Consumer Credit Regulation-A Canadian Consumer-Oriented Viewpoint

Consumer Credit Regulation: A Canadian Consumer-Oriented Viewpoint Author(s): Jacob S. Ziegel Source: Columbia Law Review, Vol. 68, No. 3 (Mar., 1968), pp. 488-519 Published by: Columbia Law Review Association, Inc. Stable URL: http://www.jstor.org/stable/1120897 Accessed: 30/01/2010 01:21 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=clra. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Columbia Law Review Association, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Columbia Law Review. http://www.jstor.org CONSUMER CREDIT REGULATION: A CANADIAN CONSUMER-ORIENTED VIEWPOINT JACOB S. ZIEGEL* In common with the United States and other Western countries, Canada has experienced a phenomenal growth in all forms of consumer credit since the end of the Second World War.1 As in the United States, this develop- ment has been accompanied by increasing public concern over abuses and the absence of adequate protective legislation. Legislative committees and royal commissions have held inquiries,2 and the federal and provincial governments * Professor of Law, McGill University; member of the English and British Colum- bia Bars. Professor Ziegel is joint author of R. GOODE & J. ZIEGEL, HIRE-PURCHASE AND CONDITIONAL SALE: A COMPARATIVE SURVEY OF COMMONWEALTH AND AMERICAN LAW (1965) and joint editor of CONSUMER CREDIT IN CANADA: PROCEEDINGS OF A CON- FERENCE ON CONSUMER CREDIT (J. Ziegel & R. Olley ed., U. Sask. 1966). Professor Ziegel says: Like Professor Kripke, I feel I must begin with a plea of confession and avoid- ance. For several years I have been a member of the Consumers' Association of Canada, a non-profit organization which represents the interest of consumers in Canada, and I am currently an honorary director of the Association. How- ever, the views expressed in this article are my own and are not to be attributed to the Association or any other institution with which I may be connected. 1. As of the end of 1965, the total indebtedness for all forms of consumer credit amounted to Can. $7,062 million, as compared with $835 million in 1948 and $4,020 mil- lion in 1960. See CONSUMER CREDIT IN CANADA: PROCEEDINGS OF A CONFERENCE ON CONSUMER CREDIT 13, Table II (J. Ziegel & R. Olley ed., U. Sask. 1966) (hereinafter cited as ZIEGEL & OLLEY); BANK OF CANADA, 1967 STATISTICAL SUMMARY 744-45. The 1965 figure is made up as follows: Sales Finance Companies: $1,131m. Consumer Loan Companies: instalment credit 67 cash loans 976 Chartered Bank Personal Unsecured Loans* 2,186 Quebec Savings Banks Unsecured Loans 16 Life Insurance Companies Policy Loans 411 Department Stores 565 Furniture & Appliance Dealers: instalment credit 176 charge accounts 33 Motor Vehicle Dealers Instalment Credit 20 Other Retail Dealers: instalment credit 85 charge accounts 337 Oil Company Credit Cards 72** Credit Unions & Caisses Populaires 987 TOTAL: $7,062m. * "Unsecured loans" means loans not secured by marketable stocks and bonds. Id. at 31 n.2. ** The published figure of $71m. is a mistake. See Letter from the Research Department, Bank of Canada, to Jacob S. Ziegel, Jan. 11, 1968. 2. See, e.g., REPORT OF THE ROYAL COMMISSION ON BANKING AND FINANCE (1964) (hereinafter cited as PORTER REPORT); FINAL REPORT OF THE SELECT COMMITTEE OF THE ONTARIO LEGISLATURE ON CONSUMER CREDIT (1965) (hereinafter cited as ONTARIO REPORT); ROYAL COMMISSION ON THE COST OF BORROWING MONEY, THE COST OF CREDIT AND RELATED MATTERS IN THE PROVINCE OF NOVA SCOTIA-INTERIM REPORT (1964), FINAL REPORT (1965) (hereinafter referred to as MOREIRA REPORT); MANITOBA, FINAL CANADIAN VIEWPOINT have responded to the joint effect of their recommendations and the pres- sure of public opinion with a veritable cornucopia of new legislation, most of which has been enacted during the past three years.3 Consumer credit has been deemed sufficiently important to be the subject of two special federal- provincial conferences,4 and one province5 has begun to move from the area of ad hoc piecemeal legislation toward an integrated and comprehensive code of regulation.6 Sooner or later-one hopes sooner-the other jurisdictions REPORT OF PREMIER'S COMMITTEE ON CONSUMER CREDIT (1965) (hereinafter referred to as MANITOBA REPORT); REPORT OF THE TALLIN COMMISSION ON REAL PROPERTY MORT- GAGE LOAN TRANSACTIONS (1965) (hereinfater referred to as TALLIN REPORT); WHITE PAPER ON CITIZEN'S REMEDIES CODE (1966); REPORT ON CONSUMER CREDIT OF THE SPECIAL JOINT COMMITTEE OF THE SENATE AND THE HOUSE OF COMMONS ON CONSUMER CREDIT AND COST OF LIVING (1967) (hereinafter cited as FEDERAL REPORT). 3. See Canada: Bank Act 1966-67, c. 87, ?? 91-92 (Can.) and Can. Stat. O. & Reg. 67-504, 101 Can. Gazette, pt. 2, at 1586 (1967), effective Oct. 16, 1967; An Act to amend the Bankruptcy Act 1966-67, c. 32, ? 22 (Can.), adding Part X, an "Orderly Payment of Debts" provision to the parent Act; Department of Consumer and Corporate Affairs Act, Bill C-161, 1967, passed by the House of Commons on Nov. 27, 1967. Alberta: The Credit and Loan Agreements Act 1967, c. 11 (Alta.), Alta. Reg. 310/67, 63 Alta. Gazette 825 (1967), and Alta. Reg. 407/67, id. at 1307; The Direct Sales Can- cellation Act 1966, c. 28 (Alta.), as amended, c. 14 (1967) (Alta.) and Alta. Reg. 446/67, 63 Alta. Gazette 1374 (1967); The Sale of Farm Implements Act 1967, c. 20 (Alta.); The Unconscionable Transactions Act 1964, c. 99 (Alta.). British Columbia: Consumer Protection Act 1967, c. 14 (B.C.), B.C. Reg. 219/67, 10 B.C. Gazette, pt. 2, at 466 (1967), B.C. Reg. 251/67, id. at 557, and B.C. Reg. 15/68, 11 id. at 16. Manitoba: The Consumers' Credit Act 1965, c. 15 (Man.), as amended, c. 11, (1966) (Man.) ; The Garnishment Act 1967, c. 18 (Man.); The Time Sale Agreement Act 1962, c. 76 (Man.), as amended, c. 87 (1963) (Man.); The Unconscionable Transactions Relief Act 1964 (2d Sess.), c. 13 (Man.), as amended, c. 87 (1965) (Man.). New Brunswick: Consumer Bureau Act 1967, c. 5 (N.B.); The Cost of Credit Disclosure Act 1967, c. 6 (N.B.) ; Unconscionable Transactions Relief Act 1964, c. 14 (N.B.). Newfoundland: The Direct Sellers Act 1966, No. 86 (Newf.) and Newf. Reg. 5/67. Nova Scotia: Consumer Protection Act 1966, c. 5 (N.S.), as amended, c. 98 (1967) (N.S.), and Regs. Nov. 8, 1966, effective Jan. 15, 1967; Mortgage Brokers and Lenders Registration Act 1966, c. 10 (N.S.); Un- conscionable Transactions Relief Act 1964, c. 12 (N.S.), as amended, c. 83 (1966) (N.S.). Ontario: The Consumer Protection Act 1966, c. 23 (Ont.), as amended, c. 13 (1967) (Ont.); Ont. Reg. 207/67, Ont. Gazette, June 10, 1967, at 1579 and Ont. Reg. 265/67, id., Aug. 15, 1967, at 2047; The Consumer Protection Bureau Act 1966, c. 24 (Ont.); The Used Car Dealers Act 1964, c. 121 (Ont.), as amended, c. 104 (1967) (Cnt.), Ont. Reg. 3/65, Ont. Gazette, Jan 23, 1965, at 350. Ont. Reg. 222/66, id., July 30, 1966, at 1703, and Ont. Reg. 380/66, id., Dec. 31, 1966, at 3221. Prince Edward Island: Consumer Protection Act 1967, c. 16 (Pr. Edw. Isl.) ; The Unconscionable Transactions Relief Act 1964, c. 35 (Pr. Edw. Isl.). Quebec: QUE. CIV. CODE arts. 1040 a-e (Kingsland 1964). Saskatchewan: The Cost of Credit Disclosure Act 1967, c. 85 (Sask.), Sask. Reg. 273/67, Sask. Gazette, Sept. 29, 1967, Sask. Reg. 316/67, id., Oct. 20, 1967, and Sask. Reg. 357/67, id., Dec. 1, 1967; The Direct Sellers Act 1965, c. 331 (Sask.) and Order in Council 785/65 Sask. Gazette, May 21, 1965; The Mortgage Brokers Act 1967, c. 76 (Sask.); The Motor Dealers Act 1966, c. 95 (Sask.), and Order in Council 1077/66 Sask. Gazette, June 10, 1966; The Unconscionable Transactions Relief Act 1967, c. 86 (Sask.). 4. The first was held on Dec. 19-20, 1966 and the second on April 3-4, 1967. The conferences were held in camera, but a copy of the agenda and minutes have been made privately available to the writer. 5. Manitoba. See PROPOSED DRAFT ACT RESPECTING THE PROTECTION OF CONSUMERS, April, 1967 (hereinafter cited as Manitoba Draft Act). Public hearings on the Draft Act have been held before the Standing Committee on Statutory Regulations and Orders of the Manitoba Legislative Assembly, and a bill incorporating all or some of the provisions of the Draft Act is expected to be introduced at the 1968 sittings of the Legislature. 6. The Draft Act is divided into the following parts: Part I, Unconscionable Trans- actions; Part II, Disclosure of Cost of Borrowing; Part III, Prepayment Privileges; Part IV, Relief against Acceleration and Forfeiture; Part V, Time Sales; Part VI, Chattel Foreclosure; Part VII, Direct Sellers; Part VIII, Assignees; Part IX, Con- sumer Protection Bureau; Part X, Licensing. 489 COLUMBIA LAW REVIEW may be expected to follow suit, for much of the recent legislation is defectively drafted and significant problem areas have been left untouched.7 In any such re-assessment, the Uniform Consumer Credit Code8 is likely to exert an important influence, just as Article 9 of the Uniform Commercial Code has in the area of secured transactions.9 Although the division of powers between the senior and junior levels of government over the regulation of consumer credit is not the same in Canada as it is under the American constitution,10 the basic problems are the same, though for historical and functional reasons the same stress has not always been laid on them at the same time. Canada's population is, after all, still only one-tenth of the United States'. I. WHY REGULATION? Considering the spate of legislative reports produced in the post-war period, the need for comprehensive consumer protection should no longer require justification. However, in Canada at least, a curiously Panglossian frame of mind still prevails in significant sections of the business community and sometimes even in government circles; there is still a tendency to regard proponents of legislation as trouble makers, misguided zealots, and enemies of a system which has given North America the highest standard of living in the world. A brief review of the principal reasons for regulation may therefore not be entirely supererogatory. Indeed it may provide a better per- spective on the aims of the legislation and a yardstick to measure its adequacy. The first reason, and perhaps the most important, is the striking dis- parity in bargaining power between the two parties to a typical consumer credit transaction of any magnitude, coupled with the average consumer's almost total lack of understanding of the legal implications of the transaction. To be sure, this is a characteristic of most adhesion contracts, but it is quanti- tatively more significant in credit transactions than in the others. In a classic work Sir Henry Maine informed us just over a century ago that "the move- ment of the progressive societies has hitherto been a movement from Status 7. The most common omission is the failure to deal with disclaimer clauses in sale agreements. All the common-law provinces have adopted the British Sale of Goods Act, 1893, 56 & 57 Vict., c. 71, which, generally speaking, permits the parties to exclude or vary the warranties and conditions implied in every agreement of sale. See id. ? 55. The Britisli Hire-Purchase Act, 1938, 1 & 2 Geo. 6, c. 53, ? 8 (now re-enacted, with additions, in the Hire-Purchase Act 1965, c. 66, ?? 16-20) implies certain mandatory warranties which are non-excludable or can only be excluded sub modo. In Canada, only Saskatche- wan appears so far to have copied these provisions. See SASK. REV. STAT. C. 393, ? 25 (1965). The Prairie Provinces also have separate Acts governing the implied warranties in the sale of farm machinery. For further details, see R. GOODE & J. ZIEGEL, HIRE-PUR- CHASE AND CONDITIONAL SALE 71-91 (1965) (hereinafter cited as GOODE & ZIEGEL). 8. Hereinafter cited as UCCC. Unless otherwise indicated, all references in this article are to working Draft No. 6. 9. See The Personal Property Security Act 1967, c. 73 (Ont.); Ziegel, The Draft Ontario Personal Property Security Act, 44 CAN. B. REV. 104 passim (1966). 10. ZIEGEL & OLLEY, supra note 1, at 70-72. 490 [Vol. 68:488 CANADIAN VIEWPOINT to Contract.""l Maine could hardly have anticipated such a swift reversal of that dictum. In area after area the legislatures in all common law jurisdic- tions have been compelled to intervene to prevent the principle of freedom of contract from being subverted into the freedom to be oppressed. It is greatly to Professor Kripke's credit that he has recognised this truism12 with respect to the regulation of "cut-off" clauses and negotiable instruments after many years of opposition to any remedial legislation. But I think the full significance of his concession may have escaped him, as to some extent it may also have escaped the draftsmen of the Code.13 If we agree that the consumer does not understand what he so readily signs and would not be able to change the terms of the agreement if he did, is it meaningful to talk about a consensus ad idem at all?14 Would it not be better to abandon the fiction of contract altogether and to recognise that the state may have to regulate all the signifi- cant terms of consumer credit transactions, just as it has been compelled to do in the case of several types of insurance contracts?15 A second factor in the need for comprehensive legislation is the natural tendency of business to follow the line of least resistance and its well docu- mented inability to police itself.16 One cannot, for example, blame a credit grantor for using an add-on method of computing his finance charges and failing to volunteer information as to its equivalence as an annual percentage rate, when he might if he did so find himself at a competitive disadvantage. It is much more difficult, however, to understand his all too often uncom- 11. H. MAINE, ANCIENT LAW 174 (4th American ed. 1906). The first edition was published in 1861. 12. See Kripke, Consumer Credit Regulation: A Creditor-Oriented Viewpoint, 68 COLUM. L. REV. 445, 472-73 (1968). 13. Interestingly enough one of the most explicit recognitions of the "status" theory of consumer credit occurs in a conflict-of-laws provision in the Code. The Comment to section 5.102 maintains that the territoriality of Part 1 of Article 5 (which deals with Limitations on Creditors' Remedies) is governed by section 1.201. Thus, Part 1 of Arti- cle 5 becomes applicable to actions or proceedings brought in the forum to enforce rights arising out of consumer credit sales or consumer loans "wherever made." In other words, the place of contracting or the law of the original residence of the parties is overridden, presumably on the theory that the state in which the creditor seeks to enforce his rights has the strongest interest in protecting the debtor. See further Ziegel, Conditional Sales and the Conflict of Laws, 45 CAN. B. REV. 284, 313 et seq. (1967). 14. Cf. McCutcheon v. David MacBrayne Ltd., [1964] 1 W.L.R. 125 (H.L.), per Lord Devlin, at 133: If it were possible for your Lordships to escape from the world of make-believe which the law has created into the real world in which transactions of this sort are actually done, the answer would be short and simple. It should make no difference whatever. This sort of document is not meant to be read, still less to be understood. Its signature is in truth about as significant as a handshake that marks the formal conclusion of a bargain. 15. The question of statutory forms of contracts is discussed at notes 169-70 infra and accompanying text. 16. For a pre-war example see Cavers, The Consumer's Stake in the Finance Com- pany Code Controzersy, 2 LAW & CONTEMP. PROB. 200 (1935); for post-war examples, see Boyd & Claycamp, Industrial Self-Regulation and the Public Interest, 64 MICH. L. REV. 1239 (1966). In fairness to industry, it should be added that efforts at self-regula- tion sometimes run into legal obstacles. See, e.g., In re Finance Houses Association Ltd.'s Agreement, [1965] 1 W.L.R. 1419 (Restrictive Practices Ct.). 1968] 491 COLUMBIA LAW REVIEW promising opposition to any remedial legislation. His enlightened self-interest, one would have thought, would be to support any steps that would improve his public image and place his business above reproach. Professor Kripke complains about extremist and unworkable proposals, and no doubt they do occur, but he overlooks the fact that they are often the direct result of a long neglect by business to set its own house in order. When business should be concentrating on making the details of a measure workable, it is often too busy opposing the principle of it, as witness the long and barren controversy over "truth in lending" legislation.17 A third reason is the uncertainty of the judicial process in adapting itself to the problems of the second half of the twentieth century and the painfully slow pace at which even modest gains are made, as they have been made in recent years in Canada.18 The fiction of freely arrived at bargains still haunts the judicial corridors,19 and when the pendulum finally begins to swing in the opposite direction there is a real danger that it may swing too far.20 Through the concept of "unconscionability" the Code proposes to restore a reviewing power to the courts.21 It is no doubt a valuable and important power but it is no substitute for the major policy decisions which very properly should be reached in legislative chambers after full and searching debate by the affected segments of the community. Finally, but certainly not least, is the important fact that the consumer credit industry deploys every available weapon to encourage the consumer to become heavily indebted. This effort adds an entirely new factor to the 17. Cf. Hearings on S. 5 Before the Subcomm. on Financial Institutions of the Sen- ate Comm. on Banking and Currency, 90th Cong., 1st Sess. 224 (1967) (hereinafter cited as Hearings on S. 5): Opponents of the [Massachusetts] bills put forth the usual arguments of im- possibility, curtailment of consumer credit, redtape, customer irritation, addi- tional expense, higher prices, and additional cost, and that simple annual disclosure was of no value to the customer. Their final main argument was that there was pending legislation on the national level and that truth-in-lending should be solved on the national level. Aware that these bills were imperfect, the committee sought technical assis- tance from the affected industries. When these requests were rebuffed, the committee favorably reported out the two bills. In effect, we were calling the bluff of the industry. We were right. The industry panicked and pleaded with us to have the bills recommitted