Background
This paper examines the legalities involved in Canadian credit card contractual agreements and attempts to analyze and suggest measures to rectify the shortcomings in the cardholder terms and conditions. Many varieties of credit cards serving diverse consumer uses are available in Canada and are issued by well-known banking and financial companies.
These include Standard Credit Cards, Gold Credit Cards, Platinum Credit Cards, and Student Credit Cards, all of these being available across Canada at low and regular rates. Besides these, there are also the US Dollar Credit Cards, the Secured Credit Cards, the Charge Cards, and the Retail Credit Cards. The study tries to analyze an actual credit card agreement as per the terms and conditions set out by a leading card issuer bank in its credit card application.
When a card applicant signs the application, a card is issued to him or her, and he uses the same, then he becomes a card-holder who is bound by the terms and conditions of use of the card as stipulated by the issuing company or bank. Since credit cards are both personal credit instruments as also payment tools and the cardholder can operate on his linked account at his convenient time, place, and ease, it is no wonder that most Canadians are in possession of at least two credit cards on average.
In all credit card transactions, the cardholder is directly under contract with the issuing bank. But there are other parties like merchants, ISOs, and Card Associations, (e.g., VISA and MasterCard). VISA and MasterCard are the organizations that frame rules and offer card services through their member banks and financial institutions. Thus the actual business relationship is between the cardholder and the issuing bank, the Card Association and the member issuing bank, between the issuer bank and the merchants/POS, etc. The relationship is for the mutual benefit of the contracting parties.
Thus, while a cardholder may opt for a card with a bank for the advantages that he perceives it offers, the issuing bank hopes to enhance its revenues, divert customers to alternate delivery channels for optimizing the cost of operations, or some other reasons. The merchants improve their sales riding on the credit availability and technological benefits of credit cards. While such business and contractual relationships are generally the same the world over, Canadian law has some specific provisions that are unlike the laws of other countries.
One reason is the way the Canadian provinces are organized and administered. Thus, each province has its own separate consumer protection and other such laws that are aligned with the national objectives but still administered provincially and separately.
An understanding of the issues concerning the credit card means gaining a deeper knowledge of the benefits, the associated risks, and other such issues. In this respect, the Financial Consumer Agency of Canada or FCAC, a body constituted under the Canadian Government provides vital information on credit cards which may be enumerated here for understanding the issues better (2009a, p. 4).
Credit cards aid in establishing a favorable credit history and earning a positive credit rating for the cardholder. These plastic cards are easier to carry in lieu of cash, provide credit readily for use of the cardholder as per his needs, even offer incentives and rewards, and are generally regarded as a safe and convenient payment mechanism that can be made over the internet or telephone using the PIN.
Risks
There is the risk that the cardholder may become steeped in debt due to the non-judicious use of the card. Another downside is that the credit rating of the cardholder suffers if he makes delayed payments on the card outstanding. Also, the cardholder agreement’s terms and conditions are quite complex and difficult to understand. The form of credit is also costlier than other forms of personal credit.
The FCAC also lists the things in a cardholder agreement that an applicant needs to check before applying for the card and which are provided as follows (2009a, p. 19):
- The annual fees (or other fees applicable)
- The minimum payments to be made monthly
- The rates of interest on purchases, balance transfers, and cash advances that the bank will charge
- The method by which the interest will be calculated
- The available grace period
- What penalties or measures that late payments would entail for the cardholder
- Additional benefits on offer
- The nature of support or service provided
The FCAC also lists the essential terms and conditions that should be a part of any cardholder agreement which should accompany cards sent by a bank to the card applicant (2009a, p. 6). These need to be mentioned to address the key issues in the latter part of this paper.
- What annual interest rate the card issuer will charge on the card
- How the interest on card outstanding will be calculated and recovered by the bank
- What will be the grace period allowed by the bank
- What will be the periodicity of the issue of statements to the cardholder
- Whether the cardholder is required to pay in full his outstanding on account when he receives his statement and what will be the penalty or additional charge if he does not so pay immediately
- What minimum monthly payments will have to be made and what will be the method of calculating the amount due payable
- What would be the initial credit available on the card (credit limit sanctioned)
- What optional features are available on the card and at what cost to the cardholder
- Other fees or charges applicable from time to time
- A phone number for contacting the card issuer on issues relating to the card account during its business hours
Likewise, the cardholder’s statement must also provide the following information (FCAC, 2009b, p. 7):
- Details of all transactions during the period of the statement
- The amount charged as fees and interest on the account
- Dates of posting the transaction entries to the account
- Amount payable by the cardholder and the date before which this is to be done so as to give the benefit of the grace period to the consumer
- The break-up of amounts of purchase, cash advances, interests and other fees charged, and the payments made into the account during the statement period.
The issuer bank must also give an advance written notice at least 30 days prior to such alteration when it alters the original terms and conditions of the cardholder agreement. But it need not give such advance notice in case the bank changes the credit limit on the card, extends the grace period, decreases a charge other than an interest rate, alters its optional proposals, or effects a change in interest with change in its base rate of interest. In such cases, however, the bank must give written notice within 30 days of such alterations in the contract (FCAC, 2009b, p. 8).
Methodology for Analysis
Leading credit card issuers in Canada are the BMO Bank of Montreal, the Toronto Dominion Bank, the President’s Choice Bank, the Bank of Nova Scotia, etc. Canada, as well as its provinces, has in place some legal statutes for protecting consumers, financial bodies, and business enterprises.
These include the Competition Act, the Consumer Protection Act, the Collection Agencies Act, the Privacy Act, the Personal Information Protection and Electronic Documents Act (PIPEDA), the Bank Act, and the Civil Code, among other such legislation, aimed at ensuring and protecting the rights of the consumer, facilitating fair competition, guaranteeing personal information and privacy rights, etc.
Since these laws govern credit card agreements, the study and analysis of the specific clauses incorporated in cardholder agreements as also the related legal statutes could reveal how effective the Canadian laws are in regulating credit card contracts, what are the perceived shortcomings in the same, and what needs to be done to improve the business and contract laws in the Canadian environment.
While most card issuers nowadays provide some ancillary benefits to each type of card that they issue their customers, only those laws that relate directly to the card issue and the contractual agreement were studied in detail. There obviously are other laws like those concerning Insurance, Mutual Funds, etc which form a set of ancillary laws. Many card issuers provide benefits of insurance, mutual funds, etc on the cards issued by them for meeting competition and also for providing their client’s value-added services.
However, the related laws have not been studied as much as they do not form essential elements of all cardholder agreements. Thus in the study, the primary contract between the cardholder and the issuer bank was examined on the basis of laws relating to contract, personal privacy, consumer protection, right to privacy of information, etc which had the most relevance to the issue of credit cards.
Description and Explanation of All Clauses of the Contract
An MBNA Credit Card cardholder agreement (Fig.1) was examined for analyzing the underlying legal implications behind the key clauses stipulated therein by the card-issuing bank. The stipulated terms and conditions in the agreement were examined, the legal provisions underlying the same pinpointed, and analysis was then done.
The first thing that was stated in the application was that only Canadian citizens could apply for the card. This actually is a standard requirement of all cardholder agreements for a card to be issued within the country. Also, applicants were required to be 18 (often 19) years or more. This also is in keeping with the majority age as specified across the various provinces of Canada. While some provinces stipulate an age of 18 years as the majority age, others maintain this to be 19 years. But what followed immediately after the age stipulation, was simply a marketing attempt on the part of the issuing bank. The bank stated that if the application for the type of card was not approved, which it could anyway do at its discretion, the application could mean to stipulate that the bank could open a Preferred Account for the applicant.
Another controversial clause appeared to be that of automatic consideration for the upgrade of the account. The terms were such as to preclude the free choice of the applicant. It simply meant that if the bank did not, at its discretion, find the applicant suitable for issuing a MasterCard Account, then it could without further information to the applicant and quite arbitrarily, open a Preferred Account for the applicant. This thus meant that the bank could protect its commercial interests in so opening an account and realize any higher fees on the same and that the applicant had no choice in the matter. This also constituted unfair practice and could be termed as the unsolicited offer of cards, goods, or services, which was prohibited by the provisions of the Consumer Protection Act, 2002 as amended from time to time.
The second paragraph stated that the applicant (once he/she signed the application) agreed to ‘everything’ written in the agreement. In addition, the applicant also authorized a customer service representative to contact him/her for selling other consumer loan products. While the selling of further or other loan products could enable the bank to further improve its loan portfolio and hence revenues, how this related to the credit card application was difficult to imagine. Also, the basic implication in any contract is that both sides to a contract are able to exercise free choice in the matter, have valid and lawful consideration for entering into the contract, specify the terms and conditions as per the stated objectives of the contract and as actually contemplated for performance, represent actual facts in their agreement.
The parties are also understood to not mislead any of the other parties to the contract, provide an opportunity to those other parties to exit the contract within a reasonable time of making the contract, and also do not arbitrarily impose certain things, including sudden and inexplicable fees, on those other parties. Thus credit card terms and conditions that impose certain irrelevant or unrelated obligations on the parties to the contract can be termed both illegal and unfair practice as also in contravention of both the Consumer Protection Act and the Competition Act or even the common contract laws in force in the country.
A still more contentious clause was that the applicant’s so applying for the credit card of the bank would also allow the bank’s affiliates, representatives, or service providers to monitor and or record the telephone conversation for education and quality service. A simple survey could very well serve the purpose of understanding the requirements of a customer, which could then be analyzed by the bank to improve service quality. How an infringement on the privacy of the individual and eavesdropping on private conversations can be supported by any laws of any democratic and civilized country is beyond comprehension. Perhaps, in these times of heightened terrorism and money laundering, a bank could only hope to pry on personal phone conversations only and only if mandated by suitable laws for enforcing the security of the country.
The next clause is related to the Privacy Rights of the applicant cardholder. The applicant was taken by the bank to be bound by the terms of the agreement so that MBNA Canada or its affiliates, agents, or service providers could have access to private information on him or her that could help identify those agencies on the credit status of the person. The parties concerned were justified in protecting their own interests and needed to adopt effective risk management practices.
However, whether the sharing of private information among others could be acceptable in view of the legal protection available to customers for safeguarding personal information and privacy is a debatable point. While the statutory need to identify an applicant, record his credit history and any relevant information as called for under Canadian federal laws was understandable, the secondary marketing avenue that the bank hoped to tap from the card issue, appeared to be bad and unfair, or unsolicited business practice. The agreement also authorized the bank to retain information on the customer for future use even if the relationship between the two had expired and for an indefinite period, which if not permitted by the customer for any future marketing promotion, also appear meaningless and unlawful.
Application of Legal Principles in the Credit Card Contract
Although electronic payments and electronic money like credit cards are accepted mechanisms for use by Canadian businesses and individuals, the dian laws are still to actually define electronic money. Since the fees and charges of most credit cards are extremely high even among developed countries, there is obviously little regulation by the authorities in controlling the credit card fee structures, which are often arbitrarily imposed on customers. Added to this are the high interchange rates that ultimately add to the outgoes of the Canadian consumer
And another important underlying requirement in the card agreement under study as well as all credit proposals issued in Canada is that the applicant should have a satisfactory credit history. This is a fundamental principle used to identify the deserving credit seeker as also a means of risk management that helps prevent loss to the creditor bank.
However, the basic law is the contract law. Here the contracting parties are the card issuing bank and the card applicant. Canadian Contract Law is based on the English common law and is conceived as a voluntary agreement between the parties concerned. While the contract creates some legally enforceable obligations on the parties to it, it itself needs to be clearly communicated, unconditional and without changes. In Canada, contractual agreements are required to be written ones. Some important concepts associated with a contract include that of privities, offer and acceptance and consideration. The contract law is also of a private nature. The capacity to contract is restricted to individuals at least 18 or 19 years of age. Hence, the age clause in credit card contractual agreements is as mandated by the law.
However, an undue influence should not be attempted by means of a contractual clause and a genuine consent is essential for ensuring the validity of a contract. In this respect the card under study appears to unduly influence the prospective card applicant to follow the bank’s terms of contract so that he or she may obtain the credit card applied for. Also, the doctrine of privities in a contract act is absent in a consumer protection act. Thus while the privities consideration stresses on the principle of caveat emptor, the consumer is attempted to be protected against undue commercial interests through the provisions of the consumer protection law. This consideration is wholely absent in the cardholder agreement studied. The agreement nowhere mentions a replacement warranty or assures the applicant that if he is satisfied with his or her card, the bank will accept back the card. Thus the consumer protection act appears more on paper than effective and neither ensures a warranty to be adopted by the bank nor prevents it from adopting unfair market practices. The customer applicant also has no choice in the matter of selection of the card depending on his or her satisfaction with the quality of card or service involved.
Another aspect of Canadian law is that of regulation in the manner in which products are sold, advertised or marketed. The federal law in this regard is the Competition Act. The Competition Act governs the prescribed standards of advertising and marketing of a product or service. However, provincially, protection is sought to be given to the consumer of goods or services through the Consumer Protection Act. In the case of the cardholder agreement under study, it cannot be said that the applicant is being offered a choice of products and services at fair prices. Rather some services or products are being imposed upon the cardholder. The bank also appears to charge exorbitant fees. And, the right of the consumer to be accorded protection against unsatisfactory card services, and the right to adequate or suitable compensation for the same is also notable for its absence from the terms of agreement.
An important provision that is also absent is that of a clear disclosure clause regarding the card issue and the charges associated with the use of the same. Obviously, the card rates and charges mentioned prior to the terms and conditions clauses are vague to say the least. Most common applicants would not be able to comprehend all the complex features represented. The clauses are also in very fine print and lack clarity. But, the Bank Act provisions mandate full disclosure of terms and conditions in credit card applications.
On a recent complaint from Ms Philippa Lawson of the Public Interest Advocacy Centre based in Ontario against the MBNA Bank credit card agreement provisions (www.piac.ca), the Privacy Commissioner observed that the MBNA bank was not reasonably informing the customer as to the purposes for which the customer’s personal information would be used by it or its agencies and affiliates. He also stated that the information in the cardholder agreement was not clear or understandable to the customer, written in complex legal terms and in very fine print, and also appeared to indicate that the personal information could be unreasonably used in any arbitrary manner and for disclosing the same to anyone that it unilaterally thought to be fit without a clear and unforced consent from the cardholder.
He opined that the MBNA Privacy Policy Statement also was written in such a way that it did not indicate that the customer had clear choice and consent in the matter of card account selection. He again found the bank guilty of unfair practices when it was divulging customer information to third parties who provided services to the bank’s customers although the bank did not clearly mention this in the application format. He found that the bank’s card agreement actually was in contravention of the provisions of the Privacy Act and the customer was precluded from forming an informed consent while accepting the cardholder agreement. The terms and conditions were in clear contravention of the right to privacy of information of the individual when the bank stated the use of personal information for its secondary marketing efforts without the consent of the customer. And, as mentioned before in this paper, the agreement did not provide the applicant any easy, immediate or convenient means of withdrawing himself or herself from the contract linked with optional practices of the bank.
Major Contractual Provisions and Legal Corrective Measures
The Ministry of Small Business and Consumer Services of the Government of Ontario, Canada has provided details of the basic features and requirements in a contract on its website (www.gov.on.ca). These provide a fair idea of the nature of contractual agreements like the credit cardholder agreement. The ministry identifies certain features of all contracts, which are provided hereunder for a better understanding of the issues concerning credit card contracts.
- All contracts need to be clear and easily understandable. This means that contracts must be clear, specific and unambiguous. The contracting parties must easily understand all clauses. Legally, unambiguous contracts go in favor of the consumer of goods or services who may be part of a contract having unclear terms and conditions or language, in cases of disputes.
- There must be a period of cooling-off. It implies that both parties to a contract need a cooling off period for exiting from the contract. For contracts worth a consideration amount more than $ 50, the legally prescribed period of cooling off is 10 days within which any of the parties can back off from the agreement even if the same has been agreed and signed upon. Cancellation of a contract can best be done by fax or mail, in which case any amount advanced has to be returned.
- Goods or services that have been pre-paid. Written contracts are mandatory for goods or services involving consideration amounts more than $50 in cases where any part of the contract will occur in the future. In addition to being written and clearly stipulated, the contract must include full particulars of transactions as also disclose completely all the terms of the credit.
- Disclosure of terms of credit in full. All credit sales of goods or providing services on credit need to provide the consumer full written particulars of charges and rates to be recovered by the supplier of the credit goods or services. Additionally, the financial details must clearly specify additional charges or fees in case of failure or delay on the part of the debtor in repaying back the loan or credit.
- Referral selling. No offer or proposal to the consumer can be false or misleading in intention or content. In other words, the parties to a contract must only include terms that they intend to comply with and also need to back up any contract with related action.
- Repossession. The law also protects the consumer who has bought a good or service but paid at least two-thirds of the price of the goods, so that in such cases the seller cannot take back the goods so sold save and except by court order. However, in the Canadian credit market, where the credit score or rating is of vital significance for the borrower or account holder, the situation could be damaging to the defaulting debtor if and when the seller takes the defaulter debtor to court.
- Unsolicited goods. The Canadian laws explicitly prohibit the sale of unsolicited goods or credit cards to a consumer. The buyer in such cases need not pay or accept such goods. But once the consumer buys something with the card or uses the card for a cash advance or purchase, then he is liable on the same and cannot disclaim his ownership of the card or goods and hence all payment liability there-against. The Consumer Protection Act, 2002 envisages a monetary fine of $50,000 or imprisonment up to two years less by one day in cases of violations of some sections of the act. The similar fine in case of corporate entities is as high as $250,000.
- Consumer agreements must reveal all relevant details. The law stipulates that, in cases where either of the parties to a contract do not deliver on their part of the contract, or one party does not disclose something that it was legally bound to disclose prior to or during the operation of the contract, then the aggrieved party shall have the right to cancel the contract unilaterally within one year of signing of such contract.
- Deliveries be made on time and redress for non-compliance. Once a delivery of a good is stipulated in a contract and the good does not arrive within 30 days of the deadline fixed, then the aggrieved party to the contract can cancel the contract unilaterally. Sending a suitable letter to the other party informing of such cancellation and the reason thereof can well achieve this. However, once the aggrieved party accepts the delivery of goods beyond the stipulated 30 days from the delivery date stipulated in the contract, he is bound by the terms of the contract.
- Remedies need to be timely. In case the buyer of goods as per a contract takes the help of the cooling off period after which he declines to accept the goods, the seller company has 15 days in which to return the money taken from the buyer. The company then has every right to take back the goods, although it may need to bear the expenses of returning the goods to it.
- Misrepresentation is illegal. Contractual terms should not be a misrepresentation of actual facts. Thus, all financial charges or fees mentioned in a contract should in actual fact be what are actually charged to the consumer.
- Unfair Practices. The law defines unfair practices and strictly prohibits false or misleading sales representations. The act also enables those subject to unfair practices to legally claim back their money. The aggrieved person has the following options available to him:
- He can get the agreement rescinded by the seller within one year of contract through fax or mail, by referring to the provisions of the act.
- He can sue the seller if the latter fails to comply with cancellation request if more than 30 days have elapsed. The same, if it involves an amount less than $ 10,000, can be done easily in court by the aggrieved himself.
- He can contact the Ministry of Government Services who might suggest ways for action and the complainant can even file a formal complaint which the Ministry can investigate and prosecute the defaulting party.
In the light of the features of contracts previously discussed and the application of the relevant laws stated to credit card agreements, it appears that there are several shortcomings in credit cardholder agreements that need to be addressed if the cardholder, who is a consumer, is to be given a fair deal by the issuer bank.
One of the effective measures could be the establishment of a 24 hour toll free 1-800 telephone service so that applicants could phone in their complaints or intention to withdraw from a cardholder agreement if they considered this to be necessary. This would ensure consumer free choice. Also, the terms and conditions need to be clearer, couched in simple terms understandable by laypersons, and also be written in larger, intelligible print. The intending cardholder could then form an informed opinion and exercise the right of free choice based on his perception of utility and quality of the product or service. While adhering to the basic form of written contractual agreements, the bank would also need to consider the rights of the cardholder applicant, which are sought to be protected by the Consumer Protection Act.
The agreement thus needs to provide an exit option from the terms and conditions of the agreement in both paper and electronic forms. The card and services offered also must be of the standards and quality promised or represented to the prospective cardholder in the agreement. While the bank needs to maintain prudent risk management practices, comply with federal and provincial laws and also meet its commercial needs, it must above all follow the provisions of the Competition Act and the Consumer Protection Act in being transparent, fair and above board in all its dealings with the customers, including the provision of credit card services.
Recommendations and Takeaways
The PAIC had many years back stressed on the need to establish an independent consumer protection bureau. It had also wanted in place measures to improve disclosure and transparency practices among credit card issuing banks and other financial service providers. But as it stands even today, much needs to be done in the matter. Thus, the cardholder agreement needs to include a clear fraud protection clause as also mention what the limits to the cardholder liability actually will be. Transactions in cash using PIN also need to be covered in the fraud protection policy of the bank.
The Financial Consumer Agency of Canada (FCAC) has brought out a model credit card application (Fig. 2). It is an innovative effort aimed at properly regulating the credit card market. In the model application, there is an Appendix that lists the details on the credit card fees and rates charged by the bank. These cover the grace period, the interest free period for purchases, the interest rates for purchases, cash advances, and balance transfers, annual fees, the minimum payment and other fees. A privacy statement is detailed where in the nature, purpose of use, and intended user of customer personal information is clearly spelt out.
Also, a separate clause for marketing and promotional offers by the bank is provided where a period of 30 days is stipulated as the promotion-free period. The customer is also provided toll free 1-800 telephone numbers for calling the bank for suppressing the promotional offer which would be implemented by the bank in case the 30 day period lapsed without such phone call for suppressing the offer from the customer is received by the bank. Adoption of the model credit card application format or similar such formats would regularize most anomalies found in the course of the study and analysis and as reported in earlier paragraphs in this paper.
Obviously, the legal structures are in place in Canada that strive to provide the credit card applicants and consumers ample protection in terms of their contractual rights, equal competition policy, privacy rights, and information privacy rights. However, a lot needs to be initiated in actually ensuring the same is done. Banks and other financial institutions are by nature doing commercial business activities. They need to charge fees to maintain profitable operations. However, in as much as their fees and interchange fees impact on the ordinary citizen and taxpayer, the system needs a re-look. Also, the rates of fees charged by all banks are highest even among developed countries and is anywhere between 24 to 60 per cent, whereas the prime bank rate is only 1 per cent.
Also, banks need to strictly adhere to disclosure and transparency requirements, protect the individual right to personal information privacy and also allow the consumer equal opportunity to reject or accept the bank’s offer of product or services. Credit card agreements need to include clauses informing the customer of his contractual rights and also not adopt unfair practices for marketing variety of products and services, which may be unwanted by the card applicants. While the legal system in Canada is thus geared to strengthen the individuals’ contractual rights and also establish fair business laws, there are various shortcomings as pointed out and these need to be addressed to fine-tune things in the legal and financial system of the country.
In all countries, even in developed nations, regulation of credit cards are not upto the standards that can be desired. The regulation is lax, consumers are not amply protected, the consumers also themselves are not aware of the related issues, their rights or obligations, and governments of the day are bent more on catering to whims of businessmen rather than on assuring and getting consumers a fair deal. While a model credit card if imposed by a concerned government would be one step in the right direction, increasingly arbitrary fees, unfair deals and other such sorry features plague the credit card industry in Canada in the present.
Perhaps, more than governmental efforts to redress consumer grievances, the government would do better to educate the citizens of their contractual rights, their obligations, what a credit card agreement can or cannot contain and the need of the cardholder to be judicious in signing the contract at the very outset. That consumer awareness can prevent unfair deals from taking place is true not only in the credit card business but also in most other businesses, conventional or technology driven. That old saying then needs repetition in context: “Prevention is better than Cure”
References
Financial Consumer Agency of Canada (FCAC), “Model Credit Card Application”, 2009: pp. retrieved from the World Wide Web 2009
Financial Consumer Agency of Canada (FCAC), “Getting the Most from Your Credit Card: Understanding the Terms and Conditions”, 2009a: pp. 1-25;
MBNA Canada Bank, 2008.
The Ministry of Small Business and Consumer Services, 2006, Modified 2007,”Cosumer Protection: Your Rights”.
The Public Interest Advocacy Center (PIAC), 2009.