Correction: An earlier version of this story incorrectly stated that the federal government's new credit card regulations that take effect Wednesday are voluntary. They are mandatory. That sentence has been removed. Also, a quote by Finance Minister Jim Flaherty was a reference to the credit/debit card code of conduct, not the incoming credit card rules. That quote has also been removed.
Tough new rules that take a bite out of the Canadian credit card industry’s profits are sparking concern that consumers could see a rise in rates similar to those hitting American card users.
On a conference call with analysts last week, Sonia Baxendale, president of CIBC Retail Markets, said the bank, which is the country’s leading credit card issuer, has been “working on a number of product changes” to offset the anticipated costs of new credit card regulations. CIBC had no further comment as to what those changes would entail.
Research firm Synovate reports that U.S. credit card companies have pushed their interest rates to their highest level in nine years following the implementation of the U.S. Credit Card Accountability Responsibility and Disclosure Act, which took effect last week. The act limits banks' ability to charge penalty fees to credit card customers and come on top of rule changes earlier this year that restrict issuers' ability to adjust rates. The spread between the prime rate and the average credit card interest rate in the United States is now the largest it has been in 22 years.
In Canada, three new regulations take effect on Wednesday that will bolster changes made earlier this year. First, card issuers will be required to offer borrowers a minimum 21-day grace period, during which they won't have to pay interest on new credit card purchases as long as they pay off their balance by the due date. Previously, grace periods varied and interest could be charged from the date of purchase on new items if the card holder had not paid last month’s bill in full.
Second, when customers make payments above the minimum amount, they must now be applied to the balance with the highest interest rate first, or proportionally to all transactions. Previously, card issuers could apply payments made above the minimum amount however they saw fit.
Third, credit card statements will have greater transparency and will have to show how long it will take to pay off a balance if only the minimum payments are made. They will also have to provide advance notice of any increases to fixed interest rates.
These regulations follow several changes made in January, which included requirements for information disclosure boxes on statements, the need to obtain customer consent for credit limit increases, an end to over-the-limit fees caused by retailer holds, and regulations governing debt collectors.
Kelvin Mangaroo, president of RateSupermarket.ca, says the regulations are a good first step, but warns that Canadian credit card companies may follow the lead of U.S. lenders who have increased their rates.
“If these regulations go into effect and if the credit card companies are losing revenue, they will have to recoup that in some way,” Mr. Mangaroo said. “So there is always the potential that we could start going down that route as well.”
Terry Campbell, vice-president of policy for the Canadian Bankers Association, says it’s difficult to compare Canadian credit card issuers to their American counterparts because the practises south of the border that prompted regulations there have not happened in Canada.
