Vol. 142, No. 19 — May 10, 2008

Order Designating Manitoba for the Purposes of the Criminal Interest Rate Provisions of the Criminal Code

Statutory authority

Criminal Code

Sponsoring departments

Department of Justice and Department of Industry

(This statement is not part of the Order.)

Description

This Order, made pursuant to subsection 347.1(3) of the Criminal Code, designates Manitoba for the purposes of section 347.1 of the Criminal Code.

On August 31, 2007, the Government of Manitoba sought a federal designation for the purposes of section 347.1 of the Criminal Code. This request was made, on behalf of the Lieutenant Governor in Council for Manitoba, by the Honourable Greg Selinger, Manitoba Minister of Finance, to the Honourable Rob Nicholson, Minister of Justice, and the Honourable Jim Prentice, Minister of Industry.

Subsection 347.1(3) of the Criminal Code states that “the Governor in Council shall, by order and at the request of the lieutenant governor in council of a province, designate the province for the purposes of this section if the province has legislative measures that protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements.”

A designation plays an important role in determining the application of section 347 of the Criminal Code, the criminal interest rate provision, and section 2 of the Interest Act to certain payday loan agreements. Section 347 of the Criminal Code makes it an offence to enter into an agreement for, or receive payment of, interest at an effective annual interest rate exceeding 60%.

This Order forms one aspect of a legislative scheme which exempts certain payday loan agreements from the application of section 347 of the Criminal Code and section 2 of the Interest Act.

A payday loan agreement will be exempt from section 347 when

(a) the payday loan is for an amount not exceeding $1,500 and the term of the agreement does not exceed 62 days;

(b) the payday lender is licensed or otherwise authorized by the province or territory to provide payday loans; and

(c) the province or territory has been designated by the Governor in Council.

In order for a province or territory to be designated by the Governor in Council, the province or territory must

(a) request, through their Lieutenant Governor in Council, the federal designation; and

(b) enact legislative measures that protect recipients of payday loans and which must provide for a limit on the total cost of borrowing under payday loan agreements.

Background on payday loans

A payday loan is typically a short-term loan for a small amount; loans generally average about $300 with a term of approximately ten days. There are approximately 1 350 storefront outlets currently operating in Canada that provide payday loans. When expressed as an effective annual interest rate, the total borrowing cost to the consumer for a typical payday loan can reach into the hundreds or thousands of percent (and therefore violates section 347). In addition, concerns have persisted in relation to unfair practices associated with the payday lending industry. Concerns have included the extremely high costs of borrowing, abusive collection practices and the inadequate disclosure of contractual obligations.

Background on the designation process

A designation is one of the conditions precedent for an exemption from the application of section 347 of the Criminal Code. To seek a designation, the province/territory writes to the federal Ministers of Justice and Industry and requests it. Accompanying its letter, the province/territory provides

(a) a copy of its order in council, issued by the lieutenant governor in council seeking designation for the purpose of section 347.1; and

(b) the provincial/territorial legislation and, as applicable, regulations which demonstrate that it has legislative measures in place to protect recipients of payday lending, including that the payday lender is licensed or otherwise specifically authorized to enter into a payday loan agreement and that the legislation provides for limits on the total cost of borrowing.

Upon receiving the letter and determining whether the criteria for designation are met, the Ministers of Justice and Industry make a recommendation as to whether to issue the designation via Order in Council. If approved, the coming into force of the federal Order in Council may be tied to a future named event, such as the coming into force of the provincial/territorial legislation.

At the time of sending the provincial/territorial request for designation, it is sufficient for the province/territory to have a mechanism in place for setting a maximum cost of borrowing for payday loans; the province/territory does not necessarily have to have already set the maximum cost. However, the designation cannot be granted until such time as a specific maximum cost has been determined by the province/territory. The subsequent coming into force of the designation then coincides with the coming into force of the provincial/territorial legislative measures.

Background on Manitoba’s Consumer Protection Framework

Manitoba’s legislation complies with the requirements contained in subsection 347.1(3) of the Criminal Code. The Manitoba Consumer Protection Amendment Act (Payday Loans) [S.M. 2006, c. 31], and its accompanying Payday Loans Regulation (99/2007) provide the statutory framework for regulating the industry in that province. This framework contains numerous measures to protect consumers, including cost of credit disclosure requirements, and a cooling-off period whereby recipients may cancel the loan without cost within 48 hours of receiving the loan. It provides a framework for the licensing of payday lenders, as well as measures to establish a maximum amount on the total cost of borrowing.

The setting of the maximum cost of borrowing in Manitoba is done by that province’s Public Utilities Board. Section 164 of Manitoba’s Consumer Protection Act provides that the Board is required to make an order setting the maximum cost of borrowing for payday loans.

Information on other jurisdictions

Like Manitoba, other jurisdictions have enacted, or are expected to enact, legislation to protect recipients of payday loans within their jurisdiction. Nova Scotia, British Columbia, and Saskatchewan have enacted legislation with respect to the regulation of the payday lending industry in those provinces. New Brunswick has introduced legislation which is currently being considered by its Legislative Assembly.

Alternatives

Subsection 347.1(3) of the Criminal Code makes clear that an order is the only mechanism available to designate the province of Manitoba for the purposes of section 347.1 of that Act.

Benefits and costs

This Order plays an important role in supporting the full implementation of Manitoba’s consumer protection scheme in respect of payday lending agreements and is, therefore, of benefit to the Province of Manitoba, Manitoban consumers of payday lending and Manitoba’s payday lending industry.

This Order is expected to provide social and economic benefits to the people of Manitoba by facilitating increased consumer protection in that province. The concerns identified above in relation to unfair practices associated with the payday lending industry have persisted for some time. The Order will assist in remedying this. Consumers will be better informed about their rights and obligations under their contracts, and thus better equipped to evaluate the implications of entering into such credit agreements. For more information on the range of consumer protection measures contained in Manitoba’s Consumer Protection Act regarding payday loans, please consult: http://web2.gov.mb.ca/laws/statutes/ccsm/c200e.php.

While it would be difficult to calculate a precise estimate of the economic benefits that will flow to consumers of payday loans from this Order and associated provincial legislative measures of payday lending, it is expected that they will experience some cost savings. The maximum amount that a payday lender will be able to charge in Manitoba will be determined by that province’s Public Utilities Board, whose decision will be informed by extensive public hearings that include evidence provided by various stakeholders.

This Order will also be of benefit to the payday lending industry. As a federal designation is one of the prerequisites to an exemption from section 347 of the Criminal Code, this Order will play an important role in facilitating a process which makes legal what is otherwise currently criminal, and therefore liable to prosecution. As such, this Order will provide the payday lending industry with certainty, knowing clearly what conduct is, or is not, subject to criminal prosecution.

Financial costs

There are no financial costs to the federal government associated with the coming into force of this Order. Nor will it directly result in increased costs for consumers of payday loans, the payday lending industry, or the Province of Manitoba. Any costs and savings arise directly from Manitoba’s regulatory framework.

Regulatory burden

The Order will complement Manitoba’s efforts to regulate the payday lending industry through its Consumer Protection Act, by facilitating its setting of a maximum amount that can be charged under that legislation for a payday loan. It will not impose any greater regulatory burden on the public or the Province of Manitoba, but will determine the application of section 347 of the Criminal Code and section 2 of the Interest Act to payday loan agreements.

Environmental impact

A strategic environmental assessment of this Order concluded that it is not likely to result in any environmental impacts, either positive or negative.

Consultation

Extensive consultations have taken place, which oriented the development of Bill C-26, An Act to amend the Criminal Code (S.C. 2007, c. 9). Bill C-26 came into force upon receiving Royal Assent on May 3, 2007, and provides the statutory basis for the proposed regulatory change.

Federal, provincial and territorial (F/P/T) governments first discussed the exemption of payday loans from the application of section 347 of the Criminal Code in 1998.

In 1999, after initial discussions among F/P/T Ministers responsible for Justice, F/P/T Consumer Ministers, represented federally by the Minister of Industry, asked the Consumer Measures Committee, a working group of senior F/P/T officials, to examine issues surrounding the alternative consumer credit industry. This industry includes, for example, pawnbrokers and rent-to-own outlets, in addition to payday lenders.

In 2000, the Consumer Measures Committee conducted a public round table in Vancouver that brought together stakeholders from industry and consumer organizations to gather their views about appropriate means of regulation of the alternative credit market. This round table was followed by a questionnaire sent to major payday lenders with the objective of gaining more information on how the payday lending industry operates.

In 2002, the Consumer Measures Committee held a public stakeholder consultation to examine possible amendments to section 347 of the Criminal Code to accommodate regulation of the payday lending industry. In 2004 and 2005, the Consumer Measures Committee consulted the public again for the purpose of examining what would be the appropriate elements of a consumer protection framework to regulate the payday lending industry. Both consultations involved direct mailings to major industry and consumer groups as well as other interested parties. In addition, the consultation documents were made available to the general public via the Internet.

These various stakeholder consultations showed that the majority of stakeholders from industry agreed that amendments to the Criminal Code which permit certain payday loan agreements to be exempt from section 347, accompanied by an applicable consumer protection regulatory framework, would be an appropriate approach. This was also the view of the majority of consumer groups and most academics consulted. Some consumer groups, however, indicated that there should be no exemption from section 347, and that the provision should be strictly enforced by the provinces and territories.

These consultations played an important role in oriented federal, provincial and territorial responses to this issue, including the development and subsequent enactment of Bill C-26. Many jurisdictions indicated that an exemption scheme was necessary in order for them to enact measures to regulate the payday lending industry, including setting a clear limit on the total cost of borrowing.

The legislative scheme which provides the basis for this Order strikes an appropriate balance among the needs of all stakeholders, including consumers, industry and the provinces and territories.

Compliance and enforcement

Payday loan agreements are subject to the requirements of section 347 of the Criminal Code regarding the charging of interest at a criminal rate and liable to prosecution unless they meet the requirements of subsection 347.1(2). Section 347 is a hybrid offence. On indictment, the maximum penalty for an offence under section 347 is five years imprisonment. On summary conviction, the maximum penalty is a fine not exceeding $25,000 and/or a maximum of six months imprisonment. Offences under section 347 of the Criminal Code are prosecuted by the Attorney General of the jurisdiction where the alleged offence takes place.

In addition, federal officials will monitor to ensure that the legislative measures that form the basis of the federal designation continue to remain in force.

Matthew Taylor
Counsel
Criminal Law Policy Section
Department of Justice
284 Wellington Street
Ottawa, Ontario
K1A 0H8
Telephone: 613-957-4716
Fax: 613-941-9310
Email: mataylor@justice.gc.ca

David Clarke
Senior Policy Analyst
Office of Consumer Affairs
Industry Canada
235 Queen Street
Ottawa, Ontario
K1A 0H5
Telephone: 613-957-8717
Fax: 613-952-6927
Email: clarke.david@ic.gc.ca