March 18, 2011
Federal Government announces proposed Negative Option Billing Regulations
Stuart S. Carruthers
On March 8, the Canadian Department of Finance announced proposed Regulations prohibiting most negative option billing practices in the financial services sector. The proposed regulations, which were formally published in the Canada Gazette on March 12, would generally prohibit negative option billing in that sector and require that financial institutions provide consumers with adequate disclosure of the terms and conditions of products and services offered by the institution. The proposed regulations are open for public comment until April 11.
The proposed regulations apply to federally-regulated financial institutions including banks and federally-regulated insurance companies, as well as institutions' affiliates, agents and representatives. Accordingly, a bank's investment dealer subsidiary, for example, would be subject to the proposed regulations. The regulations also distinguish between a "primary financial product or service" and an "optional product or service". An "optional product or service" is defined as a product or service that is offered for an additional fee and available only with an agreement for a primary financial product or service. The distinction is important since "primary financial product or service" specifically excludes products or services provided by insurance companies to insure a risk. Consequently, while insurance offered as a primary product would not fall within the scope of the regulation, optional insurance (such as creditor insurance) offered in conjunction with another financial product or service (such as a loan or credit card), so-called "Incidentally Sold Insurance", or ISI, would be subject to the proposed regulations. The adequacy of disclosure in the sale of ISI has also been a focus in recent years of Canadian provincial insurance regulators, who released a report on ISI in November, 2008. That Report's recommendations included greater clarity and simplicity in application forms and related documents.
Under the proposed regulations, an institution is required to obtain a person's express consent before providing a new primary financial or optional product or service. The use of a new product or service does not constitute express consent, and if consent is provided orally, an institution must confirm the consent in writing "without delay". Further, any communication from an institution seeking express consent must be made in a manner that is clear, simple and not misleading.
While federally-regulated financial institutions are already subject to various disclosure requirements, the proposed regulations set out the disclosure requirements related to the provision of optional products or services.
Specifically, under the proposed regulations, before a person provides express consent to receive an optional product or service, an institution must provide an initial disclosure statement. This initial disclosure statement must include, in full or in summary: (i) a description of the product or service; (ii) the term of the agreement; (iii) the charges for the product or service or the method for determining the charges and an example to illustrate the method; and (iv) the conditions under which the person may cancel the product or service. If the initial disclosure statement is provided orally, the institution must subsequently provide it in writing "without delay". The initial disclosure statement, as well as those described below, must also be communicated in a manner that is clear, simple and not misleading.
Further, an institution that enters into an agreement to provide an optional product or service must provide a subsequent disclosure statement containing "all relevant information" about the product or service, unless previously provided. In addition to the information required in the initial disclosure statement, the subsequent disclosure statement must also include (i) the date from which the product or service is available for use and, if different, the date from which charges apply; and (ii) the steps required to use the product or service. The subsequent disclosure statement must be provided within 30 days after entering into an agreement for the optional product or service.
Disclosure statements made in relation to an optional product or service that is provided on an ongoing basis, other than one provided in relation to a credit agreement, must also specify that the person may cancel the product or service by notifying the institution to that end. The disclosure statement must further state that the cancellation will be effective as of the last day of the billing cycle or 30 days after the notification is received, whichever is earlier. Refunds or credits must be pro-rated for the amount of time that the service or product was actually used and must be returned "without delay".
Finally, an institution making changes to the terms and conditions of an optional product or service is required to disclose changes to the initial disclosure statement at least 30 days before the changes take effect. In the case of promotional, preferential, introductory or special offers for an optional product or service, an institution must disclose in a subsequent disclosure statement, at least 30 days before the expiry of the offer, the date on which the offer will end and charges will be implemented. In the case of promotional offers that expire after a set amount of use, the institution must disclose "without delay" the fact that the offer has come to an end and the method of imposing charges for subsequent use of the product or service.
Impact on Financial Institutions
Institutions offering optional insurance products in conjunction with other non-insurance products or services will be required to review their disclosure, consent and cancellation procedures and materials to ensure compliance with the proposed regulations and make any required adjustments to systems, procedures, materials and staff training programs.
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