How Canada runs its own consumer finance protection agency

McClatchy NewspapersSeptember 30, 2009 

WASHINGTON — Doom and gloom warnings from U.S. banks that a proposed Consumer Financial Protection Agency would raise borrowing costs for consumers and restrict access to credit for small businesses haven't played out in Canada, which has had a similar agency since 2001.

Congress is debating legislation, proposed by the Obama administration and now before the House of Representatives, to create an independent agency whose sole mission would be to watch out for the consumer who uses credit cards, takes out a mortgage or borrows money.

The call for such a panel comes out of the financial crisis, triggered in part by weak loan standards and predatory lending. Republicans, backed by the U.S. Chamber of Commerce and bank lobbyists, warn that such an agency would bring punishing costs to consumers and small businesses and could regulate all forms of credit, even tabs at the bar or butcher shop.

Canada's experience suggests otherwise.

"I certainly have not seen anything that shows that we are vastly different from the United States in terms of access to credit," said John Rossi, who heads compliance and enforcement efforts for the Financial Consumer Agency of Canada in the capital city of Ottawa.

Canada passed a tough consumer protection act in 2001 that created the agency, giving it a dual mission. It enforces the consumer portions of banking and credit laws, and it works with industry to simplify complicated financial-disclosure statements, promoting clarity and financial literacy.

"To ensure that financial institutions meet their obligations to consumers, we oversee how those institutions comply with consumer-focused provisions in the legislation and regulations to which they are subject," Ursula Menke, the agency's leader, wrote in its 2008 annual report. "In this way, FCAC strengthens the competitive marketplace for all players, and enables consumers to make appropriate decisions based on an understanding of their rights, responsibilities and options."

Many features of the Canadian agency are in a bill sponsored by House Financial Services Committee Chairman Barney Frank, D-Mass. The proposed Consumer Financial Protection Agency would create standard, simplified consumer-disclosure language for mortgages, credit card fees and other types of loans. Also like the Canadian model, the U.S. agency would be funded primarily by fees on financial institutions.

In addition, the U.S. model would have real teeth, empowering the agency to levy fines and perhaps write rules.

"I think it's very progressive," said Bill Huzar, the chairman of the financial services committee of the Consumers Council of Canada, a Toronto-based advocacy group.

Canadian consumer advocates think their country's agency has done a good job but that its powers aren't sweeping enough.

"They do a good job within their narrow focus," said Bruce Cran, the president of the Consumers' Association of Canada, the nation's largest consumer-advocacy group.

Canadian banks have a less friendly view of the agency.

"The FCAC ensures compliance with federal banking laws, but the banks had to comply with consumer protection laws even before the FCAC was created," Terry Campbell, the vice president of policy at the Canadian Bankers Association, said in a written response to McClatchy. "However, the existence of the FCAC has meant additional costs for the banks because additional reporting is required. As well, the FCAC is funded by the institutions it regulates, so there is a cost there as well."

Campbell didn't say these costs were onerous, however, nor did he suggest that the FCAC has hurt lending, questions that were put to him directly.

"Bank lending to businesses in Canada has remained strong, but the FCAC is not a factor in this matter. The regulations around cost of borrowing disclosure were in place before the FCAC was created and the banks were complying then as they do now," Campbell said. "The FCAC opens very few compliance cases in a year, and when they do, in 99.2 percent of the cases they find that the banks are compliant."

The small number of compliance cases opened in Canada is precisely why Canadian consumer-advocacy groups admire the U.S. legislation.

"We'd like to see something with a lot more teeth and a lot more scope," Cran said.

Some Canadian mortgage lenders welcome the FCAC and its efforts to promote clearer disclosure of fees and costs.

"Because when a consumer does come to any mortgage broker in Canada, that full disclosure is there, and has been there since the early '90s," said Sam Kay, the vice president of franchising for Centum Financial Group, Canada's largest network of independently owned mortgage-brokerage firms.

While Kay has no problem with the consumer agency, he said that much of the virtue in the Canadian system, which was virtually unscathed by the global financial crisis, came from the rules of the game, not enforcement.

Canada has an income-related mortgage system that prohibits lending to anyone who has more than 42 percent of his or her income tied up in debt, including home mortgage, loans and credit card debt.

"Our credit-based system allows for someone really not to overextend themselves," Kay said, noting that the rules also prevent flipping investment properties, which was widespread in the U.S. home price run-up that led to economic collapse.

Canadian law also prohibited interest-only loans and complex negative amortization loans, which got many homeowners in California and other high-cost states into trouble.

"We didn't go down that road, and thank God we didn't," Kay said.

The prestigious World Economic Forum rates Canada's banks the best in the world.

"I think at the end of the day, the proof is in the performance of the Canadian economy and the Canadian sector. ... The Canadian financial sector has been recognized as one of the strongest," said Rossi, the regulator. "I think that speaks well of the Canadian sector and the regulations that were set up."

ON THE WEB

Draft of the Consumer Financial Protection Agency Act of 2009

The Canadian agency's annual report

Some Canadian disclosures

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