Copyright 2011, Blake, Cassels & Graydon LLP
The federal government announced that two new regulations have been proposed that would apply to some of the financial products and services offered by federally regulated financial institutions.
- The Access to Funds Regulations would reduce the maximum cheque hold period for consumers and small and medium-sized businesses.
- The Negative Option Billing Regulations would require financial institutions to obtain express consent from consumers prior to providing a new primary or optional product or service.
The proposed regulations will be published in the Canada Gazette on March 12, 2011, followed by a 30-day comment period. Given the government's focus on protecting consumers, depending on the feedback – although we understand that the proposed regulations have been the subject of pre-publication consultations – the regulations could come into force as early as this spring.
This bulletin summarizes the proposed regulations and highlights the impact on our financial institution clients and how they can prepare for the implementation of the new requirements.
Access to Funds Regulations
Once in force, these regulations will repeal the existing Cheque Holding Policy Disclosure (Banks) Regulations. The new regulations will apply to regular paper-based cheques, drawn on a financial institution located in Canada, issued in Canadian dollars and deposited in Canada in a retail deposit account or to a deposit account held by an "eligible enterprise" (the definition of which includes most small and medium-sized businesses). Notably, unlike the existing regulations, the proposed regulations do not apply to cheques drawn on an institution's branch outside Canada.
Financial institutions will be required to:
- reduce the maximum hold period for cheques of $1,500 or less from the current period of seven business days to four business days (the hold period may remain seven business days for cheques over $1,500); and
- regardless of the hold period, make the first $100 of all funds deposited by cheque into a retail deposit account available for withdrawal immediately (if deposited in person) or on the next business day (if deposited in any other manner).
We understand that the reduced hold period is meant to be reflective of the shorter cheque-clearing process now in effect at the Canadian Payments Association.
The hold periods (of four or seven business days) start running after the day of the deposit, if the cheque is deposited in person at a branch, or after the first business day following the deposit, if the cheque is deposited in any other manner. For example, the hold period for a $1,000 cheque will be four business days. If the cheque was deposited in person on a Monday, the hold period would begin running on the day after the deposit, which would be Tuesday. If the cheque was deposited into an automated banking machine on a Monday, the hold period would begin running after the business day following the deposit, which would be Wednesday.
Regarding deposits that are not made in person, the hold period begins running after the business day "following the deposit". We take this to mean "following the deposit being received by the institution", though the regulations do not make this clear. Presumably, if a cheque is mailed to an institution for deposit, for example, the hold period would not start running until after the business day following the date of receipt of the cheque by the bank.
These requirements will not apply for: (a) a deposit that a financial institution has reason to believe is being made for illegal or fraudulent purposes; (b) an account that has been open for less than 90 days; (c) a cheque that has been endorsed more than once; or (d) a cheque that is deposited six months or more after it was dated.
If an institution refuses a withdrawal for one of these reasons, it will have to provide written notice to the depositor of its refusal, which notice must include a statement that the depositor may contact the Financial Consumer Agency of Canada regarding complaints.
There is also an exception to the hold period require-ment for cheques deposited by an eligible enterprise if the financial institution has reasonable grounds to believe that there is material increased credit risk.
The requirements in the proposed regulations with respect to disclosure of a financial institution's cheque holding policy to consumers (and any changes to the policy) are similar to those in the existing Cheque Holding Policy Disclosure (Banks) Regulations. The proposed regulations also require disclosure to the general public, by means of a notice displayed at branches, other points of service and on websites.
Impact on Financial Institutions
From a planning perspective, financial institutions will need to update their automated systems to process applicable cheques and allow withdrawals in the newly prescribed time periods, and train staff on the new procedures.
Institutions will have to update their cheque holding policy accordingly and prepare for the new general public disclosure requirements in branches and on websites. Changes in the policy would have to be disclosed publicly as well as by written notice to retail deposit account holders who receive statements. By way of reminder, if an institution is planning to obtain a consumer's consent to receive electronic documents (in accordance with the new Electronic Documents Regulations coming into force this June), this notice should be included in the list of documents to be provided electronically.
From a risk-management perspective, financial institutions will have to ensure that they are ready to deal with the permitted exceptions to the regulations – such as, when the shorter hold period and immediate $100 withdrawal may be refused. In particular, the determination that there is material increased credit risk in respect of a deposit made by an eligible enterprise is a subjective one to be made by a financial institution. Sample factors to consider in this regard are set out in the regulations, but institution systems and staff may have to make this determination on a case-by-case basis, so the implementation of this element may require significant planning.
Negative Option Billing Regulations
Once in force, these regulations will apply only to a financial institution's products or services used by a natural person for non-business (i.e., consumer and investment) purposes. A financial institution will have to obtain a consumer's express consent before providing the consumer with a new "primary financial product or service" or an "optional product or service".
The term "primary financial product or service" does not include an insurance product. An "optional product or service" is a product or service for which the consumer would have to pay an additional fee and which is available only with an agreement for a primary financial product or service provided by the financial institution.
Consent may be provided orally or in writing, but if provided orally, written confirmation of the consent must be provided to the consumer without delay. The use by a consumer of a new product or service (whether primary or optional) will not constitute express consent.
Certain disclosure must be provided to a consumer before the consumer gives express consent to receive an optional product or service. Such initial disclosure may be a summary of the key information relating to the product or service (such as term and charges) and may be provided orally or in writing, but if provided orally, it must also be provided to the consumer in writing without delay. On a strict reading of this provision, if the initial disclosure is provided orally, a financial institution must also provide the disclosure in writing, even if the consumer did not consent to the optional product or service following the oral disclosure. We presume this is not an intended consequence of the regulations.
There is some additional information which, if not disclosed prior to a consumer consenting to receive an optional product or service, must be provided within 30 days of the consumer entering into an agreement for such product or service.
A financial institution must disclose any changes to the terms and conditions that apply to an optional product or service (note that the disclosure obligations apply only to optional products or services, not primary financial products or services, many of which are addressed in other regulations). Such disclosure must be in writing and be provided to consumers who subscribed to the optional product or service at least 30 days before the change takes effect.
A financial institution must also notify consumers when a promotional, preferential, introductory or special offer for an optional product or service is coming, or has come, to an end, which notice must contain disclosure regarding the charges that will be imposed for the use of the product or service going forward.
The regulations do not expressly provide for a cancel-lation right in respect of optional products or services. However, the regulations do provide that any disclosure statement made in relation to an optional product or service must specify that the consumer may cancel by notifying the institution.
On cancellation of an optional product or service by a consumer, a financial institution must refund any charges paid by the consumer for any part of the product or service that is unused as of the day the cancellation would take effect. This provision does not apply to optional products or services provided in relation to a credit agreement. The Cost of Borrowing Regulations will continue to apply to such products and services.
Impact on Financial Institutions
Financial institutions will have to review their product and service offerings to determine which products and services are considered optional for the purposes of the regulations. Possible examples are credit balance insurance, fraud alerts, overdraft protection, cheque return services and the issuing of paper statements for which there is a fee charged. If an institution continues to offer any such products and services, disclosure, consent and cancellation procedures will have to be put in place, including the preparation of initial and subsequent disclosure statements for each product and service, telephone scripts for oral disclosure and consent, and to deal with cancellation requests, and the training of staff accordingly.
Financial institutions will also have to update their automated systems and train staff (if necessary) to process any refunds of charges on cancellation of optional products and services.
Financial institutions may also want to consider whether some of their products or services that could be considered "optional products and services" under the regulations are features that could reasonably be added to the standard terms and conditions of their "primary financial products or services". If consumers agree to the terms and conditions of such features at the time of purchasing the primary product or service, there would be no need for additional consent when such features become operative.
These regulations will effectively prohibit unsolicited primary products or services (such as unsolicited credit cards), since the use of such products or services will no longer constitute express consent, as it currently does in several provinces.
Lastly, it is notable for insurance companies that insurance products are specifically excluded from the definition of "primary financial product or service". Therefore, there is no concern that the automatic renewal of an insurance policy would be considered a product or service for which express consent must be obtained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.