Overview

Payday lenders offer relatively short-term smaller dollar loans to consumers whose needs are not fully met by mainstream banks and credit unions. While payday loans may be particularly attractive for vulnerable consumers with a bad credit history who do not have sufficient access to credit cards or bank loans, the charges on these loans can represent an Annual Percentage Rate (APR) upwards of 500%—a rate well in excess of the 60% usury limit identified in Canada’s Criminal Code.Footnote 1

In 2007, faced with a legislative vacuum flowing from the gap in regulation for a rapidly growing credit product during the 1990s and challenges in enforcing the Criminal Code prohibition on usury,Footnote 2 the federal government chose to create an exemption for payday lenders in those provinces where the government would regulate payday lenders. The creation of this exemption represented recognition by the federal government of the role for payday lenders in the modern Canadian marketplace, notwithstanding certain features of payday loans, such as their high fees, that are often criticized by consumer advocates.

Left with some discretion on how to regulate the payday lending market, provincial governments initiated a regulatory response in an attempt to protect consumers through regulation while allowing the payday lending market to continue operating. The different approaches in legislation regulating payday lenders in Canadian provinces and in the United States (US) demonstrate that governments and regulators have not agreed on a unified regulatory model.

Introduction: The Rationale for Government Intervention

While markets play an important role in Western economies, governments, to varying extents, will choose to intervene in and regulate the marketplace. Efficiency, ethical, and political rationales are often cited in support of government intervention in the economy (Iacobucci and Trebilcock 2012):

Many of the rationales for regulating can be described as instances of ‘market failure’. Regulation in such cases is argued to be justified because the uncontrolled marketplace will, for some reason, fail to produce behavior or results in accordance with the public interest. (Baldwin et al. 2011)

Critics, such as consumer organizations and advocates, argue that the payday lending marketplace is characterized by market failure associated with both an absence of effective price competition and a disproportionate number of vulnerable consumers and so requires government intervention. Such intervention can be in the form of regulations setting price caps , limiting the number of loans one customer can take out, or licensing payday lending outlets.

Once a government decides to intervene in a market, there are a number of levels and forms of intervention (Iacobucci and Trebilcock 2012). Economic regulation is a form of government intervention designed to influence the behavior of firms and individuals in the private sector. “Regulation consists of rules administered by a government agency to influence economic activity by determining prices, product standards and types, and the conditions upon which new firms may enter an industry” (Parkin and Bade 2006).

There are various approaches taken by government intervention in this industry. A few provinces and territories have chosen not to set price caps but to rely on the Criminal Code usury law, which criminalizes interest rates higher than 60% (Government of Canada 1985). Québec, based on pre-existing legislation , effectively prohibits payday lenders by setting the maximum allowable annual interest rate in the province at 35%.

Many provinces have chosen to enact legislation and regulations establishing price caps —maximum prices that payday lenders are allowed to charge—and additional restrictions and prohibitions applying to the payday lending industry. The price caps ranged from relatively high, with the objective of allowing all existing firms in the marketplace to continue operating, while others were set lower, to disallow higher fees.

Government regulation in Canada has been a key tool in responding to and driving change in the payday lending marketplace. While provinces began regulating the industry after amendments to the Criminal Code a decade ago, governments still appear to be adjusting their regulations. Recent developments in Alberta, Ontario, and British Columbia suggest a trend toward lower price caps.

Usury Laws

While opinions about the ethics of charging interest have changed as commerce expanded and credit became an important part of doing business, throughout much of recorded history, many governments around the world have limited the interest rate that a lender can charge in order to prevent lenders from taking advantage of borrowers (Ellis 1998; Kitching 2006). These limits are known as laws against usury. “Usury” is defined in the Oxford Dictionary as the “action or practice of lending money at unreasonably high rates of interest” (Oxford 1884). As noted by Bellam and Talai:

The antecedents of modern usury law can be traced all the way back to the Babylonian code of Hammurabi, the Book of Deuteronomy of the Old Testament, and the Koran. The breadth and significance of these sources demonstrates a remarkably universal moral and social condemnation of excessive interest rates. (Bellam and Talai 2012)

The biblical origins of the prohibition on usury appear to derive from the principle that charging interest is taking advantage of the debtor (Ellis 1998). The Greek philosopher Plato condemned charging interest because “he felt that it produced an inequality of wealth and destroyed the harmony between citizens of the state” (Ellis 1998). Plato suggested that some members of society need to be protected from lenders, a concept which still appears in today’s interest rate laws (Ellis 1998).

In the modern financial landscape, usury laws or similar laws are still present in many countries, although, in some of the earlier cases, the rationale appeared to be geared less toward universal disallowance and more toward disallowing the practice of loan sharking and related activities.

Legislative History of Usury Laws in Canada

Sometimes a distinction is made between the continental (European) and the Anglo-American approaches to usury regulations. The continental approach, which has informed the approach currently in place in the province of Québec, places the usury rate relatively low; for instance, the rate is set at 35% in Quebec. The Anglo-American approach has tended to allow a higher rate for usury ceilings or has left regulation under the jurisdiction of the state or the province.

Canadian legislative efforts to combat predatory lending practices have traversed an uneven pendulum ranging from very restrictive limits under national small loans legislation , to criminalization under the Criminal Code (Government of Canada 1985), to a focus on product-based provincial regulatory interventions through price caps . A useful overview of this history can be found in a 2008 report of the Manitoba Public Utilities Board (PUB 2008). While this chapter focuses on the regulation of payday loans, regulation also exists for other types of financial products, such as government check cashing and rates for income tax returns (at the federal level).

Section 347 of the Criminal Code replaced the Small Loans Act, which had been enacted in 1939 to replace an earlier version from 1907 (PUB 2008).Footnote 3 The intention of the Small Loans Act in 1939 was to set an acceptable rate of the costs of small loans such that companies would still be able to give out small loans and be profitable, as opposed to people having to turn to loan sharks (Act 1939). The interest rate limits of the 1907 and 1939 laws were much stricter than the current 60% established by Section 347 and they specifically targeted small consumer loans (Act 1939).

The limits under the Small Loans Act of 1939 were 2% per month for loans of 15 months or less and 1% for loans of more than 15 months (Act 1939).Footnote 4 It appears that the main motivation for the repeal of the Small Loans Act and for limits to small loans to be included under the Criminal Code was its adverse effects on credit unions and caisses populaires, which were not as common in 1930. This is largely because the restrictions on small loans applied to them, as opposed to federal chartered banks, and rendered them unable to turn a profit on their loans. Many financial institutions would not give out loans of less than $1500 because of the differing regulations. The 1980 changes were to maintain the originally intended protections against loan sharks through added provisions in the Criminal Code (Government of Canada 1980a,b,c).

The repeal of the Small Loans Act in 1981 meant that all loans became covered by the Criminal Code. Section 347 of the Criminal Code went far beyond the scope of the previous legislation both by “criminalizing a particular interest rate for the first time, and by imposing a generally applicable ceiling on all types of credit arrangements without regard to the sophistication of the parties or the amount in issue.”Footnote 5 The higher allowable maximum interest rates applying to all loans represented a new reliance on the marketplace to provide fair rates for consumers, rather than the federally determined market maximum rates (PUB 2008).

It appears that section 347 of the Criminal Code was designed to criminalize loan sharking , which has been described as “unlicensed street-lenders offering credit at exorbitant rates and employing intimidation and violence to enforce their contracts” (Uniform Law Conference 2008; Garland 1998). Prior to the changes made in 1980, loan sharks had been prosecuted under various criminal offenses and under the Small Loans Act, which required lenders to be licensed. When the decision was made to repeal the Small Loans Act, there was a concern that illicit lenders would be left unchecked and the Criminal Code provisions were created in part to address these concerns (Uniform Law Conference 2008). There were some concerns regarding the Criminal Code interest rate:

The decision to tackle the problem of loan sharking by way of a criminal interest rate was questioned by some, including members of the Senate Standing Committee on Banking, Trade and Commerce. Some Senators questioned whether sixty percent was too high; other Senators were concerned that setting a fixed rate at 60 percent would send a message that loans with interest rates of 60 percent or less would be given legitimacy. (Uniform Law Conference 2008)

Some of the reasons for using a fixed rate in the Criminal Code have been argued to be certainty and the importance of having the elements of the criminal offense clearly defined (Uniform Law Conference 2008). Another stated reason was for practicality: it would be easier to prove the offense of loan sharking through evidence of an agreement in violation of an objectively determined criminal interest rate rather than proving the violence or intimidation associated with the act of loan sharking (Uniform Law Conference 2008).

While the Department of Justice initially considered setting the criminal interest rate at lower than 60%, bankers and investors expressed concerns that a lower rate could interfere with legitimate financial transactions, such as short-term lending and the funding of high-risk ventures (Uniform Law Conference 2008).

While section 347 was enacted to address problems associated with the void in statutory response to loan sharking , the provision has rarely been used for that effect (Uniform Law Conference 2008). It has been applied “to a very broad range of commercial and consumer transactions involving the advancement of credit, including secured and unsecured loans, mortgages and commercial financing agreements” (Uniform Law Conference 2008; Garland 1998).

The Regulation of Payday Loans in Canada

Criminal Code Exemption

Payday lenders began offering their services in Canada in the late 1990s/early 2000s, approximately ten years after the practice became prominent in the United States, following a court decision allowing banks to circumvent state anti-usury laws (PUB 2008). While sub-prime consumer loans existed in Canada before the entrance of payday lenders in the marketplace, finance companies usually respected anti-usury laws by offering loans with interest rates below the Criminal Code’s 60% cap (PUB 2008).

Prior to the entrance of payday lenders in the marketplace, borrowers typically relied on banks, credit unions, finance companies, employers, family, and pawnshops (PUB 2008). Before direct payroll deposit and the out-sourcing of payroll became common practice, some employers offered payroll advances to employees, often with no interest charges (PUB 2008). Anecdotes find that in some industrial settings and factories, employees had access to short-term loans through “lunch-box” lending, where a fellow employee would make a short-term loan to the next payday to colleagues (PUB 2008).

While section 347 of the Criminal Code would appear to make unlawful practices associated with payday lending, most lenders had a different perspective. The Manitoba Public Utilities Board explained in 2008 that most lenders had structured their products to avoid the Criminal Code prohibition (PUB 2008). Before the changes to the Criminal Code, most payday lenders charged both interest, at no more than the allowable 60%, and non-interest charges, such as brokerage, check cashing, administration, and/or other fees (PUB 2008). When both the interest and other charges and fees were taken into account, payday lenders were charging borrowers ten times and more the maximum specified in section 347 of the Criminal Code (PUB 2008).

For example, National Money Mart charged interest just below the 60% Criminal Code limit, and allowed borrowers to pay only the interest if they repaid the loan in cash prior to the due date (PUB 2008). If prepayment did not occur, the borrower’s payment included the principal and interest, as well as a check cashing fee, comprising the majority of the cost of credit to the borrower (PUB 2008).

Despite this apparent separation of “interest’ from check cashing fee, National Money Mart was the subject of at least one major class action suit claiming the check cashing fee was a component of the overall “interest” being charged and that the overall cost of credit exceeded the legal maximum of 60% under the Criminal Code (PUB 2008).

Other payday lenders also took the view that section 347 did not preclude them from separately assessing and charging fees other than interest, and that only the interest rate could be no higher than 60% (PUB 2008). Rentcash, a Canadian company operating as Instaloans and The Cash Store, developed a large national chain based on a broker model, which had Rentcash operating as a broker and service agent and not as a direct lender—the lender was a third party not owned by Rentcash (PUB 2008).

Notwithstanding the mechanisms chosen to avoid the application of section 347 to their practices, payday lenders, including the largest of the firms, were the defendants of several class action suits, some of which were ongoing when the changes to the Criminal Code were enacted (PUB 2008). In addition, a number of court decisions in the civil realm in Manitoba and elsewhere in Canada upheld the rate of section 347, resulting in cancelled consumers’ obligations to lenders (PUB 2008).

While courts in the civil realm tended to find that payday lenders were in violation of section 347 of the Criminal Code, there was a lack of enforcement of the criminal law. As stated by the Honorable Greg Selinger, Minister of Finance in Manitoba, when the province began regulating payday lenders, “[t]he Criminal Code wasn’t being enforced, it is as simple as that” (Selinger 2017). It is likely that payday lenders were never prosecuted through the Criminal Code because their product was not anticipated when section 347 was crafted (Garland 1998).

In view of the legal challenges against payday lenders, the high costs being charged to consumers and the lack of enforcement of section 347 of the Criminal Code, the federal government decided to step in. The Legislative Summary from Parliamentary Information and Research Services (LS-541E) stated that shared federal-provincial jurisdiction over payday lenders meant that they had been left essentially unregulated (Kitching and Starky 2006). Provinces were unable to regulate the price of a loan since it would bring them in conflict with section 347 and could be challenged as beyond their jurisdiction. Section 347 had rarely been used in a criminal context to prosecute and convict payday lenders. The Legislative Summary notes that provincial governments may have feared that the absence of payday lenders in the marketplace could result in consumers turning to illegal alternatives, such as loan sharks (Kitching and Starky 2006).

Faced with jurisdictional challenges in addressing the high fees charged by payday lenders, federal and provincial/territorial governments negotiated a regulatory regime. The Consumer Measures Committee (CMC) Working Group on the Alternative Consumer Credit Market was established by Industry Canada and the provinces to explore ways to provide standard levels of consumer protection across Canada (Kitching and Starky 2006). In December 2004, the CMC published a consultation document containing a proposed consumer protection framework and a number of possible measures for discussion, which led to consultations with stakeholders (Kitching and Starky 2006).

Bill C-26 ultimately came out of the consultations, amending the Criminal Code to allow provinces to regulate the operations of payday lenders. Bill C-26 created a new provision in the Criminal Code, which amounted to an exemption to criminal prosecution for payday lenders under section 347 (Kitching and Starky 2006).Footnote 6

In approving the revisions to section 347 of the Criminal Code, Parliament decided to allow payday lending, as it had been practiced, including fees and interest rates well in excess of 60%, to continue to operate, providing that provinces enacted the required legislative consumer protection measures (PUB 2008). Parliament acted to allow the industry to continue operating because the disappearance of payday lenders was perceived as being potentially damaging to consumers, with mainstream lenders not serving the short-term and small-dollar loan needs of a growing component of the borrowing community (PUB 2008). If payday lenders were restricted to the 60% maximum of section 347, with no other charges or levies permissible, the industry alleged that it would be “out of business” (PUB 2008).

The revisions to the Criminal Code consisted of the addition of section 347.1, which states that section 347 does not apply to a person, other than a financial institution within the meaning of paragraphs (a) to (d) of the definition of “financial institution” in section 2 of the Bank Act, in respect of a payday loan agreement entered into by the person to receive interest, or in respect of interest received by that person under the agreement, if:

  • the amount of money advanced under the agreement is $1500 or less, and the term of the agreement is 62 days or less;

  • the person is licensed or otherwise specifically authorized under the laws of a province to enter into the agreement; and

  • the province is designated under subsection (3) (Government of Canada 1985).

Under section 347.1(3), the Governor in Council shall 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 (Government of Canada 1985).

Achieving the Balance

Where the overall goal in payday lending regulation is to achieve a delicate balance between consumer protection and allowing reasonably efficient payday lenders to operate, the differences in approaches and tools used by regulators illustrate the challenges in achieving this objective.

The Objective of Regulating Payday Loans

Since the development of the payday loan industry, governments have struggled with the conundrum of regulating a popular product that is very expensive. From legislative debates and decisions relating to the regulation of payday lending, it appears that the goal of payday lending regulation is to achieve a delicate balance between adequate consumer protection and allowing relatively efficient payday lenders to remain in business.

On the one hand, governments and regulators have noted the apprehended concerns of eliminating the payday lending industry, such as consumers turning to dangerous loan sharking or unregulated online lending. On the other hand, governments and regulators have also noted the risks of allowing payday lenders to operate by charging exorbitant interest rates, resulting in money being taken away from disproportionately vulnerable consumers. As stated by the Honorable Greg Selinger, Minister of Finance in Manitoba, regarding the introduction of payday lending legislation in Manitoba and the goal of regulation, “[a]t the end of the day, it was to keep more money in the hands of Manitobans, their families and the community” (Selinger 2017).

Manitoba was one of the first provinces to enact legislation regulating payday loans, pursuant to section 347.1 of the Criminal Code.Footnote 7 The Honorable Greg Selinger has stated that “[g]overnment role is to use the policy tools we have to protect the public, legislation , regulation, education, consumer protection” (Selinger 2017). The Manitoba payday lending regulatory regime has reflected the balance sought to be achieved in regulating the payday lending market.

The Manitoba legislation gave jurisdiction to the Public Utilities Board to conduct hearings relating to the maximum cost of credit charged by payday lenders. The Public Utilities Board issued an Order in 2008 premised on the view that the federal government had not sought to abolish the industry but desired lower charges than were currently prevalent.

Recognizing the legislative intent to protect consumers in the absence of effective price competition, the Manitoba Public Utilities Board concluded there was no public interest basis for supporting inefficient payday lending (PUB 2008). As a result, the Manitoba Public Utilities Board sought to achieve balance between consumer protection and industry health by setting rates enabling a reasonable return for an efficient payday lender. The Public Utilities Board recognized that the maximum charges proposed would lead some payday lenders to exit the marketplace unless they became more efficient. The Public Utilities Board also understood that relatively efficient payday lenders would continue to operate at the authorized rate and those surviving firms would assume a portion of the market becoming available as a result (PUB 2008).

The Public Utilities Board concluded that “the maximum charges to be set for payday loans should be such as to reduce the cost of credit for consumers while promoting increased efficiency within the industry” (PUB 2008; emphasis added). It explicitly rejected the alternatives presented by the industry interveners as being too costly for consumers and concluded that the maximums set would allow for the survival and continuance of business of efficient payday lenders. The Public Utilities Board acknowledged the possibility of considerable consolidation in the industry and the exit of several firms and outlets (PUB 2008).

A Patchwork of Regulation

The current exemption for payday loans under the Criminal Code has led to a patchwork of regulation across the country, with some provinces choosing not to regulate payday loans, other provinces opting for different degrees of regulation, and one province choosing to effectively outlaw payday loans. Under this decentralized legislative framework, Canadian consumers do not all benefit from the same level of protection across the country, and the industry has to be familiar with and adapt to different jurisdictions in which it operates.

While it appears that giving the provinces jurisdiction to regulate payday loans has led to significant research into the industry and the impact of payday loans on consumers, a federal regulatory framework in addition to or as a substitute to provincial regulations, such as under the Small Loans Act, could be a way to ensure that all Canadians benefit from the same level of protection and could provide more predictability for the industry.

Payday Lending Regulation Across Canada

In response to the exemption created in the Criminal Code for payday lenders, provinces began enacting legislation and regulation to protect consumers, while still allowing the industry to operate.

The package of regulatory tools used by legislators range from significant interventions in the marketplace and business model, such as price caps and limits on the amount borrowed, to less interventionist, such as education and disclosure of information to consumers. The particular common elements of regulation found in Canadian provinces include: price caps on rates charged for loans, limits on the amount borrowed, limits on the number of loans that a customer can take out at once, enforcement of regulation, provisions relating to installment loan options, data requirements, and disclosure of information to borrowers (Table 7.1).

Table 7.1 Summary of Canadian payday lending regulationsa
Full size table

In some Canadian provinces, the payday lending market is not yet regulated:

  • In 2010, the provincial government of Newfoundland and Labrador announced that it would not regulate payday loan companies operating in the province and that it would rather uphold the maximum interest rate set out in the Criminal Code (Government of Newfoundland 2010). The government’s rationale for not regulating payday lenders was that putting in place regulations permitting interest charges above 60% would not protect consumers’ best interests and would be counter-protective to the provincial Poverty Reduction Strategy (Government of Newfoundland 2010). However, Newfoundland and Labrador’s House of Assembly passed An Act to Amend The Consumer Protection and Business Practices Act on December 16, 2016 that would make payday lending legal in Newfoundland and Labrador (Government of Newfoundland and Labrador House of Assembly 2016). The Act does not come into force until proclaimed by the Lieutenant Governor in Council (Government of Newfoundland and Labrador 2016). The Act is not in force at the date of writing and the proposed Regulations have not been made public.

  • Before the issue of regulating payday lending arose, Québec chose to limit interest on all loans to 35% annual interest, which has effectively banned the industry from the province (Lo 2011). This capped interest rate makes it unprofitable for the payday loan industry to provide its conventional services in the province.

  • Yukon, the Northwest Territories, and Nunavut do not currently regulate payday loans and therefore section 347 of the Criminal Code applies.

In addition to provincial regulation, some cities have also begun to enact by-laws to regulate some aspects of payday lenders. For example, the City of Calgary has a by-law which prohibits payday lenders from being located within 400 meters from another payday lending outlet (Calgary 2007). Another example is the City of Hamilton which enacted a by-law that regulates the licensing of payday lending outlets, the information provided to customers about the products, and that credit counseling information be provided to customers (Hamilton 2016). While we note the existence of such municipal by-laws, the focus of this chapter is on provincial regulation.

Price Caps

Price caps have been a primary tool used by provincial governments in Canada to protect consumers from very expensive payday loans. Under economic regulatory theory, the creation of price caps is one way to regulate a market:

A price cap regulation is a price ceiling—a rule that specifies the highest price the firm is permitted to set. This type of regulation gives a firm an incentive to operate efficiently and keep costs under control. (Parkin and Bade 2006)

Regarding the Manitoba government’s amendment to its Consumer Protection Act, the Honorable Greg Selinger, then Minister of Finance, stated that the government’s purpose “…was not to drive the companies out of business, because people are showing an interest in having this service, but to make sure that when they offer the service they do it in a way that’s just and reasonable” (PUB 2008).

The first “just and reasonable” rates for payday lenders were set by regulation in 2010 based upon a 2008 Manitoba Public Utilities Board Order. The price cap is set in section 147(1) of the Consumer Protection Act, which states that a payday lender cannot charge more than the maximum cost of credit allowed by regulation. The Payday Loan Regulation at section 13.1(1) indicates that the total cost of credit for a payday loan must not be greater than 17% of the principal amount of the payday loan (Government of Manitoba 2007).

The price caps enacted in 2010 are still in effect today and the Public Utilities Board has most recently recommended to the provincial government in June 2016 that price caps should remain unchanged (PUB 2016).

The price cap set by Manitoba in 2010 was initially significantly lower than the price cap selected by other provinces and was subject to industry criticism. According to the Honorable Greg Selinger, “[w]e were able to lead in Manitoba and most other provinces followed us” (Selinger 2017). Recent legislative developments in provinces such as Alberta, British Columbia, New Brunswick, and Ontario suggest an emerging consensus that consumers would be better protected and the industry would continue to be sustainable at price caps in the range of $15–$17 per $100 borrowed.

While he notes that a national regulatory regime could have ensured uniformity across the country, the Honorable Greg Selinger has also noted the advantage of having provinces regulate the payday lending industry: “[i]t allows for more innovation and every time there is a breakthrough, it is an obvious example for other jurisdictions to follow” (Selinger 2017).

In Alberta, effective August 2016, rates for payday loans became the lowest in Canada, for provinces that allow payday loans. Section 124.61(1) of the Fair Trading Act sets the maximum cost of borrowing at 15% of the principal amount of the payday loan, including fees for all mandatory and optional services and any other fees or charges set out in the regulation (Government of Alberta 2000).

In Ontario, section 23 of the General regulation pursuant to the Payday Loans Act (Government of Ontario 2008a) sets out the maximum allowable cost of borrowing (Government of Ontario 2008b). Effective January 1, 2017, section 23 of the regulation lowered the cost of borrowing to:

  • $21 per $100 borrowed for agreements entered into before January 1, 2017;

  • $18 per $100 borrowed for agreements entered into between January 1, 2017, and January 1, 2018; and

  • $15 per $100 borrowed for agreements entered into on or after January 1, 2018 (Government of Ontario 2008b).

In British Columbia, section 112.02 of part 6.1 of the Business Practices and Consumer Protection Act establishes that the Lieutenant Governor in Council may set the maximum amount that may be charged for a payday lender in the regulation (Government of BC 2004). As of January 1, 2017, section 17 of the Payday Loan Regulation lowered the maximum allowable cost of credit from 23 to 17% of the principal borrowed (BC Gov News 2016; Government of BC 2009).

In addition to lowering the rates, in September 2016, the British Columbia provincial government announced that it was undertaking a consultation with stakeholders to “help determine how best to further strengthen consumer protection for British Columbians who use high-cost alternative financial services, and whether more affordable options exist” (BC Gov News 2016).

In Nova Scotia, the Nova Scotia Utility and Review Board most recently reviewed payday loans in 2015. In its March 2015 decision, the market approach was retained to determine the maximum cost of borrowing and the price cap was reduced from $25 to $22 per $100 borrowed (NSUARB 2015).

In Saskatchewan, the maximum cost of credit is set out in section 14(1) of the Payday Loans Regulations, pursuant to the Payday Loans Act, and is currently set at 23% of the principal amount as set out in the payday loan agreement (Government of Saskatchewan 2007, 2012a,b).

In Prince Edward Island, section 24 of the Payday Loans Act Regulations pursuant to subsection 30(2) of the Payday Loans Act (Government of PEI 1988) provides that the prescribed limit on the cost of borrowing under a payday loan agreement is $25 per $100 advanced under the agreement (Government of PEI 2015).

Borrowing Limit

As another tool to achieve consumer protection, some jurisdictions have enacted limits on the amount that consumers can borrow through a payday loan. As was noted by the Manitoba Public Utilities Board, the debt spiral for payday loan users is a known phenomenon and “limiting the level of borrowing to a portion of the net pay of the individual reduces the likelihood that they will further overextend their credit obligations” (PUB Order 2013).

In Manitoba, section 151.1(1) of the Consumer Protection Act provides that the loan agreement cannot exceed the proportion of the borrower’s net pay set out in the regulation. Section 15.2(1) of the regulation indicates that the prescribed proportion of the borrower’s net pay is 30% (Government of Manitoba 2007).Footnote 8 In June 2016, the Manitoba Public Utilities Board recommended that the borrowing limit remain unchanged.

In British Columbia, section 18 indicates that a payday lender must not issue a payday loan in excess of 50% of the borrower’s net pay or other net income to be received during the term of the payday loan (Government of BC 2009). In Saskatchewan, payday lenders may not enter into a payday loan agreement with a borrower that is in excess of 50% of the borrower’s net pay during the term of the payday loan (Government of Saskatchewan 2012b).

Multiple Loans/Repeat Loans

Many jurisdictions have legislated provisions regarding the number of loans that consumers can borrow at once or during a specified period of time. These types of provisions attempt to address the cycle of debt that has been observed in many payday loan consumers.

For example, in Manitoba, concurrent loans are prohibited by sections 154(1) and 137 of the Consumer Protection Act, meaning that a payday lender shall not offer, arrange, or provide a payday loan to a borrower who is indebted to the lender under an existing payday loan, unless the new loan is a replacement loan,Footnote 9 and immediately after the initial advance under the new loan is made, the borrower is no longer indebted under the existing loan (Government of Manitoba 1987). The regulation at section 13.1 sets out that the total cost of credit for a replacement loan must not be greater than 5% of the principal amount (Government of Manitoba 2007).

The regulation states that the total cost of credit for a payday loan must not be greater than 5% of the principal amount of the payday loan if the payday loan is an extension or renewal of a payday loan previously arranged or provided, or if the payday loan is arranged or provided by a payday lender within seven days after the borrower repaid in full another payday loan previously arranged or provided by that payday lender (Government of Manitoba 2007). This seven-day period is referred to informally as a “cooling-off period.”

In June 2016, the Manitoba Public Utilities Board recommended that the 5% “cooling-off period” rate cap imposed in the regulations be amended to only apply for a one-day period, after which the client would be able to take out another loan at the regular rate of 17%. The one-day cooling-off period would delineate the issuance of a replacement loan which is used to repay the initial loan and a completely new loan. The Board found that the seven-day “cooling-off period” was not preventing borrowers from getting stuck in a debt trap spiral given that consumers could simply go “across the street” to another lender if they needed another loan during the seven-day period (PUB 2016).

In its June 2016 report, the Manitoba Public Utilities Board also recommended that lenders be prohibited from making more than 10 payday loans to a customer in a consecutive 12-month period. The Board concluded that some lenders are making an excessive number of payday loans to individual customers such that these customers are stuck in a debt trap (PUB 2016).

Another example of this regulatory tool is in Nova Scotia where the Utility and Review Board has recommended that the Minister consider placing restrictions on repeat and concurrent loans, such as (1) a requirement that payday lenders report all loans to a central database; (2) a requirement that a payday lender, before agreeing to lend money, must first check with the central database to see if the prospective borrower has any outstanding payday loans; and (3) that where a borrower takes out more than two loans in a 62-day period, the third loan and any subsequent loan should be extended over a minimum of three pay periods if the borrower is paid bi-weekly, or a minimum of two pay periods if the borrower is paid less frequently (NSUARB 2015).

Data Requirements

Some jurisdictions require payday lenders to provide annual data to a central agency, which is especially useful in tracking the effect of regulation on consumer trends and assisting regulators in making decisions based on evidence. The governments of Nova Scotia and British Columbia have been Canadian leaders on the requirement to provide annual data to regulators.

In British Columbia, sections 4(2)(b) and 4(3) of the Payday Loans Regulation require all payday lenders licensed in the province to annually report aggregated loan data. According to the Regulation, the aggregate data must include data respecting the number of loans, number of transactions, loan amounts, loan duration, and number of default charges (Government of BC 2009).

Consumer Protection BC, an arm’s length not-for-profit corporation that protects consumers and encourages a fair marketplace in British Columbia, regulates and licenses payday lenders. An Aggregate Data Form is available on its website that is filled out by payday lender licensees to provide information on the most recently completed fiscal year (CPBC 2016). Aggregate data are then reported publicly on the regulator’s website.

In Nova Scotia, section 5 of the Payday Lenders Regulations stipulates that payday lenders must provide information on loans granted from the location specified in their permit for the 12-month period from July 1 to June 30 immediately before the date of the permit renewal (Government of Nova Scotia 2015). Form A, attached to the Regulations, must be filled out by the payday lender and collects information regarding the number of loans granted, the average size of loans granted, the number of defaults on loans granted, the average size of loans defaulted, the number of borrowers who have been granted more than one loan, the number of repeat loans granted, the total number of borrowers who have been granted repeat loans , and the number of borrowers who have been granted repeat loans 1, 2, 3, 4, 5, 6, 7, and 8 or more times in one year (Government of Nova Scotia 2015). This information in aggregate form is available from the regulator upon request.

In June 2016, the Manitoba Public Utilities Board recommended that data collection provisions for the receipt of detailed information from lenders should be included in payday lending regulation (PUB 2016).

Installment Loans

Some have argued that converting payday loans into installment loans, either universally or where certain conditions occur, is one way to address the repeat loan cycle. As a result of the traditional payday loan paid in full on the next payday, many consumers have no choice but to take out another payday loan in order to meet all their expenses, resulting in significant difficulties in getting out of the loan cycle.

In June 2016, the Manitoba Public Utilities Board recommended that a mandatory installment loan option or a loan extension option should be made available to payday loan consumers to assist them in paying back their loans in a manner which is manageable, potentially avoiding the start of a “debt spiral” (PUB 2016). The Manitoba Public Utilities Board suggested that, at the request of a borrower, a lender be required to extend the loan for at least another pay period or to convert the loan to an installment loan, provided that the borrower has successfully paid off three previous payday loans during the preceding 12-month period. If an installment loan is issued, the cap on the rate for the loan should be set at 7%. The installment loan repayment terms should allow repayment over at least the next four pay periods, where no payment exceeds 35% of the sum of the principal and cost of borrowing (PUB 2016).

In Alberta, as of 2016, the government has mandated installment payments for payday loans. Section 124.3(1) states that a payday lender shall ensure that a payday loan agreement contains a term requiring the borrower to repay the loan through an installment plan over a period of at least 42 days and no more than 62 days (Government of Alberta 2000). The payday lender must ensure that if the borrower receives income on a semi-monthly, bi-weekly, or more frequent basis, the agreement specifies that repayment is to be spread over at least three pay periods or if the borrower receives income less frequently, the payday loan agreement specifies that repayment is to be spread over at least two pay periods (Government of Alberta 2000). Finally, a borrower may pay all or part of the outstanding balance under the loan agreement at any time without incurring any prepayment charge or penalty (Government of Alberta 2000).

Disclosure to Borrowers

Most jurisdictions legislate specific information that must be presented to consumers in a specific format by payday lenders. These provisions aim at ensuring that consumers have all the information required to make financial decisions in an accessible format. As stated by the Honorable Greg Selinger, it is an “[a]ttempt to show [consumers] that they may wish to choose another way to get credit” (Selinger 2017).

For example, in Manitoba the legislation specifies that payday lenders must post signs at each location providing information regarding the payday loan products they provide (Government of Manitoba 1987). The Regulation articulates the information to be posted at each physical licensed location as well as for Internet payday loans (Government of Manitoba 2007). The Act and the Regulation also set out the information to be provided in both physical and online payday loan agreements (Government of Manitoba 1987, 2007).

In Nova Scotia, in March 2015, the Utility and Review Board recommended that the Minister consider mandating that lenders display comparisons of borrowing costs of alternative financial products in dollar terms (NSUARB 2015).

Enforcement

Most payday lending legislation includes provisions relating to the enforcement of obligations faced by payday lenders and, in many cases, a consumer protection body is designated to enforce the legislation and regulation.

In Manitoba, the Act and Regulations establish that a notice of administrative penalty may be issued if a person fails to comply with provisions of the Act or the Regulations (Government of Manitoba 1987, 2007).

One example of a regulator enforcing the provisions found in the payday lending legislation is demonstrated in a decision by the Ontario Superior Court of Justice in 2014. In that matter, an action was brought by the Director designated under the Ministry of Consumer and Business Services Act and authorized under section 54(1) of the Payday Loans Act to apply for an order “if it appears to the Director that a person or entity is not complying with this Act or the regulations” (Director v The Cash Store 2014). The action was brought against The Cash Store, a company that previously offered payday loans in Ontario but whose license had lapsed in 2013. The company had restructured its business and began offering a newly fashioned financial product called a “Basic Line of Credit” to its customers (Director v The Cash Store 2014).

In that case, the Director alleged that The Cash Store’s new product was in substance a payday loan and that it was subject to the numerous consumer protection provisions built into the provincial regulatory regime for payday loans. The Court found that the “Basic Line of Credit” amounted to a payday loan and stated that “the persistent regulatory cat has caught the clever business mouse” (Director v The Cash Store 2014). In addition to declaring that the company’s new product was subject to the provisions under the Payday Loans Act, the Court ordered the Respondent prohibited from acting as a loan broker of the product without a license under the Act and the Respondents were ordered to pay costs in the amount of $50,000.

Education and Financial Literacy

While government regulation of payday lending has been a primary tool in responding to and driving change in the payday lending marketplace in Canada, laws and regulation by themselves cannot resolve broader issues relating to financial exclusion. Government investments in education and financial literacy are vitally important to achieving financial well-being for all consumers.

Recent thinking in the field of financial literacy has been linking literacy with well-being, such as in the Financial Consumer Agency of Canada’s “National Financial Strategy for Financial Literacy” released in 2015 (FCAC 2015). Another example is the work of the US Consumer Financial Protection Bureau (CFPB), which has defined financial well-being as:

…a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life. (CFPB 2015)

The CFPB further specifies that the concept of financial well-being has four central elements:

  • Control over day-to-day, month-to-month finances;

  • Capacity to absorb a financial shock;

  • Being on track to meet financial goals; and

  • Having the financial freedom to make choices to enjoy life (CFPB 2015).

In Canada, in an effort to encourage and support financial literacy, the ultimate measure of success being individual financial well-being (CFPB 2015; FCAC 2015), some jurisdictions have legislated requirements for contributions by payday lenders to a financial literacy fund.

For example, in Manitoba, the Financial Literacy Fund was established in 2011 under section 161.6(1) of the Consumer Protection Act. Since its implementation, each licensed payday lender has had to pay an annual financial literacy support levy to the Fund.Footnote 10 In the past number of years, the Fund has contributed to community organizations supporting financial literacy programming, to a study on financial literacy in Manitoba and to support financial literacy tools (Government of Manitoba 2014–2015 and 2015–2016).

Regulation of Payday Loans in Other Jurisdictions

Canada is not the only country that has decided to address payday lending through legislation and regulation. In this section, we have chosen to focus on the United Kingdom (UK), Australia, and the United States (US) given that there exist some similarities to the approach taken in Canada. However, the differences in the tools used in these jurisdictions provide a further example that regulators are still struggling with finding the appropriate balance between consumer protection and allowing the industry to operate. In reviewing the effectiveness of payday lending regulation, it can be beneficial to look to other jurisdictions to learn from best practices, where possible.

Regulation of Payday Lending in the United Kingdom and Australia

In the United Kingdom, the Financial Conduct Authority began regulating payday loans in 2014 and implemented Policy Statement PS14/16 in 2015 (FCA 2015). Under this policy statement, the following caps and rules were implemented:

  • Initial cost cap of 0.8% per day—lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.

  • Fixed default fees capped at £15—protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.

  • Total cost cap of 100%—protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed (FCA 2014).

The caps established by the Financial Conduct Authority are to be reviewed in the first half of 2017. In addition, under UK law, the enforcement of debts through harassment, deception, or threats is prohibited (Uniform Law Conference 2008; Government of UK 1970). The civil law provides for relief from the court where there exist unfair relationships between creditors and debtors (Uniform Law Conference 2008; Government of UK 1974).

In Australia, under the National Credit Act, the Australian Securities and Investments Commission (ASIC) regulates and licenses any entity that engages into credit activities, including lenders, lessors, and brokers (ASIC 2015b). Under this law, credit providers must:

  • Make reasonable inquiries about your financial situation, requirements, and objectives;

  • Take reasonable steps to verify your financial situation; and

  • Decide whether the credit contract you are asking for is “not unsuitable” for you (ASIC 2015b).

As of March 1, 2013, new laws came into effect affecting loans of $2000 or less. Under the law, the following is established:

  • “Short-term” loans of $2000 or less that you must repay in 15 days or less are prohibited.

  • Credit providers are required to display a warning that notifies you of your options before you borrow money when they offer a “small amount” loan of $2000 or less that is to be repaid between 16 days and 1 year.

Fee limits on small amount loans ($2000 or less): from July 1, 2013, fees charged on small amount loans are capped (i.e., limited to a maximum amount). Credit providers can only charge the following fees:

  • A one-off establishment fee (of not more than 20% of the loan amount);

  • A monthly account keeping fee (of not more than 4% of the loan amount);

  • A government fee or charge;

  • Default fees or charges (the credit provider cannot collect more than 200% of the amount loaned if you default—i.e., fail to pay back the loan); and

  • Enforcement expenses (if you fail to pay back the loan, these are the costs incurred by the credit provider going to court to recover the money owed under your credit contract) (ASIC 2015b).

This cap on fees and ban on short-term loans described above does not apply to loans offered by Authorized Deposit-taking Institutions (ADIs) such as banks, building societies, and credit unions, or to continuing credit contracts such as credit cards (ASIC 2015b).

In 2015, the ASIC published a report which found that “payday lenders need to improve compliance with some of the key consumer protection laws operating in the industry” (ASIC 2015a). While it found that payday lenders were complying with some of the rules put in place in 2013, it also found that they were falling short of meeting some of the important regulations. It found particular compliance risk around the test for loan suitability established in the law. In this report, ASIC noted the 2013 small amount credit reforms would be independently reviewed after July 1, 2015, and that it would continue its focus on enforcing the current provisions and raising industry standards (ASIC 2015a).

In addition in Australia, the law provides relief for credit transactions that may be deemed unjust or unconscionable (Uniform Law Conference 2008; Government of Australia 2009).

Regulation of Payday Lending in the United States

Active debate about usury in the United States focuses currently on the regulation of the costs of payday loans. This section will review the regulation of payday lending in the United States, especially where recent developments are relevant to the Canada regulatory landscape. We have chosen to include the United States as the principal comparator for the purposes of this analysis given the significant research on payday lending in the United States, and some similarities between the United States and Canada in regulation at the state level. A further discussion of the United States as a comparator country is found in the introduction to this book.

Permissive, Hybrid, and Restrictive

An important source of the research on payday lending from the United States comes from the Pew Charitable Trusts (Pew), which is an independent, non-profit global research and public policy organization (Pew 1946).Footnote 11 Since 2011, Pew has conducted extensive research on payday, auto title, and similar loans in its Small-Dollar Loan Project, which included a large-scale omnibus survey, leading to a series of four comprehensive reports on payday lending practices in the United States and, in the face of identified problems, policy recommendations.

Similar to Canada, different states have taken different approaches to regulating the industry, ranging from less to more restrictive (refer to Appendix 4 in Chap. 4). In order to analyze the impact of different regulatory schemes and to compare the consequences of policies in states with different policy regimes, Pew has categorized state payday loans regulation into three categories: Permissive, Hybrid, and Restrictive (Pew Trusts 2012).

Under Pew’s categorization, Permissive states “are the least regulated and allow initial fees of 15 percent of the borrowed principal or higher” (Pew Trusts 2012). While most of these states have some type of regulation, they allow for payday loans due in full on a borrower’s next payday with Annual Percentage Rates usually in the range of 391–521% ($15–$20 per $100 borrowed per two weeks). Payday loan storefronts are readily available to borrowers located in these states, and 55% of Americans live in the 28 Permissive states (Pew Trusts 2012).

Hybrid states have relatively more exacting requirements than Permissive states with at least one of the following three forms of regulation: (1) rate caps, usually around 10% of the borrowed principal, which are lower than most states but still permit loans to be issued with triple-digit APRs; (2) restrictions on the number of loans per borrower, such as a maximum of eight loans per borrower per year; or (3) allowing borrowers multiple pay periods to repay loans (Pew Trusts 2012). While storefronts that offer payday loans exist in substantial numbers in these states, the market may be more consolidated and per-store loan volume may be higher than in less restrictive states. Sixteen percent of Americans live in the eight Hybrid states (Pew Trusts 2012).

Restrictive states either do not permit payday lending or have price caps low enough to eliminate payday lending in the state (Pew Trusts 2012). This rate cap is often 36% APR. Generally, payday loan storefronts are not found in these states. Twenty-nine percent of Americans live in the 14 states and the District of Columbia that have a Restrictive payday loan regulatory structure (Pew Trusts 2012).

Pew’s categorization of policy regimes can be applied to the Canadian regulatory framework in order to compare the policy choices made by provinces. In Canada, if Pew’s categorization is applied, most jurisdictions that currently regulate payday loans would initially have been considered Permissive when regulations were first introduced in 2009 and shortly thereafter. In more recent years, however, and especially since 2016, additional consumer protection provisions have been implemented or have been recommended to provincial governments, and many more jurisdictions may be moving toward the Hybrid category. The province of Québec, however, would be categorized as Restrictive given that payday loans are effectively illegal. Provinces that do not yet regulate payday lending and where the Criminal Code limits operate, such as the territories, Newfoundland and Labrador, would also be considered Restrictive as payday lenders are unable to profitably operate at 60% interest rate or less but some do operate, nevertheless.

Colorado

The state of Colorado has particularly interesting payday loan regulations that relate to the movement toward installment repayment plans. Colorado’s payday lending regulatory scheme is very different than the rest of the United States and Canada. Lump-sum payday lending came into use in 1992 in that state, making it an early adopter (Pew Trusts 2013). In 2010, state lawmakers agreed that the payday loan market had failed and decided to act to correct it. As indicated by Pew, legislators “forged a compromise designed to make the loans more affordable while granting the state’s existing nonbank lenders a new way to provide small-dollar loans to those with damaged credit histories” (Pew Trusts 2013). The law changed the terms for payday loans from a single, lump-sum payment to a series of installment payments stretched over six months and lowered the maximum allowable interest rate (Pew Trusts 2013).

While payday loans remain costly in Colorado compared to mainstream borrowing options, borrowers now pay an average of 4% of their paychecks to pay back the loan, compared with 36% under a conventional lump-sum payday loan model (Pew Trusts 2013). The average Annual Percentage Rate in Colorado is 129%, and Pew reports that individual borrowers are spending 42% less money than they did under the old law (Pew Trusts 2013).

According to Pew, short-term credit remains widely available in Colorado despite considerable storefront consolidation. “The Colorado law has transformed a payday lending business with low-volume stores into one that serves more customers at each location, with borrowers spending less on loans annually” (Pew Trusts 2013).

Pew finds that “small-dollar lending can fit better into a borrower’s budget when the loans are due in installment based on ability to repay—that is, to make required loan payments and meet other financial obligations without having to borrow again or draw from savings” (Pew Trusts 2013).

Notwithstanding the advantages with the Colorado mode, Pew reports it has its shortcomings. It allows interest rates that may be substantially higher than those needed for small-dollar lending to be profitable and the fee structure is complicated, making comparison shopping difficult and price competition unlikely (Pew Trusts 2013). Pew adds that it is possible that eliminating high-cost lending entirely would have been better for consumers (Pew Trusts 2013).

According to Pew, simply adding installment payment plans to payday loans is not sufficient. Pew suggests that small-dollar loan markets generally lack price competition so that the cost of borrowing can become unnecessarily high in states that do not limit interest rates (Pew Trusts 2013). In addition, Pew notes that when the law allows installment loans to include fees and charges that are front-loaded, data shows that lenders encourage borrowers to refinance repeatedly, a concept known as loan flipping (Pew Trusts 2013). Finally, Pew observes that consumers can be put at risk of losing control over their checking accounts and being harmed by unscrupulous lenders where postdated checks and electronic access are used as loan collateral (Pew Trusts 2013).

Washington

The state of Washington has introduced another approach to installment loans . This approach is to allow a borrower to take out a traditional payday loan with the fixed fee and loan repayment due on the next payday, while also providing the customer the option to convert the loan to an installment loan on or before the due date.

Under the state of Washington’s regulation, the regular payday fee is 15% on the first $500 and 10% on any additional amount, with a maximum of the lower of $700 and 30% of income (Washington 2015). A borrower may not take out more than eight loans in a 12-month period (Washington 2015).

The borrower also has the right to an installment loan:

BORROWERS’ RIGHTS TO INSTALLMENT PLANS Borrowers are entitled to an installment loan at any time prior to default. Borrowers do not have to pay a fee for the installment plan and have from 90 to 180 days (depending on the original loan amount) to repay the loan in a series of installments. (Washington 2015)

There is still an active payday loan industry in Washington state, even with several regulations that reduce fees substantially below those in Manitoba. The option to convert to an installment does not entail any further cost to the borrower.

Consumer Financial Protection Bureau Proposed Rule

The Consumer Financial Protection is a federal agency that “helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives” (Government of US 2008).

In recognition that there remain challenges in the regulation of payday lending in the United States, in June 2016, the CFPB proposed a rule “aimed at ending payday debt traps by requiring lenders to take steps to make sure consumer have the ability to repay their loans” (Government of US 2016). This proposed rule was open for comments until October 2016. The Rule, entitled Payday, Vehicle Title, and Certain High-Cost Installment Loans, was issued on November 17, 2017 and is effective January 16, 2018 (Government of US 2017).

Under this rule, the protections cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans as a result of serious concerns by the CFPB that risk lender practices were pushing borrowers into debt traps (CFPB 2016).

The rule includes an ability to pay test, requiring lenders to determine upfront that consumers can afford to repay their loans without further borrowing (Government of US 2016, 2017). The rule identifies it as “unfair and abusive practice for a lender to make covered short-term or long-term balloon-payment loans, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay the loans according to their terms” (Government of US 2017).

The rule limits attempts by lenders to debit the client’s bank account that can result in multiple fees and make it difficult for consumers to get out of the cycle of debt (Government of US 2016, 2017). Lenders are required to provide certain notices to consumers before attempting to debit the consumer’s account and after two straight unsuccessful attempts, the lender is prohibited from debiting the account again unless specifically authorized by the borrower (Government of US 2016, 2017).

In addition to the proposed rule, the CFPB has launched an inquiry into other products and practices that may harm consumers facing cash shortfalls.

Regulating for Effectiveness in a Dynamic Marketplace

In order to remain effective in their regulations, governments and regulators must acknowledge that the marketplace is constantly changing. Industries and companies constantly develop new products or find new ways to provide existing products, which may differ from traditional products covered by laws and regulations. To achieve effective consumer protection, laws and regulations should change alongside the marketplace.

Dynamic Marketplace

In the payday lending marketplace, online loans are a product that has proven difficult to regulate. As demonstrated in a 2015 report by the Consumer Council of Canada, the chance of finding an unlicensed lender online is greater than the chance of finding a licensed lender (C.C. 2015). The danger to consumers is that unlicensed lenders are more likely not to comply with applicable laws around payday lending (C.C. 2015). While many Canadian provinces have enacted provisions regulating online payday lenders, enforcing the regulation can be challenging, in part due to the presence of lead generators, “firms that present themselves to consumers as companies that can arrange payday loans, but, in fact, collect the consumer’s information and pass it along (i.e., sell it) to lenders anywhere in the world” (C.C. 2015). Significant challenges relating to jurisdiction and enforcement of legislation arise when lenders are located outside the province or the country.

In recognition of the changing marketplace, Manitoba has recently enacted a new regulation under the Consumer Protection Act, which came into force on September 1, 2016, as per the Consumer Protection Amendment Act (High-Cost Credit Products) (Government of Manitoba 2013). This regulation supports recommendations made by the Manitoba Public Utilities Board in 2013 to regulate payday loan-like products, such as high-cost credit products (News Release – Manitoba 2013).

The High-Cost Credit Products Regulation (Government of Manitoba 2016) applies to loans of money and lines of credit where the annual interest rate exceeds 32%, as well as loans of money and lines of credit that are no more than $5000 and where the high-cost credit agreement terms include the payment of interest at a rate of up to 32% and one or more high-cost credit fees, and where the repayment of the loan is over a term not exceeding two years (Government of Manitoba 2016).

Under this regulation, the creditor requires a license to provide high-cost credit products. The regulation ensures that an information disclosure document be provided to consumers and sets out what must be included in high-cost credit agreements, such as the grantor’s business name, the principal amount of the loan, the terms of the agreement, as well as the forms that should accompany this agreement (Government of Manitoba 2016). The regulation specifies requirements for the entrance signs for each type of high-cost credit product at their licensed locations. The name and license of the high-cost credit grantor must be prominently displayed (Government of Manitoba 2016).

There exist specific design requirements to provide information for Internet high-cost credit products. A high-cost credit grantor must ensure that the borrower has consented to entering into the Internet high-cost agreement (Government of Manitoba 2016).

The regulation specifies that discounting the principal amount of the high-cost credit product by deducting or withholding from any advance or drawing an amount representing any portion of the cost of credit or any component of the cost of credit is prohibited (Government of Manitoba 2016). The regulation also restricts other high-cost credit product lending activities (Government of Manitoba 2016).Footnote 12 The regulation specifies that there cannot be repeated attempts to process repayment if the borrower is charged a fee, penalty, or other amount (Government of Manitoba 2016).

The regulation provides for an administrative penalty if a person fails to comply with specific provisions of the legislation and the regulation (Government of Manitoba 2016).

While this law focuses on disclosure requirements for lenders and prohibits certain conducts, it does not limit the interest rates charged by lenders on their products, making it less interventionist than the payday lending legislation.

Monitoring and Accountability

Regulating to achieve the desired balance between sufficient consumer protection and allowing efficient payday lenders to operate requires regular monitoring given that the market for payday loans is dynamic. To ensure regulations best address this tension requires active public participation in periodic reviews that inform the decision-making process.

In Manitoba, the Minister is legislatively mandated to review the effectiveness of the legislation and regulation every three years, and to decide whether the Public Utilities Board should conduct a further review. This demonstrates one type of effort by government in assessing the success of the legislation in achieving its objectives. The Honorable Greg Selinger stated the following:

The reason we put it into PUB, because it is a quasi-judicial body, arms-length from government, and they can play a strong role in monitoring and reviewing the legislation on a proactive basis. They have a requirement to review every three years, I thought that was quite innovative[…] We gave them a proactive role to stay in front of this issue.

[…]

By putting [the PUB] in charge, it would endure any government, [and be a] sort of a permanent mechanism. (Selinger 2017)

In order to make periodic review of legislation and regulation effective, a determination may be necessary of how to measure success and against which benchmarks. One example of measuring success can be found in the intervention by a coalition of consumer groups to the Manitoba Public Utilities Board hearings on payday loans, where evidence has been filed showing changes and trends in statistics and data relating to payday lending outlets and payday lending use over the years since regulation has been enacted.

Public Participation

Public participation in decision-making “actualizes fundamental principles of democracy and strengthens the democratic fabric of society” and contributes to both individual and community empowerment and learning (Stewart and Sinclair 2007). Practically speaking, there are many advantages associated with public participation.Footnote 13 While much of the literature on public participation relates to environmental assessment, the findings are transferable to other policy and legislative decisions affecting the public. While there is no one superior format for meaningful public participation, best practices have been established in the literature:

  • the process should reflect integrity, accountability, and transparency;

  • participants should have a genuine opportunity to be heard and influence decisions;

  • the process should be inclusive and provide for adequate representation of affected groups;

  • the dialogue should be fair and open;

  • there should be multiple and appropriate methods of public participation rather than a one-size-fits-all process;

  • provision should be made for participant assistance;

  • participation should be early and ongoing; and

  • adequate and accessible information should be available to participants.

Additionally and importantly, given the current Canadian context in which the federal government has committed to a “renewed relationship with Indigenous peoples, based on the recognition of rights, respect, co-operation, and partnership” (Rt Hon Justin Trudeau 2017), public participation mechanisms should allow for Indigenous peoples to participate in their environments and respect should be given to Indigenous legal traditions and worldviews.

Laws enacted by governments should be a mechanism to give meaning to the best policies for consumers. Meaningful public participation should become an essential part of decision-making relating to payday loans to better ensure that laws meet the needs and circumstances of consumers and that the decision-making process is accountable, transparent, and legitimate.

Decision-Making

Many jurisdictions in Canada, such as Manitoba, Nova Scotia, Alberta, Ontario, and British Columbia, have already incorporated public participation in their decision-making processes relating to payday lending, whether in a public hearing or public consultation format.

In Manitoba, the Consumer Protection Act states that the Public Utilities Board holds hearings in relation to payday lending. Under section 164(3) of the Consumer Protection Act, within three years after the first regulation regarding the maximum cost of credit for payday loans came into the force, the Public Utilities Board was directed to conduct a review, including public consultation (Government of Manitoba 1987). Every subsequent third year, the Minister must review the effectiveness of the legislation and the regulations and decide whether to require a further review by the Public Utilities Board and whether to recommend changes to the legislation or to the regulation (Government of Manitoba 1987).Footnote 14

The Honorable Greg Selinger recognizes the importance of public participation and the decision-making process established in the legislation:

I think the PUB review is very innovative, I think that was very positive and has shown results because they have improved the regulations.

[…]

It also gave a venue for the public to have a hearing on a regular basis, in a proactive way, and there is the possibility of intervener funding[….] That makes the legislation much more of a living piece of legislation that stays in touch with current trends and what’s happening to people (Selinger 2017).

Since the amendments to the Manitoba legislation in 2006, the Public Utilities Board has held three public hearings, in 2008, 2013, and 2016, on issues relating to payday lending, including the maximum cost of credit. Giving jurisdiction to the Public Utilities Board to conduct public hearings has allowed any interested organization or individual to participate in the process, whether by applying for formal intervener status or by making an oral presentation or submitting written comments to the Board.

In Manitoba, interveners who fulfill a set of criteria can apply for costs from the Public Utilities Board for their participation in the hearing (PUB Rules). Parties who are granted intervener status can present expert evidence through the submission of written reports and oral witness evidence during the hearing.

The oral hearing represents an essential element of the decision-making process in Manitoba allowing parties to cross-examine witnesses who may be adverse in interest. Cross-examination allows for parties to question the accuracy and the credibility of the evidence adduced by other parties, while direct examination of a witness and closing arguments allow a party to demonstrate to the Board why their evidence should be given more weight in making findings and recommendations.

A coalition of consumer groups has participated in each Public Utilities Board hearing relating to payday loans.Footnote 15 This coalition has focused on evidence-based advocacy and has been represented by legal counsel from the Public Interest Law Centre, an independent office of Legal Aid Manitoba. In each hearing, the coalition has retained a team of experts to conduct extensive research and file evidence with the Public Utilities Board in support of their arguments and submissions. The research filed by the coalition has been undertaken by an interdisciplinary team of experts, bringing together different analytical and methodological tools. Interdisciplinary research enables in-depth disciplinary analysis and broad-based interdisciplinary examination. The main methods used in the research undertaken for the coalition have been from the fields of economics, finance, and social sciences. Methodologies used have included econometric analyses, financial analyses, and field research and analyses.

For the first time in 2016, the Manitoba Public Utilities Board heard directly from a panel of payday loans consumers during the hearing. The panel answered questions from interveners’ legal counsel and directly from the Board on their payday loan practices.

Nova Scotia has also taken the approach of holding public hearings, with the most recent hearing being held in February 2015 (NSUARB 2015). The hearing allowed for formal interveners to participate, as well as groups and individuals to make presentations at an evening session.

Ontario and Alberta provide a different example of a decision-making process where public consultations have assisted governments in making decision regarding payday loan regulation (Government of Alberta 2016; Government of Ontario 2016). British Columbia also recently announced a public consultation to review its payday lending regulation (CPBC 2016). In public consultations, governments have invited comments from the public on payday lending regulation and interested organization or individual can participate by sending in their submissions.

Conclusion

The history of payday lending legislation and regulation in Canada and in the United States demonstrates the recognition by governments that payday lenders fill a gap in the marketplace but that payday loan consumers must be protected from high fees and the cycle of debt often associated with payday loans. In these jurisdictions the objective of payday lending regulation appears to be a delicate balance between protecting consumers and allowing reasonably efficient companies to continue operating. However, as demonstrated by governments constantly evolving and reviewing regulatory tools and that the marketplace remains dynamic, regulators are still struggling to achieve the desired delicate balance.

The Manitoba Public Utilities Board has recognized in each of its reports on payday lending that the industry exists because a significant segment of consumers cannot access the products they require through mainstream financial institutions, such as banks and credit unions. The Manitoba Public Utilities Board has consistently recommended that mainstream banks and credit unions begin offering small balance short-term credit options for consumers who rely on payday lenders (PUB 2008).

While some credit unions have recognized this gap in the market and have begun offering products with similar characteristics to payday loans (Buckland et al. 2016),Footnote 16 it is likely that until more banks and credit union begin offering products that meet the needs of all consumers, payday lenders will continue to fill a gap in the marketplace. Given this reality, governments will likely continue to strive to achieve the balance between protecting consumers and allowing efficient payday lenders to operate, while remaining vigilant of payday loan-like products developing in a constantly evolving marketplace.