On November 16, 2024, the Department of Finance released Proposed Regulations Amending the Financial Consumer Protection Framework Regulations (Regulations) and opened a 30-day consultation period that closes on December 16, 2024 (Consultation).
Consistent with the federal government’s promises to address non-sufficient funds (NSF) fees in Budget 2024 announced earlier this year, the proposed changes are part of the government’s continued efforts to improve affordability for Canadians. The Regulations propose significant changes to NSF fees that can be charged by banks on personal deposit accounts of natural persons (consumers), including to accounts jointly held with another person, and they also propose additional obligations on banks in respect of such fees. The Regulations would apply to Schedule I and Schedule II banks and authorized foreign banks (banks) but would not apply to other federally or provincially regulated financial institutions, such as provincially regulated credit unions. Notably, the proposed measures would not apply to accounts held by corporations or business accounts, and they would also not apply to NSF fees charged by merchants or non-bank lenders, among others.
Proposed Changes
The proposed changes include the following:
- Capping NSF fees at C$10 per instance
- Limiting to one the number of NSF fees that can be charged in a 72-hour period
- Prohibiting multiple NSF fees when the same transaction reoccurs
- Prohibiting NSF fees for small overdrawn amounts under C$10
- Requiring banks to alert consumers when their account falls below zero dollars (or beyond their overdraft limit) to warn them that they are about to be charged an NSF fee and providing a grace period of at least three hours to deposit or transfer additional funds into the account to avoid the NSF fee
- Notably, the alert must be sent by email or text, and
(a) It must specify the minimum amount that the consumer needs to deposit and the time limit for doing so (b) Be sent within normal business hours for the person receiving the alert (i.e., between 8:00 a.m. and 4:00 p.m.)
(b) It should also be noted that an NSF fee can only be charged if the bank sends the alert, unless the consumer opts out, in writing, of receiving alerts from the bank with respect to NSF fees or has refused to provide their contact details, in which case the bank can charge an NSF fee without sending the alert.
- Requiring banks to disclose on an annual basis the following information in respect of NSF fees charged:
(a) The number of times NSF fees were charged within the preceding year and the total gross revenue generated by those fees
(b) The total number of natural persons in respect of whom NSF fees were imposed, including the number of natural persons who were charged an NSF fee four or more times during that year
- The prescribed information would need to be disclosed within 30 days after the end of each calendar year and it would need to be disclosed on the website through which the bank offers products or services in Canada. The bank would also need to maintain the information for a three-year period from the day on which the information was made available.
Rationale for Changes
NSF fees are charged by banks in the event that there are insufficient funds in a customer’s bank account to cover a payment, such as a cheque or pre-authorized debit, and there is no overdraft protection available on the account. According to the Regulatory Impact Analysis Statement (Impact Statement) released with the Regulations, NSF fees charged by banks typically range from C$45 to C$48. They are used by banks to incentivize customers to maintain a sufficient balance to cover payments coming from their bank account as well as a revenue stream, but they also represent a source of financial hardship for consumers. In particular, NSF fees have been identified as disproportionately impacting the financial wellbeing of lower-income Canadians who may not have overdraft protection on their bank account, thereby contributing to cycles of debt.
The Impact Statement also notes that it is common practice for multiple NSF fees to be charged on the same account and in rapid succession when the same payment is re-presented and following multiple declined payment attempts. It is also typical for customers to be unaware that funds in their account are insufficient to cover a payment and for NSF fees to be charged regardless of the size of the shortfall. The key objective of the proposed amendments is therefore to reduce the financial burden of NSF fees on consumers by capping the amount of the fee and restricting the circumstances in which NSF fees can be charged.
Furthermore, the public disclosure of prescribed NSF fee data by banks is intended to increase the level of transparency regarding NSF fees in order to assist consumers, advocacy groups and policymakers in understanding the impact that such fees are having on Canadians.
Impact and Next Steps
The proposed amendments will have a wide-ranging impact on banks. In addition to the loss in NSF fee revenue, implementation costs and resources will also be required for banks to reprogram their systems to comply with the proposed changes. For example, banks will need to modify their existing alert system to notify consumers when they are about to incur an NSF fee and to identify accounts that have been charged an NSF fee in the preceding 72-hour period as well as transactions that would have resulted in a nominal overdraft balance.
Banks will also need to consider whether changes may be required to product documents, including disclosures, as well as updates to the bank’s policies and procedures, product pages on its website and consumer-facing communications to reflect the new NSF fee cap and associated measures.
As noted above, the 30-day consultation period for comments on the Regulations closes on December 16, 2024.
Based on their current formulation, the Regulations contemplate a staggered implementation timeline. Proposed amendments to cap NSF fees at C$10 would come into force one month after the registration of the final Regulations, whereas a six-month transition period is currently contemplated for amendments restricting the circumstances in which NSF fees can be charged, including the alert notification requirements. These changes would come into force six months after the day the final Regulations are registered, thereby allowing banks more time to implement the necessary system changes and updates required to comply with the new requirements. Finally, according to the Impact Statement, the first disclosure of NSF fee-related information would be required within 30 days following the end of the calendar year in which the Regulations were registered.
For more information on the proposed amendments, including submissions on the Consultation, please contact any member of our Financial Services Regulatory group.
