Written Submission for the Pre-Budget Consultations in Advance of the Upcoming Federal Budget
List of Recommendations
- Recommendation 1: The government should include language in Budget 2022 that accurately defines the fintech lending sector, differentiating it from payday lending.
- Recommendation 2: The government should ensure that credit options remain available across the entire credit spectrum.
- Recommendation 3: The government should amend the Canadian Payments Act to ensure RPAA-regulated fintechs are eligible to benefit from Payments Canada’s Real-Time Rail.
- Recommendation 4: As the Buy Now, Pay Later (BNPL) industry continues its successful uptake in Canada, the government continues to collaborate with industry stakeholders to ensure that Canadians can continue to access this important product in the financial ecosystem.
- Recommendation 5: The government should, in accordance with the Advisory Committee on Open Banking’s recommendation, move forward quickly to implement a hybrid, made-in Canada system of consumer-directed finance.
The Canadian Lenders Association (CLA) supports the growth of over 230 companies that are in the business of lending, or providing other means of credit, to small businesses and individuals. Our founding members include some of the leading financial technology companies across Canada. CLA members effectively and responsibly use innovative underwriting technology and practices to fulfill a demand for underserved Canadians. The CLA supports innovation across the home, auto, consumer and commercial lending sectors and works with the entire ecosystem to promote transparency and foster responsible and ethical lending practices.
Recommendation 1: The CLA recommends that in the 2022 Budget, accurate terms are used to define the fintech lending sector as a dominant form of reliable lending rather than an “alternative” option.
It is essential that the Canadian government uses terms that accurately reflect the fintech lending sector, in which a broad array of lenders provide essential credit to millions of Canadians. CLA members extend credit to many unbanked and underbanked borrowers, and dozens use new financial technologies and non-traditional business models. Over 8.6MM Canadians do not qualify for prime financing, and even more are new to credit, have little credit history or are experiencing temporary financial difficulties. These are the “invisible primes” that can be found in our fast-changing workforce, that include gig drivers, influencers and an army of Zoom-based workers.
Fintech lenders effectively and responsibly use innovative underwriting technology and practices to fulfill a demand for underserved Canadians. In this regard, they are not an alternative form of credit but, in many cases, the future of how Canadian borrowers are more effectively and timely served.
Recommendation 2: The government should ensure that credit options remain available across the entire credit spectrum.
Currently, S. 347 of the Criminal Code makes it an offense to charge interest for credit at a “criminal rate,” which is defined as over 60% effective rate (46.96% APR). A person found to be guilty of such an offense is liable to a $25,000 fine, and/or a maximum of five years imprisonment. Payday lenders (loans under $1,500 repaid within 62 days) are exempt from this rate cap under S. 347.1 of the Criminal Code, which is why they can charge interest at significantly higher interest rates.
More than 8 million Canadians are non-prime, meaning they would likely not qualify for loans from traditional financial institutions because they have credit scores that indicate they are “higher-risk” for defaulting on loan repayments. Canadians are non-prime for many reasons, whether due to a lack of financial literacy, unexpected life events, or having recently immigrated to Canada. These are everyday Canadians who are struggling to consolidate debt, pay down their bills, or manage through an unexpected expense such as auto or home repairs.
Non-prime lenders lend to these Canadians by using a risk-based method to calculate interest rates. The more risk the lender takes, the higher the cost of interest on the loan. If the Criminal Code rate of interest is reduced, lenders will no longer be able to offer loans to customers who would have otherwise qualified for loans. These non-prime Canadians would then have even few options when in need of a loan, having to turn to last-resort options such as payday lenders, pawn shops or, even worse, the black market.
There is also an inherent contradiction in limiting the rate of interest under S. 347, while allowing the exemption under S. 347.1 to persist for payday lenders, who charge interest over 300%. Any reduction in the existing rate would increase Canadians’ lending costs by pushing them into the arms of the payday loan industry. Without access to credit, non-prime Canadians would also struggle to rebuild their credit. Improving a low credit score is almost impossible if a person is not given an opportunity to borrow and repay credit, as the repayment of credit is the main driving force behind credit scores.
CLA members report their customers’ credit repayments to the credit bureaus, so that customers can improve their credit scores with every payment, and get back to borrowing at prime interest rates. Payday lenders rarely report credit repayments to the credit bureaus, meaning their customers are not rebuilding their credit, which perpetuates a cycle of dependency on payday loans. Before any other expense associated with lending, the average cost of capital for our members is approximately 13%, among the highest cost of capital of any industry given the credit-risk profile of our customers. Reducing the maximum allowable rate of interest dramatically stifles new entrants into the non-prime lending market, which reduces competition and innovation in the space.
At a time of record-high inflation with Canadians struggling with affordability, reducing the Criminal Code rate of interest would further marginalize over 8 million non-prime Canadians. Canada’s lending ecosystem covers a vast array of financial products ranging from low-cost prime mortgages to unique commercial lending products. The government’s commitment aimed at a small part of this ecosystem would merely disrupt access to credit for 8 million non-prime Canadians, pushing them to payday loans, bankruptcy, or worse.
The government should carefully consider the impact that a change in the maximum rate would have on credit availability.
Recommendation 3: Fintechs regulated under the Retail Payments Activities Act (RPAA) should be eligible, under the Canadian Payments Act, to have direct access to national payments systems; in particular, Payments Canada’s Real-Time Rail.
Payments Canada plans to launch the RTR toward the end of 2022. The CLA supports regulatory reforms that will allow nonbanks (including fintech lenders) to have direct access to the RTR. Fintechs have much to offer in optimizing the real-time payments sector and have been consistent innovators in the payments space. It is critical that fintechs be allowed access to the payments infrastructure that the Canadian economy operates on. This will foster continued competition with the goal of offering more expansive, faster and better services to customers.
Recommendation 4: As the Buy Now, Pay Later (BNPL) industry continues its successful uptake in Canada, the government continues to collaborate with industry stakeholders to ensure that Canadians can continue to access this important product in the financial ecosystem.
Buy Now, Pay Later (BNPL) is a new and exciting payment service that supports the needs of Canadian consumers to spread their payments into smaller segments without taking on additional interest or fees. BNPL is an alternative to traditional credit cards and oftentimes offers more straightforward terms. FinTechs that provide BNPL support the spending needs of a new generation of consumers and can help support both in-store and online retail commerce. The CLA represents over 40 domestic and international BNPL companies, and looks forward to future collaboration with the government in this space.
Recommendation 5: The government should work collaboratively with industry players to expeditiously implement a consumer-directed finance (CDF) regime in Canada.
As outlined in the Advisory Committee’s Final Report on Open Banking, open banking has been set for implementation in Canada by January 2023. Open banking has the potential to place more power in the hands of consumers in order to let them use their own information during financial transactions at the third parties of their choosing.
There are certain pitfalls to avoid in this crucial period before open banking is fully rolled out. For example, Canada should learn from the example of the United Kingdom in its rollout of CDF systems, in which certain financial accounts were excluded from the system leading to inadequate efficacy and confusion about limitations. Instead of following along this path, Canada can choose a more expansive scope for its covered accounts. Further, a regulatory sandbox should be made to allow for the incorporation of elements that may arise with future innovations in the lending ecosystem.
Ultimately, the CLA supports a measured yet expeditious implementation of a made-in-Canada implementation of open banking.
It is critical that the government understands the distinctive nature of the fintech lending sector, as it seeks to transition to a CDF system in Canada. The CLA deeply supports the move towards more open access to data across financial institutions, which will allow consumers to make their own choices and foster greater competition within the lending space. This submission (i) recommends the government should maintain the existing Criminal Code rate of interest at 60% effective interest rate, (ii) advocates for fintechs regulated under the RPAA to have access to Canada’s Real-Time Rail (iii) recommends that the 2022 Budget uses accurate terms to define the fintech lending sector, delineating it from “alternative,” (iv) encourages the government to work alongside BNPL industry experts to ensure Canadians have access to the best credit products, and (v) advocates for the effective implementation of a CDF regime in Canada.
On behalf of the CLA and its membership, we would like to extend our gratitude to the Canadian government for the opportunity to provide a submission to the federal pre-budget consultations.