Strengthening Consumer Financial Protection
What are Alternative Financial Services?
Alternative financial services are any financial service offered by a party other than a bank or a credit union.
The alternative financial services that are the focus of the proposed legislation are those that typically offer higher-cost services including: cheque cashing services, instalment lending, payday lending, and rent-to-own services.
Suppliers other than banks or credit unions offer cheque cashing services to consumers. The cost of these services typically consist of a flat fee and a percentage of the face value of the cheque.
Instalment loans are any loans repaid with a set number of scheduled payments (or instalments). The instalment loans referred to in the proposed legislation are those that charge high interest rates.
Payday lending is an advance of money in exchange for a future payment like a post-dated cheque or pre-authorized debit. The average amount of a payday loan borrowed in Ontario is estimated to be $460 for a two-week term.
Rent-to-own services offer consumers furniture, appliances, and other goods for rent with an opportunity to purchase the rented goods by paying the rental fee for a set period of time or by paying a lump sum.
Potential Risks of Alternative Financial Services
Consumers using alternative financial services are protected by the Consumer Protection Act and the Payday Loans Act. Consultations held over the summer of 2015 indicated that these protections could be improved to better protect consumers. Suggested improvements included:
- Limiting the cost of cheque cashing services for government-issued cheques
- Requiring instalment lenders to more carefully consider the ability of the borrower to repay the loan
- Providing repeat payday loan borrowers with an extended payment plan
- Making the pricing of rent-to-own items clearer to the consumer
When debts go unpaid, the creditor may hire a collection agency to collect the debt. Under the Collection and Debt Settlement Services Act, collection agencies must be registered and must comply with certain rules when collecting on a debt. These rules give consumers rights when dealing with collection agencies and protect consumers from abusive practices.
It is increasingly common for creditors with overdue debt to sell that debt to a third party who then becomes the creditor. When the debt is purchased by a third party who then seeks to recover the debt, the current rules of the Collection and Debt Settlement Services Act do not apply.
During consultations, we heard about collection practices being used that would not be allowed for debts covered by the act. For example, purchasers of debts acting as creditors are not prohibited from repeatedly contacting friends and family of debtors. In response, it was suggested that the debt collection rules be applied to these debts.