No hard cap on rates in Tories' new credit card rules

Finance Minister Jim Flaherty unveiled a slew of new regulations for the credit card industry on Thursday, including a minimum 21-day interest-free period on all new transactions.

But despite expectations that the Conservatives might impose some sort of firm limit on how much credit card companies are allowed to charge consumers for purchases, the moves stop short of any sort of over-arching hard cap on rates.

At a press conference in Toronto, Flaherty announced nine new proposed regulations designed to make the industry more transparent and fairer to consumers. The changes to the cost-of-borrowing regulations would have to be approved in Parliament to become law.

The main change would be the mandated minimum 21-day interest-free grace period on all new transactions when consumers pay their balance in full by the due date. Currently, there is no mandatory grace period.

"This is a major change that was resisted by financial institutions," Flaherty said. "It will cost them tens of millions of dollars a year."

The new regulations would also require card issuers to clearly display information about grace periods and interest rates in a summary box on bills.

In addition, the regulations would require bills to give a clear indication of how long it would take people to pay off their balances in full if they only made the minimum payments every month.

"A lot of people think if they pay their minimum balance, things are OK," Flaherty said. "But things are not OK. It can take you more than a decade to pay it off [that way] and we just want to make sure people are aware of that."

Card issuers would be required to give advance notice if interest rates were going to increase during the next payment period, and consumers would be informed in advance if a rate was set to expire or if a penalty for missed payments was to be imposed.

Card issuers would also be forbidden from increasing credit limits without expressed written consent of cardholders.

'Increasing the font size on a credit card contracts doesn't help Canadian families who are hurting right now.' —NDP MP Glenn Thibeault

The new rules would require payments on outstanding balances to be allocated "in a way that is advantageous to consumers," Flaherty said.

He offered the example of a consumer with multiple purchases on one bill, with two sets of interest rates. Consumer payments would have to be assigned to the balance with the higher rate, or spread between the two based on the relative size of the balance.

The federal government also moved to prohibit over-the-limit fees solely arising from holds placed by merchants, and to limit debt collection practices that financial institutions use in contacting a consumer to collect on a debt. Financial institutions would no longer be allowed to contact customers outside specific hours on weekdays and weekends, for example, Flaherty said.

Though Flaherty called the moves significant, reporters asked him why the government didn't put a limit on how high card interest rates could go.

"[This government] believes in consumer choice. We are not interested, like some parties, in nationalizing banks," Flaherty said. "If someone wants a lower interest rate on a card, then they have choices and they can do that."

Opposition dismisses move

The NDP immediately dismissed the moves as half-measures, saying Prime Minister Stephen Harper and his Conservatives didn't go far enough to address the central issue of usurious rates. 

"The Harper government still doesn't get it," said NDP Leader Jack Layton.

"Increasing the font size on a credit card contracts doesn't help Canadian families who are hurting right now," said New Democrat MP and consumer protection critic Glenn Thibeault.

"Interest rates are at an all-time low, yet credit interest rates remain at an all-time high."

But Flaherty dismissed the NDP accusations that the Harper government had not done enough to help consumers, noting that the NDP voted against the recent federal budget, which Flaherty said contained a host of motions designed to help everyday Canadians.

Although they welcomed certain aspects of the proposed legislation, Liberals were quick to note that the regulations do nothing to offer retailers relief from rising interchange fees — fees merchants pay to the financial firms that operate customer cards every time a transaction is made. In some cases, such fees have nearly doubled in the last two years, Liberal MP and consumer affairs critic Dan McTeague noted.

"Like with so many other files, they are throwing the public a few bones," he said. "But [they] are ignoring other very important aspects of this issue, hoping the other glaring problems will simply disappear."

At the press conference, Flaherty stressed the Conservative party's belief that the proposed legislation arms consumers with the power to control their financial future.

"By being better informed, Canadian consumers will be in a better position to make good financial decisions," Flaherty said.

"But only if they are equipped properly to do so."

Similar measures introduced in U.S.

The movement on credit cards in Canada comes on the heels of similar measures in the United States this week.

Under a new law awaiting President Barack Obama's signature, credit card companies will be prohibited from giving cards to people under 21 unless they can prove they have the means to repay the debt or a parent or guardian co-signs for the loan.

Congress passed the bill this week, and Obama is expected to sign it into law on Friday. The changes will go into effect in nine months.

In addition to curbing the number of young people who can obtain a card, the U.S. legislation would set new limits on when and how banks charge fees.

For example, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance. Even then, the lender would be required to restore the previous, lower rate if the cardholder paid the minimum balance on time for six months.

Consumers also would have to receive 45 days of notice and an explanation before their interest rate was increased.