CG-5 Consent for increases in credit limits

Effective date: April 28, 2011

Background

In January 2010, as part of the measures to improve access to financing and strengthen Canada’s financial system, the Government of Canada introduced regulations to enhance the protection of consumers of financial products.

The Credit Business Practices Regulations were created in an effort to limit financial institutions’ business practices that are deemed not to be beneficial to consumers.

As part of these regulations, the government introduced a new requirement for federally regulated financial institutions (FRFIs) to obtain express consent from consumers prior to increasing the credit limit on their credit card accounts. This new requirement would allow consumers to be more informed about their credit situation and help them make better financial decisions.

Requirement

The Credit Business Practices Regulations state:

• 6.(1) An institution may not increase the credit limit on a borrower’s credit card account without first obtaining the borrower’s express consent to do so.
• 6.(2) If the borrower’s consent to the increase is given orally, the institution must, not later than the date of the first statement of account that is provided after the date of that consent, provide confirmation of that consent to the borrower in writing, in paper or electronic form.
• 6.(3) The use of any service related to the credit card account by the borrower, including the simple use of the credit card, does not constitute express consent for the purpose of subsection (1).

Issue

Following the coming-into-force of these regulations, the Financial Consumer Agency of Canada’s Supervision and Promotion Branch (SPB) reviewed the application of the new regulatory requirements. The review noted an inconsistent application of the requirements among FRFIs.

SPB identified the two main approaches used by FRFIs. First, several institutions have implemented a process to ensure that express consent is obtained from consumers each time their credit card credit limit is increased. Others have implemented a process to obtain a one-time or “evergreen” consent^{Footnote 1}  from consumers for any future increase to their credit card credit limit.

Analysis

The Credit Business Practices Regulations were designed to limit financial institutions’ business practices that are deemed not to be beneficial to consumers, including the practice of automatic credit limit increases.

Ultimately, the new requirement for FRFIs to obtain express consent for credit limit increases on their credit card accounts was introduced in an effort to help consumers make better decisions regarding their financial situation and to enhance the consumer’s ability to manage credit.

While the use of an “evergreen” consent approach does demonstrate a level of consent from the consumer regarding credit limit increases, it does not meet the standard of express consent that is required under the Credit Business Practices Regulations, nor does it meet the intent of the regulatory requirement. Moreover, the new regulations do not represent a change from practices prior to their coming into effect.

First, the text of section 6 indicates that each increase to a consumer’s credit limit requires its own consent. Subsection 6(1) speaks to “the credit limit” and “the borrower’s express consent.” Subsection 6(2) is even more specific in referring, when consent is given orally, to “the” increase to the credit limit. Similarly, in section 7, the express consent or written authorization of a debtor to certain types of communication (in subsections 7(3)(b), 7(6)(c), 7(7), 9(c)) is not “evergreen” but is limited to “the debt.” In our view, if section 6 were meant to permit “evergreen” consent to any and all future increases, the wording would have clearly indicated this. For example, subsection 6(2) would have read: “If the borrower’s consent to increases is given...” or “If the borrower’s consent to all future increases is given...” or “If the borrower’s consent to any increases is given...”

Second, in order for consumers to make informed decisions regarding whether to provide express consent or not to proposed credit limit increases, consumers would have to be able to assess and consider their actual financial situation at the time of the offer to increase the credit limit, in order to best assess whether the increase would be beneficial or not to their credit profile.

In an “evergreen” consent situation, consumers would effectively agree to accept future credit limit increases that could occur months or even years after the provision of consent occurred, without knowing what their financial situation would be at that time.

This inability for consumers to consider their financial situation for future credit limit increases in an “evergreen” consent scenario also leads us to conclude that, for the purposes of section 6(1) to (3) of the Credit Business Practices Regulations, the acceptance of “evergreen” consent would not constitute express consent.

Guidelines

It is the Financial Consumer Agency of Canada (FCAC) interpretation that the Credit Business Practices Regulations require FRFIs to:

• obtain express consent from consumers in each instance of a proposed credit limit increase by the FRFI; and
• obtain such consent at the time of the proposed credit limit increase.

This would ensure that consumers have the information they require to make informed and appropriate decisions regarding the credit card limits they are willing to accept, based on their actual financial situation at the time of the increase.

Follow-up

Each FRFI is responsible for ensuring full compliance with the Credit Business Practices Regulations. Where changes are required to improve documentation, processes or approaches, FCAC expects that all institutions will incorporate the required amendments within 90 days of the date of this guidance. SPB may follow up with FRFIs to ensure that regulatory requirements have been met.