[Recorded by Electronic Apparatus]
Thursday, December 14, 1995
.1110 
[English]
The Chairman: Ladies and gentlemen, it's like the days of the early church: when two or three are gathered together you may hear witnesses.
We have colleagues coming. We also have other colleagues who are frantically out at the airport trying to get out of this town.
I think it's important that we begin the discussion. This is a discussion that has had its -
Mr. Bélanger (Ottawa - Vanier): Mr. Chairman, they're not frantically trying to get out of this town; they're frantically trying to get home.
The Chairman: Yes, that's right. Let's put it in a more positive light. They're abandoning with greatest reluctance this town. I'm sure they would prefer to be here for Christmas, but they're reluctantly rejoining their families. How's that?
Mr. Bélanger: It's a slight exaggeration.
The Chairman: First of all, I want to say to our colleague Mr. DeVillers that he's been most patient with us. This is an issue that he has undertaken and made his own. We were remiss, I think, as a committee in getting back to him in the first place. Then, after we had scheduled a meeting with the officials to go over some of the questions he raised in his meeting with us, it was, as you may recall, the week before the referendum and as we were perhaps not in the best frame of mind we actually cancelled the meeting.
So, once again, we thank him for bringing the matter before us. We are really here today to try to understand why it is that whereas various of the issues he raised with us have been raised before previous committees, both Industry and Finance, as far as I understand, and while the committees seem to be in some agreement as to courses of actions that might be taken, nothing ever seemed to happen. So I suppose we're really here to find out why that was so and whether indeed something might yet happen.
We want to welcome the officials from the department. They are before us and they are from Industry Canada, although there are people in the room as well from the Department of Finance, if I'm not mistaken, who might help us out perhaps if we need further reference.
Ms Watson, I think you're going to present your team and perhaps make some opening comments. Is that right? Welcome.
Ms Vinita Watson (Director General, Office of Consumer Affairs, Department of Industry): Thank you, Mr. Chairman. Good morning.
My name is Vinita Watson, and I'm director general of the office of customer affairs at Industry Canada.
I'll begin by introducing two of my colleagues who are here with me. They are Jean-Baptiste Renaud and David Waite. They work on credit card issues and will help me to answer any questions you may have on this topic.
I'd like to begin with some background information and make a statement, if that's okay.
Consumer credit in general, and credit cards in particular, are active files in our office. We're very interested in ensuring that this market works well for consumers, that they enjoy a range of choice among competing products, and that they have good information on which to base their choices. So I thank you for this opportunity to talk with you.
[Translation]
Generally speaking, we believe that the credit card market has improved since the matter was first brought up in 1987 by the Standing Committee on Finance and Economic Affairs.
However, as you know, this is a very complex area that we are continuing to study. Today, I would like to explain to you how we perceive the situation concerning the three main concerns of the various standing committees that have studied this whole issue.
[English]
The three areas the committee looked at previously were information disclosure and reporting, competition in the credit card market, and a ceiling on card interest rates and fees. I'd like to address each of the three areas in turn.
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On information disclosure, three aspects are particularly relevant: the information that is provided to consumers on credit card charges, rates and conditions; consumer understanding of credit and budgeting matters and the services provided in this regard; and the standardized method for calculating and disclosing the cost of its credit. Many of the committee's recommendations for better consumer information on credit cards have been adopted by card issuers. Credit card application forms and promotional materials now routinely provide information on fees and payment periods. Monthly statements of account show credit limits, interest rates, method of interest calculation, minimum payment required, and the manner in which partial payments are allocated.
Bank card statements have a toll-free number that consumers can call for additional information, while retail cards provide a local number for account inquiries. There is a minimum 30-day notification of interest rate changes.
[Translation]
The federal government also adopted the 1987 standing committee's recommendation regarding the publication of a quarterly information bulletin on credit card use costs. The first issue of this bulletin was distributed in December 1987 to consumer groups, the media and various organizations. The bulletin has come out regularly ever since.
Consumer groups are called upon to comment on its content and changes are made to it if required. We have tabled copies of the last three issues of the bulletin with the clerk of the committee.
[English]
We think that publication on a more frequent basis, such as monthly, as was recommended by the standing committee in 1989, is not necessary because consumers have access to toll-free numbers for credit card inquiries. Also, credit card interest rates do not change frequently, in part because of provincial legislation requiring a minimum notification period for rate changes.
With respect to consumer understanding of credit and budgeting matters, since 1992 we have funded studies by several consumer groups on various aspects of this question. A consistent finding of the studies has been that consumers of all ages and in all income groups need greater knowledge in matters of budgeting and credit. Many consumer organizations are active in credit counselling, and several provinces have programs on the orderly payment of debt. In Ontario, for example, credit card counselling services are provided through the Ontario Association of Credit Counselling Services, which is a non-profit organization that is funded in part by creditor donations. Credit counsellors also provide preventive education in their community.
The third aspect of disclosure concerns harmonization of federal and provincial laws on the disclosure of the cost of consumer loans. This has not yet been achieved. However, federal and provincial governments are working towards harmonization under the internal trade agreement. There is commitment to reaching agreement by January 1996, with harmonized legislation to be implemented by January 1997. While there remains a lot of work to be done, we do expect to meet these deadlines.
A federal-provincial consultation paper containing draft proposals was issued for comment last July, and copies of the paper have been provided to the clerk of the committee. The proposed harmonized legislation on cost of credit disclosure will apply to all forms of consumer loans such as fixed credit, open credit, including credit cards and lines of credit, mortgage loans, and supplier credit such as conditional sales agreements and certain long-term leases of consumer goods. When implemented, it will result in a standardized method for calculating interest as well as a common set of disclosure requirements to more clearly describe the rights and obligations of consumers and creditors. This will allow consumers to readily compare the costs and conditions of the various instruments and to make their choices accordingly.
[Translation]
Concerning the second point, namely if there is sufficient competition in the credit card market, there are signs that the market is competitive. Consumers have the choice between various options. A growing number of new products have appeared on the market since 1992, which shows that there is competition among card issuers.
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There are low-interest credit cards for consumers who have monthly balances. The interest rate on these cards is 4 or 5% less than that of most other credit cards. Furthermore, there can be compensation for the higher annual fees on these cards if the monthly balance varies between $300 and $400.
[English]
Consumers have several other choices among credit cards as well, which would suggest a competitive market. For example, there are affinity cards, cards offering a range of ancillary services and/or merchandise such as rental car insurance, free travellers cheques, travel points, and discounts on purchases, to name a few.
In the last couple of months, two non-deposit-taking financial institutions, Canadian Tire Acceptance Corp. and G.E. Capital Corp., have announced that they will be issuing MasterCard. Recently, four banks have dropped the annual fees on their Visa card without increasing the interest rate.
To look at competition from another perspective, we also did some analysis to see whether interest rates on bank credit cards move in response to changes in the Bank of Canada rate and whether rates are more sticky in coming down than they are in going up.
In the analysis, we looked at rates on a standard Visa card from 1978 to 1994. We found that since the late 1980s, which was about the time of the first committee, interest rates have tended to move with changes in the bank rate, albeit with a lag of at least three months. Our analysis did not show that bank rates, card rates, were more sticky in coming down than they were in increasing.
While the rate charged in retailer credit cards has not changed over the last decade, we recognize that today virtually all major retailers accept bank credit cards, so consumers do have a choice of credit instrument.
A survey conducted in 1994 showed that 90% of retail cardholders also have a bank, Visa, or MasterCard. Of the 10% who do not, close to one-half have household incomes of over $35,000, and so probably could obtain a bank credit card if they wished. The 5% with household incomes under $35,000 may be more limited. We do not know how many of these are young people who are just starting their careers or new Canadians who have not established a credit record.
A third broad issue I'd like to touch upon is whether credit card interest rates should be capped.
[Translation]
The three standing committees examined this issue. The capping of rates was not recommended by the standing committees of 1987 and 1992. However, the report of the 1987 committee noted that if Schedule I banks did not reduce their rates, the government should look into any anticompetitive practices and intervene if necessary.
As for the 1989 committee, it recommended the capping of credit card interest rates, suggesting that the rate for bank cards be set at 8% above the Bank of Canada rate and that for retailer cards it be 16.5% above the Bank of Canada rate.
[English]
While at first glance interest rate caps might seem advantageous for consumers, we are concerned that they could have some unintended effects. Capping the interest rate on only one form of consumer credit that amounts to about 5% of total household debt, including mortgages, would distort the consumer lending market. We would expect card issuers to respond by adjusting their practices so that the net effect of caps may not be beneficial to consumers.
For example, card issuers may impose other charges that are not specifically prohibited. They may shorten grace periods, lower the credit limit, or increase the income required to obtain credit cards. The effect of the cap could therefore be less choice and reduced access for consumers, particularly those with lower incomes, young people, and new Canadians.
Because of our interest in this topic, we also looked at the United States, where some 60% of states impose ceilings on the interest rate that can be charged. It is difficult to draw any lessons from the United States' experience since not all states have such ceilings and card issuers have gotten around the limits by issuing cards from states that do not have interest rate or fee caps.
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Data provided to us by the Canadian Bankers Association show that credit card interest rates on average are slightly higher in the United States than in Canada, as is the spread between the credit card rate and the three-month treasury bill rate. In the United States as well, 90% of credit card issuers assess late payment fees and 86% assess over limit fees. There are no late or over limit fees in Canada.
An additional reason why we feel interest rate caps may not be desirable is that they may reduce competition. In effect, an interest rate ceiling could operate as a floor price if all card issuers were to follow the ceiling.
[Translation]
It is possible to set credit card rates based upon the monthly average of the Bank of Canada rate. However, with monthly fluctuations in credit card rates, it would be even more difficult for the consumer who has a monthly balance to know what he or she is paying in interest, given the volume of transactions and the fact that billing is spread out over the entire month. Frequent changes in the rates would increase the administrative costs of card issuers, who would most probably seek out a way of passing these costs on to the consumer.
[English]
A final point I would like to mention is increasing personal debt-to-income ratios in Canada and the record number of consumer bankruptcies. There have been questions as to whether this is a result of increasing credit card debt. This is an area that is of keen interest to us and one that we are studying.
At this point we know that while personal debt-to-income ratios have risen steadily since 1984, virtually all of the increase is attributable to higher mortgage debt. The consumer portion of the ratio - credit card debt, personal lines of credit, and consumer loans - has been stable at about 20% since 1970.
We also know, based on information provided by the Superintendent of Bankruptcy, that on average, credit card debt represents only a modest proportion of total liabilities and consumer bankruptcies.
However, within the area of consumer debt, there has been a steady shift towards credit card debt. In 1985 credit card debt accounted for 12.4% of banks' total loans to consumers. By 1994 this had risen to 19.5%, with a corresponding decline in other forms of consumer debt. We do not yet know the reason for this. The increased use of credit cards may simply mean that the variety of cards on the market today meets consumers' preferences, so consumers choose them as a convenient credit instrument.
We plan to study the consumer's use of credit in greater depth and expect to have the first results of our work by the summer. Thank you. I'd be happy to take any questions you have.
The Chairman: Thank you very much. It would be our normal practice to begin withMr. Schmidt, and he certainly has the option of beginning the questioning, but due to his other obligations he arrived a little late.
If you would prefer to defer, that's okay, or if you want to go now, that's okay too. Which will it be?
Mr. Schmidt (Okanagan Centre): I have a couple of questions, Mr. Chairman.
The Chairman: Well, then go for it.
Mr. Schmidt: I'm sorry I was late, Mr. Chairman.
I think it's a very interesting subject. What really intrigued me was right at the end of your comment. It had to do with you not yet knowing why the consumer debt had shifted primarily from the bank debt into the credit cards. Who owns most of the credit cards?
Ms Watson: Are these bank credit cards? Are you asking whether these are issued by banks?
Mr. Schmidt: When you talk about credit cards, are you talking about the retail card owners like the Hudson's Bay Company, Sears, and so on, or are you dealing with Visa and MasterCard?
Ms Watson: In the particular example I cited, I'm dealing more with bank credit cards only, not with retailers.
Mr. Schmidt: You couldn't understand why that had happened.
Those cards are owned by the banks, and they charge more interest on those cards. So why wouldn't they go in that direction? They would want to persuade everybody to go to the credit card business. That's rather self-explanatory - a pretty logical kind of thing for a bank to do, it seems to me.
.1130
Ms Watson: There could be other reasons. For example, credit card debt is unsecured. Credit card debt is typically for much smaller amounts - outstanding balances are much smaller - than those going for a consumer loan. So from a pure convenience point of view, for smaller amounts a consumer may well prefer to use the credit card, which is unsecured, rather than going to the bank, arranging a personal line of credit, or going for a consumer loan for a specific purpose. And yes, presumably some part of the difference in the rates is also because of the differences in risk.
Mr. Schmidt: I'm sure that's true. There are all kinds of reasons for that.
The other question I had is what has been the increase in consumer debt in mortgages? I appreciate that's the major increase in consumer debt. Do you know approximately how much that has increased over the last while?
Mr. David Waite (Senior Analyst, Office of Consumer Affairs, Department of Industry): I can't give you a dollar figure for it. What I can tell you is that -
Mr. Schmidt: What are those proportions in terms of income?
Mr. Waite: Debt-to-income ratios have gone up from about 60% to 90% in the last ten years. All of that increase has been the result of mortgage debt.
Mr. Schmidt: That's very significant, Mr. Chairman.
Who holds the bulk of those mortgages?
Ms Watson: Individuals.
Mr. Schmidt: No, who issues the money?
Mr. Waite: The banks are the heaviest lenders in Canada in all areas, so the majority of those loans would be bank loans. About who the individuals are who hold the mortgages, we don't have a very clear picture.
Mr. Schmidt: No, that wasn't my question. My question is, who is the major financier? The debt-to-equity ratio has increased to about 90% of the -
Mr. Waite: Yes.
Mr. Schmidt: So most of that is owed to the banks.
Mr. Waite: Yes, that's true.
Mr. Schmidt: That's all I wanted to know, Mr. Chairman.
The Chairman: Was there any further comment?
With the permission of the committee, perhaps I might turn to Mr. DeVillers, who has been so patient with us and who has taken such a lively interest.... I think we'll give him the first crack at it.
Mr. DeVillers (Simcoe North): Thank you, Mr. Chair.
I have a point of clarification on the figures you quoted, Ms Watson, on the question of consumer debt, where the increase in credit cards has gone from 12.4% in 1985 to 19.5% in 1994. Is that the proportion of total consumer debt in credit cards or -
Ms Watson: That's how much credit cards account for of all the consumer debt. If consumer debt is 100%, 19.5% of that is credit card debt.
Mr. DeVillers: But I think before that you made a reference to something being 5%.
Mr. Bélanger: It was a subset of total household debt, including mortgages.
Ms Watson: Basically, the 5% of people who have only a retail credit card but do not have a bank credit card...it's approximately 5% of people with household incomes under $35,000.
Mr. DeVillers: On the issue of capping interest rates, you indicated some 60% of U.S. states or jurisdictions have that, and your explanation was that they just issue them from other states.
Ms Watson: Yes. You can issue nationwide from any state, so you would issue, quite rationally, from a state that didn't have an interest rate cap. That -
The Chairman: Which is the biggest? Is it Delaware or some place like that?
Ms Watson: I can't remember, Mr. Chairman.
The Chairman: Under our system, the Canadian system, would that be possible if caps were put on - to issue them interprovincially, so to speak?
Ms Watson: In our case, we have federally regulated financial institutions and we have provincially regulated financial institutions. If the federal government were to do something, it would apply only to the federally regulated financial institutions, which would cause some other issues, such as an unlevel playing field and imposing particular requirements on one set of financial institutions and not on another. So it wouldn't apply to the caisses populaires or the credit unions.
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Mr. DeVillers: Because they're regulated provincially?
Ms Watson: Yes.
Mr. DeVillers: You're concerned about a floor price. You don't believe that within the range of whatever the cap is, the competitive forces would come into play at that point and the rates would be fixed accordingly?
Ms Watson: Mr. DeVillers, our best indication is and everything suggests to us that it's a pretty competitive market.
The banks are coming out with new features and services attached to each of these cards. One of them started by issuing a standard Visa card and dropping the fee on it. Three others have followed suit. There's good competition at the moment. There doesn't seem to be any indication that we need to cap interest rates at this stage.
Mr DeVillers: I understand the Bank of Montreal has a credit card available that has a floating rate over the prime rate, or the Bank of Canada rate. Are you familiar with that?
Mr. Waite: I'm not familiar with that. I believe they have a low-interest rate card.
Mr. DeVillers: But it's tied into the rate. It goes up and down with the fluctuation in the rate, does it not?
Mr. Waite: I don't believe it's tied in lock step to the rate, no. I would doubt that. That would mean changing it weekly.
Mr. DeVillers: But maybe it's changed at intervals?
Mr. Waite: Yes. The lower-interest rate cards tend to be more closely linked to short-term rates.
Mr. DeVillers: One of the problems this committee is concerned with is the lack of disclosure of profitability of credit cards as opposed to other forms of credit. Does the department have a position on that?
Ms Watson: Again, there are several ways one could look at this. If we look at simply one segment of a bank's business rather than at the overall return, then we will probably be getting a picture that is not very complete. We would also have concerns about commercial confidentiality.
If you look at return on equity, our Canadian banks are not at all out of line. In fact the return on equity of the six largest Canadian banks this year, in 1995, I believe is slightly below that of the49 largest U.S. banks. So if you look at their profitability from a return on equity point of view, you could argue that our banks in Canada still need to generate from internal efficiencies.
Mr. DeVillers: But the record profits they're reporting, you're saying, are because they're injecting more equity? I don't understand the -
Ms Watson: As we understand it, part of the reason the banks have had such a profitable year is increased services, both business services and debit cards, the use of which I understand has increased phenomenally. They've had better performance on their loans, a better quality of loans and a general expansion of services, which would account for profitability. But on the return to shareholder equity, the profits do not appear to be out of line.
Mr. DeVillers: Previous committees made recommendations on disclosures. Before our last date at the committee on October 26, I went up and down the mall here and into the various banks - there are five banks on the mall - and obtained copies of applications for their credit cards. I note, for instance, the Bank of Montreal has three different cards available, the TD has three, the Royal has two different ones, and CIBC has.... So there's a sea of information out there.
Is the department satisfied that consumers have a road map sufficient to direct them through that information? Disclosure is fine, as long as you can find your way through the information.
.1140
Ms Watson: This has always been an interesting question. It's one that is very hard to put your finger on. You say the information is out there and yet we find - and consumer groups do a lot of counselling and they've done some studies that we've been in - that people do need more information on credit and budgeting.
I would certainly say that if consumers wanted to know what cards would be best suited to them, there is enough information today about the various cards, in addition to the information that we put out each quarter, that they can readily do this. I don't think information disclosure is a bigger problem. I think the bigger problem is getting into the habit - all of us are guilty - of not reading the fine print or even the clear print.
Mr. DeVillers: You don't see an advantage in standardizing the method of disclosing this information.
Ms Watson: I can't really see how you could do this. If you had a standard product then you might be able to have a sort of boiler plate that says you will have all of these five things in it.
We now have an array of cards that are really customized to particular niches of consumers. One person wants travel points, another person gets Zellers' points and somebody else is getting a discount on a GM truck. It's very difficult to see how you could standardize it.
I think what does need to be standardized, and we're not there yet, is disclosure on exactly what your credit is costing you. There's pretty much nearly standardization on the bank cards because they calculate their interest on a daily basis, but that is not the case with the other forms of consumer credit. That's something we are working very hard toward in internal trade.
Mr. DeVillers: Are you familiar with the American Schumer box, the one that is used under the Fair Credit and Charge Card Disclosure Act, which standardizes it? You don't see the benefit of something similar to that for use in Canada.
Ms Watson: I'm not convinced that you need to standardize the information. I'm not convinced that the Schumer box would work very well with all the different cards. I think the Schumer box goes back about three or five years....
Mr. Waite: It's probably longer.
Ms Watson: In 1989.
Mr. DeVillers: In 1988.
Ms Watson: Yes.
Mr. DeVillers: Mr. Chair, I don't want to take all the time. I have other questions. If other members have questions maybe I could come back in a second round.
The Chairman: There are other members who have questions. I should warn all present that Mr. Schmidt has indicated that he has a speech coming on. He is, in the language of the season, ``great with speech''. However, I just put this out as a general warning to everybody.
Mr. Schmidt: Have no fear. I won't make a speech.
The Chairman: Maybe not here. He's saving the good stuff for a bigger room.
We will come back to everybody. We're not so numerous that we can't have a pretty good conversation here.
Next on my list is Mr. Mitchell and then it's Mr. Bélanger.
Mr. Mitchell (Parry Sound - Muskoka): Thank you, Mr. Chairman.
Welcome. I have a couple of questions. Some are on your comments and some are general.
It is the view of the department that there should be absolutely no controls on any parts of bank profitability, that it should be left totally to the marketplace?
Ms Watson: I don't believe Industry Canada has a view and I don't believe that would be the view of the Department of Finance either. I think financial institutions in Canada are regulated - and well regulated - but certainly as far as I'm aware, there's no view that this should be unregulated in any way. There is a fair degree of oversight. There is the office of the superintendent of financial institutions, with its regulation and regular reviews.
Mr. Mitchell: So you're suggesting that the regulatory regime, as it exists today, is satisfactory and that there would be no need to increase regulations specifically in terms of profitability.
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Ms Watson: I'm not in a position to comment generally.
On the credit card issue, I would say that having looked at this, I don't believe there is any need for us to step in and do something at this point, and I qualify that.
Mr. Mitchell: So you wouldn't rule it out at this point, you're saying.
Ms Watson: At this point we have no indication that anything needs to be done.
Mr. Mitchell: I noticed that your concern about the banks being required to disclose the profitability on their card operations as opposed to including it in their general statement was one of confidentiality. I ask you to compare that to the American banking system, where, I understand, many of the American banks do provide their profitability on their card operations separate from the rest of their operations.
Ms Watson: I'm not aware of what the U.S. banks do. In the case of the Canadian banks, they do say where their revenue comes from, consumer services versus business services versus interest income, for example.
I think that looking at one particular segment really wouldn't give you a clear picture of what this profit means. If we're looking at the banks, we need to look at their overall portfolio. Again, you would then ask, why banks? Why not Sears, the caisses populaires or the gas company?
Mr. Mitchell: I think in part because there's a public policy issue that banks have an impact on individual Canadians far beyond what Sears has.
I would suggest that if you were the president of a bank or were sitting on the board of directors of a bank, you would know how much your card operation is adding to your bottom line, and that would be an important ingredient in your decisions. I have difficulty understanding why that can't be shared with the public. I don't see a confidentiality concern there.
Ms Watson: It would seem to me that as a bank president you would know that information for every separate segment of your business. Whether you wanted to share that with your competitors, I don't know. If you had a strategy, for example, to go for share and decided you wanted to move to get more market share and therefore you were going to go with it -
Mr. Mitchell: We do that with certain things. Loan losses are reported. I'm sure the banks don't want to disclose their loan loss history, but they have to, in part because it's good public policy. So, yes, there could be a conflict between what the banks want to make public and what good public policy is. I'm suggesting that knowing what they make on their card operations is good public policy. I understand that the banks might not like it, but I don't see where it would hurt them, nor would it hurt the general public.
But to go on, it's about 25 years now that the banks have been in the card business. Has there been any analysis done between what the average spread was between prime and the average rate charged on cards 20 years ago and what that is today?
Mr. Waite: Yes, there has. I believe we provided some of it in the facts and figures document.
Mr. Mitchell: I don't happen to have it.
Ms Watson: I'll give you a copy.
Mr. Waite: Essentially, the spread was much wider initially than it is now. The spreads tended not to be responsive to changes in short-term interest rates until the late 1980s. After that the average spread has been around 10.5%. It has fluctuated, not in lock step with the bank rate, but it has tended to lag either three or six months behind.
The Chairman: What page is that on in your facts and figures document?
Mr. Waite: It's on page 8.
The Chairman: So you're saying that if we had the earlier figures on the left-hand side of the page, they would show a greater spread.
Mr. Waite: Yes, they would, and less responsiveness to the bank rate.
Mr. Mitchell: I have one last question, Mr. Chairman. It has to do with disclosure.
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You talk about the need for consumers to educate themselves about what it's actually costing them to use the cards. I don't disagree with that. If I had an opportunity to look at all the interest I've paid on bank credit cards over the years, it would be scary.
One of the ways to do that would be to put on your December statement for your various credit cards an extra box that says ``Total interest paid for the year 1995''. So when the consumer gets that last statement of the year, by simply looking at it they will see very clearly and graphically how much it has cost them to use that card. That would certainly give the consumer a very clear picture of the cost and make it in their interest, as part of their new year's resolution or whatever, to do something about that.
When you get it every month, if it's only $30 or $25 every month, then you might not even notice it, but if you get that big box at the end of the year and it says it cost you $780 in interest to use your MasterCard this year, you might do something about that next year.
That's a suggestion.
The Chairman: Are there any reactions to that? Is it doable?
Ms Watson: That's very interesting. I think that's something we should take up with the banks.
The Chairman: We'll note that.
Mr. Mitchell: I would certainly recommend that.
The Chairman: I'm just looking at the rest of the room to try to judge the reaction. We have some poker-faced individuals in the back row. They're hiding under their chairs, actually.
Some hon. members: Oh, oh!
The Chairman: In the spirit of balance and Christmas and all that, perhaps we'll have a question from Mr. Schmidt and then we'll come to Mr. Bélanger.
Mr. Schmidt: I have a question of information, Mr. Chairman. It has to do with the use of the term ``equity''.
I think I heard you say the return on equity from the banks is not unreasonable, and you also used the term ``debt-equity ratio''. The word ``equity'' appears in both of those statements. It seems to me you must be using a different definition when you talk about the debt-equity ratio of a consumer and equity in terms of return on equity for the bank.
Mr. Waite: For consumers it's the debt-to-income ratio.
Mr. Schmidt: All right. I'm sorry.
I still think there is such a thing as debt-to-equity ratio in terms of individuals as well. When you do a mortgage, there's a definite debt-to-equity ratio.
Ms Watson: You can do your balance sheet and see. Yes, exactly.
Mr. Schmidt: So how do you define ``equity'' when you use the specific term ``the return on equity to a bank''? What's the bank's equity?
Ms Watson: It's the return on invested capital.
Mr. Schmidt: Just a minute now. Is invested capital the same as equity?
Ms Watson: It's what they return to their shareholders. That was the question, I believe.
Mr. Schmidt: Well, no. The question is what do you mean by ``equity''? That's the question, because there are so many different ways in which you define ``equity''.
Ms Watson: Equity is the share capital, the people who own the bank, the shares that are....
Mr. Schmidt: No, no, it's more than just shares, I'm sure.
Mr. Bélanger: It's share equity and returned earnings.
Ms Watson: Yes.
Mr. Schmidt: Okay. I just want to make sure we -
The Chairman: We now have a definition on the table that is more or less agreed to.
Mr. Schmidt: That's exactly what I'm leading towards, of course.
The Chairman: We have a working definition, which is share equity plus accumulated retained earnings. So this will be our working definition of what we mean by equity, is that correct? That's the equity against which we're going to return things. All right.
Mr. Schmidt: I just wanted to clarify that for the record. I want to be sure we know exactly what we're talking about here, because it will appear again, I'm sure.
The Chairman: Do you have further questions at this point?
Mr. Schmidt: No, not right now.
The Chairman: All right. That brings us to Mr. Bélanger.
Mr. Bélanger: Thank you, Mr. Chairman. I have a few questions.
First, you say there's a target of January 1996 for harmonization of disclosure of some sort with the provinces. I presume that's the end of January 1996.
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Ms Watson: Yes. We're hoping to have agreement among the provinces and the federal government at the official level in January 1996. We will then submit the proposals to ministers for their agreement, and we hope to have the harmonized cost of credit system implemented in legislation by 1997.
Mr. Bélanger: Do you know offhand what is the impact of daily compounding? My understanding is that on a monthly compounding basis, the net effect is essentially to add close to a point on an annual basis by compounding monthly - between half a point and a point. Would you know what the effect of a daily compounding is?
Mr. Waite: That is a tough question.
Mr. Bélanger: No, it's not; it's mathematics, pure and simple.
Mr. Waite: Let me start by saying that banks do not compound interest on their credit cards. They calculate interest daily, but there is no compounding whatsoever.
Mr. Bélanger: Okay.
Mr. Waite: So the rate you see is the rate you pay, whatever happens.
Mr. Bélanger: They don't compound monthly?
Mr. Waite: No.
Mr. Bélanger: They don't add the interest to the total bill and calculate interest on the interest?
Mr. Waite: No.
Ms Watson: No.
Mr. Bélanger: Not at all?
Mr. Waite: The interest is added to the bill, but interest is not calculated on interest for bank credit cards.
Mr. Bélanger: That's good to know.
Mr. Waite: For retail cards, it's a different situation. The interest is compounded monthly. However, if the consumer makes the minimum payment required, the interest is paid within that minimum payment and there isn't any compound. The declared annual interest rate is 28.8% for retail cards. If you don't make any payments for a year and compound every month, it works out closer to 32%.
Mr. Bélanger: That rate, yes, I can imagine. Thanks.
You mentioned, Madame Watson, that one of the reasons why there is resistance to a floating ceiling is that the fluctuation would cause significant administrative costs. Would you elaborate a bit on that, please? I am not sure I follow what these administrative costs would be.
Ms Watson: On a credit card, you have a number of transactions throughout the month. The Bank of Canada rate could change every week, and in periods when we have volatile interest rates they change quite significantly every week.
You would then have to determine for every transaction what the interest rate is on a transaction-by-transaction basis. When somebody does not pay their amount, you would have to determine what they have paid, to which transaction does that payment apply, what is the total interest rate -
Mr. Bélanger: That's assuming the banks, if there were a floating ceiling, would use the ceiling as a floor and therefore would have to move in lock step with any variations in the bank rate. If they were to be a point or so below the ceiling, there's room to manoeuvre. They wouldn't have to amend their card rate every day. Correct?
Ms Watson: Correct.
Mr. Bélanger: In that case, would there be significant administrative costs, or would it just be a factor of plugging in - because I presume all of these things are automated - the rate to the program at the front end and everything else is taken care of by whatever software they're using? Incidentally, we helped them develop that through IRAP grants.
Ms Watson: Yes. In your scenario, the rate in fact wouldn't change that often.
Mr. Bélanger: No. If there are significant variations in the bank rate, they'd follow.
Ms Watson: That's right.
Mr. Bélanger: That argument, therefore, I would not accept as a valid one for resisting a floating ceiling. Sorry.
You mentioned that credit cards represent 5% of total household debt including mortgages. Correct? What is it not including mortgages? Is it 19.5%?
Ms Watson: Credit cards represent 19.5% of all that banks loan to consumers.
Mr. Bélanger: You said credit cards represent -
The Chairman: Exclusive of mortgages, is that what you're saying?
Mr. Waite: Yes.
Mr. Bélanger: But that's to banks. We are not comparing apples and apples here. It represents 5% of total household debt. That's total household debt, not just debt to banks?
Ms Watson: Correct.
Mr. Bélanger: Including mortgages?
Ms Watson: Correct.
Mr. Bélanger: What is it not including mortgages? Do we know?
Mr. Waite: We don't have an answer on that.
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Mr. Bélanger: Okay. Just for my colleague here, if you're at sea, you don't need a road map, you need a chart of the stars or something.
Mr. Waite: There just aren't the statistics on that. That is the answer.
Mr. Bélanger: Okay.
I also want to ask you about your comment that there's a lot of competition in the marketplace. I will agree with you that there are a lot of bells and whistles, because there are a lot of contests and a lot of free trips that you end up paying for. There's a lot of that. Would you care to tell us what is, for the major banks, the current rate on their credit cards?
Ms Watson: It's about 18.6%. It varies from about 12% to about 18.9%.
Mr. Bélanger: But for the bulk of them what is it? It's the same, isn't it?
Ms Watson: No, you have low-interest options that are about 9%. You have some basic cards that are at 16.75%. You have 19% on the standard MasterCard. Visa tends to be a little bit lower than a MasterCard because they tend to charge an annual fee.
It depends on the card. At the moment my list here of the December numbers from our credit card quarterly shows a range of 9.9% to 18.9% annual interest rate.
Mr. Bélanger: I'll accept that. You may be right that there's enough competition out there.
In your calculations of the total household debt, or the percentage of debt that the bank loans and credit cards represent in that package, do you ever try to factor in the underground economy and the debt that's held by the underground economy?
Ms Watson: We've done no work on the underground economy. I don't know if the Department of Finance has, but we have done no work on it.
Mr. Bélanger: Perhaps it's a little off the topic of credit cards, but I've had some people tell me that one of the reasons the bank may be retrenching from lending is that there's a resistance on the part of a lot of borrowers to disclose their income. Therefore, they go to the secondary markets to get the loans, because there they'll disclose the income that isn't disclosed to Revenue Canada.
The Chairman: The secondary market being the guys in leather jackets?
Mr. Bélanger: Perhaps people who wear overalls.
The Chairman: Okay.
Mr. Bélanger: I understand I'm deviating from the main topic, but it's something this committee might want to take a look at, at some point.
The Chairman: If I may, then, as we issue Christmas homework to the Department of Finance, I'll ask them whether they've given some thought to those issues or whether they have any information somewhere that would be useful.
Mr. Bélanger: How could we as a government use that to perhaps tackle the underground economy a little further?
The Chairman: That's something for us to ponder. It's a huge overall problem as to whether the credit angle is a better way of coming at it rather than using Statistics Canada statistics, which show some.... There are a lot of ways of looking at the underground economy, and I think the committee would want to sit down and spend a little time thinking about whether that's a useful overall activity for the committee, and if it were, what would be the appropriate way of coming at it that hasn't been used by other groups trying to deal with a very large but difficult topic.
Mr. Bélanger: Thank you.
The Chairman: Mr. DeVillers, I'm sure you have questions.
Mr. DeVillers: Yes, thank you, Mr. Chairman. We've been dealing mostly with bank cards, but what are the current interest rates on retail credit cards?
Ms Watson: They are 28.8%.
Mr. Bélanger: They've been like that for ten years.
Mr. DeVillers: All of them?
Ms Watson: All of them.
Mr. DeVillers: I think the Bureau of Competition Policy is also under your ministry. Has there been any work done there on investigating that?
Ms Watson: I am not aware of what the Bureau of Competition Policy has done in this area. Certainly, I am happy to take your query to Mr. Addy, the director of investigation and research, and ask if they've looked at that.
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Mr. DeVillers: My information is that they're pretty much all the same. Life is full of wonderful coincidences, but that one strikes me....
The Chairman: The interest rate is actually based on the technical lunar month.
Mr. DeVillers: Is it? Okay.
Mr. Bélanger: That hasn't changed for 15 years.
The Chairman: It hasn't changed. That's right.
Mr. DeVillers: We've been kicking around definitions of equity. I just wondered about the other definition of equity in the sense of fairness and I wondered whether the department has any opinion on an interest rate of 28.8%.
Some hon. members: Oh, oh!
Mr. Bélanger: You're vicious.
Ms Watson: I believe that two or three years ago, or perhaps after the 1992 report, the Bureau of Competition Policy did look at the issue of whether everybody having a single rate was anti-competition. I believe they concluded that this in itself is not anti-competition.
I simply do not have any other information. You would have to ask Mr. Addy. But in terms of the 28.8%, Mr. Manley has written to the retailers, sort of noting his interest in seeing these rates come down. Their response has been that their costs are much higher than the banks' costs are, that they provide this as a service to their customers, that they often have very long-term payments, and that basically this is the service they provide. They feel quite comfortable.
Mr. DeVillers: Do they feel that's fair and acceptable?
Ms Watson: They're not making money out of this service. It's a service they provide. Because of their costs and their costs of administration and because sometimes they offer special things to their cardholders as a special service, they feel their costs are justified.
Mr. DeVillers: As for the question of partial payments, I think recommendation 6 from the 1989 committee report suggested that there should be a uniform method of dealing with calculating the interest. But the part that seems most peculiar is the difference between a partial payment and a full payment made during the grace period. Has the department done any studies on consumer comprehension of how that functions?
Ms Watson: Jean-Baptiste, do you want to answer this?
We have funded studies for consumer groups in the area of consumers' knowledge of credit and other matters. I can't tell you offhand whether any of the studies has looked specifically at that particular issue.
Mr. Jean-Baptiste Renaud (Analyst, Office of Consumer Affairs, Department of Industry): Not really. We funded a study on consumer competency and credit, where I guess one of the main conclusions or recommendations is that education and credit in general for all ages appears to be necessary for and wanted by consumers, including credit cards.
Mr. DeVillers: In dealing with this issue my experience has been that very few people appreciate the different treatments for a partial payment and a full payment. Would there be any difficulty in regulating uniformity, as was recommended in the 1989 committee report?
Ms Watson: Would this be in the case of retail cards, or are you thinking of all cards?
Mr. DeVillers: All credit cards.
Ms Watson: Banks charge interest on the outstanding balance daily.
Mr. DeVillers: Right.
Ms Watson: It's daily interest.
Mr. DeVillers: Daily interest. But if a person makes a partial payment on the 20th day, they pay the interest on 20 days. If they make a full payment on the 20th day, they pay no interest.
Ms Watson: They have a full grace period.
Mr. DeVillers: Right. Why the difference? Why not receive the benefit of the grace period for a partial payment? Would there be any difficulty in doing that?
Ms Watson: From a policy point of view I think it would certainly raise the question of whether you want to have an incentive to not pay on time. Part of the reason that a lot of people do in fact pay credit cards or retail cards on time is that interest rates are high and so forth. If you are granting allowances for whatever has been paid, then I would assume that because this is unsecured credit, you may in fact see some adjustment somewhere in the rates, because I would assume that banks would want to look at what this does to their lending portfolio. I don't think everything else would stay exactly the same while you imposed this. I think you would have to have other adjustments.
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Mr. DeVillers: But if there's an incentive to make a full payment, why not have an equal incentive to make a partial payment, to pay what you can?
Ms Watson: Because then in effect you would be giving a low interest or a lower interest on your credit card.
Mr. DeVillers: That's on everything instead of just the partial rate?
Ms Watson: Yes.
Mr. DeVillers: You're giving me some of the argument I received from the Canadian Bankers Association that if we make adjustments on interest rates on cards, etc., they would have to raise the cost of other credit to make up for the loss of profitability in the credit card areas.
Ms Watson: Where I'm coming from is that if you have a competitive market and you have full information, or as full information as is practicable, then by and large nobody, not even the banks, can sustain rates at levels that are artificially high. Therefore, if you try to sort of squeeze in one way or change in one way, then in a competitive market you will expect to see other changes occur in response.
Mr. DeVillers: To maintain the same levels of profits?
Ms Watson: Yes, to come back to the prior situation.
Mr. DeVillers: We are achieving record profits each year. Is there such a thing as normal profits or regular profits?
Ms Watson: I guess that's for the banks to answer.
Mr. DeVillers: Yes, maybe that's not a fair question to ask you.
In terms of your credit card cost bulletin, has the department done any studies to see how many people actually get to see this?
Mr. Waite: Circulation is about 5,000. We get a reasonable number of media inquiries after each issue. It gets a fair amount of coverage in the press. Curiously, in the summer we did canvass the people on the mailing list to find out how many people were interested in continuing to receive it. The results were a little disappointing in that I think only 20% responded and about half of them said no, we don't want to continue receiving it.
Ms Watson: Since we first started this, there's a lot of information that is now available on credit cards generally, so I'm not surprised that the advantage of this bulletin is that it puts all that information in one place. We certainly intend to continue to publish it each quarter for the next little while, but this is something we will look at again.
Mr. DeVillers: But apart from whatever media coverage it gets, it doesn't get a wide circulation.
Ms Watson: We have the mailing list and we assume, for example, that the consumer groups we send it to in turn disseminate that information. So I can't really tell you how many people would actually get this information as a result of that mailing list of 5,000. It's sort of like newspaper readership. Do 5 people read every newspaper?
Mr. DeVillers: Thank you, Mr. Chair.
The Chairman: This whole operation is a bit like the last movement of Haydn's Farewell Symphony. People keep coming and going and blowing out their candles and heading out with their violins, but I'm assured by....
Oh. You see, they come back.
I think there is a comment from Mr. Mitchell, if there are no further questions.
Mr. Bélanger, you have another question?
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Mr. Bélanger: Do you have statistics or data on the percentage of cards that come under federal jurisdiction, if I can call it that, versus provincial jurisdiction and the credit coming with those cards? Can you take a guess?
Mr. Waite: Yes, we collect information at the end of the year on how many cards are issued by retailers and by financial institutions. It's about 50-50 roughly.
Ms Watson: Federal versus provincial.
Mr. Waite: Federal versus provincial is more difficult. No, we don't because some of the Visa cards and MasterCards are issued by credit unions and caisse populaires.
Mr. Bélanger: Do we have any statistics on credit card fraud? Do we leave it to the institutions to deal with that, or do we, as a government, intervene?
Mr. Waite: We leave it to the institutions to deal with, in the main. The marketing practices branch has some initiatives under way regarding telemarketing specifically.
My understanding is that most credit card fraud is with counterfeit cards rather than individual consumers. So it's an organized thing.
Mr. Bélanger: Is it the same for the electronic use of the credit card, buying on the net type of thing? Is the ministry involved in looking at that, or are we leaving it to the institutions as well?
Ms Watson: This is an area we're just beginning to explore - purchases on the Internet and so forth.
The Chairman: On the phone?
Ms Watson: We do have information on telemarketing. The marketing practices branch of the Bureau of Competition Policy in fact looked at telemarketing.
But on this whole sort of electronic payment, this next wave system, we're starting to look into what consumer issues there are there.
Mr. Bélanger: Am I correct in believing there is a local company that has developed a system in conjunction with...I don't know if it's MasterCard or Visa - to make secure electronic transactions using credit cards? Are you aware of that?
Mr. Waite: I'm not aware of a local company that has done it. Both MasterCard and Visa are working with software companies to develop something secure. I understand they were working together to produce a unified standard, but that comes and goes.
Mr. Bélanger: Thank you.
I think I've run out of questions, Mr. Chairman.
The Chairman: Mr. DeVillers, have you any final comments or questions?
Mr. DeVillers: On the letter - I don't know if it was to the legislative assistant from the Canadian Bankers Association - dealing with the recommendations of the previous committees and how they're being handled...for instance, the recommendation on any written material, prominent display of effective annual interest rate fees and grace periods. The answer is that six of seven of the card issuers - I guess in this case it was the banks - that were polled responded that this information was on all written material, while one respondent included this information on most.
The entire letter goes through and refers to six of seven, or most of. Has the department seen this material?
Ms Watson: I have seen a copy of it.
Mr. DeVillers: Yes. Is that a satisfactory response, in your opinion, that these issues have been dealt with?
Ms Watson: We can basically look at these things in two ways. We do what you've done, which is collect a lot of promotional material. We have officers in other parts of Canada who likewise follow this. We also look at complaints. Over the last year I think we've had fewer than a handful of inquiries on this subject. Consumers are quite quick to get on the phone when something is annoying. So I am assuming that the indications are that information is getting out there.
Mr. DeVillers: No further questions, Mr. Chair.
The Chairman: Mr. Mitchell.
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Mr. Mitchell: Mr. Chairman, I'd like to make two final comments.
First of all, with the indulgence of the other members of the committee, if you could perhaps write a letter to the Canadian Bankers Association with this suggestion about reporting the total amount of interest the consumer paid on that card - perhaps they could put it on their year-end statement - and ask for the association's reaction to that, I would appreciate it.
Finally, on behalf of the committee, Mr. Chairman, since this is our last meeting before we break, I'd like to -
Mr. Bélanger: We're not having another meeting today?
Mr. Mitchell: No, I'm afraid not.
On behalf of the committee, I would like to thank you for your chairmanship and your direction over the last four months since you took over the committee. Well done.
Some hon. members: Hear, hear!
The Chairman: Thank you very much. I must say it makes it easier when possible dissenters are absent, of course.
I would like to make a couple of year-end comments, and this won't take more than half an hour.
First of all, I want to thank Mr. DeVillers for being so patient. I detect that there are really three major issues he has raised. In a sense, they escalate in difficulty in terms of policy considerations. I think there is general agreement on the first one, which we're going to be addressing in a specific letter. Indeed, it is one on which we may send future letters, and that is the whole issue of clarity to consumers about what's involved.
It wasn't until Mr. DeVillers pointed this out to me about the balance issue, but as one of these credit card consumers I'm ashamed to admit that I'm one of the sinners. You'd think I'd know better. Then again, maybe you wouldn't.
What I think we can do on an informal basis, both as individual members and as a committee, is keep on top of this issue of clarity for consumers. Anytime we have a good idea, I hope Industry Canada will receive it in the spirit of advancing the cause of all consumers. I think that's what we're here for as members of Parliament.
The more troubling or difficult issues of both interest rate capping and profit disclosure are ones that raise larger issues that we may not have dealt with yet. I think it will be up to the committee to sit down in the new year to decide what future action, if any, it will take on the whole file of credit cards. Again, though, we want to thank our colleague for making us aware of what are very important issues.
I would say, by way of response to your kind remarks, Mr. Vice-Chair, that it is a pityMr. Schmidt isn't here. I wanted to thank him for the generous remarks he made in the House on the way in which we worked as a committee on Bill C-99, and indeed on C-88. We have gone beyond partisanship and have tried to be helpful to our department, which is Industry, and to our constituents in coming up with positive and creative responses to pieces of legislation. I therefore want to thank the committee, too, for helping me as the new boy on the block.
I should tell you that in the new year we will have such thrilling topics to look forward to as the Bankruptcy Act amendments and the Standards Council of Canada Act amendments, of which we've had a brief taste.
We have established our subcommittee on defence conversion and aerospace in the context of the OECD study on the innovation gap. We are attempting to get a written mandate for that subcommittee, which we will share with all members. We're in the process of having a discussion with the department and with the subcommittee folks. We're getting to them a copy of the OECD report, and we will also attempt to get one in due course for all members. It's a very interesting document on the state of Canada.
In the future, we will continue with our work on and with the banks with our quarterly meetings. I think we have now regularized those. We have a very full agenda that will deal with continuing the benchmarking exercise and with monitoring the progress of the ombudsman process and the dispute settlement mechanisms.
The major thrust of this committee over the next little while, apart from the things that we have to do, will be in the area of science and technology, innovation policy and knowledge-based industry. But we are holding back until we have a better understanding of what will come down from cabinet on the science and technology review and on any possible special technology funds so that we may contribute positively to the development of policy while working closely with the department rather than simply thrash about.
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So, again, thanks to the witnesses today, to Mr. DeVillers, and to the committee, both real and virtual.
With that, I wish everybody season's greetings.
And of course - my gosh, how could I forget the people who really tell me what to do - our excellent researchers and our clerk, who has kept us on the rails, and when you deal with a chaotic personality like me, that's no mean feat.
I wish all the people who help us get through the day, including the translators, the folks who keep us honest, and those who direct the microphones, and everyone else season's greetings. We'll see you in the new year.