On September 19, 2014, the Supreme Court of Canada delivered decisions in three related appeals from the Québec Court of Appeal that have come to be known collectively as "Marcotte." These class actions arose out of a very narrow issue concerning the requirements under the Québec Consumer Protection Act (CPA) for the disclosure of foreign exchange conversion charges by credit card issuers. All of the defendant credit card issuers, but for one, were banks, thereby giving rise to the constitutional law issue whether provincial law could apply to the credit-granting powers of banks under the federal banking power in section 91(15) of the Constitution Act, 1867.
Marcotte also considered the qualification of the representative plaintiffs in the class actions and the issue of punitive damages. Those issues are addressed in two of our blog posts, which may be found on the Canadian Class Actions Monitor and the Canadian Appeals Monitor.
The principal case in this trilogy is known as Réal Marcotte v. Bank of Montreal (the BMO Case), which involved nine banks, including the six major banks. The second case, Sylvan Adams v. Amex Bank of Canada (the Amex Case), also dealt with a bank. The third case, Réal Marcotte v. Fédération des caisses Desjardins du Québec (the Desjardins Case), involved a Québec regulated credit union.
The Amex and Desjardins cases dealt with some specific questions that were not engaged in the BMO Case. We limit our comments to the common issues facing the banks in the BMO Case, which are as follows: (i) whether the foreign currency conversion charges are "credit charges" within the meaning of the CPA that must be included in the calculation of the credit rate as required under section 72 of the CPA (which deals with credit agreements); and (ii) even if the charges were not to be treated as part of the credit rate, whether the failure to disclose those charges entitled the plaintiffs to restitution and punitive damages from the banks by virtue of sections 12 and 272 of the CPA.
Some of the banks (the Group A Banks) had for different periods of time not made any disclosure of the conversion charges, whereas other banks (the Group B Banks) had done so. This turned out to be a very important distinction. However, none of the banks had included the conversion charges in the calculation of the credit rate disclosed to their customers.
Calculation of the Credit Rate
The consequence of finding that conversion charges are "credit charges" is that they must be included in the calculation of the credit rate (often referred to as the APR) and disclosed to consumers. One of the problems of such a finding would be that some fees cannot be expressed as an annual rate. On this point, the Court in each of the cases affirmed the reasoning of Dalphond, J.A. in the Desjardins Case in the Court of Appeal – namely, that the conversion charges were to be treated as principal (net capital), not credit charges: "These fees are not charged to access the credit or to guarantee its reimbursement. Instead, they stem from using an incidental service offered to cardholders, much like access to millions of ATMs in foreign countries to obtain local currency cash advances, a service which is also subject to a charge." In endorsing the reasons of Dalphond, J.A., the Court could be said to have tacitly accepted Dalphond's dicta that there may be other charges that should not be treated as credit charges, such as ATM fees and fees for a monthly statement or stop-payment orders. The Court's finding on this issue benefits not only banks, which now have the comfort that some non-interest charges should be treated in the same manner under both the federal Cost of Borrowing Regulations and under the CPA, but also non-banks that issue credit cards in Québec, which now have some certainty that, at least under current law, such charges do not need to be factored into the calculation of the credit rate. If there is a silver lining to be found in Marcotte, then this might be it.
If all the banks had disclosed the amount of the foreign exchange conversion charges, that would have been the end of the matter. By doing so, they would have complied with section 12 of the CPA, which states that costs cannot be claimed unless the amount is disclosed in the contract. However, because the Group A Banks had not disclosed such information at various times, the issue remained whether the plaintiffs had recourse against the Group A Banks under section 272 of the CPA. That section provides consumers with various civil remedies, including the reduction of consumers' obligations, rescission of the contract and punitive damages for failure of a merchant (this would include a credit grantor) to comply with its obligations under the CPA.
What gave rise to the constitutional issues in the BMO Case was whether sections 12 and 272 of the CPA applied to credit cards issued by banks.
First, the banks argued that the doctrine of "interjurisdictional immunity" should render the CPA inapplicable to their credit card activities. Under section 91(15) of the Constitution Act, 1867, Parliament was given exclusive jurisdiction over banking, which is embodied today in various federal statutes, including the Bank Act, the regulations thereunder, and the Financial Consumer Agency of Canada Act. Under the principle of interjurisdictional immunity as expressed by the Court, provisions of the CPA would be rendered inapplicable to the credit-granting activities of banks by way of credit cards if those provisions impaired the "unassailable core" of the federal banking power. However, the Court relied on its prior decision in Canadian Western Bank and held that the doctrine of interjurisdictional immunity must be applied "with restraint" and "should in general be reserved for situations already covered by precedent" – for which the Court noted that there is none – particularly in the current "era of co-operative, flexible federalism." In applying these principles, the Court found that sections 12 and 272 of the CPA "do not prevent banks from lending money or converting currency, but only require that conversion fees be disclosed to consumers" and therefore did not impair "the manner in which Parliament's legislative jurisdiction over bank lending can be exercised." In elaborating on this, the Court stated the following:
"Although the s. 12 disclosure obligations and the s. 272 civil remedies relate to bank lending, these provisions do not in any way impair any activities that are "vital or essential to banking" such that Parliament might be forced to specifically legislate to override the provincial law (Canadian Western Bank,at para. 86). Requiring banks to inform customers of how their relationship will be governed or be subject to certain remedies does not limit banks' abilities to dictate the terms of that relationship or otherwise limit their activities. Similarly, even if foreign currency conversion is accepted as being part of the core of the federal banking power, imposing a broad disclosure requirement for charges relating to currency conversion in no way impairs that power. As such, the CPA does not impair the federal banking power and the doctrine of interjurisdictional immunity is not engaged."
Second, the banks relied upon the doctrine of federal "paramountcy," and argued that sections 12 and 272 of the CPA frustrate the purpose of the federal banking scheme, which has the dual purpose of (i) providing for exclusive federal banking standards that apply across Canada, and (ii) ensuring that bank contracts are not nullified even if a bank breaches its disclosure obligations. On the second point, it must be remembered that disclosure of the conversion charge is also required under the federal Cost of Borrowing Regulations.
In the Court's view, "Paramountcy is engaged where there is a conflict between valid provincial and federal law. In such cases, the federal law prevails, and the provincial law is rendered inoperative to the extent of the conflict. Conflict can be established by impossibility of dual compliance or by frustration of a federal purpose." In applying that principle in the BMO Case, the Court held, first, that in light of the conclusion that conversion charges are net capital, none of the disclosure issues in Division III of the CPA (dealing specifically with credit agreements) needed to be considered in the context of the paramountcy issue. The Court also acknowledged that if provincial law required that conversion charges or interest be calculated or disclosed in a different manner than federal law or if provincial law provided for a different grace period, then it could be said to either result in an "operational conflict" or "undermine a federal purpose of exclusive national standards" (assuming one could be made out), and the principle of paramountcy may make the provincial requirement inoperative. However, in respect of sections 12 and 272 of the CPA, the Court held that those provisions were of the nature of a rule of contract that applies to all contracts governed by Québec law and do not provide for "standards applicable to banking products and banking services offered by banks, but rather articulate a commercial norm in Quebec." In short, the CPA requirements are "contract law," not "banking law."
In response to the second stated purpose that bank contracts are not to be nullified even if the bank breaches its disclosure obligations under the Bank Act, the Court stated that this need not be considered since the plaintiffs sought only a reduction in the amount they were obligated to pay to the banks under those contracts – not nullification.
As well, the Court rejected the banks' argument that because the Bank Act was silent on civil remedies when a contract violated the Bank Act and only provided for administrative sanctions, this meant that consumers were to have no civil remedies.
Implications of Marcotte for Banks
It is very difficult to assess the full extent of the decisions of the Supreme Court because they deal with broad principles, which may be difficult to apply in many situations. Both existing and new products will come under close examination for compliance with provincial law that may apply. In this connection, regulations under the Bank Act may also be more carefully examined to determine whether there is operational conflict that would invoke the paramountcy doctrine.
There also seems to be a greater possibility of provincial legislative oversight. The Québec Office of Consumer Protection may become more active on this front. One wonders whether other provinces will be emboldened by Marcotte to take a greater interest in these matters. It may also lead the federal government to impose even more regulation and increase regulatory oversight in the Financial Consumer Agency of Canada to strengthen and preserve strong national standards for banks.
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