Vol. 143, No. 13 — June 24, 2009

Registration

SOR/2009-177 June 11, 2009

CRIMINAL CODE

Order Designating Nova Scotia for the Purposes of the Criminal Interest Rate Provisions of the Criminal Code

P.C. 2009-946 June 11, 2009

Whereas Nova Scotia has legislative measures that protect recipients of payday loans and that provide for limits on the total cost of borrowing under a payday loan agreement;

And whereas the Lieutenant Governor in Council of Nova Scotia has requested that the Governor in Council designate that province for the purposes of section 347.1 (see footnote a) of the Criminal Code (see footnote b);

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of Justice and the Minister of Industry, pursuant to subsection 347.1(3) (see footnote c) of the Criminal Code (see footnote d), hereby makes the annexed Order Designating Nova Scotia for the Purposes of the Criminal Interest Rate Provisions of the Criminal Code.

ORDER DESIGNATING NOVA SCOTIA FOR THE
PURPOSES OF THE CRIMINAL INTEREST RATE
PROVISIONS OF THE CRIMINAL CODE

PROVINCE DESIGNATED

1. Nova Scotia is designated for the purposes of section 347.1 of the Criminal Code.

COMING INTO FORCE

2. This Order comes into force at 12:00 a.m., Atlantic Time, on the first day on which all of the following are in force:

(a) sections 18B to 18S and 18U of the Consumer Protection Act, R.S.N.S. 1989, c. 92, as enacted by section 2 of An Act to Amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, S.N.S. 2006, c. 25;

(b) the Payday Lenders Regulations, made pursuant to section 18U of the Consumer Protection Act, R.S.N.S. 1989, c. 92, as enacted by section 2 of An Act to Amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, S.N.S. 2006, c. 25; and

(c) the Order dated July 31, 2008 made by the Nova Scotia Utility and Review Board under section 18T of the Consumer Protection Act, R.S.N.S. 1989, c. 92, as enacted by section 2 of An Act to Amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, S.N.S. 2006, c. 25.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Order.)

Executive summary

Issue

Background on payday loans

A payday loan is typically a short-term loan for a small amount. The loans generally average about $300 with a term of approximately 10 days. There are approximately 1 400 storefront outlets currently operating in Canada that provide payday loans, and approximately 32 outlets in Nova Scotia. 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. 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 Nova Scotia’s request for designation

On May 5, 2008, the Government of Nova Scotia requested a designation by the Governor in Council for the purposes of section 347.1 of the Criminal Code. This request was made, on behalf of the Lieutenant Governor in Council for Nova Scotia by the Minister Responsible for Service Nova Scotia and Municipal Relations, to the Minister of Justice and the Minister of Industry.

In his request, the Minister Responsible for Service Nova Scotia and Municipal Relations noted that Nova Scotia’s legislature had passed legislation which, once in force, would implement a number of substantive protections for recipients of payday loans in the province, including a maximum cost of borrowing charge. The Nova Scotia law, An Act to amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, received Royal Assent on November 23, 2006. The protections in this legislation include, inter alia:

• prohibitions on rollovers (repeat loans, which can become particularly expensive for consumers);
• a cooling off period of at least 24 hours (allowing consumers to cancel their loans without charge if they choose to do so by the end of the next business day following the day the loan was first taken out); and
• specific contractual disclosure requirements, such as disclosure of the complete cost of borrowing expressed as an Annual Percentage Rate.

The provincial legislation delegated to the NSUARB the task of carrying out public hearings on the question of what should be an appropriate maximum cost of borrowing charge for payday loans in the province. Following hearings from January 21 to 25, 2008, and having considered a number of submissions from stakeholders, the NSUARB issued a report on July 31, 2008, that concluded that the maximum cost of borrowing for payday loans in that province should be $31 per $100 loaned.

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.”

Background on the designation process

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%.

Under section 347.1, 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.

A designation is one of the conditions required 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 grant 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.

Objectives

By designating Nova Scotia for the purposes of section 347.1 of the Criminal Code, the Governor in Council is ensuring the province has the flexibility it requires to regulate the payday lending industry as it deems appropriate. Given that the cost of borrowing charges for typical payday loans exceed the 60% criminal interest limit set out in section 347, the province may face difficulty in regulating and licensing the provision of such loans (as opposed to prohibiting them outright), because to do so would essentially result in the licensing of an activity that is prohibited by the Criminal Code.

Description

The Order designates Nova Scotia for the purposes of the criminal interest rate provisions set out in section 347 of the Criminal Code. 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. An exemption from section 347 of the Criminal Code was viewed by many jurisdictions as being 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 Order takes effect on the first day upon which all of the following are in force:

(a) sections 18B to 18S and 18U of the Consumer Protection Act, R.S.N.S. 1989, c. 92, as enacted by section 2 of An Act to Amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, S.N.S. 2006, c. 25;

(b) the Payday Lenders Regulations, made pursuant to Section 18U of The Consumer Protection Act, R.S.N.S 1989, c. 92, as enacted by section 2 of An Act to Amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act, S.N.S. 2006, c. 25; and

(c) the Order dated July 31, 2008 made by the Nova Scotia Utility and Review Board under section 18T of the Consumer Protection Act, R.S.N.S. 1989, c. 92, as enacted by section 2 of AnAct to Amend Chapter 92 of the Revised Statutes,1989, the Consumer Protection Act, S.N.S. 2006, c. 25.

Regulatory and non-regulatory options considered

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

To refrain from designating Nova Scotia for the purposes of section 347.1 of the Criminal Code would effectively prevent Nova Scotia from implementing its regulatory framework to protect consumers of payday loans, particularly its maximum cost of borrowing charges, which are an integral part of the regulatory framework.

Benefits and costs

There are no costs or benefits associated directly with the federal Order. Any costs or benefits will be accrued by Nova Scotians by virtue of the implementation of the provincial regulatory framework. There will be some regulatory costs for payday lenders in the province, most concretely in the form of a $3,000 annual licensing fee for each payday lending store, payable to the province. Given that there are approximately 32 lending locations in the province, this brings the total cost to $96,000. There may be some dollar costs to Nova Scotia consumers, if those lenders who currently charge less than the maximum rate decide to raise their rates to that maximum allowable. The payday lenders will benefit from regulatory stability that has been absent up until the present time. The benefits to consumers will include greater consumer protection, as an industry that was not regulated to date becomes subject to prohibitions on certain unfair business practices. There may be some dollar savings for consumers, to the extent that some very high-cost lenders will have to reduce their charges to the maximum level. However, there may not be many savings given that most lenders appear already to charge less than the maximum that will be allowable.

Consultation

Extensive federal, provincial and territorial (FPT) discussions, along with public consultations, took place over nine years, leading up to 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, adding section 347.1 to the Criminal Code.

The FPT 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 FPT Ministers responsible for Justice, FPT Consumer Ministers, represented federally by the Minister of Industry, asked the Consumer Measures Committee, a working group of senior FPT 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 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.

Nova Scotia’s own public engagement has included the legislative procedures that led to the passage of An Act to amend Chapter 92 of the Revised Statutes, 1989, the Consumer Protection Act in 2006. This was followed by a public consultation process on the Payday Lender Regulations, during the summer of 2007, which included the publication of a discussion paper online which was distributed to stakeholders. In addition, the NSUARB carried out a week of hearings in January 2008 on maximum cost of borrowing limits, and subsequently invited stakeholder submissions on a variety of related issues through March 2008. The NSUARB issued a report on July 31, 2008, determining that the maximum cost of borrowing for payday loans in that province is to be $31 per $100 loaned.

This Order was published in the Canada Gazette, Part I, on Saturday, March 7, 2009. One comment was received, from officials of Service Nova Scotia and Municipal Relations, to signal an editing error.

Selected option and cooperation

The option chosen is to designate Nova Scotia for the purposes of section 347.1 of the Criminal Code, in accordance with that province’s request. In the context of the legislative scheme laid out in section 347.1, there are essentially only two options — to designate or not to designate — based upon whether the criteria are met. An analysis of the Nova Scotia regulatory framework (legislation, regulations, and the NSUARB decision) indicates that it does meet the requirements for federal designation, pursuant to subsection 347.1(3).

The decision to designate Nova Scotia will result in a benefit for those residents of Nova Scotia who use payday loans. As noted above, the various protections that are provided for in the Nova Scotia legislation will ensure better disclosure of consumers’ contractual rights and obligations, will allow for a cooling-off period and will ban costly rollovers.

The maximum charge of $31 per $100 loaned is not expected to significantly reduce the overall costs to consumers of payday loans in the province, except among those lenders who currently are charging more than that, which would appear to be a small number of the lenders, according to the NSUARB report. (Research commissioned by the NSUARB indicated that rates in the province range from $15 per $100 up to $35 per $100, but most were below $30.) However, the NSUARB’s rationale for its decision rests on its view that a relatively non-constraining maximum charge structure will permit competition to flourish in the payday lending industry within the province, and this competition will serve consumers’ needs. As the Board states, “the maximum rate set by the Board must be sufficiently high to allow the marketplace to function properly, while also preventing lenders from charging excessive fees and charges.”

Thus, with a set of legislative consumer protections, including a maximum charge, Nova Scotia appears ready to move forward with implementation of its regulatory regime. The Nova Scotia regime will place some burden upon payday lenders, but the reaction of lenders to the Nova Scotia approach has been largely very positive, and therefore this burden would not appear to be excessive.

The regime is very narrow in scope, applying only to payday lenders, and therefore has no effect on other sectors. Similarly, the federal designation has no impact on the application of section 347 outside of a narrowly defined set of payday lending agreements provided by payday lenders licensed by the province.

Implementation, enforcement and service standards

Federal officials will inform Nova Scotia officials once the Order is made. The Order will come into force on the first day upon which Nova Scotia’s complete regulatory framework relating to payday loans has come into force. The province will notify the industry and the public of the new requirements and protections in accordance with its own normal regulatory practices.

The protection of consumers within the payday lending industry is a matter of provincial jurisdiction. Therefore, the task of the Government of Canada, once the designation is made, is to monitor to ensure that Nova Scotia continues to have measures that protect recipients of payday loans including maximum cost of borrowing charges. If at some point such measures are no longer in effect, then the Governor in Council would revoke the designation in accordance with subsection 347.1(4) of the Criminal Code.

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.

Performance measurement and evaluation

The objective of the Order is to ensure that Nova Scotia has the flexibility to protect recipients of payday loans within the province. Achieving this objective hinges upon the province’s implementation of its legislative framework to regulate payday loans, and the commencement of regulatory controls on the payday lending industry. Nova Scotia expects to bring its regulatory framework into force sometime in early 2009, once the Order is made.

Evaluating the effectiveness of the Nova Scotia framework in protecting that province’s payday lending recipients is the responsibility of the province itself, as the matter falls within its jurisdiction. However, provincial officials remain in ongoing contact with federal officials, and with officials in other provinces, to consider the various provincial approaches to protection payday lending consumers.

Contact

Paula Clarke
Counsel
Criminal Law Policy Section
Department of Justice
284 Wellington Street
Ottawa, Ontario
K1A 0H8
Telephone: 613-957-4728
Fax: 613-941-9310
Email: paclarke@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: david.clarke@ic.gc.ca

Footnote a
S.C. 2007, c. 9, s. 2

Footnote b
R.S., c. C-46

Footnote c
S.C. 2007, c. 9, s. 2

Footnote d
R.S., c. C-46

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