loan amount of $1,500 or less for no more than 62 days. Do you have any break point as to how you would distinguish between your past history in dealing with members and this new initiative, which you label broadly as convenience loans?
Mr. Ayoub: You have properly defined the difference between micro-credit, which generally speaking is for terms longer than 62 days. We are talking about loans that are small in nature — $750, $1,000, $1,500 — for organizations or for small companies that are starting out. The payback would be over a period of time. These loans are more traditional, except very small and less regulated from our perspective in terms of risk evaluation.
The Chairman: On that point, you heard the previous witness. There is a difference in terms of micro-lending, because my understanding of micro-lending is what you have just described: micro-lending to small businesses for a period of time to allow them to become established. Micro-lending in the sense of Ms. Plamondon had to do with smaller loans for shorter periods of time. That is a micro-loan of a different nature.
Mr. Ayoub: Absolutely. We are talking about, as is Senator Eyton, a small loan of $500 or $1,000, for example, for a two-week period of time or until a paycheque or pension cheque arrives. That period of time could be two weeks; it could be 30 days. Generally speaking, it is limited to that short of a time frame.
Senator Eyton: Do you have a program doing that now as part of the examination or is that something at which you are looking?
Mr. Ayoub: That is our next phase. We would likely test this and test our models, the models that Mr. Whitelaw described.
Senator Eyton: You are not actually out in the field yet?
Mr. Ayoub: No, we are not out in the field yet.
Senator Eyton: I was captured by your four points to describe the convenience loan program. The first was simple and convenient, which we all applaud and, of course, why this industry has grown so quickly across the country. You talked about an initiative to break the cycle, which we will all applaud. To generate, in Canada, a savings of any percentage is an accomplishment.
Then you had two other factors. One was to be a risk-based loan. I understand that. To me that means generally tougher terms and higher rates. You coupled that with socially responsible lending. It seems to me within those two factors, you have a conundrum.
What do you mean? I believe you talked about responsible terms or limits for that kind of activity. ``Socially responsible'' was the term I heard. How do you define that? What are your limits?
Mr. Whitelaw: In terms of the risk tolerance, first, these are our members or potential members, so we already know the member. They have their paycheque deposited at the credit union; they have their chequing account at the credit union. We have found from our studies in the United States with other credit unions offering a similar type of product, that their risk is minimal. Of course, our risk-management people want to ensure any program has a degree of risk tolerance. It is minimal, including that we would not, for this program, require a credit check. Their Beacon score or bankruptcy navigation index, BIN, would not be compiled as part of the risk. That is the risk tolerance. The socially responsible cost is that we look at the components in providing this money to the individual and recognize that there has been an interest in Canada at all levels, government, consumer affairs groups, the media and with consumers about costing.
Alterna wants to make sure, in terms of the way credit unions operate, our costing recognizes the cost of the money, the cost to deliver and the value added. That, then, is the pricing structure.
In terms of the social responsibility issues, this is an extension of current loan products to those Canadians who perhaps do not have rainy-day savings accounts; yet have other types of vehicles, but do not have access to immediate cash. When they come traditionally and ask for $500, we do not have the mechanism at this time. That is what we are looking at, to be responsible to these needs. As Mr. Ayoub has pointed out, we have identified the needs by both those who are working and those who are receiving monthly pension cheques. We believe it is very important that we respond to our members and eventually to new members with this type of program.
Senator Moore: I am interested in following up on some of Senator Eyton's questions with regard to membership. You said any resident of Ontario can participate. Is that policy, part of your memorandum or legislation? What restricts it to Ontario?
Mr. Ayoub: It is in our policy today. It is open to any resident of Ontario. Of course, as you are aware, credit unions are provincially regulated, so we are limited to residents of Ontario.
Senator Moore: You mentioned you had 100,000 members or thereabouts in Ottawa. You also mentioned members in Toronto and that you have 24 branches. What is your total membership and how many of those are in Toronto?
Mr. Ayoub: Our total membership is 150,000 members, split two thirds, one third.
Senator Moore: Is that 50,000 members in Toronto?
Mr. Ayoub: Yes, approximately that amount.
Senator Moore: You mentioned other branches, but your total is 150,000 members.
Mr. Ayoub: Yes. We do have branches in Pembroke, North Bay and Kingston.
Senator Moore: To participate in any of the current loan programs or your proposed convenience loan project, you must be a member.
Mr. Ayoub: You must be a member, yes, of a credit union.
The Chairman: Thank you so much for your evidence. We will continue our evidence today. We will have another day of evidence after our break, in several weeks. This would allow you two weeks to give us your views of this bill in writing, if you do not mind. If we have any questions, our staff will be in touch with you. We very much welcome the work that you are doing. We believe you are trying to move in a responsible way to deal with this gap in services that people obviously need.
We are very mindful of the studies that you have referenced, one by Environics Research Group Limited, a very reputable research group. Their study in 2006 found that 10 per cent of the Canadian population would experience financial hardship if their paycheque was delayed for just two days, which is obviously one of the sources of the problem in terms of providing this need.
You then go on to say, and this is back to Senator Goldstein's point, a study done in August 2006, prepared by Strategic Solutions Group — of which we know to be a very established and responsible group — showed that 8.1 per cent of the Canadian population is in a cluster identified as living from paycheque to paycheque.
These are devastating numbers, and signify a gap in our economy that we have to serve in a responsible way. We are wrestling with this to see how to solve this problem in a responsible way. I assure you our committee and staff will be looking at everything you have to say. We thank you very much for your leadership in preparing these models. You are trying to address a gap in our economy to deal with people who are struggling from paycheque to paycheque. We are trying to come up with a solution that will solve that problem as well. I ask the next witnesses to appear immediately.
We continue our investigation of Bill S-26, which deals with the criminal interest rates. Welcome Mr. Keyes and Mr. Bishop, two representatives from the Canadian Payday Loan Association (CPLA). I particularly want to welcome an old friend and colleague, Mr. Keyes, a long-standing member, long-time friend and brilliant leader in Parliament when he was here and now, obviously, taking on leadership in the private sector.
I want to apologize for the delay in your evidence. You will understand we are pressed for time. I hope your opening comments can be very brief to allow the senators ample time to probe this question.
Stan Keyes, President, Canadian Payday Loan Association (CPLA): Thank you for providing the Canadian Payday Loan Association with an opportunity to present its views on Bill C-26.
I am Stan Keyes, President of the Canadian Payday Loan Association, CPLA. Joining me is Mr. Norm Bishop, who is secretary for the association and has appeared before this august committee on two previous occasions.
The CPLA represents 24 individual companies offering payday loans across Canada. It is important to note that each of these companies is led by entrepreneurial business people — all competitors — all companies that have come together to share a common interest in regulating the payday loan industry. Together, we called for regulation.
While we represent two of the biggest companies in the industry — Money Mart and Cash Money — we also represent 22 of the smallest companies in the industry. We adhere to the code of best business practices and submit ourselves to mystery shopping and oversight by an independent ethics and integrity commissioner, who has the authority to hand out fines of up to $30,000 per infraction of our code. We take regulation seriously.
This industry serves up to 2 million people a year, almost 2 million Canadians who require access to short-term, small-sum loans. Provinces want to regulate these services as they do with many other financial products. The CPLA fully supports Bill C-26, as written, without amendment.
Following up on the eloquent explanation given by you, Mr. Chairman, Bill C-26 gives authority to the provinces to regulate the industry, if they so choose. Equally important, Bill C-26 does not require any province to change the status quo. A province, such as Quebec, that does not allow payday lending will be able to continue with its policies completely unaffected by Bill C-26.
The real effect and impact, however, will be for the rest of the provinces that have indicated their desire to regulate this industry. The provinces of Manitoba and Nova Scotia have already passed legislation and are ready to launch public hearings into setting rates as soon as Bill C-26 is passed. In addition, the provinces of British Columbia, Saskatchewan and Ontario are all preparing to move forward this spring, with the provinces of Alberta and New Brunswick eyeing this fall.
This is an important issue for the provinces, one on which they, and Industry Canada, have been holding consultations for over six years.
There are three important parts to this legislation. First is the carve-out I just spoke about, allowing the provinces, who wish to do so, to regulate the payday loan industry. A direct answer to Senator Angus's earlier question of yesterday, if Bill C-26 does not pass, section 347 of the Criminal Code remains the law of the land. Provinces that do not want to regulate with de facto remain subject to section 347.
The second important piece of this bill is the requirement for any province that wants to regulate to demonstrate legislative measures to protect consumers; this is key. This will ensure the rules around payday loans are described in detail — in law — with a framework to endorse them and enforce them. This will likely include a ban on rollovers and other harmful practices that the CPLA and all its members banned more than two years ago.
The third critical piece of this bill is the requirement for provinces to set a maximum cap on fees that can be charged by payday lenders. This is critically important to consumer protection.
Once Bill C-26 becomes law, those provinces that wish to regulate the industry will begin a thorough and thoughtful process to set regulations and fix maximum fees. They will take input from stakeholders, including industry, consumer advocates and experts — including economists — to determine the right consumer protection measures for their province.
Provinces, such as Manitoba and Nova Scotia, have already announced that public hearings will be held, bringing together industry experts and new studies that will assist in setting a maximum rate high enough to ensure true competition in the market place while still ensuring that consumers are being protected.
I want to take a moment to directly address the concerns being raised by your next witness, Rentcash Inc. Rentcash Inc. has raised an issue of competition, suggesting that provinces do not understand the industry and could accidentally create monopolies and put companies out of business.
The CPLA is made up of 24 companies. I have talked to the owners of each and every one of them. They all support regulation, and they believe they will be able to stay competitive with price caps and regulation. Twenty-two of the companies are the smallest in the industry. They run anywhere from one to 15 stores each. If these small companies believe they can compete with rate caps, surely the largest companies in the industry with the largest economies of scale can compete too. They might make less profit, but they can still viably operate.
Here is the reality. We have a totally free competition today without any rate caps at all. What does the market look like? Most payday lenders charge a dollar figure between the high teens and the low- to mid-$20s for a $100 loan all in, all charges. Rentcash charges around $50 for the same loan. I have provided the clerk with copies of loan agreements, if you want to compare them.
The facts are these: Most companies charge the going rate of $35 if you bounce a cheque; Rentcash charges $125. Rentcash forces you to sign a document waiving your right to include your loan if you declare bankruptcy. They make you sign a document that gives Rentcash the right to seize your property, including your car, if you do not pay back your loan on time. They make you sign a document that gives them the right to call your employer and demand money if you miss your payment. These are exactly the kinds of practices the provinces want to stop.
I have provided a transcript of an investigative report by City TV in Alberta that found Money Mart charged $17 for a loan of $100, Cash Money charged $20 — both members of the CPLA — and Rentcash charged $52 to borrow $100. That is free market competition today without rate caps.
I raise this issue so that honourable senators are not misled by false and well-articulated arguments to protect market competition. The amendment they will propose to you would remove the requirement that provinces must set a cap on fees. We need a cap on fees, not to distort the industry and not to kill competition; the cap must be high enough to allow real competition.
Rentcash is not worried about market competition or monopolies. They are worried about rate caps that prohibit $30, $40 or $50 for a loan. It is profit instead of consumer protection. When the rest of the industry charges in the high teens and the low- to mid-$20s, I say we must protect consumers from companies that will gouge them with high fees. That is the whole point of regulating the industry, to protect the consumer.
The CPLA believes that consumers are best served by a competitive market that allows for free market competition. We believe the provinces understand the principles of competition. Provinces do not want a monopoly, but they do not want their customers getting gouged, either. They understand the political and public policy realities surrounding the rate.
I will quote from a consultation document that the Province of Ontario shared with us two weeks ago. They say their objective in regulating the industry is to:
. . . design a regulatory approach that achieves a balance between protecting vulnerable consumers and maintaining an environment that permits responsible business operators to thrive.
They get it. Honourable senators, all the provinces get it.
The final issue I would like to raise today is the matter of Senator Plamondon's former bill, known as Bill S-19. We agree that a debate on the maximum interest rate in Canada and its effects on all consumer institutions, including banks, trust companies and consumer lenders, such as The Brick or Future Shop, should be considered, but it should be considered separately from Bill C-26.
The objectives of Bill S-19 are fundamentally different from what Bill C-26 allows for today. Bill C-26 specifically deals with the payday loan industry, while Bill S-19 would have affected every consumer lender in the country.
Bill C-26 allows for immediate action and consumer protection by provinces, while the principles of Bill S-19 would require several months, even years, of further interventions and debate. Bill C-26 is well known by the provinces, and almost all provinces are already moving to implement it. It has been gaining public support by most provinces. The bill, when passed, could mean real consumer protection within 90 days in some provinces. This is real, this is immediate, and it effectively addresses the issues around regulating the payday loan industry.
The principles of Bill S-19 will require more study to assess their full impact. For instance, in some cases, entire lending instruments such as bridge financing from banks and credit unions would have to be completely overhauled.
I ask you, honourable senators, to recognize the simplicity and importance of Bill C-26. It has received support of Liberals, Conservatives and New Democrats in the House of Commons. It has the support of almost every province in the country; and those who do not support it are not required to implement it.
This is a fundamental and important piece of consumer protection legislation, and I ask honourable senators to endorse it. Thank you again for the opportunity to appear before you on this important piece of legislation. I look forward to responding to all and any questions.
The Chairman: Yesterday you heard my questions and Senator Angus's question of the government witnesses with respect to the position of Ontario — the province where you reside and that I represent.
You heard evidence that the Province of Ontario had a concern about this particular bill. They chose a different method. Do you have any insight on where the Province of Ontario stands with respect to the underlying policy of this bill, to which they appear to object?
Mr. Keyes: Yes, we do. We met a couple of weeks ago with representatives of the Ontario government. Mr. Bishop and I also met with the Minister of Government Services about a month ago. We have been in constant touch with them. Perhaps Mr. Bishop can fill in some detail on exactly what was discussed when we were with the Assistant Deputy Minister of Ontario.
Most definitely, their position that this is in federal government hands and they should be the ones to regulate —
The Chairman: That was not the evidence, Mr. Keyes. According to Mr. Jenkins, whom we heard yesterday, the last word he heard was the statement that the Province of Ontario wished that the federal government would regulate the cost of lending for these loans. Has there been any change in their attitude, based on what you have gathered, or is it still the same?
Norm Bishop, Corporate Secretary, Canadian Payday Loan Association (CPLA): I would go back to Senator Angus's remarks about druthers. When we spoke to them two weeks ago, they indicated to us that, in the event Bill C-26 passed, they would probably start stakeholder consultations with industry and consumer advocates as early as this spring on how the regulate the industry and move forward to address what happens under Bill C-26.
They were also actively drafting regulations. They are indicating that they are starting immediately on disclosure of cost of borrowing for the payday loan industry, specifically. They are talking about putting a two-and-a-half foot by two-foot poster in the lobby of every payday lender, so it states clearly the cost of borrowing in dollars per hundred, with all amounts in. Therefore, a consumer can go in and see the information on the wall.
They are also talking about having a standard form of disclosure box on the top of contracts. I believe this all indicates that the Province of Ontario is aware this bill will come through and are looking forward to adopting regulation.
Senator Angus: Mr. Keyes, welcome back to Ottawa. It is good to see you. You have a long record of public service, and I thought your testimony was very clear.
The chairman has covered the Ontario situation. I believe you know we were concerned yesterday that the largest province in the country, which has a major number of people in this business, would not be a player. You are assuring us that, based on firsthand knowledge, they will indeed be a player if this bill becomes the law of the land.
Mr. Keyes: That is correct.
Senator Angus: I have two other questions. First, my understanding is that your association represents 23 companies, but less than 50 per cent of the people in the business.
Mr. Keyes: It is 40 per cent.
Senator Angus: Yes, and I am not sure why. You have been very clear in what you say; you have strong views that are articulately presented; and you have even singled out one of the companies that used to be in the business — a member of your association who is no longer a member. You have been quite harsh with them in terms of what you have told us — that is Rentcash. Could you elaborate?
There is clearly not unanimity in the business among the players. Am I right?
Mr. Keyes: You are absolutely correct. I harken back to when I was approached to take the job as President of the Canadian Payday Loan Association. At first, I was reticent about the idea. It is mired in this perception; it has people thinking that they are just a bunch of loan sharks, who are legally on the street.
It was not until I did my homework on the issue that I quickly learned that there are those respected and responsible lenders, who are part of the Canadian Payday Loan Association — 24 and growing in membership, with more membership applications by lenders asking to become members of our association.
It is these respected and responsible lenders who say there should be rules. We have a code of best business practices, they should be followed. If we break any of those codes, we have an independent ethics and integrity commissioner, who goes out and mystery shops twice a year at about 15 per cent of our membership to ensure there is compliance to that code of best business practices. If they do not act properly or are found to not be following our code, there is a procedure that the ethics and integrity commissioner follows. It can result in fines of up to $30,000 or expulsion from the Canadian Payday Loan Association. That 40 per cent of the industry must follow the code.
As for the other 60 per cent of the industry, I am not saying they all do not follow the code. Many of them may choose not to join an association. They prefer to act on their own, have their own company, do their business and do it well. Many of these businesses are located in rural areas of many provinces in this country where, quite frankly, paying a membership fee or not paying a membership fee makes a difference in their bottom line and their income. They do act properly.
Then there are those out there that have caused this industry to literally be mired in this perception that all payday loan operators and companies are bad, that they are gouging the consumer, which could not be further from the case. That is why I took the job. I feel there is a challenge here to demonstrate that it is the industry itself that is asking to be regulated.
Each person I called in our association said to me, ``Please tell them that we are prepared to take a rate cap. We will operate within that rate cap.'' We even put out a press release not long ago with a fee of $20 on $100; interest, administrative, capital — all costs combined. In Ontario, they said it will go in the window, so people can see how much it will cost to borrow $100.
Senator Angus: If I were to ask what your association would recommend, because Bill C-26 requires that there be a cap stipulated in the provincial legislation enacted pursuant to this enabling legislation, what would you recommend is a fair, reasonable and appropriate cap in today's world?
Mr. Keyes: The membership of the association — all the company owners — came together a couple of months ago in Toronto. When I joined this association, they told me I would never get unanimity from the companies on what the rate should be to lend $100. They range anywhere from $17 and change to a maximum of $26.50. In that range, they have different business models and try to supply 2 million customers out there with short-term loans. They work hard at what they do.
After that one-day meeting, they all came to the same conclusion: We have to get serious about this, and we have to indicate to the provinces that we are credible.
Senator Angus: What is the number?
Mr. Keyes: An appropriate cap is $20. To qualify that, if the industry demonstrates to a province that if it was $21 or $22, the association will not stand up and say, ``You have to stick to $20, you cannot take $22.'' If it can be demonstrated that is what it takes to ensure competition and viability of the industry, but at the same time protect the consumer, then that will be the number. However, it is not a number above $30.
Senator Angus: That is helpful. Now we have heard evidence from many people. You are a very smart man. I have seen you in action before and I respect you. In big organization such as the Royal Bank of Canada, in that ballpark, there are economies of scale, and these big banks can do things cheaper than a small credit union on the corner. In like manner, Money Mart, which is a large American public company — and one of your esteemed members — I am sure, can take advantage of economies of scale much better than a smaller player. Would you agree to that?
Mr. Keyes: Absolutely.
Senator Angus: Of the 40 per cent of the industry that are in your association, are they big and small alike or are they mainly the size of Money Mart?
Mr. Keyes: We have two large companies — Money Mart and Cash Money — and we have 22 of the smallest companies. Many of them are just one-store operations.
Senator Angus: The ones that are not members of your association, how many of them were, at one time, members of your association?
Mr. Keyes: I can only say from my experience thus far, I know of just one. How many more, Mr. Bishop?
Mr. Bishop: I couldn't say. Maybe there are two.
Senator Angus: It is not five or 10. Is it Rentcash Inc. and maybe one other?
Mr. Keyes: That is correct.
Senator Angus: We are concerned, although I do not want to speak for everybody, about the people at Rentcash Inc. — and I am mentioning the name because you did; you singled them out particularly. They came to us earlier in those other hearings that we had in our consumer study, telling us that there is an association, which they are a member of, and that they want regulation; they want Bill C-26. They are here, so they will tell us.
Did they get kicked out? Did they get fined $30,000? Why are they no longer in your association?
Mr. Keyes: I am not in the practice of saying why a member is not in the association.
Senator Angus: Did they leave voluntarily?
Mr. Keyes: They left on their own accord. They decided not to be a member. It is better left as a question for your next witness than for me to guess.
Senator Angus: Mr. Keyes, there is that 60 per cent of the industry that are not members of the association. As you say, they all have their own reasons, and one of the reasons might be the cost. What is the cost of being a member of the association?
Mr. Keyes: It is $1,000 for a year per outlet, paid quarterly.
Senator Angus: The issue of competition has been raised, and you have addressed it in your opening remarks. I would like to hear more on that because this law provides for appropriate legislation to be enacted by the provinces as a precondition of these people getting an exemption from the Criminal Code.
Would it be fair to say that an appropriate framework of regulation designed to protect the consumer would provide for some promotion of competition? Putting it the other way, would it inhibit restriction of competition?
Mr. Keyes: That is a good question. I have travelled to each of the provinces, B.C., Alberta, Manitoba, Ontario, Nova Scotia, New Brunswick and about to go to Saskatchewan. We are going to New Brunswick again in a week and a half. In each one of these provinces, we met with both the legislative representatives and the public servants — sometimes separately, sometimes in the same room — and, I can assure you, that just as a matter of public policy, just as a matter of pure politics, to be quite blunt, they get it. They understand that in order to ensure consumer protection, they will put the measures in place. Will that also include a rate cap? That is what this legislation says it must do, so the rate cap will be there.
In addition to that, they also understand — and this is where I am encouraged — this must be a viable and competitive industry. Otherwise, if it is not, if that rate is not set at the appropriate level so as to not gouge the consumer but at the same time ensure viability and competitiveness, then we end up with a monopoly.
Senator Angus: You might get a raise.
Senator Moore: Thank you both for appearing today. I believe that you have partially answered my question. I was interested in your comments on both Manitoba and Nova Scotia, which are the two provinces with legislation drafted and ready to go should this bill become law.
Mr. Keyes: Yes.
Senator Moore: I am from Nova Scotia, so I would like to ask you about that. When you met with Nova Scotian legislators and public servants, did they ask you for a copy of your CPLA membership rules? What kind of assurances do you give them as to your organization's enforcement of your membership rules?
Mr. Keyes: The short answer, Senator Moore, is that we are completely transparent as an association. We have a website, which can be found by a simple search for ``CPLA.'' That will take you directly to the Canadian Payday Loan Association website where our mandate is described, our members are listed and also the name of the ethics and integrity commissioner. It also lists the 18 points of the code of best business practices. It also states, Mr. Chairman, for your interest too, the Environics Research Group study and the Ernst and Young study on pricing and other completed studies. As well, there are excerpts from newspaper articles and media releases. We direct them initially, on the first phone call before we go down, to have a view of our site and, if they have questions, I am available at a moment's notice.
Senator Eyton: You referred to ``the code of best business practices.'' Might we have a copy of that? Does it include any limit on the cost of borrowing?
Mr. Keyes: Yes, we will provide you with copies. It is also on the website.
The Chairman: Yes, it is on the website. Please give us that and any other material related to your ethics and integrity commissioner and how your system works. All of that information is highly relevant to the testimony you have given.
Mr. Keyes: In response to the second part of your question, senator, the cost per hundred is determined by each and every company separately. I am the CPLA president and each company determines individually how much they charge.
Senator Eyton: You said a $20 charge per $100 loan. What is the time period for that?
Mr. Keyes: That is in the initial discussions that we have had. We know that the provinces have indicated that whatever they do when it comes to a response to Bill C-26, it will probably be renewed at least every two to three years.
The Chairman: Senator Eyton did not ask about when the rate would be renewed. Rather, he asked about how long the loan is at the rate of $20.
Mr. Keyes: I am sorry. That is the figure for a $100 loan that traditionally goes 10-14 days.
Senator Eyton: Perhaps I could address that further.
Mr. Bishop: The average loan is for 10 days. Governments recognize the fact that, because the loans are so short, it does not make sense to tie it to a term because the cost of giving a five-day loan or a 10-day loan is the same, even though the term is twice as long. The cost that we expect the government would set would be for the loan because the loans cannot be longer than 62 days under the proposed legislation. It is not tied to a period of time.
The Chairman: Mr. Keyes and Mr. Bishop, thank you.
Mr. Keyes: Thank you for your time.
Senator Angus: Mr. Keyes, if you have additional comments for the committee, please feel free to send them along to the clerk of the committee.
The Chairman: If you have any response to other witness questions or evidence, please respond to the committee in writing. We want to ensure that we have a full picture of all the facts.
We are delighted to welcome our next witnesses from Rentcash Incorporated, Mr. Michael Thompson, Vice- President, and Mr. Michael Teeter, Consultant. That is a historic name if you are in the polling business — I remember the name well. Please proceed with your opening statement.
Michael Thompson, Vice-President, Rentcash Inc.: Thank you, Mr. Chairman. We met with many of you in advance of today's meeting. To those we spoke to and met with and to those who have read the materials, thank you for your attention to our concerns. We believe that these concerns are in the public interest.
We ask that the committee recommend a couple of amendments to Bill C-26. Let me state clearly that we do not oppose Bill C-26, its objectives or its intents. Rather, we ask that it be refined to lead to better legislation.
We ask that the word ``shall'' be changed to ``may'' in proposed new sections 347.1(3) and 347.1(4) of Bill C-26. We believe that if these changes are made, the Governor-in-Council will have more discretion to ensure that recipients of payday loans are protected in provincial regulations. If these changes were made, the Governor-in-Council would have more discretion to ensure that the provincial regulations do not unduly restrict competition or consumer choice. I state categorically that we are not opposed to rate caps.
Additional strength to this measure could be achieved by a further amendment to proposed new section 347.1(3) to make transparency, competition and consumer choice preconditions of provincial designation.
It appears that the government has accepted, in principle, the need for competition and transparency in consumer choice by virtue of Senator Eyton's opening statement at second reading. We are grateful for the senator's good work in this area. This outcome is in the public interest. We were disappointed that, despite the senator's remarks, government representatives did not mirror that in their comments yesterday.
We believe these verbal commitments in favour of competition and consumer choice and the ability of the Governor-in-Council to rescind provincial designation if these conditions are not met need to be followed up by formal recognition in the statute. This could be achieved by the amendments that we recommend today. It is only through statutory amendment that these verbal commitments can be guaranteed.
Last year, your committee recommended that the government study the payday loan industry; you pointed out a lack of government understanding of the industry and its customers. To our knowledge, this study has not been done federally or provincially. It is difficult, if not impossible, to effectively regulate an industry to ensure continued competition and consumer choice without an understanding of the industry and its customers. Given the importance of Bill C-26 to the entire regulatory framework of this industry, we hope that the committee will give due consideration to our recommendations.
Michael Teeter, Consultant, Rentcash Inc.: We had the good fortune of being able to listen to other testimony before we had to appear. I will relay my reaction to the comments of the government official yesterday. In essence, he said nothing that assured us that our request should be changed. In fact, I would say that he reinforced for us the need for this committee to consider the small amendment that we ask to be made.
When Bill C-26 was before the House of Commons, considerable discussion was had and commitments made by parliamentary secretaries, ministers and others for the federal cabinet to clearly have a role in this process; to ensure that the words in the bill to protect consumers and establish limits and so on are represented and honoured by the provincial legislation that they are being asked to designate.
Also, Senator Eyton took that further by suggesting that competition and transparency were principles that should be considered in the designation process. Also, particularly in the House of Commons and in the Senate, there was discussion about the role of the Minister of Industry and how the Minister of Industry had an obligation to actually look at these designation plans, these regulations, and decide whether to recommend to the Governor-in-Council that they be approved or not.
We heard no references at all yesterday to these points by officials. In fact, officials said their job really was just to take whatever the provinces requested and basically rubber-stamp it. We are not assured by what the officials said that what is represented in the House and the Senate will, in fact, be the practice.
We feel that with this small statutory change, instead of making it mandatory for the cabinet to approve, it gives the cabinet the discretion to say: Maybe things should be changed a little bit because we have heard from some people that it will restrict choice or that the rules will not enhance the competitive framework. It will give the cabinet the chance to do that. Nothing has changed in our views.
I will pass it over to Mr. Thompson in terms of the CPLA.
Mr. Thompson: There are so many allegations levelled against my company; I did not have a chance to write them all down.
The Chairman: If you want to deal with them one at a time, give it to us in writing and we will take that into account. We are trying to be open-minded about this. When statements are made by one witness, we want to ensure that the other witnesses, who are the subject matter of their comments, have an opportunity to fully and adequately give their views. Please respond. You can give us a sense of what you want to say, but give us a detailed response to all the questions or statements made about your company that you disagree with and we will take them into account.
Mr. Thompson: All I wanted to say, Mr. Chairman, is if you feel that those comments are worthy of significant consideration, I would be happy to bring my CEO back to address them directly.
The Chairman: Please do so in writing.
Senator Meighen: Mr. Thompson, I have a piece of paper in front of me that states: Michael Thompson favours rate caps; Michael Thompson waivers on rate caps; Michael Thompson opposes rate caps. I heard you say you are in favour of rate caps. Is that correct?
Mr. Thompson: I have never argued against rate caps; that is correct.
Senator Meighen: Are you in favour of them now?
Mr. Thompson: That is correct. Let me restate. We are in private industry.
Senator Meighen: You would rather not have them, but you are not opposed.
Mr. Thompson: We would rather not have them, but we recognize the public policy constraints, so we accept them.
Senator Meighen: You suggested we change the word ``shall'' to ``may'' in proposed new section 347.1(3). Is that correct?
Mr. Thompson: That is correct.
Senator Meighen: Is it proposed new section 347.1(3) or proposed new section 347.1(4)?
Mr. Thompson: It is in both proposed new subsections.
Senator Meighen: Both in terms of revocation and exemption?
Mr. Thompson: Yes.
Senator Meighen: It is not obligatory.
Mr. Thompson: I have been an active proponent of this bill. I was the president of the Payday Loan Association before I came to Rentcash.
For some time after the bill had been introduced, it appeared that all provinces were going in a direction that would involve a broad consultation of the industry, such as the case proposed in Manitoba and Nova Scotia, which I believe is the right way to go.
Some other provinces are looking at setting the rates through a regulatory instrument as opposed to public process necessarily. Through some of my discussions with officials in the Province of British Columbia, I became very concerned about some proposed rate formulae that they had proposed some months ago. Based on the formula I had seen and my verification that the province would likely use that as the basis for their initial consultations, I felt a significant portion of the industry could be squeezed out — including possibly our company — by the formulae they had proposed.
If they stuck to those formulae and the designation process is in place, as it is presently written in Bill C-26, basically that means that the province could come up with a rate structure that would exclude a large chunk of the industry. They would propose it to the federal government and the federal government has some obligation to approve that. In my opinion, and I believe that of many others, the federal government has some obligations in the area of competition to ensure it is properly promoted and respected. I believe that the designation process outlined in Bill C-26 may undermine that obligation.
By changing the word ``shall'' to ``may,'' we are saying there should be something in the statute that says that the Governor-in-Council has a discretionary power. In having that discretionary power, the Governor-in-Council would then be able to address the many issues, which several of you raised yesterday, in regard to the list of items and concerns and areas of obligation that the provinces would have to address.
To give you an example, the Province of Ontario is now proceeding with its own regulatory framework outside of the ambit proposed by Bill C-26. They are focusing exclusively on the area of disclosure, and, for the most part, we support the proposals they have made.
I asked the officials in that province: Why are you not dealing with the issue of rollovers, which has been identified as one of the most egregious issues in the industry? What will you do about that? They said they will not do anything; they will just leave it.
Our company, along with members of the CPLA and other members of the industry, has gone through quite a bit of pain to implement that rollover policy to protect consumers. We believe it should be in there and that the federal government should oblige a province to have a rollover provision in their consumer protection framework.
Officials have told you, in a very loose way, that there is some type of consensus about how that consumer protection framework should look, but it was not clearly articulated yesterday. I could not see how that consensus would look. For the most part, it actually reflects the provisions in the Canadian Payday Loan Association code, but there is nothing in terms of provincial or federal statute or guidelines in which this is codified. There is nothing codified with respect to an obligation to preserve competition.
It is a federal obligation. If you look at the designation and the way that statute is written, it could actually exist in perpetuity. One government could come in, implement a particular framework; then there is an election and another government comes in and changes the framework, specifically in the area of rates. However, because they already have the designation, there is no need to have any further oversight of the approach that they take.
In my opinion, the objective and the intent are good, but the legislation is kind of sloppy. The amendment we have proposed is the simplest one we could come up with that would allow the amendment to be put in the act in the most expeditious fashion possible without coming in with new preambles or clauses. We feel that if we change that one word, we could address this serious concern that could be dealt with quickly.
Senator Meighen: As I understand, that would, in your view, cover the requirements that Senator Eyton alluded to in his second-reading speech.
Mr. Thompson: I believe so.
Senator Meighen: What would be the result of different provinces legislating different regulatory regimes? It will inevitably be a patchwork. Will that lead to jurisdiction shopping, and is that good, bad, or indifferent in your industry? How do you stop patchwork legislation, if you want to?
Mr. Thompson: Generally speaking, in the area of business regulation, consistency is good. It is more efficient. It is easier to keep on top of matters. Patchworks can create problems because everyone is always checking out what everyone else is doing, and they are refining and changing and so on.
We have to be realistic about Bill C-26. It is a compromise that was arrived at because outside of disclosure provisions, the provinces and the federal government could not agree on an approach.
You heard yesterday about the federal obligation in the area of interest rates and so on. As you can appreciate, because we have, for the most part, a free market-oriented government structure in Canada, the federal government did not want to get into the world of setting rate caps. They appointed the responsibility to the provinces. We accept that because in the long run some type of regulatory certainty for the industry will be good. This is an option. It is not the best option, but we accept it. We would prefer not to have a patchwork. That is a long answer, but there are a number of complicating factors.
Mr. Teeter: There is a business principle we all know about. If we had one system operating in all 10 provinces, we would obviously be a lower-cost provider than if we had 10 different systems in 10 different provinces. Since the objective of this is to reduce the cost to consumers, obviously one system would be in the consumers' interest, but the federal government has decided against that. It is self-evident that one system would be more efficient.
Senator Meighen: A large number of industry participants are not members of the Canadian Payday Loan Association. Your company is one of them.
Mr. Thompson: That is correct.
Senator Meighen: Can you tell us why the association does not include all or most of the industry?
Mr. Thompson: I can tell you why we are not a member of the association. This was not a decision that was mine to take. There was a feeling in the leadership of our company that the association was primarily focused toward the interests of one or two companies, which did not include our interests, and that was reflected in the composition of the board of the organization.
You earlier asked a question about how many members used to be part of the association. There used to be 90 members and now there are 24 members.
Senator Meighen: Mr. Keyes indicated there were 24 members, with two very large members.
Mr. Thompson: Yes.
Senator Meighen: What percentage of the CPLA would those two large companies represent?
Mr. Thompson: I can only tell you based on what the association looked like prior to my departure last fall, but at that time, Money Mart represented, I believe, 350 outlets. Cash Money represented about 90 outlets. That is about 440 outlets, leaving the other 22 members or so comprising 64 companies.
Senator Meighen: They represent 440 outlets; how many do the other 22 members represent?
Mr. Thompson: They represent about 60 companies. One company represents 15 outlets; another represents about 10 outlets. You can determine what you want from what I have said.
Mr. Teeter: Clearly, the vast majority of the revenues of the CPLA would be from those two companies.
The Chairman: I have another statistical question. We had previous evidence that the size of this industry was growing at the rate of 20 per cent to 35 per cent or 40 per cent a year and that the number that we had first seen was $5 billion, moving upward since the inception of the business. Yesterday, the evidence we received from the government is that it was $1.7 billion. That is a huge difference, yet we have the evidence this morning that the number of people who require this service is 10 per cent of the population. We are trying to look at the scope of the business and the scope of its problems.
Do you have any sense of the size of your business? I know it is anecdotal, but we do not believe the $1.7 billion. We believe the $1.7-billion number seems low, but we have no support for those statistics.
Mr. Thompson: There are a number of elements to your question. The best way to address them would be to briefly speak to several established economic trends. The other one would be to speak about our company in particular. I will do it in reverse.
We in fiscal year 2005 had a loan volume of $550 million. We have 350 stores. Our own growth projections at the present time are roughly two to three stores per month. Within that growth framework there would be some consolidation.
Our own growth projections as a company for the next several years are not large or overly ambitious by any means. There are a number of reasons for that. One is that we view the level of market saturation as being sufficient to slow our rate of growth. In prior years, we grew at a much more rapid rate.
On the economic trends, CIBC has reported over the past few years, and they base their reports on Statistics Canada data, that the household debt ratio in the past year grew from 117 per cent to 122 per cent in a 12-month period. There have been a number of studies on the consumer and more on the business side in regard to household spending patterns. It is a clearly established fact in Canada that the majority of households now spend in excess of their annual revenue. The projections on the percentage vary a little bit. This is a trend that Canada is slower to get to. Other countries, such as the U.K. and the United States, have preceded us in this regard. You will note that the industry in the United States is quite large. There are about 22,000 payday outlets in that country. The consumer debt problem in the U.S. is much more severe than it is in Canada. However, here, there is a clear trend that people spend more money than they earn, across income categories. At the end of the month, once they take into account all their debt- management payments, their disposable income has been eroded, and they need money to get them from one payday to the next. It is an economic fact. That is why the industry is growing.
The Chairman: If you do $5 billion a year, what percentage of the entire business do you represent?
Mr. Thompson: By store count, we represent about 25 per cent of the market.
The Chairman: What about volume?
Mr. Thompson: In volume, I do not know.
The Chairman: If we took your criteria, it would be more than $1.7 billion to represent 20 or 25 per cent, and your volumes are not fixed. Clearly, we are north of $2 billion.
Mr. Thompson: That is fair. Our own company — and it actually speaks to issues related to our rates — is young, only five years old. A significant portion of our stores are not yet operating at what we would describe as a maturity level. We expect that they will grow to that level. Even if we stabilized and did not expand our number of stores, we would expect that over time our loan volumes will increase.
Senator Moore: I want to follow up on the chairman's question.
Mr. Thompson, you say you were the president of the association until last fall?
Mr. Thompson: That is correct, until last fall.
Senator Moore: Did you not keep track of the numbers? How is it that we do not know? The chairman mentioned we heard over $1 billion and $5 billion repeatedly in evidence over the past months. When you were the president, did you not have some type of accounting or an indication from your membership as to their total volume?
Mr. Thompson: As you may have judged by some of the earlier comments, there is a lot of competition within the association. That type of information would not typically be shared with the CEO. The $1.7-billion number, I believe, can be attributed to Chris Robinson, an academic at York University. He is the only person, as far as I know, who has done any concerted economic analysis of the industry. I cannot say I agree.
Senator Moore: Where would he get the numbers? Would he not have to come to your association?
Mr. Thompson: I would say that based on the way he has put his documents together, he would have taken information from those documents that were available from the publicly traded companies in the industry in Canada, which would be Money Mart and Rentcash, and done some projections. I cannot speak to his mathematics, but when I look at the rates that he proposes, I do not believe his mathematics are very good.
Senator Moore: Do you believe he is low?
Mr. Thompson: I do not know how he came up with his numbers.
Senator Moore: We were told, yesterday, by government officials that they have had extensive consultations with the provinces to arrive at a stipulated list of criteria that would enable the federal government to consider a province to have met the measures to protect the recipients of payday loans. You do not seem to take comfort from that.
Mr. Thompson: I was dismayed that the officials were not willing to clearly articulate for you a list they believe should be taken into account. They talked a lot about consensus and talking back and forth, but they did not give you anything specific.
Part of the objective of this legislation is to achieve regulatory certainty. As has been discussed, the absence of an appropriate regulatory framework has led to a number of complications for consumers, the industry and provincial regulators. Without any criteria clearly articulated, I feel that puts the Governor-in-Council in a bad spot. It is not good for industry, as far as I am concerned.
Senator Moore: I do not believe, as a result of their consultations, it was quite without form or as loose as that. You raised the important matter that the rollover provision must be included. Maybe we can write to the government officials and ask whether or not there is one. I realize they look at this as a provincial jurisdiction and say they cannot set the rules, but we have talked to the provinces and territories and have an understanding that they agree what will be the basic rules that we would consider appropriate to protect the consumer. Let us find out whether or not that rollover provision is one of the items we can write to them about.
The Chairman: I may be wrong — and Senator Angus can comment on this — but my understanding of the witnesses on the government side was that they were not entering into appropriating responsibility that they felt was more properly at the provincial level. They listened carefully; they received the documents; and they had a long list. The Province of Nova Scotia had a long list of principles they were intending to adopt in the legislation and that was to be covered by their regulatory regime. I sensed reluctance on behalf of the officials and the government to go further other than to prod them to come up with a piece of legislation that would cover off the jurisdiction. It struck me that they were not prepared to go further.
Senator Angus: Judging from what I have heard and knowing already the two bills that have been drafted are almost identical, the industry is very good at making their points when this legislation gets drafted. It will be harmonious. There is no reason for any province to come up with something different. I do not feel you need to worry about that.
The Chairman: Have you seen the legislation from the Province of Nova Scotia?
Mr. Thompson: Yes, I have seen legislation in the Province of Nova Scotia and in the Province of Manitoba.
The Chairman: Are rollovers included in that?
Mr. Thompson: They do not refer to it as such, but there are provisions in there to protect them. In the Province of Saskatchewan, they have circulated draft legislation that I consider quite favourable. Basically, it comes down to the fact that there are three components to this legislation. One is the licensing regime, which enables the government to keep track of the industry, and we are totally fine with that. The second is the consumer protection regime. I agree with the officials that the criteria that provinces should adhere to are pretty well agreed upon.
The third component, and this is the most fundamental part for the industry, is the rate regime. As far as I am concerned, providing a province engages in proper measures to ensure that they come up with a rate cap that allows for new entrants, allows companies to operate at different stages of development, we are fine with that. The evidence before me, so far, is that provinces are not moving in that direction. I do not believe there is a safeguard in the bill to prevent them from allowing a monopoly to be created or potentially restricting the market to very few participants and giving them a distinct competitive advantage over others. The rate regime should take these issues into account, and the legislation should include a safeguard. That is why we have proposed the amendment.
Senator Angus: When Rentcash resigned from the association, were you the president of the association?
Mr. Thompson: No. I left the association and then the company departed shortly thereafter.
Senator Angus: When you left the association, you went straight to Rentcash?
Mr. Thompson: That is correct.
Senator Angus: Mr. Teeter, you are not an employee or a director. You have been hired for the purpose of this bill. Is that right?
Mr. Teeter: Correct. I am a consultant.
Senator Angus: With respect to the cap, I believe your testimony was that, in a perfect world, there would not be one. However, you recognize from a public policy point of view, it makes sense to have it capped. I read in an article in The Toronto Star of May 30, 2006 that you, as the president of the association at the time, felt that the fee cap should be set high enough to allow payday loans to operate at a profit and that it should be left up to consumers to shop around.
I am asking what you consider, at this point in time, would be an appropriate cap.
Mr. Thompson: Presently, our total fee structure works out to about $21.60 per $100, if you were to express it that way. Obviously, we would want the cap to accommodate our charges.
I say this categorically: I personally have written to officials in all provinces saying we support consumer protection, and we are more than happy to open our books in camera to have our costs and structures verified.
Senator Angus: My question was pretty clear. Mr. Keyes gave us a direct answer. Do you agree that $20 per $100 is agreeable?
Mr. Thompson: We charge $21.60 roughly, so we feel the cap should accommodate that charge.
Senator Angus: That would be an appropriate cap. I thought you said it was your cost structure.
Mr. Thompson: No.
Senator Eyton: I would like a better understanding of the market itself. We heard about the 40 per cent of the industry represented by the association and the two big players there. You guys are a big player. Who are the top four or five players in the industry, and what kind of percentage do they have in the marketplace? I guess we are calculating according to locations and numbers of stores.
Mr. Thompson: Just because my memory is not that good, I would not be able to give you the specific names of these companies. There are a few companies in the industry that might have as many as 25 or 30 stores. That might be three or four different companies. The main three players are the ones we discussed today: Money Mart, Cash Money and Rentcash. We represent about 60 per cent of the industry.
Senator Eyton: Bill C-26 came about through prolonged discussion and consultation with the provinces and the federal government. You have suggested a change here; a very simple change, easy to make. Do you have any idea how that change would be welcomed by the provinces and the territories?
Mr. Thompson: My guess is that they would not be that responsive. We are wading into the world of federal- provincial dynamics. There is a federal statute, and it is a federal obligation, so I believe the federal government has an obligation to act on its obligation. I do not know how the provinces will respond. Generally speaking, in the Canadian dynamic, provinces will do what they want to do. I feel there needs to be some type of safeguard in place.
Mr. Teeter: We learned, yesterday, that the officials simply do not know where the provinces are. You asked some or all of them to appear. I believe we had comments from two provinces that have legislation in place. An accurate answer to that question, Senator Eyton, is they have not been asked.
The Chairman: I will conclude, but I would like you to respond in writing to this question. There is another way of dealing with the issue that you suggested, and I am not sure what is appropriate or whether or not we will accept your suggestion. This committee is of an open mind. We are looking at the evidence and the issues. We have other evidence to come now from the consumers as well as from the Competition Bureau. We will be very interested to see what they say about the questions and the principles you raised.
One suggestion is that the federal government, instead of vacating the field, might establish a principle to take back the jurisdiction based on some general principle that consumer interests were not protected. This would give the government the right to withdraw their approval as opposed to vacating the field subject to the legislation. Would you give consideration to that as an alternative to your proposal?
Mr. Thompson: I will do that.
Senator Angus: We can make Senator Plamondon the ombudsperson for the industry.
The Chairman: Thank you for appearing. Thank you for your patience.
The committee adjourned.