Consumer rights and debt is an increasingly important topic. As modern societies move toward open data movements in government, health care and banking, it’s important to note that North American society wasn’t built on a bedrock of a citizen’s right to know.

Sociologist Michael Schudson reveals how consumer rights movements between the 1950s and 1970s were based mainly on environmental activists’ demands, consumer advocates and investigative journalists.  Schudson outlines this drive toward modern transparency in his book, “The Rise of the Right to Know: Politics and the Culture of Transparency, 1945-1975.”

Schudson’s book campaigns for greater openness across several domains such as truthful communication in health care and transparency at all business and government levels. Today, in an era of constant information and the uncertainty amid COVID-19, it’s important to revisit this idea of consumer rights, specifically around consumer debt.

Most find it hard to open up about their finances and lack the courage to ask for help

Broadly, consumer rights ensure people obtain accurate and unbiased information and that they are not mistreated. Additionally, being informed on individual rights increases economic welfare. It also improves societal health by bolstering demand for openness and encouraging industries to make ethical progress.

In the consumer debt space, access to non-judgmental, confidential options is essential. Most find it hard to open up about their finances and lack the courage to ask for help. Despite a recent drop in consumer insolvencies, Canada is a heavily indebted nation. Unfortunately, that is not going to change anytime soon.

In a recent Credit Counselling Canada survey, Canadians revealed the issues they face when seeking debt assistance. The greatest challenge was a lack of focus on financial wellness and education (72 per cent). Next, a lack of transparency around fees (70 per cent). Then, concern about conflict of interest and a lack of transparency around an organization’s motives (69 per cent).

The survey also shows motivates people to get out of debt. It’s one of the oldest tropes in recovery, and a claim that’s been repeated for decades. You’ve got to hit rock bottom before you can change course. Strikingly, nearly four in 10 Canadians would have no idea where to turn when facing rock bottom.

More work needed to build awareness

Major work is needed to increase awareness of consumer rights around debt and debt relief. Canada is taking steps in the right direction. The Financial Consumer Agency of Canada recently renewed its Consumer Protection Advisory Committee, seeking to strengthen financial literacy and ensure appropriate regulations are in place. Nevertheless, more can be done.

Canada should look towards models in the U.K., Australia and New Zealand. Together these countries have invested upwards of $115 million in financial help services to supplement their COVID-19 relief packages. Although Canada has responded swiftly to address the immediate emergency, there is no long-term strategy to build Canadians’ financial well-being beyond the crisis. These countries have put the interest of indebted consumers first.  Moreover, they have developed a progressive framework of sustainable options, including the critical service of non-profit credit counselling.

Protecting the right to unbiased, safe and holistic debt relief requires action from several players. Governments, local community foundations and charitable foundations can band together to support the financial literacy goals of non-profit credit counselling. Funding can also help shift the economics of debt repayment through incentives for banks and credit unions to innovate.  Meanwhile, community centers and organizations can provide space and resources for consumer debt education. Finally, Canadians can seek out Canada’s non-profit, certified credit counsellors as a smart place to start.

It takes a collaborative approach

There is no panacea for Canada’s consumer debt problem. A cross-sector, collaborative approach that includes the non-profit, credit counselling sector is essential.

There is a clear path ahead.  One that involves a dual commitment to economic transparency and a progressive consumer debt approach. Egalitarian society advances when consumers have greater access to information and a protected set of rights. As we make our way through the second wave of the pandemic, we must strive to enshrine and elevate those rights.  Learn about Credit Counselling Canada’s bill of rights for Canadians in debt.

CEO of Credit Counselling Canada

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Credit Counselling Canada is pleased with many of the outcomes of these consultations, including the Ontario government proposing to lower fees on payday loans to $15 on $100 by 2018. A lower rate will ease the financial burden on consumers when they are at a difficult time in their lives.

Our position is that while such amendments are a start, they are not a sufficient solution to the payday loan problem.

While the cost of borrowing is certainly problematic, we believe that payday borrowing is a symptom of much deeper financial problems. These include a lack of financial literacy and consumer protection. To protect vulnerable consumers, there should be additional payday loan regulations put in place, not only in Ontario but across all jurisdictions.

1. Increase transparency around rates.

Consumers using payday loans may be vulnerable in the sense that the average consumer does not understand the actual calculation of interest for payday loans.

We prefer lowering the fee but more importantly, we recommend a requirement for the rate to be expressed as an annualized rate. Consumers see $21/$100 and think this is 21% which compares reasonably with other credit products and interest rates. Consumers do not realize that the annualized rate is more like 479%.  Having the rate expressed in an annualized rate makes the comparison with other credit products clearer and creates a better understanding of the cost up front.

2. Decrease repeat borrowing. Ie. the payday loan cycle.

We are concerned about the prevalence of repeat borrowing. Many consumers are unaware of the longer-term consequences of taking the maximum possible amount when applying for their first payday loan. For example, they will only have $X of their pay remaining after they pay for their first loan and the cycle begins.

How many times do you estimate you have used a payday loan in the last three years? (FCAC national survey of 1,500 Canadian payday loan users)

British Columbia has dealt with this by implementing a regulation that says if you take out three payday loans within a 62-day period, a repayment option will be triggered, which allows the borrower to repay the outstanding indebtedness over two or three pay periods. This gives the borrower a fair chance to get back on track and end the cycle.

To give borrowers a chance to repay their loans in full as opposed to paying debt with debt, as proposed in New Brunswick, consumers should be limited in the maximum amounts to be borrowed based on net income. New Brunswick has proposed the total amount that can be borrowed by any one person be at 30% of net income as compared to 50% which exists in other jurisdictions.

In addition to changing borrowing periods and maximum borrowing limits, repeat borrowing may be decreased by increasing reporting of payday loans to credit bureaus. This practice could help regulate multiple concurrent loans and give consumers the opportunity to increase their credit ratings when they properly pay back money borrowed.

With current legislation, repeat borrowing often creates a dependency on payday loans which in our experience only ends in personal bankruptcy.  This occurs after months of financial stress trying to repay with an even larger psychological effect on the borrower and their families.

3. Incentives for proper payday loan repayment.

Options on lending products where paying on time reduces the interest or even opportunities for lowering interest when the total amount of credit is reduced are incentives for good repayment.

Such incentives could include: At the request of a borrower who has successfully repaid three prior payday loans from a lender over the preceding 12-month period, the lender be required to either grant a payday loan extension at a rate of 5% or convert the payday loan to an installment loan. The installment loan would be repaid over the next four pay periods. The applicable rate for the installment loan may be 7% of the principal outstanding amount of the principal owing when the installment loan was requested.

As previously mentioned, reporting of payday loans to credit bureaus would also provide consumers with an incentive to build their credit ratings. This could potentially increase their prospects of qualifying for more traditional loans.

4. Development of new options.

People using a payday loan are frequently facing circumstances with significant pressure.  They are already cash strapped and spend their paydays going from lender to lender to renew loans creating added expense on an already tight budget. If they are not physically going to a payday loan company, they are renewing or obtaining loans online. More online businesses are providing loans and credit than ever before. Consumers are not always aware of the jurisdiction they are dealing with. This makes it difficult to understand the associated laws and risks.

We need to be much more open to other types of credit products to assist people with short-term borrowing needs. For this reason, we support governments in making it easier for other financial institutions to develop easy to access, low-cost products to compete with payday loans. Additionally, lending circles have become popular in community development groups. These circles establish savings and borrowing concepts.

Other solutions beyond regulatory considerations should include a view to treating the underlying cause versus the symptom.  Financial literacy education which addresses the root cause for high-cost borrowing is essential. In a national survey of 1,500 Canadian payday loan users conducted by the Financial Consumer Agency of Canada, self-reported financial literacy correlated with both successful budgeting and less frequent payday loan use. Helping people to understand how to plan for emergencies and how to manage when income and expenses are not aligned is critical.  Choosing the right credit product is also an important feature of using credit wisely.

Together, we need to do more to meet the needs of underbanked, marginalized and vulnerable populations.

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