Canada: Banks And Provincial Consumer Protection Laws – The Supreme Court Of Canada Weighs In

On September 19, 2014, the Supreme Court of Canada rendered its long-awaited judgment in Marcotte v. Bank of Montreal et al.¹ and clarified the constitutional principles governing the application of provincial consumer protection laws to federally regulated businesses and activities. Given the proliferation of provincial consumer protection legislation, federally regulated businesses will have to pay close attention to this judgment when organizing their contractual relations with Canadian consumers. In addition, the court dealt with a number of other issues relating to standing in class actions and consumer protection that are not addressed in this update.

The issue

At issue in Marcotte was whether the requirements of Quebec's Consumer Protection Act (CPA) respecting the rules governing disclosure and calculation of consumer borrowing costs apply to foreign exchange conversion fees on transactions charged to credit cards issued by the defendant banks. The matter arose as a result of a class action brought on behalf of Quebec consumers who had paid such conversion fees.

Specifically, the court was required to determine whether sections 12 and 272 of the CPA apply to federally regulated banks. Section 12 CPA requires that all contractual charges be precisely indicated in consumer contracts. Section 272 CPA provides for a number of consumer remedies – including punitive damages – for breach of the merchant's obligations under the CPA. In unanimous reasons written by Justices Rothstein and Wagner, the court held that both provisions validly applied to banks.

The constitutional judgment

Two constitutional arguments are addressed in the court's reasons for judgment: (1) that sections 12 and 272 CPA are constitutionally inapplicable to banks pursuant to the doctrine of interjurisdictional immunity; and (2) that these provisions were incompatible with the federal legislative scheme governing banking and constitutionally inoperable under the federal paramountcy doctrine.

With respect to interjurisdictional immunity, the court confirmed that this doctrine ought generally to be limited to situations covered by precedent. The court held that the doctrine did not preclude application of sections 12 and 272 CPA, as these provisions could not be said to impair any activities that were vital or essential to banking. According to the court, the provisions require that conversion fees be disclosed to consumers, but could not be said to prevent banks from lending money or converting currency.

The court also rejected the argument based on federal paramountcy. The court held that sections 12 and 272 CPA articulate norms analogous to the basic substantive rules of contract law found in Quebec's Civil Code. As a result, these provisions could not be said to frustrate a federal purpose that banking be governed by exclusive national standards. The court did, however, leave open the possibility that a difference in substantive rules between the CPA and the federal regulatory regime could give rise to application of the paramountcy doctrine.

The notion of "credit charges"

In addition to the constitutional issues, the court's reasons address a number of other matters relating to class actions and Quebec's CPA. Of particular significance is the court's interpretation of the notion of "credit charges" in the CPA. In this respect, the court held that conversion fees constitute "net capital" – effectively forming part of the loan extended to the consumer – rather than a "credit charge."

The court noted that treating conversion fees as "credit charges" would give rise to numerous practical and conceptual problems. Indeed, under the CPA, "credit charges" have to be disclosed separately, included in the disclosed credit rate and subject to a 21-day grace period. The court found that including conversion fees within the notion of "credit charges" would not benefit consumers as it would result either in confusing credit rate disclosure or increased costs for all cardholders, including those not using currency conversion services. In short, the court eschewed a purely literal reading of the CPA, in favour of a purposive construction that looked to the consequences of its interpretation on Quebec consumers generally.

The court's conclusion that conversion fees do not constitute credit charges resulted in the class action being dismissed as against those banks who had included disclosure of such fees in their credit card agreements. With respect to those banks who had failed to disclose the fees, the court held that they had breached section 12 of the CPA and, as a result, were liable for reimbursement and punitive damages under section 272 CPA.

Takeaway

In light of the Marcotte decision federally regulated undertakings, including financial institutions, cannot assume that their activities are exempt from all provincial and territorial consumer protection legislation. That said, the court's reasons on the constitutional issues of interjurisdictional immunity and federal paramountcy do not break new ground and are consistent with the recent trend of encouraging cooperative federalism.

Finally, the clarity brought by the court to notion of "credit charges" under the CPA is certainly welcome as it endorses an approach that is both consistent with economic reality and actually beneficial to consumers.

Footnote

1. 2014 SCC 55. The court also released judgment in two companion cases: Marcotte v. Fédération des caisses Desjardins du Québec, 2014 SCC 57; and Amex Bank of Canada v. Adams, 2014 SCC 56.

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