Date: 20041126
Ottawa, Ontario, this 26th day of November, 2004
Present: THE HONOURABLE MR. JUSTICE von FINCKENSTEIN
BETWEEN:
MBNA CANADA BANK
Applicant
and
THE COMMISSIONER OF THE FINANCIAL CONSUMER AGENCY OF CANADA and THE ATTORNEY GENERAL OF CANADA IN THE MATTER OF JUDICIAL REVIEW PURSUANT TO SECTION 18.1 OF THE FEDERAL COURTS ACT
Respondents
REASONS FOR ORDER AND ORDER
[1] This is an application for judicial review in respect of a decision made by the Commissioner (" Commissioner") of the Financial Consumer Agency of Canada (the "FCAC") on February 9, 2004.
FACTS
[2] The Appellant, MBNA Canada Bank ("MBNA") is a wholly owned subsidiary of MBNA America Bank, N.A. and began doing business in 1997. The company is a leading issuer of endorsed MasterCard credit cards and one of the world's largest independent credit card lenders.
[3] The FCAC, is a federal agency established under the Financial Consumer Agency of Canada Act, 2001 C.9 ("FCACA"). The FCAC has the mandate to supervise financial institutions to ensure they are in compliance with the consumer provisions found in various statutes.
[4] In June of 2001, MBNA offered credit cards through the mail to some potential customers
with the prospect of a Regular Annual Interest Rate As Low As ("RALA") 9.99%. The interest rate would be either 9.99%, 10.99%, 11.99%, 12.99%, 13.99%, 14.99%, 15.99%, 16.99%, 17.99%, 18.99% or 19.99%, "depending upon the creditworthiness of the applicant".
[5] In the Spring of 2002, the FCAC approached MBNA to examine compliance with the Bank Act and its consumer provisions in relation to the statutory cost of borrowing requirements associated with credit card loans. Following a review of MBNA's documents, the FCAC began a more detailed review of the RALA program material. By the officer's Report dated August 1, 2003, the FCAC informed MBNA that their RALA program did not comply with subsection 11(1) of the Cost of Borrowing (Banks) Regulations SOR/2002-101 under the Bank Act because the program failed to disclose an "actual or regular interest rate" at the time of application for the credit card.
[6] A Notice of Violation was served on the Appellant on December 15, 2003, in which MBNA was invited to make representations with respect to the alleged violation. MBNA responded making submissions with regard to the amount of the fine but not the violation itself.
[7] The Notice of Violation was signed by the Commissioner and had attached to it a document entitled "Commissioner's Reason for Decision" also dated December 15, 2003, and also signed by the Commissioner. A copy of these reasons is attached hereto as Annex A.
ISSUE
[8] The simple issue in this application is whether the Commissioner breached the rules of natural justice (as particularized in the procedure laid out in section 21 to 23 of the FCACA) by attaching to his Notice of Violation the Commissioner's Reason for Decision.
STATUTORY PROVISIONS
[9] The relevant provision of the FCACA are sections 21 to 23 which provide as follows:
21. If a contravention or non-compliance that is designated under paragraph 19(1)(a) can be proceeded with either as a violation or as an offence, proceeding in one manner precludes proceeding in the other.
22. (1) Every contravention or non-compliance that is designated under paragraph 19(1)(a) constitutes a violation and the person who commits the violation is liable to a penalty determined in accordance with sections 19 and 20.
(2) If the Commissioner believes on reasonable grounds that a person has committed a violation, he or she may issue, and shall cause to be served on the person, a notice of violation.
(3) A notice of violation shall name the person believed to have committed a violation, identify the violation and set out
(a) the penalty that the Commissioner proposes to impose;
(b) the right of the person, within 30 days after the notice is served, or within any longer period that the Commissioner specifies, to pay the penalty or to make representations to the Commissioner with respect to the violation and the proposed penalty, and the manner for doing so; and
(c) the fact that, if the person does not pay the penalty or make representations in accordance with the notice, the person will be deemed to have committed the violation and the Commissioner may impose a penalty in respect of it.
23. (1) If the person pays the penalty proposed in the notice of violation, the person is deemed to have committed the violation and proceedings in respect of it are ended.
(2) If the person makes representations in accordance with the notice, the Commissioner shall decide, on a balance of probabilities, whether the person committed the violation and, if so, may, subject to any regulations made under paragraph 19(1)(b), impose the penalty proposed, a lesser penalty or no penalty.
(3) A person who neither pays the penalty nor makes representations in accordance with the notice is deemed to have committed the violation and the Commissioner may, subject to any regulations made under paragraph 19(1)(b), impose the penalty proposed, a lesser penalty or no penalty.
(4) The Commissioner shall cause notice of any decision made under subsection (2) or (3) to be issued and served on the person together with notice of the right of appeal under section 24.
ANALYSIS
[10] Both parties agree that notwithstanding a right of appeal provided for in the FCACA, judicial review is available where the issues in question deal with whether or not there was a failure to observe the principles of natural justice or a breach of a procedural statutory provision. The cases of Rolls Wood Group (Repairs and Overhauls) Ltd. v. M.N.R. (2001), 199 F.T.R. 64 and Telecommunications Workers' Union v. C.R.T.C., [1993] 1 F.C. 231 support this proposition.
[11] Let us now the turn to the issue of whether or not the Commissioner failed to observe the principles of natural justice. It is well established that the principles of natural justice have two basic objectives:
- no person shall be adversely affected without a hearing, and
- any decision affecting a person must be made by a tribunal that is impartial and not biased.
[1] In this case, section 22(3) of the Act requires that the Commissioner "propose" a penalty in the Notice of Violation. If the recipient makes any representations, the Commissioner is obliged to consider the representations and then decide, on a balance of probabilities, whether a violation of the Act has occurred.
[2] In this case, the Commissioner attached to the Notice of Violation signed and dated the "Commissioner's Reasons for Decision". These reasons did not only outline the case that the FCAC staff makes against MBNA and MBNA's position, but also contains an analysis of the issue and lengthy considerations regarding an adequate penalty. While the first line refers to an "alleged contravention" and the second last line states " I propose a penalty in the amount of $75,000.00", these two modifiers do not detract from the fact that this document amounts to a decision by the Commissioner. Any doubt is removed by the fourth paragraph on page 4 which ends with the following categoric sentence:
"I therefore conclude that MBNA contravened subsection 11(1) of the Cost of Borrowing (Banks) Regulations in that it has not disclosed the annual interest rate in its credit card applications or accompanying documents"(Underlining added)
[3] The procedure carefully laid out in sections 22 and 23 requires:
a) a notice of violation where the Commissioner believes on reasonable grounds that a person has committed a violation;
b) the notice should identify:
i) the violation,
ii) the proposed penalty, and
iii) the right to make representation within the following 30 days; and
c) upon receiving the representations the Commissioner makes a decision on the balance of probabilities and where required imposed the requisite penalty.
[4] This procedure was not followed in the instant case. Not only did the Commissioner issue the "Commissioner's Reasons for Decision" on December 15, 2003, but the internal documents from the agency reveal an e-mail dated November 12, 2003, from the Deputy Commissioner to his staff concerned with the MBNA file [Tab F Application Record of the Applicant] which states:
Bill [the Commissioner] has asked for a detailed briefing on this case before he concludes on the issues of an AMP and the appropriate amount
In particular he would like:;
- Bernard to do a timeline from the day we opened the file to now identifying where delays occurred.
- to be briefed on the content of any discussions over the past year with MBNA in terms of the compliance issue.
-to be briefed on what other FI's are using RALA and when we will open investigations on their practices
- a communication plan (Susan)
Danielle, can compliance please prepare the required information for this meeting.
Johanne . Can you set up a meeting for 2 hours as soon as bill returns, perhaps Nov. 26th
Please review the material with me before the meeting ( underlining added)
[5] From this e-mail and the Commissioners Reasons for Decision only one inference can be drawn; namely the Commissioner considered this case in detail, including the position of MBNA and then made a decision. He is now in effect asking MBNA to comment on this ' preliminary decision' before it is made final. Or, stated differently, instead of giving MBNA a fair hearing, he is giving MBNA a right of appeal. This is not the right provided for under the FCACA, nor the procedure called for therein.
[6] Even if one were to assume that the Commissioner has not yet decided the issue under these circumstances (i.e. having had a two hour in depth briefing and then having signed a seven page letter in detail outlining the agency's and MBNA's position as well as having considered and proposed an appropriate penalty), it is impossible to posit that the Commissioner would still have an open mind and be able to give MBNA an impartial hearing upon receiving MBNA's representations.
[7] In this light, the fact that MBNA chose not to make representations on the finding of violations, but only on the penalty is irrelevant. Both parties agree that estoppel does not apply in case of a breach of the rules of natural justice.
[8] The Commissioner would be well advised to contemplate adopting a different procedure in the future. First, any notice of violation should follow the precepts of s. 22(3) of the FCACA and not contain a reasons for decision. Secondly, he might want to adopt a procedure used by other government agencies having both an investigative and adjudicatory function, namely splitting the internal responsibility for investigating and adjudicating. It is normal in such agencies that the deputy commissioner is delegated the investigative work, supervises the activities of staff and sends out the notice of violation. Once the representations of the alleged violator are received the Commissioner with an unbiased mind then makes the final decision (based on staff representations and alleged violator's representation) on whether to impose a fine and in what amount. Such a mode of procedure or a variant thereof might avoid future challenges to determinations of the Commissioner under s. 23(2) of FCACA.
CONCLUSION
[9] By proceeding in the manner outlined above, the Commissioner breached the rules of natural justice as particularized in the FCACA. Accordingly, his decision cannot stand.
ORDER
THIS COURT ORDERS that
1. The Notice of Violation of the Commissioner of the Financial Consumer Agency of Canada dated December15th, 2003 is hereby set aside.
2. The Applicant shall have his cost in this matter assessed by agreement of the parties at $10,000.00.
"K. von Finckenstein"
Judge
ANNEX A
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-492-04
STYLE OF CAUSE: MBNA CANADA BANK
v.
THE COMMISSIONER OF THE
FINANCIAL CONSUMER AGENCY
PLACE OF HEARING: TORONTO
DATE OF HEARING: NOVEMBER 24,2004
REASONS: THE HONOURABLE MR.JUSTICE
VON FINCKENSTEIN
APPEARANCES:
APPLICANT: J.ALAN AUCOIN
RESPONDENT: IAN DICK
SOLICITORS ON THE RECORD:
BLAKE CASSELS & GRAYDON
TORONTO, ONTARIO
FOR APPLICANT
MORRIS ROSENBERG
DEPUTY ATTORNEY GENERAL OF CANADA
FOR RESPONDENT
ANNEX A
Commissioner's Reasons for Decision
MBNA. Platinum Plus Credit Card Application Forms Re: File #800-21813
This case involves'an alleged contravention of a consumer provision, namely a failure to specify the annual interest rate in an application form for a credit card, or in . -the form or in a document accompanying it, as required by subsection 11(1) of the . Cost. ofBorrowing (Banks) Regulations_. Subsection 11(1) reads as follows: -.
,11. (1) A bank that issues credit cards and that,distributes an application form for credit cards must specify the following.information in the form or in a document accom apnvirïg it, including. the date on which each of the matters mentioned takes effect: - .
(a) in the case of a credit card with a
(i)fixed rate of interest, the annual interest raté, or
(ii) variable interest rate that is determined by adding or subtracting â fixed percentage rate of interest to or from a public index, the public index and the fixed percentage rate to be added or subtracted from it;.(b) the day on and after which interest accrues and information concerning any grace period that applies; and .
(c) the amount of any non-interest charges.
Background to the Compliance Review
In April of 2002, an FCAC officer commenced a review of the actions of MBNA Canada Bank (referred to- herein as MBNA) in disclosing.the credit card interest rates in relation to its credit card products. During that month, FCAC received
various MBNA templates for its credit cards offerings. These consisted of . promotional documentation with a detachable application form.
On May 31; 2002, the FCAC officer met with MBNA representatives to obtain . their -views on-how certain MBNA Platinum Plus credit card application forms, referred to by MBNA 'as "R-ALA" offers ("Rate As Low As"), were compliant with the disclosure requirements of the Regulations.
As a result of these discussions, MBNA modified their mail-out materials. These modifications continued however to be problematic. By letter dated July. 19, 2002, MBNA was advised that an'examination pursuant to section 659 of the Bank Act into the mail-out materials was being undertaken. Three compliance reports were subsequently.produced (file-numbers 800=21801,.800-6958'and 800-21813).
. . By letter dated September 5, 2003, MBNA provided comment to the FCAC on two compliance reports including the one*which was produced.in the present file.. .
It appears from the compliance'officer's report that the MBNA Platinum Plus . credit card application forms (hereafter referred to as the "RALA offers") which were mailed out from August 2002 to April 2003 stated as follows:
"Low introductory 1.9%Annual Interest Rate on CASHADVANCE CHEQUES.and BALANCE TRANSFERS. Thereafter the RATE is as low as 9.99%. "
The reverse side of the documentation stated as follows:
"The interest: rate assigned to your account will be one of the 9.99%, 10.99%, 11.99%, 12.99%* 13.99%, 14.99% 15.99%, 1 F.99Y 17.99%, 18.99%, or 19.99% depending on your creditworthiness.."
The reverse side of the detachable application form states.as follows:
"The -regu.lar interest rate for purchases and other cash advances is the rate assigned to your account (as low as-9.99%). The regular annual interest rate will apply to both new and outstanding cash advance balances (consisting of cash. advance cheque and balance transfer transactions) if you. do not. qualijyfor the introductory promotional interest rate. See account agreement for details. "
In these offers,'the consumer is assigned an annual interest rate from a range of annual interest rates based on the consumer's creditworthiness as determined by MBNA.- This is determined once a completed application form is returned to MBNÂ.
It is represented that the annual interest rate for the use of the card may be as low as 9.99%..
MBNA's Position
MBNA takes -the' position in its comments of September 5, 2003 that these representations are proper "assumptions" within the meaning of section .6(3) of the Regulations. That section reads as follows:
(3) Informatiop.disclosed in a disclosure statement may be based on an assumption or estimate if the assumption or estimate is reasonable-and the information disclosed by if -
-(a) cannot be known by the bank-when it makes the statement; and
(b) is, identified to the borrower as an assumption or estimate.
MBNA refers to FCAC's understanding of the expression ."assumption" as. meaning "a thing that is assumed to be true", to "accept as true without proof', and 447'an assuming that something is true".and "a fact.or statement (proposition, axiom,
. postulate or notion) taken for granted"". In the September 5`" letter, MBNA argÿes- as follows:..
We believe that these definitions apply to the-RALA product. The-thing-that is assumed to be true or accepted as true without proof is that the applicant will. . meet our highest credit requirements and qualify for the 9.99% rate: If that assumption is not correct,. then it is assumed that the applicant will meet the credit requirements for one of the.otlier rates specified.
MBNA also asserts that if, the assumption that the consumer will qualify for thelowest rate is not true, then it is assumed that the.applicant will qualify fora higher annual interest rate. . .
Analysis
The assumption that an applicant will meet NMNA's highest credit . requirements.is not reasonable. This is borne out by the fact that only 8.56% of new accounts were sufficiently.creditworthy to qualify for the 9.99% rate. Given MBNA's experience .as â mayor.credit card issuer, it was- well placed to- realistically assess the credit profiles of typical consumer populations with sufficient specificity to know that most consumers will notqualify for the lowest advertised rate. .
As-for the argument that a consumer who does not qualify for the 9.99% rate is "assumed;' to qualify for â higher rate, this is not an assumption of the kind contemplated'by subsection 6(3). NMNA posits that a consumer who does not qualify
for the 9.9.9% rate will nevertheless qualify for a higher rate by default. However the consumer has no idea'what the rate applied to -the account will be, how his or her.. creditworthiness will be 'established, or of the source.of the information to be used to establish creditworthiness. Nor does the consumer have any knowledge of the criteria to be used to establish creditworthiness, of the relative importance of_the criteria, or of haw these criteria result in the assignment of one rate as opposed to another.
...A
it is important to bear. in mind that the purpose of subsection 11(1) of the - . Regulations is to ensure that critical financial information is available to the consumer as early as the application process sô that he or she can make informed financial choices. This. provision came into force in September 2001 and represents an . important change from. the former regulations. Effective disclosure ofinformation -fosters a level playing field among financial service retailers.and allows consumers to - compare products. This in turn fosters the development of better financial products..
In keeping with this important public purpose, subsection 6(3) does not contemplate assumptions where- all the elemehts'of the -assumption are within the exclusive knowledge or discretion_ of the financial institution.
An assumption; in order to be reasonable.,-must. provide some objective and verifiable basis for the consumer to determine for himself or herself the substance of the .information that is required.-to be disclosed by regulation. - In the case of RALA `offers, the consumer is being asked to speculate upon an annual interest rate outcome based on MBNA's unilateral findings of creditworthiness:
. MBNA relies on subsection 6(3) of the Regulations as a basis-. for not . disclosing the annual interest rate, nameljy_that disclosure is not necessary because the information is based on a "reasonable assumption". For the. reasons set-forth above I do not accept this argument. I therefore.conclude that MBNA has contravened subsection 11(1) of the Cost of Borrowing (Banks) Regulations in. that it has not disclosed the annual interest rate in its-credit card applications_ or accompanying documentation. -
Given that the violation in this case related-to a large mail-out campaign extending over many months and is therefore systemic, and given that this is a contravention in relation to- the disclosure of critical information under the Bankl4ct and the Regulations, a notice of violation will therefore be issued against MBNA . pursuant to subsection 22(2) of the FCAC Act.
Penalty
-As for the amount of penalty, I am required to-consider the amount of penalty in light.of three.criteria set out in section 20 of the Financial.Consumer Agency.of Canada Act,. namely thedegree of intention or negligence,-the Harm done by the . violation, and the history of the person who committed the violation with.respect to .any prior violation or conviction within the preceding-,five-year period.
As.for degree of intent or negligence, two previous files were opened with respect to MBNA concerning RALA offers.
File number 800-21801 dealt.with the French-language version of an MBNA Platinum Plus credit card offering. A-letter of reprimand is proposed because the . advertisement on the envelope for the French language version of the MBNA credit card offering .advertised the annual interest rate to be "seulement 9,99%".("only.9.99%"). The offer materials inside the French mail-out specified that the rate was as low as 9.99% ("aussi bas que 9,99%"): The rate of 9.99%is identified as being the.- applicable interest rate, not- the potential rate.
In file number .800-6958 a letter of reprimand noting two violations against . MBNA has been issued in respect of credit card offerings that were mailed out during the months of May, June and July, 2002. In this 'case,'the credit card application and accompanying documentation did not set out the interest rate on purchases made'during a promotional_ introductory period. It also did not indicate the annual interest rate for the use.of the card, but set out a "rate as low as 9.99%".
MBNA did not set Out the range of altemative interest rates in the event the low promotional rate was not available. MBNA stopped distributing the materials upon being alerted by FCAC of its concerns with the RALA approach to advertising the credit card in that particular Mail-out:
MBNA pressed on nevertheless with'a mail-out campaign.using a RALA approach which added a range of possible annual interest rates as alternatives to the . -9.99% rate advertised -in the mail-out.- As seen above-this mail-out did not correct the fundamental defects of the RALA approach. MBNA states that they advised:FCAC as early as the May 30-, 2002. meeting that. they proposed to proceed with a mail-out substantially in this form, that the compliance officer was asked to confirm that this was acceptable and that the compliance officer undertook to do so. MBNA claims that when they followed ÿp with FCAC on June 15 the compliance officer indicated that the matter was still under "discussion". MBNA claims that the proposed mail-out . _ offer was again discussed with the compliance officer in July of 2002 and MBNA. advised the officer that this-offer would be mailed. out, but that the. officer "did not suggest that the.practice should be discontinued".'. MBNA claims that the matter was . again raised with the compliance- officer on numerous occasions between July 2002. and.March 28, 2003, but that it received no direction in the matter from the officer. Finally MBNA claims that it was diligent and acted in-good faith in trying to obtain the views of the FCAC on this product. .
However as early as May 30, 2002 the compliance officer had expressed concerns to. MBNA with the RALA offers and in June 2062 had indicated that he could not provide feedback to MBNA as to the acceptability of the product and that it was not the FCAC's policy to provide advice of this kind to institutions. A letter requesting an examination .of MBNA under the Bank Act was sent on July 19, 2002 concerning the RALA product. This should have alerted MBNA that the matter was not resolved. On October 25, 2002 the officer advised MBNA that no determination had yet been made.
Given the growing.complexity of financial products and competitive pressures on financial institutions, FCAC can not place itself in â position where it is complicit - with financial institutions- in the development and marketing of their financial
products. To do so would be to risk placing FCAC in conflict with the regulatory scheme it is mandated to uphold. The officer's actions in the file *are -consistent with these concerns. The-burden of complying with the law lies on the financial institution. - In the present case, MBNA proceeded at its own risk having been previously alerted, to the problems inherent with this promotional strategy in two. earlier files and after having received a letter of examination at the very early stages. of discussions with FCAC. -
As for harm done, MBNA reports having mailed 5,905,500 RALA offers'in the months of"August and September 2002. At the rate of 0.13% accounts booked per mail-out (estimate provided by MBNA), this would have resulted in 8770 booked
accounts.. Of 8770 booked accounts,-approximately 742 (8770 x 8.56%) would have received-the-9.99% rate.
I am prepared to assume that consumers were induced to apply for and use the MBNA
Platinum Plus credit card based on a representation that a.,9.99% annual interest rate - would apply. .
The important public policy interests discussed above have been undermined by the actions. of MBNA. The law is clear that consumers are entitled to precise - information concerning the annual interest rate applicable to their credit card account and that they_are entitled to this information at the time a credit card application is'. made. Thi-s allows consumers to make informed financial decisions and to comparison shop. By depriving consumers of this information, consumers- make less informed choices. In representing the annual interest rate as it did, MBNA lured consumers - - from competitors who are compliant with these regulatory requirements, thus . contributing to.an uneven playing field-in financial retail services and undermining the development and distribution of better products and services. If unchecked,. the unlawful actions of an institution conceiving an important industry product line can . act as a disincentive to those institutions-who invest in compliance thereby undermining their résôlve.to migrate to compliance with the consumer provisions.
As .for a history of previous violations, the violations in files 21801 and-6958
wère more or less. contemporaneous-with the violation in this file and I would therefore attach less importance to this heading as a basis for the penalty in. this case.
For the reasons given above, and as the violation 'in this: case is a serious one that has an impact on a large number of consumers and on the marketplace; I propose a.penalty in_the amount of $ j5,00 .00..
OTTAWA, December .15, 2003
William (Bill) G. Knight
. Commissioner of the Financial Consumer Agency of Canada.