EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, February 12, 1997

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[English]

The Chairman: Bienvenue. Welcome to our committee. Pursuant to the Standing Order 108(2), the Standing Committee on Industry will continue its study of credit card interest rates and matters related to that.

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I'd like to welcome the witnesses. Before I introduce you to the committee members,Mr. Bodnar has an item of business for us, and then we'll return to our activities with the credit cards.

Mr. Bodnar (Saskatoon - Dundurn): Mr. Chairman, on the Bill C-91 review and the minister's appearance before the committee, we had scheduled it for next Wednesday. He is unable to be here next Wednesday because of his commitments as the result of the budget the day before, but he is able to appear on Monday at 7 p.m. before this committee.

The Chairman: Thank you very much. So our first meeting next week concerning the review of Bill C-91, which has been referred to us by the House of Commons, will be Monday, February 17, at 7 p.m., with the appearance of Mr. Manley and whoever else he chooses to have with him.

[Translation]

Mr. de Savoye, I have discussed this matter with Mr. Leblanc.

[English]

Mr. de Savoye (Portneuf): All right.

The Chairman: From the Consumers' Association of Canada we have Rosalie Daly Todd, I believe. Is that right?

Ms Rosalie Daly Todd (Executive Director, Consumers' Association of Canada): Yes.

[Translation]

The Chairman: We welcome from the Association coopérative d'économie familialeMr. Gilles-André Paquin.

Mr. Gilles-André Paquin (Coordinator, Association coopérative d'économie familiale de l'Outaouais): Good day.

[English]

The Chairman: From the Consumer Aid Services of Shawinigan, Madeleine Plamondon. Bienvenue.

[Translation]

Mrs. Madeleine Plamondon (President, Consumer Aid Services of Shawinigan): Good day.

[English]

The Chairman: Do we have, from the Federation of Family Economic Cooperative Associations of Quebec, Mr. O'Narey? Not yet? He may join us. And from Democracy Watch, Duff Conacher is not yet here, as I understand it. So you may have other witnesses.

Now, if I can just say something to the witnesses in the beginning of this, we have in today's format a round table. And what we try to do in the round table, and we've used this more and more extensively in the committee system in the House of Commons recently, is we ask you to make a presentation. You've probably been given some idea, but ten minutes is a good measure of people staying really interested in what you're saying. Then we open it up for discussion.

The members are usually very relaxed about going back and forth and pursuing different issues with you. If a question is directed to you, obviously we'd like you to respond. If someone else is responding and you feel you have something germane to contribute, feel free to indicate to me as your chair that you'd like to do it. So we just don't do it in a linear fashion. We go back and forth a lot and we try to make sure everybody has a chance to participate.

As far as I can determine, the bells going off are for a quorum, which I don't think involves the committee at this time, but every once in a while we are interrupted by the proceedings of the House, so we go with the House.

Having said that, Ms Todd, would you like to begin from the Consumers' Association of Canada with your presentation?

Ms Todd: Thank you very much, Mr. Chairman, members of the committee.

I want to begin with a quotation:

It is customary to begin a presentation of this nature by thanking the committee for extending an invitation to appear before it. At the risk of appearing ungrateful, or even rude, we want to begin by saying that the Consumers' Association of Canada regrets the necessity for its appearance before this committee, or any other committee, on this particular subject.

Those were the words that led into the submission of the Consumers' Association of Canada on credit card interest rates on November 20, 1991, to the House of Commons Standing Committee on Consumer and Corporate Affairs.

At that time it was my hope and that of the volunteers who appeared with me that public scrutiny and government pressure would spur changes within the credit card industry that would result in real competition. We were looking for competition on the basis of rates, not just on the basis of new incentives to win and keep the loyalty of those 50% of consumers who don't use their cards for credit.

As my opening quotation illustrates, by 1991 CAC already was frustrated with the ability of traditional avenues - public scrutiny and government pressure - to effect voluntary change by the credit card industry.

We had made three appearances on credit card interest rates before various committees over the previous five years. In reviewing for our 1991 appearance the presentations made by CAC in 1986 and 1989, we found it distressing to see that very little had changed. We said that only the urgency of the need for consumer relief had increased, along with the frustration of being in front of a committee addressing the same problems.

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In preparing for today's presentation, one of my staff members said, only half jokingly, that all I would have to do was put a new cover on my 1991 presentation.

I do want to take a moment to recap the position CAC took in 1986, 1989, and again in 1991. If nothing else, this should illustrate how little things have changed, despite the good intentions of a number of parliamentary committees.

In 1986 CAC appeared before the parliamentary committee on finance and economic affairs. The issue then, as now, was one of market failure, specifically the failure of interest rates charged on credit cards to respond to falling costs. There is a remarkable similarity even in the numbers for 1986, 1989, and 1991. To quote from our 1986 presentation:

For financial institutions and issues of T&E cards, there can be no real cost justification for interest rates over 18%, more than double the cost of money for those institutions, and we must look elsewhere for an explanation of these high levels.

On the retail credit card side, we said that the comparative data was even more striking. Retail credit cards have been virtually identical in rate from 1986 to 1991.

The explanation CAC gave in 1986 for the failure of credit card interest rates to adjust to the changing market conditions was structural problems in the marketing of credit card services. We characterized it as a non-competitive market, a classic oligopoly generating excessive profits. The tendency was for interest rates to be inflexible on the downward side as costs fall.

That explanation, in our opinion, holds up today, eleven years later. Traditional bank card rates still hover around 18%, despite a record low bank rate. If anything, today's dramatic gap in the spread between traditional bank card rates and the bank rate indicates that the situation has worsened. And retail cards have remained frozen at 28.8% for those same eleven years.

What is new is the distinction I just implied by using the words ``traditional bank card''. In 1992, not too long after the most recent parliamentary committee reported, one bank broke ranks and gave consumers a new kind of card - a ``budget'' card, or lower-interest credit card.

According to Industry Canada's Office of Consumer Affairs, in December 1996 the rates on low-rate Visa and MasterCards ranged between 9.25% and 14.5%. That's the good news. The bad news is that consumers are not switching to the low-interest options. The most obvious explanation is that this is more evidence of the same issue we cited in 1986, 1989, and again in 1991: structural problems in the marketing of credit cards.

If the problem has not changed, neither have the solutions. In 1986 CAC said that our first choice for solving the problem was the introduction of measures to make the market more competitive. We also wanted better consumer information, with all statements showing the current rate and how it is calculated. We supported a standard methodology for calculating the amount of interest charged on part payments, again clearly disclosed. We recommended that the level of charges and other consumer information be prominently displayed in banks and other appropriate institutions.

In 1986 we must have had a premonition, because CAC was uncharacteristically pessimistic about the ability to interject real competition into the credit card market. We went so far as to sanction specific regulatory action: the linking of credit card rates to a moving average of the prime rate.

Three years later, in 1989, CAC appeared before another House of Commons committee. In a case of déjà vu, we again observed that credit card interest rates had not fallen with the bank rate, and we offered the same explanation: the non-competitive market for this service.

We renewed CAC's strong preference for market forces over direct government regulation. We argued that if credit card interest rates continued to be unresponsive to market forces, direct regulatory ceilings might become necessary. We also observed that there had been no action on our previous recommendations endorsed by the House of Commons committee for increased consumer information and a uniform method of interest calculation.

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In 1991 we described Canada as treading water on the whole issue. The bank rate was falling, while bank credit card rates generally remained static at twice prime. Retail credit cards appeared to be immovable. Consumer awareness had not improved across the board, and there was no uniform method among all issuers of credit cards for calculating interest on payments.

That brings us full circle to 1997. The Consumers' Association of Canada still views a mandated cap or spread as a last resort, which could, in the worst-case scenario, mean loss of credit for the very consumers we are trying to insulate from excessively high rates. Instead, we urge this committee to accomplish what others have not been able to: put sufficient pressure on credit card issuers to accomplish the reforms whose need has been apparent for more than a decade.

First of all, credit card information must be simplified and disclosed in a standard manner, which will allow consumers to easily comparison shop. That means, as CAC has argued for the last eleven years, a standard methodology for calculating the amount of interest charged on part payment clearly disclosed. The standard disclosure format should apply to all credit card issuers. It also means that this committee should take a good look at the experience of the U.S. with mandatory uniform disclosure. It's about time that Canada comes up with its own standardized box and other disclosure rules.

The sobering fact is that two out of five Canadians have difficulty reading and with numbers. It is likely that they form a very high percentage of the 50% of all Canadians who don't use the credit card system to their advantage. They need to have the amount they are paying in interest brought home to them simply and clearly in a timeframe that will be meaningful to them.

Secondly, information on low-interest-rate cards and any associated fees should be made available to all consumers who carry a balance for two consecutive months. This information could be added to the credit card statement in a simple, plainly written manner in a typeface that won't strain eyes and the abilities of those who may have literacy problems.

Lastly, there should be disclosure by all credit card issuers of the costs, revenues, and profits from credit card operations. For too long, consumers and government have been asked to trust the issuers when it comes to the same old arguments for sticky credit card interest rates.

CAC wants to go on record as recommending that the Baillie task force adopt the recommendations of the Senate Banking, Trade and Commerce Committee concerning the introduction of competition through foreign banks and near banks.

We would like to close with the words we used in 1991: Thank you for this opportunity to again put forward the consumer position on credit card interest rates. We look to your committee for the kind of tough action that will make future appearances unnecessary.

Thank you, Mr. Chairman.

The Chairman: Ms Todd, thank you so much for coming in. Your presentation was very germane, because what we've asked the witnesses to do is to make reference to earlier recommendations. I'm sure that different members will pursue this with you as we go along.

Ms Todd: Thank you, Mr. Chairman.

[Translation]

Mr. Paquin: Thank you, gentlemen and madame - I see that there aren't many women on the Standing Committee on Industry - for giving us this opportunity to present our views to you.

The Association coopérative d'économie familiale was established in the Outaouais region in 1966 to provide practical services to those experiencing serious debt problems. Our services are greatly appreciated by the various social advocates in the Outaouais, namely the CLSC, youth protection services and all other agencies which help people with debt problems.

We work on a daily basis with individuals experiencing debt or credit problems, with people who are unemployed or separated and who are in dire financial straits. Every day, we deal with people experiencing indebtedness as a result of credit cards. I think we can safely say that we speak from experience.

To assist people, we have developed an educational approach which gives them the skills to gain control of their finances. However, they are sometimes in such dire financial straits that the only solution, which we in this field of work refer to as the ``final solution'', is bankruptcy. Increasingly, this is the route taken. It's unfortunate, but that is what's happening today to real people.

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We come before you today armed with our vast experience and backed by the 40 Quebec consumer associations which supported our call to Minister Manley to place an 8 per cent floating ceiling on credit card interest rates.

This proposal has been on our agenda for some time now. As early as 1992, ACEF Outaouais presented a similar request to other members of Parliament and agencies. In the words of the representative of the Consumers' Association of Canada, the time for action has come. I for one hope that I won't have to make a second appearance before the committee. Some people have been here three times. I hope that this is my first, and last appearance and that the government and members of Parliament will turn their attention to the task of resolving this catastrophic situation.

I won't bother to read the brief that I have tabled. Instead, I will try to summarize it for you in as lively a fashion as possible.

Over the past several months, many people throughout Quebec and Canada have joined forces to demand lower interest rates in the face of the banks' unwillingness to act; interest rates had reached ridiculously high levels in relation to the Bank of Canada bank rate.

As I mentioned, we had already tabled in 1992 a brief calling for lower interest rates, but no follow-up action was taken. We also filed a complaint, or at least we asked the federal Competition Tribunal to investigate the collusion which we felt existed between the major retailers. What explanation can there be for the fact that since 1981, all of the major retailers in Canada have charged the same interest rate, namely 28.8%? If this isn't a case of collusion or a monopoly, I don't know what is. However, the federal Competition Tribunal felt that an investigation was unwarranted.

The members of Parliament who took a stand on this issue last November or December had also observed this state of virtual collusion between the major retailers.

We have also supported on numerous occasions private members bills, including the one tabled by Mr. Paul DeVillers, calling for a ceiling on interest rates.

In 1996, Industry Canada described in its Credit Card Quarterly Report how the difference between the bank rate and that charged on bank credit cards fluctuated between 11.65 per cent and 14.65 per cent. This is far more than the 8 per cent that we are calling for or at least far more than can be considered reasonable. In the case of retailers' cards which as I mentioned earlier, carry an interest rate of 28.8 per cent, the difference is 24.55 per cent. This difference has not changed since 1981.

In this report, the President of the Canadian Bankers Association, Mr. Protti, justified this difference by saying that banks incurred losses as a result of bankruptcies and fraud. Even Minister Manley was not very impressed with these arguments. He shot back that the President of the Canadian Bankers Association didn't understand that consumers were fed up with paying sky-high interest rates and with being robbed blind by retailers and the big banks.

Subsequently, in November, a number of members of Parliament - close to 150 to date - expressed support for a 50 per cent cut in interest rates. They spoke out on behalf of consumers who have had enough with excessive interest rates. Even Mr. Manley expressed similar feelings.

The press release issued by these MPs contained the following statement:

The group feels that the interest rates charged by banks and retailers on credit card balances is excessive and unacceptable. Over the past few days, the prime rate set by major banks has dropped to its lowest level in 40 years.

Meanwhile, credit card interest rates have not budged an inch.

Finally, on November 26, Quebec MNAs unanimously passed a resolution in the National Assembly asking banks and retailers to lower their credit card interest rates by 50 per cent.

Against this backdrop, ACEF Outaouais launched a campaign involving all Quebec consumer associations to bring pressure to bear on Minister Manley to legislate credit card interest rates. As I mentioned in my opening remarks, we have the backing of over 40 consumer associations. Virtually every consumer association in the province supported us. In the Outaouais region, we were backed by unions, popular groups and social welfare agencies whose clients are also battling the enormous pressure of credit card interest rates.

We argued that it was time for the legislator to take action. Meanwhile, the banks responded by saying that low rate credit cards would be offered to consumers. But even then, the interest rate on these cards ranges from 9 per cent to 14 per cent, while annual fees run anywhere between $12 and $29.

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Mr. Bérubé, a financial analyst with Le Devoir, argued that these rates were still high and difficult to justify. In his view, the issue has nothing to do with bank profits. The banks may claim that the average rate charged on traditional cards is currently 17.6 per cent, when in fact they should be explaining why they are charging anywhere from 4.5 per cent to 9.25 per cent more than the prime rate. In his view, it would be less indecent to charge prime plus 3 per cent.

Furthermore, there are approximately 27 different types of credit cards on the market. Consumers are swimming in a veritable sea of plastic. Moreover, there are nine different low rate cards available.

Industry Canada maintains that it is getting out information to consumers in the publication Credit Card User Costs. Just between us, who receives this publication aside from members of Parliament, bankruptcy trustees, the ACF and other consumer groups? It isn't true that consumers receive this publication which would help them to chose a credit card wisely based on the interest rate charged. When we look at what the guide has to say about low rate cards, we have to make some actuarial calculations in order to find out if it is really advantageous to chose the card which has a lower rate, but carries an annual fee. It is ridiculous to say that Industry Canada is keeping the public informed, because this is not true. Only a handful of people receive the guide, not members of the general public.

Two types of services have recently emerged. While some cards carry a preferential rate, they also carry an annual fee. Do you really believe that low-income consumers will be able to afford a $29 annual fee? Industry Canada claims to be concerned about persons on low incomes, but does it really believe that they have $30 to spend to acquire some credit. It's ridiculous.

You are all familiar with the facts surrounding the issue of consumer credit and credit cards. We have drawn up a list which can be found on page 13 of our brief. I think you will find it interesting to see who are our clients are, the real people who come to the ACEF for help. To what extent are credit cards responsible for these people's debt problems? We deal with persons who own between three and five credit cards and who are carrying balances of about $2,000, and sometimes of up to $10,000.

The ACEF does not see people who are well off, but rather ordinary workers, people on low incomes who are waging a daily battle for survival, people who hold down part-time or contract jobs. As a result of cutbacks in the Public Service, there are no longer any steady jobs in the Outaouais region or any steady sources of income. People are forced to work on contract. They don't know what their income will be from one week to the next. Forced to go into debt to survive, they must pay exorbitant interest rates to boot.

These are the facts. In January alone, the situation was worse than ever before. Le Droit reported this story after contacting a substantial number of Outaouais residents. I know that other associations doing the same work as us elsewhere in Quebec and in Canada are encountering similar or worse situations.

Figures released several wee ks ago show that bankruptcies have reached record levels in Canada. The consumer debt ratio has reached a high of 95 per cent, while the savings rate has fallen to a low of 5 per cent. This dramatic situation is unheard of.

The time has come to take action, Mr. Chairman. In closing, I would like to review our recommendations: firstly, we recommend that a ceiling of 8 per cent be imposed over and above the Bank of Canada prime rate; secondly, as a number of consumer associations have suggested - and there are three of them here today - , we recommend that the credit card industry be legislated and regulated.

We mustn't leave this industry any longer in the hands of the banks which earn billions in profits on the backs of consumers. The industry must be regulated. Working conditions, the environment and many other areas are regulated in the name of public safety. In the case of credit cards, I think that regulations are also warranted. We must no longer allow the wealthy to set interest rates without having to comply with regulations of any kind.

Thank you, Mr. Chairman.

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The Chairman: Thank you very much, Mr. Paquin.

Mrs. Plamondon, do you have a presentation for us?

Mrs. Plamondon: Yes, Mr. Chairman, I do.

I would like to thank you for inviting me to appear. At the same time, I have to admit that I am pessimistic about the outcome of this exercise, especially if there are elections in the spring or even in the fall. We agreed to come because it is our duty, but as Rosalie Todd said, the problem of high credit card interest rated has been examined several times and nothing has ever been done about it.

Let me begin by quickly telling you about our organization, which obviously operates on a non-profit basis. We have carried out a number of studies on the subject of credit. We found that initially the goal was to establish credit at any cost, by introducing all types of credit. We discovered that the most serious problem was obviously credit cards.

We examined the issue of credit cards from the standpoint of responsibility, which is borne by consumers, not by the card issuers. One study revealed that credit cards are responsible for many bankruptcies. Moreover, the Superintendent of Bankruptcy had already observed that a second or third bankruptcy was almost always attributable solely to credit cards and that easy access to credit cards was a cause of indebtedness.

Let's look at the issue of responsibility. From an environmental standpoint, if a creditor realizes that land is contaminated, he will have to decontaminate it before selling it. Taking another example, if a bartender serves a customer one too many drinks, he can be held liable if the inebriated customer gets behind the wheel.

In the case of financial institutions, a bank can issue a credit card to a person who does not have the ability to reimburse the money, increase that person's credit limit, issue one or more additional cards to him and wash their hands of the whole affair. I would even venture to say that these unfortunate consequences are planned. Indeed, when the bankruptcy rate is less than 4 per cent, the credit card portfolio is considered profitable; card issuers anticipate in advance that 3 per cent or4 per cent of cardholders will declare bankruptcy. We must, therefore, find a way of making credit card issuers accountable.

It is impossible to talk about prohibitive credit card interest rates without mentioning in the same breath the issue of their accessibility and the information provided to consumers. The two previous presentations touched on these subjects. When a consumer applies for a credit card, it is essential that he receive information about all of the cards that the issuer has available in order to make a choice. Once this information is imparted to him, for example, by the media, he will be able to make an enlightened decision. My colleague from ACEF Outaouais mentioned the Industry Canada press releases distributed to select clients, but not to the average consumer.

It is often said - by bankers in particular - that 50 per cent of consumers pay off their credit card balances on time and that therefore, no problem exists. According to a cross-Canada survey we conducted in 1994, 20 per cent of respondents pay off their credit card balances using another form of credit. Therefore, the financial institution is always the one that comes out ahead, even if it doesn't make money right away from the credit card.

During our budget counselling sessions, we have seen people on the verge of bankruptcy with an R-1 credit rating. It's possible for a person to have a very good credit rating and still be on the verge of bankruptcy. Why? Because once a person has one credit card, it is easier to get a second and then a third one. After four cards, it becomes more difficult to get another one. The next step is to apply for a line of credit.

A line of credit is associated with a debit card. To refer to it as a debit card is a misnomer, because it fast becomes a credit card when used to access a line of credit. When the financial institution later sees that you can't manage to pay off all of your cards, it contacts you and offers to give you a personal loan. The consumer is then offered more cards because his credit rating is still very good.

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Consider how Equifax credit works. Persons can pay only the minimum amount each month, using either another card or their line of credit, thus using the technique of kiting, that is taking advantage of the various forms of credit available to them.

Before blaming the consumer, perhaps we should look at how the government views the emergence of these various types of cards. The government is a kind of accomplice in this new cashless society. Every knows that governments favour preauthorized deposits and withdrawals. One dollar and two dollar bills have been withdrawn from circulation and they no longer have legal tender. They can no longer be exchanged in any institution. They cannot be exchanged at the Bank of Canada or brought to the Royal Canadian Mint for a refund. Only coins can be replaced when they become damaged. Thus, $1.2 billion in one and two dollar bills are floating around in financial institutions.

One dollar and two dollar bills no longer have legal tender, new types of cards are being introduced into the market and more and more machines that accept cards are popping up everywhere. A study on the use of credit cards in grocery stores in Northern Quebec and in Northern Ontario is wrapping up. If credit cards become more commonplace, the benefits to card issuers will be fairly substantial. Businesses that accept credit cards will see their costs increase and this will drive up prices.

The situation could become critical in the food services industry if at some point, credit cards were accepted everywhere.

Banks are posting billions in profits at a time when more and more people are declaring bankruptcy. People are deeply in debt, jobs are uncertain, young people can't find work and jobs lost to technology will never be recovered. Looking for work will become a job in itself.

I believe the number of bankruptcies will increase. More and more cards are in circulation and the market is almost saturated, considering that each person owns between 2.6 and 2.9 cards. Unemployment statistics published in the newspapers are manipulated. Persons 18 years of age and over employed year-round would have to be counted and all of the others considered unemployed or without work.

This right-wing attitude seeks to make people who are in debt feel guilty when they often have no other choice and are continually offered credit cards or the option of not paying for one year. Just look at the amount of advertising to which people are exposed! There is more advertising about financing methods than about the product itself. What we're really being told to buy is credit. This is true everywhere, whether we're talking about an automobile, furniture or some other product.

Credit cards are not only used to make small purchases. One credit card, or a combination of several, can be used to purchase a refrigerator and much more.

I did not come here today to quote figures. Industry Canada supplied them to you in a fairly comprehensive document. At least they did a very good job compiling this data and making it available to you and to other groups.

Now it is up to you to take action. It is often said that money is power. The banks are the ones that have the money. Are you prepared to let them prove that they also wield the power. They weren't the ones who elected you. No, you were elected by the people and very soon you will be seeking a new mandate from them. It's up to you to respond to the public's call to lower credit card interest rates, to base access to credit cards on people's repayment abilities and to make information available to all consumers.

Thank you.

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The Chairman: Thank you very much, Mrs. Plamondon. You mentioned that you conducted a survey of some sort. Could you possibly provide us with a copy so that it can be put on the record?

Mrs. Plamondon: Yes.

[English]

The Chairman: Mr. O'Narey, you came in a little late. What we're trying to do is get people to present opening comments as briefly as they can.

[Translation]

Would you care to comment, in less than 10 minutes? We're having a round table discussion.

Mr. Ronald O'Narey (Member of the Executive, Federation of Co-operative Family Economics Associations of Quebec): I have a presentation, but no comments at this time.

The Chairman: Fine.

Mr. O'Narey: May I proceed?

The Chairman: Yes.

Mr. O'Narey: I represent the Fédération des ACEF du Québec. Like many of the other associations that testified earlier, one of our main tasks is to meet with consumers experiencing serious debt problems.

We are in a position where we can observe the problems created by credit card use, specifically by high interest rates, the focus of our discussions today.

Indeed, the gap between the Bank of Canada bank rate and credit card interest rates reached an average of 12.5 per cent last year. Over the past decade, this gap has continued to widen, and in our view, this is unacceptable.

In 1986, the Standing Committee on Finance and Economic Affairs examined interest charges on credit card transactions and concluded that banks has virtually no incentive to lower their credit card interest rates. Most credit card users are in fact a captive audience that the banks are in no danger of losing, even if the rates remain high.

Generally speaking, Canadians are poorly informed about the credit card market and user charges. It is virtually impossible for the vast majority of them to change quickly from one credit card to another so as to take maximum advantage of optimum market conditions.

After concluding its work, the Committee recommended a number of different measures. It shied away from recommending a ceiling on interest rates, but specifically asked credit card issuers to lower their rates and other related charges. They also called upon the Minister of Consumer and Corporate Affairs to investigate any eventual monopolistic behaviour on the part of the major Canadian banks if they failed to take the necessary steps to lower interest rates and other charges.

Obviously, the recommendations of the Standing Committee on Finance did not have the desired effect.

The committee also pointed out in its report that interest charges weren't the only cost associated with the use of credit cards. Fixed charges, the length of the grace period and the method of calculating the interest-bearing balance are also factors which influence credit card user costs.

The committee also mentioned that confusion reigned when it came to calculating interest charges. This confusion stems in part from the complexity of the credit card as a debt instrument and also from the fact that credit card issuers use different methods to calculate interest charges.

The vast majority of Canadians are ultimately confused and unable to verify the accuracy of the interest charges on their statement.

Quebec's Consumer Protection Act stipulates that credit card interest must be calculated from the day the monthly statement is issued. However, since 1983, all banks, including the Fédération des caisses populaires du Québec, have gradually stopped complying with the legislation and now calculate the interest from the purchase date, generally using the average daily balance as a benchmark.

One consumer has just given notice of her intention to file a class action suit against Visa Desjardins. Legal action could also be taken against the banks for failing to comply with the legislation.

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However, in Canada, calculating credit card interest is a grey area. It is difficult to say right now who has jurisdiction to legislate credit card interest, the federal government or the provinces.

However, it is clear that the variety of methods used to calculate interest confuse consumers and are of no real benefit to them. Furthermore, the complexity of most calculation methods does not give consumers the opportunity to verify interest charges or to make an enlightened choice from among the various credit cards available.

Moreover, the Standing Committee on Finance had asked the Minister of Finance to arrange with the provincial ministers for legislative measures which would force credit card issuers to use one single method for calculating interest-bearing balances. This was another recommendation not acted upon, but which should be reconsidered with special attention paid to simplifying the calculation method and making it more transparent. For real competition to prevail in terms of user charges and credit interest rates, the method used to calculate interest must be simple, transparent and uniform.

Even if this were the case, true competition would not really exist.

Some may have believed that the arrival on the market of low rate bank credit cards would virtually resolve the competition problem, since consumers would now have a broader range of choices when it comes to credit cards. Unfortunately, almost all of these new cards carry an annual fee which significantly offsets the benefits of the lower interest rate.

Furthermore, it is extremely difficult for consumers to determine which credit cards have the lowest carrying charges. To make this determination, they must take into account five important factors: annual fees, interest rates, the grace period, the method of calculating interest and the unpaid balance. Last February 10, the Department of Industry published a table showing which cards carried the lowest annual fees and combined interest rates when persons carry a monthly balance. The table also showed in the case of each card at which point in time it was preferable to use a no- fee card, that is when the unpaid balance reached a particular level.

This table proves that it is impossible for the average consumer to make all of these comparisons himself. They are far too complex. The arrival on the market of these new cards will not help consumers make a more judicious and enlightened choice. On the contrary, it will merely add to the overall confusion. While there may be more choices available, it is even more difficult to sort through the confusion. It should also be pointed out that only a very small percentage of consumers have been able to benefit thus far from low rate cards which are not widely promoted.

In conclusion, we believe that the current interest rates charged by the major credit card issuers are too high, despite the introduction of low rate cards. We maintain that for a variety of reasons, consumers are a captive audience who cannot easily switch from one credit card to another in order to benefit from competition in this sector.

We are also convinced that consumers are not adequately informed about credit card user charges and unable to make enlightened choices owing to the difficulty in comparing the costs associated with different cards.

Credit card issuers have been taking advantage of this situation for many years. They are not subject to any controls. They turn a deaf ear to the recommendations and warnings issued by the House of Commons committees and even ignore the provincial laws that are in place to protect consumers.

Consequently, we believe the government should take steps quickly to provide better protection to consumers.

We wish to stress two measures in particular. Firstly, the methods of calculating credit card interest should be standardized and simplified so that consumers can check for themselves the interest that has been charged to them and compare the benefits of the different cards.

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Secondly, all credit card issuers should be required to make substantial contributions to a special fund which would be used to inform consumers in a proper and objective manner of the real costs associated with using various credit cards. This special fund could also be used to address the issue of consumer indebtedness, a growing problem attributable in large part to credit card use.

This fund could be managed by an independent agency composed of representatives of credit card issuers, the government and consumer associations. Without this balanced representation, in our view, no real competition would be possible.

Finally, we recommend that a floating ceiling be placed on credit card interest rates. This ceiling would be tied to a certain base rate and it would also be different for retailer cards.

The Chairman: Thank you very much. Mr. de Savoye.

[English]

would like to begin the questioning. We'll set aside about ten minutes for him, and then we'll go to the government side.

[Translation]

Mr. de Savoye: Ms Todd, Mrs. Plamondon, Mr. Paquin and Mr. O'Narey, we're happy to have you here with us today. I was going to say ``compared to yesterday'', but I will refrain.

Mr. Paquin, we had the opportunity to meet in December when I attended a press conference which you had organized on the heels of a campaign launched by 150 members of Parliament to get the banks to be reasonable when it comes to charging outrageous and even unacceptable interest rates. I also know that you circulated a petition drafted by my colleagues which calls upon Parliament to take legislative action to deal with this problem. I will get back to this issue in a few moments.

Mrs. Plamondon, I read your report some time ago. You will recall that at the start of 1994, when Parliament convened, I was the first member to table a private member's bill calling for a floating ceiling on credit card interest rates. Mr. DeVillers has also tabled a similar private member's bill. Back then, your research proved invaluable to me in terms of gaining a clear understanding of the situation. I was happy to hear you talk about it this afternoon.

Mr. O'Narey, I haven't had the pleasure of hearing from you before, but I want to catch up first a bit with Ms Todd.

Ms Todd, you were here on November 20, 1991. You took a similar approach at that time, that is you recalled your previous encounters with the Industry committee. Your comments back then were similar to the ones you made today, but I would like you to confirm some of your statements.

You stated that in 1989, your association strongly favoured market forces over direct regulation by the State. However, your position in 1991 was that the industry should be regulated and that your association was prepared reluctantly to support the imposition of a ceiling or of some other measure which would force the banking industry to do what it should have done of its own volition.

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After the coalition of members of Parliament launched its campaign last November, your president, Mrs. Lacombe, was kind enough to write a letter to Mr. Zed in support of our initiative. Here is what the letter says:

[English]

If the efforts of your coalition to promote immediate relief do not prevail, CAC is prepared to support stronger measures. In the past we have said that we would reluctantly support a legislated ``cap'' on rates or a set spread between the bank rate and the maximum credit rate chargeable. This proposal should be revived if voluntary action is not forthcoming.

[Translation]

Unfortunately, as you pointed out, the banks have refused to give an inch. Representatives of this industry were here yesterday. If there was even a slim chance that they could be made to opt for a socially moral stand over corporate profits, if there was even a glimmer of hope that there was still something that could be done, I would be tempted to speak less harshly. However, there is no longer any doubt in my mind: if the government doesn't act to put guidelines in place, the situation will continue to be a free-for- all, except of course for the unfortunate people who must continue to pay these interest rates.

Contrary to what you stated in 1991, today -

[English]

The Chairman: Mr. de Savoye -

Mr. de Savoye: My question is coming.

The Chairman: How did you know what my question was? It's just that we have four witnesses and I'd like them all to have a chance to speak.

[Translation]

Mr. de Savoye: In 1991, you were prepared to wait a little, but given what Mrs. Lacombe has said, is your association now prepared to support legislative action aimed at imposing a ceiling on interest rates?

The Chairman: Who would care to go first?

Mr. de Savoye: My question is for Ms Todd.

The Chairman: Fine.

[English]

Ms Todd: Again, I dealt with that very briefly in my presentation. Our concern is that you may try to legislate something in the absence of information. We don't have any required information from these people. If you get your spread wrong and they are right - or close to being right - on their costs, you deprive those people who are at the bottom of credit and you send them into the hands of the loan sharks.

Our first desires would be that we get them to give us the facts and that we also do the other things I proposed. If that does not work, then yes, we would reluctantly propose something, but I don't think it should be done in the absence of good information. We don't have the facts; they're not required to give them to us now.

Mr. de Savoye: Just to make myself very clear, I asked for those stats several times yesterday. Many members around the table in the committee here have asked for those facts. We didn't get them, so what do we do next?

[Translation]

Would anyone else care to comment?

[English]

Ms Todd: Again, if you can't get the facts and you can't get the reforms, we would reluctantly support you. We're hoping, however, that you can do what others have not been able to do.

[Translation]

Mr. de Savoye: Thank you, Ms Todd. Mr. Paquin?

Mr. Paquin: Ms Todd's answer is somewhat in contradiction with her opening remarks. She herself said that this was her third time coming here and that no action had been taken to address the issue of sky-high credit card interest rates. That is why we launched this campaign in November.

It is essential that the Parliament of Canada impose a floating ceiling on interest rates as soon as possible. It's a matter of social justice. With interest rates hovering at 28 per cent, credit card issuers have virtually become loan sharks.

At 28 per cent, the interest rates on major retailer cards are usurious. They are ludicrous, particularly when the interest on short or medium-term loans is less than 10 per cent today. Therefore, we need to act as quickly as possible.

Mr. de Savoye: Mrs. Plamondon?

Mrs. Plamondon: I would like to share with you one concern about retailer cards. At 28.8 per cent, if no payments are made for one year, the actual interest charges total 32.9 per cent.

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However, the banks covet this market and we must be careful not to give them the opportunity to strengthen the oligopoly they currently hold. Our recommendations must apply equally to bank cards and to the major retailer cards, because right now, the banks are looking for scapegoats and the major retailer cards are a perfect target. They divert attention away from what the banks are doing.

Therefore, we recommend that there be no fees charged on low rate credit cards. Interest rates should be lowered and the annual fees eliminated. Card issuers could take certain measures. For example, if a person fails to pay more than the minimum amount owing for a certain number of months, perhaps a red flag should be raised. Instead of offering these individuals a higher credit limit, they could be offered assistance. Mr. O'Narey's recommendation is right on the money because these people need help. They don't need to have their credit limit increased.

Mr. O'Narey: As I stated in my presentation, one of the problems with imposing a ceiling on credit card interest rates is that it leaves the door open to many other possibilities. The real cost of a credit card depends on various factors such as the grace period, user fees and the interest calculation method. These factors influence the overall cost of the card.

By passing legislation solely to impose a ceiling on interest rates, we could be faced with other substantial cost increases. In the case of some cards, the method of calculating interest could change.

I talked about what happened in Quebec where over a 15-year span, one bank after another unilaterally changed the way in which interest was calculated and consumers did not react. Why? Because in most cases, people didn't see or understand what was happening. By defying Quebec's Consumer Protection Act, the banks were able to make enormous profits on each transaction. Some have been doing this since 1983.

That is the situation we face today. If banks are unwilling to listen or to give an inch, a ceiling will have to be placed on interest rates. However, if this happens, we will also have to look at other credit factors.

We wanted to get across the fact that we favour a true competitive climate. At present, consumers are not really able to make the choices they should, choices which would perhaps force financial institutions to lower their interest rates.

That's why I spoke earlier of standardizing the method of calculating interest rates and of making it simpler and more transparent so that consumers can find their way through the confusion. They would thus be able to know exactly what the rate on each card is. The process would be made easier for them.

Secondly, mechanisms should be put in place to inform consumers of how credit cards work. They need more than the very limited information they receive from financial institutions or from Industry Canada.

The Chairman: Thank you.

[English]

I'll now turn to Mr. Murray for his questions.

Mr. Murray (Lanark - Carleton): Thanks very much, Mr. Chairman.

I think I'll start by addressing my questions to Mrs. Todd, a veteran of these hearings over the last few years.

Because the Consumers' Association of Canada has been so involved for so long, I assume that credit issuers would take note of that and would see the organization as either a potential threat or an ally. My question is simply this. Do they ever talk to you? Do they approach the members of your association on a regular basis to discuss credit charges?

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Ms Todd: Some do and some don't. I won't name names, but we have one bank that is particularly enlightened in that it tried to do a lot of work in the area of literacy and plain language. It came to us and sought our advice.

We are involved in a program with the Canadian Bankers Association in which we're trying to sensitize their branch personnel to the fact that many of their consumer clients have problems with numbers and writing. We've produced videos and a checklist that branches can use to make sure their people are sensitive to people who have problems.

So yes, we're working with the industry. Some are more enlightened and responsive than others.

Again, we're talking about a huge gap between the sophisticated and the unsophisticated consumer. I believe that those 50% or 55% of consumers who know how to use the system are referred to in the banking industry as deadbeats, because they pay no interest and they earn incentives. They work the system beautifully. The other 45% to 50%, or whatever percentage, are those people we're concerned about. As I said in my presentation, a lot of them have problems with numbers and literacy.

As the gentleman to my left said, it's hard for an unsophisticated person to calculate the four or five different factors. The sophisticated consumer doesn't have to, though, because he or she knows that balance can and will be paid off. So it's the poor person, the unsophisticated one, the person with a literacy problem, who has to go through all these machinations. That's why one of the things we have been saying consistently is to reform the system in order to make it easier for them. I think that's something everyone here has said.

I hope that answers your question.

Mr. Murray: Yes.

How about retailers and oil companies?

Ms Todd: It's a common methodology across all issuers, those industries from which you can't try to get it on a voluntary basis.

Mr. Murray: Actually, my question was whether you have talked to them or not. Will you go after them or will they come to you?

Ms Todd: We have spoken to the Retail Council of Canada, for example.

Mr. Murray: I'd like to pursue this question of education. I imagine you monitor most of the brochures and application forms, etc., that banks or other credit issuers send out, to see how they -

Ms Todd: We're a volunteer organization, and we have about 300 people active on national issues. If they find something, they will send it in, and we'll then attempt to deal with it. But again, it's a very hard problem to get at in that way.

We have put together tip sheets for consumers and have given them to newspapers to tell them what we think is the best way to try to get a good deal. But we're talking about 50% of the population having a problem, and we need help to get the message out. Even if you get the message out, it's still very complicated to do well in the system if you're going to use it for credit. Again, the gentleman to my left has explained that there are at least four or five factors that you have to take into account. We'd be hard pressed to do it.

Mr. Murray: Actually, I'd like to ask Mr. O'Narey about his suggestion that there be a special fund for education. There's also an add-on to that. I believe you suggested that the fund could react to over-indebtedness on the part of consumers. I'd appreciate some clarification on that part.

On the question of a fund for education, how would you propose that this be funded? Would you be open to the idea of a nominal charge on credit cards that the consumer would pay to fund that?

[Translation]

Mr. O'Narey: We have not yet given a great deal of thought as to how these funds could be amassed. Basically, what we're saying is that financial institutions and retailers which issue credit cards have a certain responsibility to educate consumers about their products and about the consequences of using their products. That's why we feel that the bulk of this funding should come from the financial institutions. However, I couldn't say offhand how these funds could be amassed. We haven't looked this far ahead.

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[English]

Mr. Murray: Would other witnesses like to make a comment on that subject?

[Translation]

Mrs. Plamondon: This could come out of their profits which are substantial.

[English]

Mr. Murray: Eventually it all comes from the consumer, though, one way or another.

The Chairman: May I intervene in Mr. Murray's questioning? With respect to improving the education, right now that's left up to the individual financial institution. In their minds, and I won't be judgmental...they say they try to facilitate consumer knowledge.

But here's what we're curious about. If governments have to play a more aggressive role, are there specific recommendations within your proposals that we should be looking at very carefully with respect to how to facilitate the improvement of materials available in classrooms, for example, to make sure that young people are fully informed about credit before they start using it? We have some questions about the national distribution of these materials.

It's too early in the proceedings to say whether we're happy or unhappy. We just have some questions, and since you're here representing the consumers we're very interested in your perspective.

Ms Todd, would you like to respond?

Ms Todd: Again, this is just an idea that came to me. We're trying to make our children computer literate so we could build this into that kind of training. We could make it fun and start at an early age with practical information life skills.

[Translation]

The Chairman: Mr. Paquin.

Mr. Paquin: This morning, I received the publication Access from the Canadian Bankers' Association. It contains a small game that children can play. It's recommended for elementary school children. The game is called ``The Smart Card''. The article talks about the new generation of direct payment smart cards. Money no longer changes hands. Children are told how easy it will be for them when they have a smart card to go to a restaurant or to buy toys in a store. That's the type of information that banks are currently passing along to young people. I have copies of this article if you would like to see it. Children are being led to believe that money grows on trees and that everything will be rosy if they have a smart card. The children are even asked to suggest a design for a smart card. If this is the type of education that the banks are involved in, then I have no confidence whatsoever in the banking institutions to inform and educate the public.

Consumer associations like ours, which work with real people, are the ones that educate people by giving courses on budgeting and by arranging budget counselling sessions. We need more funding to reach as many people as possible.

Currently in the Outaouais, there are two permanent employees to cover a vast area with a population of 300,000. We need to educate people on how to be real consumers able to compete with wealthy institutions that advertise widely.

Yesterday, La facture analyzed RRSP advertising which stops just short of being fraudulent. The ads boasted that a person could amass a retirement fund of several hundred thousand dollars, but it neglected to mention a number of things. The consumer was required to invest - I don't recall the exact figure - $300 a month, but the ad neglected to mention this.

[English]

The Chairman: Monsieur Paquin, if you can leave that with us, we would appreciate it. Give it to the clerk, si possible. That's fine.

The committee is going to listen to Mr. Ianno's questions. One of our witnesses has arrived, so we'll make time for him to make his presentation and then we'll return to questions from Mr. de Savoye.

Mr. Ianno.

Mr. Ianno (Trinity - Spadina): Thank you very much, Mr. Chairman.

Thank you for the information you're providing.

With respect to Industry Canada, which has a consumer affairs portfolio or department, how accessible is it to your associations in helping you try to inform the consumers in such a way that they are protected against high interest rates, etc.?

[Translation]

Mrs. Plamondon: Since the Department of Consumer and Corporate Affairs was eliminated, and since consumer services were scaled back, the small group at Industry Canada's Consumer Affairs office is doing a very fine job.

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Information is readily available from this office and with the new site on the Internet, anyone with a computer who is plugged into the Internet can easily access thousands of documents.

Having said this, until such time as the Government of Canada recognizes the importance of consumer affairs and appoints a consumer affairs minister, as we once had, the Consumer Affairs office will continue to play a minor role. The Minister of Industry serves in caucus as the Minister of Industry. While he may be attuned to the concerns of the Consumer Affairs office, he nonetheless remains Industry Minister. Action translates into results. The banks must be made to toe the line, otherwise I would have to believe that the Industry Minister represents only the interests of this sector.

[English]

Mr. Ianno: Thank you.

I'd also like to know if there is a plan amongst yourselves to encourage consumers to attempt to get term loans to pay off their credit card debt, considering that the interest on term loans will probably be in the 8% to 9% range compared to the interest rate of 18% or thereabouts on credit cards.

Ms Todd: That is one of things we recommend, but the reality is that the people who most need them are the ones who are least likely to qualify. I believe someone else said that.

Mr. Ianno: Do you have any examples? Yesterday I tried to ask the banks if there was a plan. For example, without any questions asked, a student with a $1,200 income is given credit cards with a limit of $500 or thereabouts, yet someone earning - this is just hypothetical - $20,000 a year who asks for a term loan more than likely won't get the $2,000 loan without collateral. Yet their credit card will have a $2,000 limit with a rate from 16% to 18% instead of a term loan at 8% or 9%.

I'm wondering if there is an attempt by consumer associations, in conjunction with Industry Canada, to inform Canadians - with your encouragement, and hopefully ours from this end - about some of the strategies that could be utilized to reduce their exposure and their high debt level with high interest rates.

Ms Todd: I think you very correctly describe the situation that many people face. They just can't get them, so -

Mr. Ianno: Can you supply us with any examples, without names, in terms of what happens when they go to the bank and ask for the loan? What kind of turndown rate is there? Can you supply us with anything like that?

Ms Todd: I can't give you that kind of data.

Mr. Ianno: Is there a way of asking any of your membership if they gather any of that?

Ms Todd: It sounds to me like you're up against big privacy problems, but maybe someone else can tell you.

Mr. Ianno: But without names -

Ms Todd: Yes, but I think even gathering that kind of information would be difficult.

[Translation]

The Chairman: Are there any further comments? Mr. Paquin.

Mr. Paquin: As I said in my introduction, persons experiencing this type of problem should be monitored. They are so deeply in debt that when they apply for a personal loan, perhaps a consolidation loan to refund high-interest credit card loans, their application is rejected out of hand by the institutions. The latter are not helping people who are indebted because of high interest rates to pay back a little money each month, to spread out their payments and so forth. No, they turn down their applications for consolidation, personal and short-term loans.

We have the statistics to prove it. I'm certain that all Quebec consumer associations could give you tons of data. If we had the means of analyzing it, our records would be far more complete. However, our initial concern is to help people. We do not have the means to conduct investigations or to compile records each month on clients who consult us.

Mrs. Plamondon: Let me tell you about one recent budget counselling session. The client arrived at our office with over $25,000 in debts, and this didn't include a mortgage, and was convinced that her credit rating was R-1 because she paid the minimum monthly balance on all of her cards. She paid this minimum balance with another credit card. She had a line of credit associated with a debit card as well as a personal loan. She was convinced that there was no need for her to declare bankruptcy. She argued that her credit rating was good because issuers kept offering to raise the spending limit on her credit cards.

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When the time comes to find ways of consolidating his debts, the person meets with the bank manager, but the latter is unwilling to give him a consolidation loan. Yet, when it comes to credit cards, a person can have his spending limit increased. This is one of the rare forms of credit where a person never meets with his banker, either over the telephone or in person. All you have to do is complete a form. You are even offered a higher limit on your credit card without having to ask for it.

It's not surprising then that the consumer says he has a good credit rating because he sees himself offered even more credit. However, if he wants to consolidate his debts at some point, this is what he will be told: ``Listen, you're having trouble managing now. Look at your repayment ability.'' Yet, this issue never arises when it comes to credit cards.

[English]

The Chairman: Thank you.

Mr. Ianno: If I could just make this comment -

The Chairman: One last comment.

Mr. Ianno: From my perspective, I will be working within the committee to try to get quarterly reports from the banks and the retail outlets so we can try to figure out how to get at this problem so Canadians are not left with the disadvantage they have right now under these circumstances. It seems the profit goal is really what's driving the approach the banks are using in giving out easy credit and sometimes causing bankruptcies to come into play.

[Translation]

The Chairman: Very briefly, please.

Mrs. Plamondon: If you borrow $300 in the morning and return later in the day to borrow another $300, no one at the bank is going to lend this money to you. However, if you rack up $1,200 in purchases on your credit card over the course of the same day, there won't even be a ripple of protest. These are two different approaches.

To get a personal loan, you have to meet with the banker. When you apply for a credit card, this is not the case. All you do is fill out a form and submit it. Increasingly, people are not doing their banking in person. Consequently, there will be more bankruptcies and more cases of indebtedness.

Mr. O'Narey: It is difficult for consumers with credit card problems to obtain a personal loan from a financial institution to cover these debts. On average, Canadians own 2.6 credit cards each. Generally speaking, the people we counsel have more than one credit card. They may have two, three, four or more cards, in addition to other types of debts.

When the time comes to consolidate these debts in order to benefit from a reasonable interest rate, none of the creditors who have risked a small amount is prepared to risk any more, mindful of the fact that this person is a risk. A problem has been created, a problem that no one wants to resolve.

Quite often, consumers who come to see us find themselves in a situation where even the issuer of the credit card is telling them that they should declare bankruptcy. They prefer to lose $2,000 than to risk an additional amount by attempting to consolidate their debts.

Therefore, there are fewer restrictions on the issuing of cards, but as soon as a problem arises, each party protects itself as best it can. The financial institution is not concerned about the interests of consumers, only about protecting itself.

The Chairman: Thank you very much.

[English]

Duff Conacher from Democracy Watch has just joined us. Mr. Conacher has presented a long and detailed brief, which is in front of you. He has agreed to make his own oral submission of about ten minutes, and I assured him that through the research and our own reading, all of his brief will be thoroughly gone over.

Mr. Conacher, I know it's hard to step into the middle of a round table. I thank you for coming to the table. Perhaps you can begin with your ideas.

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Mr. Duff Conacher (Coordinator, Democracy Watch): Thank you very much for the invitation. I apologize for being late. I actually thought I was early because I was informed we would be proceeding one after another, which meant I would be appearing around 5:15 p.m.

I will keep it brief because hopefully you all have my submission in front of you. I will just take you through the key points and finish before my ten minutes are up.

First of all, in terms of context, Democracy Watch takes a different view from most bankers in terms of their characterization of the banks. Bankers like to characterize themselves and their banks as private corporations that should give priority to shareholders' interests.

However, given that the banks would not be as large or as profitable as they are without individual Canadians' deposits and the privileges and protections granted them by Canadian governments over the past several decades, we view banks as much more like public utilities. Therefore, in the same way that public utilities are given almost exclusive rights to generating and exploiting a natural resource, banks have been given the significant privilege of playing the major role in generating and exploiting a human-created resource, namely money.

Both utilities and banks are in positions of public trust with regard to the resources they manage. Given this and the privileges and protections banks enjoy, we feel they should face higher standards in many areas of their activities than other corporations. Also, the consumer or depositor interest should prevail over the interests of the banks in any financial sector policy that is being considered by the government.

Unfortunately, the current federal government's attitude toward regulation in general and specifically toward strengthening consumer protection is inadequate. It is inadequate because the government has created, in conjunction with the Canadian Manufacturers' Association and Industry Canada, a business impact test consultation that is sent out to all businesses whenever a new regulation or legislation is proposed that will affect those businesses. The cover page from one of these discussion papers gives a very clear idea of what the business impact test is for. It states:

In essence, the attached questionnaire provides you with an opportunity to influence the Government's policy making process by identifying how Government action could help or hinder Canadian businesses.

This raises a fundamental question: where's the corresponding consumer impact test? Unfortunately, there isn't one. As a result, and because of other conclusions the government has made concerning the marketplace, the government has been pursuing voluntary codes and voluntary compliance as the proposed solution to any identified problem, including credit card interest rates.

This is simply inadequate, mainly because the studies that have been completed, including one by Industry Canada, have concluded that voluntary codes and compliance work in only very specific and rare circumstances. Therefore, we feel that effective enforcement must always entail independent and fully resourced enforcement, an enforcement body that is accountable to the public, appeal mechanisms available to unsatisfied customers, sanctions for violations, and government support. We view the issue of credit card interest rates and other financial services issues where consumers are facing problems as being within this context and feel that any measure aimed at solving the problem should be judged by those five criteria.

Turning to credit card interest rates in particular, we support uniform cost of credit disclosure and recommend that every credit card provider be required by law to use standard tables for advertising promotional materials and application forms. We have included in appendix A a copy of the so-called Schumer box, which was put in place by the U.S. Fair Credit and Charge Card Disclosure Act of 1988. It sets out a standard disclosure form that must be included in advance of offering credit to a consumer.

Secondly, we feel a key part of solving the problem the committee is trying to address is to require all credit card providers to disclose in their quarterly financial statements the total revenues from their credit card operations and the total costs of those operations, broken down into various categories. That will reveal overall the profit margin the credit card companies earn; their profits and the profit margin they earn from their credit card operations. If the profit margin is revealed to be excessive, we feel public pressure will soon see credit card interest rates decrease drastically.

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Also, as part of the disclosure, all credit card providers should be required to disclose the total amount they pay to merchants for charges made by customers to credit cards and the total amount merchants pay to them in administrative fees on transactions. The banks in particular claim one of the reasons their interest rates are so high is that there is a 21-day interest-free period and they have to recoup the cost from that period with a higher rate of interest. But in fact merchants pay administrative fees to the credit card providers and those fees cover the costs of the 21-day interest period. That is why that information needs to be disclosed in order to determine their actual profits.

Another area the committee should examine is the relationship between bank credit cards and the GST. Merchants pay that administrative fee based on the total cost charged to the card by a customer, and that includes the GST. Therefore, merchants are paying a commission on the GST, even though the merchants face all the costs of collecting the GST and submitting it to the government.

In a CTV National News story in December 1995 the total was disclosed. Since 1991 the banks have reaped $260 million in these GST commissions. That is completely unjustifiable. It's a cost merchants, including many small businesses, are paying to the banks' benefit. To correct this problem, banks should be required to return to merchants the amount of the administrative fee from credit charges that is attributable to the GST.

There's been much discussion of a cap on credit card interest rates. The problem is at what rate do you set the cap? Again, we feel if you do not require the banks to disclose their revenues versus their costs, and therefore their profit margin, the government will have no idea at what rate a cap could be set, because you won't know whether you're setting it too low, at a point where no credit card company could make a profit and therefore none of them would offer the service. So again, disclosure of their profit margin is essential.

However, if they refuse to disclose this information, we support the government setting a cap based on the best information possible. We also feel if the credit card companies refuse to disclose this information, Canadians and the government are quite justified in assuming they are hiding excessive profits and are gouging consumers, and therefore setting a cap is a reasonable response.

There's also an issue of availability of credit cards. The banks were testifying yesterday that about half of all applicants, whether for a low-rate or a high-rate card, are rejected. We feel this should be required to be disclosed so we can actually determine the availability of all different types of credit cards and see whether the claim that low-interest-rate cards are easily available is actually true. They also testified that only 7% of all credit cards held in Canada are low-interest-rate cards, which raises a suspicion that maybe they're not as easy to get as the banks are claiming.

Finally, we feel the committee should address the issue of the connection between credit card perks and interest rates. The banks say one of the reasons some cards have higher rates is that perks and benefits are offered with those cards. We see no reason, and we have not heard any reason from any credit card providers, why any perks should be linked to the interest rate on a credit card. Why should you pay a higher rate of interest to receive air miles, for example? We feel it would be much clearer for consumers what they are actually paying for a perk if the banks and other companies tied them to the annual fee paid for the card.

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In a similar vein, as has been mentioned by other members of the committee, we feel you should require credit card companies to disclose to consumers, at least once a year, the total amount they have charged on their credit card, and the amount and effective rate of interest they have paid on that total charged on their card. It's important to include that because it will inform consumers and help them understand the costs of carrying a credit card.

To give you an analogy of the difficulties and blockades that we feel you're facing - I think you'll understand this - the things the credit card companies and the banks in particular will put before you, we feel you can learn many lessons from the disclosure of business lending statistics that you have undertaken in hearings over the past few years.

The Chairman: I'm going to ask your indulgence and ask you to summarize. I give my apologies to the witnesses, but this is the inconvenience of the House of Commons. There is a vote that all members - at least, all members on our side - are required to attend.

Mr. de Savoye, I'd ask you and the other members who would like to speak to be very much to the point. Please make sure that each of the four members gets a chance to ask their questions in the next twenty minutes or so.

Mr. de Savoye: Will I have one question, at least?

The Chairman: Yes.

Mr. de Savoye: All right. Thank you.

The Chairman: Mr. Conacher, you're over your ten minutes, and we operate a real disciplined shop here. You can make your point as people ask questions.

[Translation]

Mr. de Savoye, you're up first.

Mr. de Savoye: I will be brief. As you pointed out, it's a jungle out there when it comes to credit cards. We can accumulate points, air miles, and gifts; some cards charge fees, while others do not, the rates vary as do the methods of calculating interest charges. In short, it's enough to confuse anyone.

Having said this, I'm not even sure myself which card is best for me. When I see the list of people whom you helped during the month of January, the following question comes to mind: do these individuals usually act irresponsibly or are they responsible people who ultimately fell into the credit trap? Compared to last year, are you seeing as many cases or more of them?

Mr. Paquin: Since the start of the year, we have seen a rather marked increase in the number of persons seeking counselling services. I don't think these individuals are irresponsible. They have merely fallen into the credit trap because credit is so readily available. As we have noted, there is a vast array of retailer cards out there. Retailers are literally falling over customers to offer them credit cards. They are offered gifts as well as all kinds of incentives.

Once the customer is in possession of the card, if a problem arises, whether it be unemployment or loss of income or some such thing, a person is tempted to use this card to meet immediate needs. That's what the credit trap is all about. It's not a solution. People sometimes charge tens of thousands of dollars on their cards. We are not talking about compulsive shoppers. We're talking about people who unfortunately, because credit is easily accessible, use their cards and fall into this trap.

Credit is not the answer to existing social problems, but unfortunately, banks use it to their advantage because they can always recover the money. Over a period of several months, these persons have paid a great deal of interest as well as their balance in order to eliminate this debt. When they seek assistance from an association like ours, they really want to resolve their debt problems. They want the means and the tools to dig themselves out of the hole.

[English]

The Chairman: Mr. Conacher had a quick intervention.

Mr. Conacher: Yes, and this also relates to an earlier question about solutions and consumer education generally.

We feel there's a very simple solution. The government should simply require banks to enclose in their mailings to their customers, in the same envelope, a one-page flyer that would invite customers to join a financial consumer watchdog. It would cost the government and the banks nothing to enclose this flyer and it would reach everyone who would be concerned. It would describe the group and invite individuals to pay a nominal annual fee to join the group. Then that group would have ample resources to reach consumers and also ample resources to do research and to educate consumers on these issues and advocate further interests. As you may know, the Minister of Industry, John Manley, has publicly expressed his support for the creation of a financial consumer watchdog using this method.

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The Chairman: It's an interesting idea. Thank you.

Mr. Schmidt.

Mr. Schmidt (Okanagan Centre): Thank you very much, Mr. Chairman. I'm sorry I wasn't here at the beginning of the meeting. I just couldn't get here on time. But I do want to ask a question.

What is the problem? Is the problem the availability of credit? Is the problem the interest charges? Is the problem the additional charges that are added to credit cards? What really is the problem as you see it?

Ms Todd: All of the above.

Mr. Schmidt: It's all of them.

Mr. Conacher: Potentially. We don't have enough information in any of those areas really to know what the reality is in terms of availability or whether the interest rates are justified.

Mr. Schmidt: I would like to ask two short questions. First of all, should the major responsibility rest with the consumer or should it rest with the government to protect the public against the abuses, as I guess you're saying, or the difficulties, of credit cards?

Ms Todd: This is an area where consumer protection has been frustrated, and I think the government has to help in some form. Certainly the Consumers' Association has been putting forth very concrete recommendations for the last eleven years. Certainly the industry isn't listening. I think the government has to help.

Mr. Schmidt: That answers part of my question. Do you have an answer to the question, does the consumer have a responsibility?

Mr. Conacher: Yes, but the government -

Mr. Schmidt: Not ``yes, but''. Yes or no?

Mr. Conacher: Yes. But the government has been saying just shop around. It has been very difficult to shop around. All we're saying is create a financial consumer organization at no cost to government and no cost to the banks and allow consumers to help themselves.

Ms Todd: Better yet, support the groups that have been trying for fifty years to do so. We already have the groups; we just don't have the funding mechanism.

[Translation]

Mrs. Plamondon: You weren't here when I mentioned that credit card issuers should be held accountable. They anticipate in advance that up to 4 per cent of credit card holders will default on their payments. They earn profits by basing all of their credit card portfolios on this figure. There are millions of credit cards in circulation. You have seen the figures. What this means is that many consumers are in debt and going bankrupt.

High consumer debt is responsible for 24 per cent of all bankruptcy cases, while excessive loans account for 8 per cent of all cases, for a combined total of 32 per cent. If you consult Strategis, the government's on-line site, you will read that unemployment is high - you will see that insolvency is responsible in 30.4 per cent of cases - and that there is an increase in long- term unemployment. Cases of unemployment lasting more than one year increased from 6 per cent of overall unemployment figures in 1990 to 15 per cent in 1994. We are seeing an increase in job turnovers and in periods of unemployment.

You're asking us if the consumer is responsible. When he first receives his credit card, he fully intends to pay off his balance as soon as the statement arrives. However, when he loses his job and five, six or even eight weeks go by before he begins receiving his unemployment insurance benefits, the credit card becomes a temporary source of income and indebtedness. Since UI benefits are substantially lower than income, the problem of indebtedness begins. He tries to plug the holes using one card or his line of credit and the problem compounds itself. You should check out the government's Strategis site. It's extremely rare -

[English]

Mr. Schmidt: It's not a question of whether I should look at it. I know that story extremely well. I have counselled many people in this area. I know exactly what you're talking about. The issue, however, is one where it has to be a cooperative venture. I think we need to recognize that you don't have to take credit. Sometimes, in the extreme cases you're suggesting, maybe you have to. The point is that you're not necessarily required to escalate.

[Translation]

Mrs. Plamondon: Consumers are bombarded with information and solicited through the mail. Even when you don't want your credit limit increased, they offer to increase it for you.

[English]

Mr. Schmidt: You can always say no.

The Chairman: I would like to give a chance for Mr. Shepherd to ask a question or two, and then if at all possible Mr. Lastewka.

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Mr. Shepherd (Durham): Thank you.

My question is to Ms Todd and then Ms Plamondon. It's a question of rational choice. The banks have argued that this is all about free market economy, and people should have the right to make rational choices.

It seems to me there are two features in this whole marketing strategy that make it very difficult, if not impossible, for people to make rational choices. First, they probably don't have the commensurate skill levels. You mentioned numeracy and literacy rates. They also don't have the proper information flow, even if they have those commensurate skills. In fact, even the vice-president of cards at the Royal Bank said the other day she doesn't pay off the balance. So I can't really understand why we think it's so exceptional that 45% of people don't pay off their balances.

This whole issue gets back to the question of access and who has access to the credit market. We're selling credit based on all kinds of gimmicks. I've had comments from consumers who even bought into the gimmick side of it - the down payment on a car and so forth. People are constantly saying they thought they had earned credits and were denied them because they hadn't read the small print. One woman said she thought she was saving for car she owned, but in fact she had to buy a new car. Another gentleman referred to the fact he was two days overdue and therefore lost all his points. Even the way we're marketing this thing -

Even if we do all this stuff and make all these disclosures, we will still have abuse of the system by the financial institutions because a good number of people don't have the commensurate skill levels to make those choices.

Ms Todd: Exactly. We're not worried about that vice-president you mentioned. We're worried about the little guy who might want to earn points for a car and has the right credit card. He'll go bankrupt before he has enough points to earn access to that car.

You talked about free markets. Canada has the most highly concentrated banking industry in the world. The banks talk about competition, but we have less competition than almost any of the comparable countries in the world. We need foreign competition to shake things up a bit. We need banks and near-banks in here. As I said before, that's what the Senate Standing Committee on Banking, Trade and Commerce has recommended, and we hope the Baillie task force will look at those recommendations seriously.

The Chairman: Another brief question.

Mr. Shepherd: A point was made to the industry officials that this is a simple supply and demand situation. As interest rates are pushed up, one would expect the demand for credit to decline. That doesn't happen. Once again, the question is whether there should be some kind of limit on access to credit. In other words, should we put some of those standards up higher to actually limit people's access to the system in the first place? We have a student here with a $500 loan and he's earning an income of $1,200. Should he have access?

Ms Todd: I think the problem is the multiplicity of cards. For some low-income consumers, it's the only form of credit they have. So I'd be concerned if we cut them out of the industry. There has to be a better way of doing it.

The Chairman: Thank you.

Mr. Lastewka can ask his question, and then we can squeeze in any final comments at the end.

We have about five minutes.

Mr. Lastewka (St. Catharines): I had questions for each of the witnesses, but I'll limit them.

I'm hearing both sides of the story here. On the one side, I heard very clearly that we need to limit cards because of the ability to pay them off...and other items. On the other hand, Ms Plamondon mentioned the average number of cards is 2.9. Then there's the moving of cash from one card to pay off another card to pay off another card. Then some people said no, they didn't want to do that; they didn't want to limit it.

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Is the availability of cards the problem, or isn't it? I've heard both sides now, both stories. Some said yes and some said no.

[Translation]

Mrs. Plamondon: Access to credit cards is not bad in and of itself. However, the problem arises when the consumer pays the minimum amount for a certain period of time and uses other credit cards. If you have three credit cards and pay the required amount on receipt of your statement of before the due date, you don't have any problem. However, if you own only one card and for a period of six months, you pay only the minimum amount, then you really do have a problem.

I hope that the Vice-President of the bank who fails to pay off his card balance or to choose the best type of credit doesn't do the same thing with the bank's funds, because he would be fired. If the government of Canada borrowed money at rates similar to those charged by credit cards, it wouldn't be doing a good job either.

[English]

Mr. Lastewka: Let's get at the question.

[Translation]

Mrs. Plamondon: Access as such is good, in as much as it is not unlimited access and a person pays more than the minimum monthly balance. A red flag should go up and a stop put to increasing the credit limit if a person pays only the minimum amount on his card balance for a period of six months. This is one of the warning signs we caution people about when we do budget counselling. We tell the person that they have a problem if they've been paying only the minimum amount for the past six months.

[English]

Mr. Lastewka: Mr. O'Narey talked about not being able to move from one card to another, and I didn't quite understand what he meant there. Maybe he could give a short answer.

[Translation]

Mr. O'Narey: Competition is not much of a factor for a consumer who uses the card issued by one particular financial institution and who might observe that another institution is offering more advantageous rates. It's not always easy to switch to another financial institution quickly. You have to apply for credit, await an answer, get used to a new system and very often, over time, another institution offers a more attractive deal and it's time to change again. I simply want to make a point that consumers are generally captive clients, particularly when it comes to the major universal credit cards. Competition is less of a factor in this area.

To comment on a question raised earlier, credit cards aren't the only area where financial institutions often lose sight of their client's ability to repay.

Four years ago in the Montreal region, we visited four financial institutions to discuss the case of a family comprised of two adults and two children in day care. This family was experiencing a budget shortfall in that it needed $200 more a month to meet all of its expenses.

The four financial institutions that we visited were willing to give this family a personal loan of $7,000. When we finally showed them the family's complete file, the credit officer admitted that we were right and that he had not taken into account certain factors. For example, many financial institutions ignore the fact that people pay child care costs. In this particular case, these costs totalled $800 a month. Quite often, if the loan were approved, the client would be overextended.

The Chairman: Do you have a very brief comment to make?

[English]

We have three and a half minutes.

[Translation]

Mrs. Plamondon: I hope that I have not come here in vain today and that you will achieve some concrete results so that we don't have to come back here again.

Mr. Paquin: We share these sentiments.

[English]

The Chairman: I can't guarantee next year.

Mr. Conacher.

Mr. Conacher: It's clear to us at Democracy Watch that the government can do many things to help financial consumers on this and many other issues, and unfortunately to date the government has largely abandoned consumer protection and has issued a directive to shop around and protect yourself. But there are many measures that can be taken, and we hope the government will show commitment to take some of these.

The Chairman: That's why we had you here, to see more specifically -

Mr. Conacher: Thank you very much.

The Chairman: I'd like to thank you.

[Translation]

Thank you very much for your contribution.

[English]

It's been very helpful. We like to have these round tables because it gives us a chance to ask different people. You may not appreciate it but we get an ear for different subtleties and approaches.

Thank you so much. I'm sorry the vote is taking place, but that's life.

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The committee is adjourned until tomorrow at 9:30 a.m., in the same room, to hear other witnesses on the same issue.

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