THE BORROWERS AND DEPOSITORS PROTECTION ACT: A CASE HISTORY IN LEGISLATIVE FAILURE by SUSAN KATHLEEN BURNS B. Sc., The University of B r i t i s h Columbia, 1968 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER. OF SCIENCE i n Business Administration in THE FACULTY OF GRADUATE STUDIES 1 : -'Faculty*/r, of C ommerce and Business Administration We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA October 1981 Susan Kathleen Burns In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the r e q u i r e m e n t s f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h C o l u m b i a , I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s t u d y . I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y purposes may be g r a n t e d by the head o f my department o r by h i s o r h e r r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l no t be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Department o f The U n i v e r s i t y o f B r i t i s h Co lumbia 2075 Wesbrook P l a c e V a n c o u v e r , Canada V6T 1W5 Date DE-6 (2/79) i i ABSTRACT The Borrowers and Depositors Protection Act (BDPA) was introduced into the House of Commons on October 27, 1976 by the Honorable Antony Abbott, Minister of Consumer and Corporate Affairs. The Liberal Party was in a majority position, and had been in power for fifteen months of their four year term of office. Yet, eight months after i t s introduction, BDPA died on the order paper. The question this thesis asks i s , "why?". Why was the Borrowers and Depositors Act a legislative failure? Research was conducted using original documents dating back to 1968, obtained from the Department of Consumer and Corporate Affairs. As well, interviews were conducted. Those interviewed included: Consumer Research Branch staff and o f f i c i a l s from other areas of the Department of Consumer and Corporate Affairs; o f f i c i a l s from other federal government departments, -former Ministers of Consumer and Corporate Affairs and their staff; a Senator; and representatives from the provinces, the finance industry, consumer groups, other interest groups and the academic community. This history of the policy process surrounding BDPA begins in 1960, when Senator David A. Croll f i r s t introduced a private member's b i l l respecting disclosure of consumer credit contract terms. It ends in mid 1981, with developments in the area of consumer credit. To assist in understanding the variations in public policy that were developed and recommended during this process of attempted reform in the i i i area of consumer c r e d i t , a model, the Alpha and Beta Weltanschauung, has been developed. Weltanschauung i s a German word, which l i b e r a l l y t ranslated, means "worldview". The Alpha and Beta weltanschauung are, therefore, two ways of viewing the world. Those with the Alpha perspective use ecomonic e f f i c i e n c y ( i n a l l i t s dimensions) as t h e i r c r i t e r i a of "good" public p o l i c y . They prefer an omnibus, syoptic, i d e a l , uniform and consistent p o l i c y . Alpha's are not concerned with i s o l a t e d market problems. Rather they evaluate the market from a national perspective. Beta's, on the other hand, have equity and d i s t r i b u t i v e j u s t i c e as t h e i r c r i t e r i a . Those with the Beta perspective prefer an incremental, piecemeal and de l i b e r a t e l y ad hoc approach to developing p o l i c y . Beta's are concerned with redressing i n d i v i d u a l concerns and favor a greater degree of government intervention i n the economy, than do Alpha's. It i s concluded that BDPA f a i l e d f o r many reasons. The proposed B i l l met with h o s t i l i t y from the p r o v i n c i a l governments. It was not as much the questions of l e g a l c o n s t i t u t i o n a l i t y that hindered BDPA, and that raised the united opposition of the provinces, as much as i t was the manner i n which BDPA was being introduced. The finance industry, too, was wholeheartedly opposed to the Borrowers and Depositors Protection Act. Their influence was s u b s t a n t i a l . Even the B i l l ' s alleged b e n e f i c i a r i e s , consumers, were unhappy with many of the B i l l ' s p r ovisions. Dynamic f a c t o r s , that i s , changing economic, p o l i t i c a l , technological and governmental conditions, meant that BDPA became anachronistic. The B i l l ' s substantive inadequacies only exacerbated these others problems. IV The most s a l i e n t reason for BDPA's f a i l u r e was the lack of M i n i s t e r i a l leadership, and the r e s u l t i n g influence (even power) that came to rest with o f f i c i a l s within the Department of Consumer and Corporate A f f a i r s . This influence was manifest through the a b i l i t y . of o f f i c i a l s who were able, in turn, to veto the Minister's p o l i c y request, to i n i t i a t e renewed a c t i v i t y , and to change the e x i s t i n g p o l i c y (the one they r e i n s t i g a t e d ) . The o f f i c i a l s did not do a good job. They f a i l e d as pol i c y analysts. Of greater concern in this transfer of power, from the Minister to the o f f i c i a l s are the question i t raises concerning the basic assumptions of Cabinet government. Did the Government f a i l to support i t own legisation? Thesis Supervisor TABLE OF CONTENTS ABSTRACT i i LIST OF FIGURES .. - i x ACKNOWLEDGEMENTS x 1. INTRODUCTION 1.2. Why BDPA? , 1 1.3. The Story 2 1.4. Structure of the Study 6 Notes to Chapter 1 7 2. THE ISSUES 2.1. Finding a Typology - choosing the appropriate lenses 9 2.2. The Alpha and Beta Weltanschauung 31 2.3. Other Minor Themes 4 2 2.3.1. J u r i s d i c t i o n 43 2.3.2. Timing y 4 5 Notes to Chapter 2 47 3. THE STORY 3.1. Period of Conception 51 v i 3.1.1. Period of Study and P r o v i n c i a l Action (1960-1968) 53 3.1.2. Department Takes on the Issue (1968-1969) 62 3.1.3. The Fetus Shows Signs of L i f e -there i s kicking i n the womb (1970-1972) 66 3.1.4. Years of I n a c t i v i t y - maybe i t w i l l be s t i l l born (1972-1974) 72 3.1.5. Fast Changes - sharp kicking, the pregnancy i s obvious 79 3.2. B i r t h (1975- October 1976) 3.2.1. New Leader, New Team - prenatal preparation (1975) 81 3.2.2. The Race to be Ready (1976) 94 3.2.3. B i r t h - rush delivery (October 1976) I l l 3.3. Struggle f o r Survival (November 1976 -January 1977) 3.3.1. Parliamentary Committees and the Press -sk e p t i c a l r e l a t i o n s (Nov.- Dec.) 122 3.3.2. Departmental Consultations and Analysis -anxious parents 129 3.4. Metamorphosis (February 1977 - June 1977) 3.4.1. Amendment Process- 132 3.5. Death without Resurrection 3.5.1. Euthanasia recommended and enacted (June 1977 - July 1977).... 146 3.5.2. Attempts at Resurrection (July 1977-March 1978) 150 v i i 3.6. Genetic Mutations (1978-1981) 3.6-1. Which way to go? (March 1978-Sept. 1978).... 159 3.6.2. Piecemeal Approach (October 1978 - 1981) 167 3.7 The Story i n Alpha and Beta Terms .175 Notes to Chapter 3 181 4. POST MORTEM 4.1. Did i t Really F a i l ? 200 4.2. Why no B i l l i n 1971? 202 4.3. Bureaucratic Control i n 1975 to 1978 206 4.4. Federal-Provincial Relations - l e g a l and p o l i t i c a l problems 215 4.5. Interest Group P a r t i c i p a t i o n - strong lobbyists and strength through divisiveness 236 4.6. Dynamic Factors 253 4.7. Substantive Problems 268 Notes to Chapter 4 274 5. CORONER'S VERDICT 5.1. Can t h i s Case be Generalized? 293 5.2. L e g i s l a t i v e F a i l u r e - managerial and market f a i l u r e s 294 5.2.1. Bureaucratic Control 295 5.2.2. M i n i s t e r i a l Leadership 298 5.2.3. Constituency Base 302 5.2.4. Supply Side Summary .-.305 5.2.5. Interest Group P a r t i c i p a t i o n 305 v i i i 5.2.6. P r o v i n c i a l Government P a r t i c i p a t i o n 310 5.2.7. Demand Side Summary 314 5.3. Departmental Role F a i l u r e 315 Notes to Chapter 5 322 APPENDIX I The "Major Players" 326 APPENDIX II Major Features of B i l l C-16 330 o APPENDIX III Department of Consumer and Corporate A f f a i r s Organization Chart. .. .337 APPENDIX IV B i l l s Introduced by the Department of Consumer and Corporate A f f a i r s 338 APPENDIX V Highlights of the History of BDPA 339 LIST OF REFERENCES 343 i x LIST OF FIGURES Page Figure 1 Four Models of Interest Group Representation i n the Development of P u b l i c P o l i c y 20 Figure 2 Representation of the Substantive Areas of Agreement i n the BDPA Debate .252 X ACKNOWLEDGEMENTS This thesis could never have been written without the generous assistance of many i n d i v i d u a l s and i n s t i t u t i o n s . Through the auspices of Dr. Geoffrey Hiscocks, Director of Consumer Research, Department of Consumer and Corporate A f f a i r s , I obtained access to the Departmental f i l e s r e l a t e d to' the Borrowers and Depositors Protection Act. Without this access, the thesis could never have been written. Those interviewed for this thesis have asked to remain anonymous. Many provided personal documents related to the BDPA debate. A l l shared f r e e l y with me both th e i r time and the i r knowledge. I thank them for th e i r candour and for t h e i r patience. In any endeavor of t h i s magnitude, the support of family and friends i s e s s e n t i a l . I thank mine for the i r understanding and assistance. My largest debt of g r a t i t u t e must go to Professor W.T. Stanbury. His enthusiasm and support, and the resources of his voluminous l i b r a r y spurred me on when the task appeared overwhelming. Professor Stanbury's genuine i n t e r e s t and desire to argue every point contained within these pages was appreciated, not only for the way i n .which i t helped to focus the issues, but also, for the se n s i t i v e manner i n which i t was done. Not every Masters student has the honour to have so exacting and so supportive an advisor. While I acknowlege the useful insi g h t s and cooperation offered by a l l these people, any errors are, of course, my own. 1 1. INTRODUCTION 1.1 Why the Borrowers and Depositors Protection Act The Borrowers and Depositors Protection Act (BDPA) was introduced into the House of Commons on October 27, 1976 by the Honorable Antony Abbott, Minister of Consumer and Corporate Affairs. It was a B i l l aimed at protecting consumers through; more and better information, elimination of unnecessary complexities in credit contracts; stricter definition of terms; and uniform rules. The problems created by loan sharking were also to be addressed by BDPA. There were many reasons why this B i l l should have succeed. It was a b i l l for the " l i t t l e guy". Both the United States (1), and the United Kingdom(2) had similar legislation. The Liberals were a majority government and were only 15 months into their term of office. Yet, eight months after i t was introduced, BDPA died on the order paper. A similar piece of omnibus consumer credit reform legislation has not, to date (mid 1981), been reintroduced. The question this thesis asks i s , "Why?". Why did the Borrowers and Depositors Act f a i l ? Other legislation has been introduced and has failed to reach third reading.(3) In fact, the pattern of legislative success (failure), especially by the Department of Consumer and Corporate Affairs, shows what might be considered a trend to an increasing number of legislative failures. (See Appendix IV.) A case study on the Borrowers and Depositors Protection Act in the course of addressing i t s primary 2 question (Why did BDPA f a i l ? ) , may suggest some insights on why a number of l e g i s l a t i v e i n i t i a t i v e s - have ended in f a i l u r e . This problem of l e g i s l a t i v e f a i l u r e i s of considerable importance In a parliamentary government, the Cabinet and the Prime Minister are supreme. Once Cabinet approves a piece of l e g i s l a t i o n , that l e g i s l a t i o n i s i n fact. "Government P o l i c y " . The p r i n c i p l e of cabinet s o l i d a r i t y means, that once Cabinet decides, a l l i n t e r n a l differences are forgotten. It then becomes the duty of each Cabinet member and each government MP., to support the Government b i l l . When a b i l l f a i l s , e s p e c i a l l y when the Government i s in a majority p o s i t i o n there are question that need to be asked: Was the b i l l simply inappropriate?; Was i t poorly drafted?: or Did the Government f a i l to support i t s own l e g i s l a t i o n ? The l a s t question i s the most important. While a single case study cannot answer these general but fundamental questions, i t i s hoped, that this study of the Borrowers and Depositors P r o t e c t i o n Act, w i l l contribute to the better understanding of these concerns. 1.2 The Story The seeds of c r e d i t reform l e g i s l a t i o n were sown by Senator David A. C r o l l . In 1960, he introduced into the Senate, a private member's b i l l c a l l i n g for better disclosure of the terms of consumer c r e d i t contracts From 1960 to 1968 the idea of "truth-in-lending" (4) 3 l e g i s l a t i o n was discussed i n both Chambers, and through a v a r i e t y of public hearings. With the creation of the Department of Consumer and Corporate A f f a i r s and the appointment of Mr. Ron Basford as Minister i n 1968, a c t i v i t y switched from the public arena to the Department. Mr. Ron Basford, Minister of Consumer and Corporate A f f a i r s (the Department) t r i e d to get drafted and then passed, amendments to the Small Loans Act, the Interest Act, and the B i l l s of Exchange Act. He was successful only with the l a t t e r . (5) After Basford l e f t the Department i n January 1972, very l i t t l e a c t i v i t y took place on the issue of consumer c r e d i t reform. By 1974, Dr. Warren James, Director of the Consumer Research Branch, completed a paper on consumer c r e d i t - l a t e r referred to as the "Green Paper". This very tentative document quite suddenly was raised to the status of a "White Paper" (Government p o l i c y ) during the 1974 general e l e c t i o n . In August 1974, M. Andre Ouellet, was named Minister of Consumer and Corporate A f f a i r s . The L i b e r a l Party had j u s t been elected, with a majority, to serve a four year term of o f f i c e . Ouellet spoke out immediately on the need for increased consumer protection i n the area of consumer c r e d i t . Within a year the Department had a new team of o f f i c i a l s , and by late 1975 the d i r e c t i o n of the Borrowers and Depositors Protection Act (BDPA) had been set. The i n t e r e s t i n g aspect of this period, was that the type of l e g i s l a t i o n described i n the "Green Paper", was r a d i c a l l y transformed. On October 27, 1976 BDPA was introduced to Parliament. C r i t i c s 4 immediately attacked the B i l l . Opposition came primary from the finance industy and the provinces. Consumers, while generally supportive, expressed reservations. In December, the B i l l was sent to the Senate Committee on Banking, Trade and Commerce, and to the House Standing Committee on Health, Welfare and Social Affairs. By May, the Department had submitted i t s proposed amendments to the House Committee. In June the Senate Committee recommended that the b i l l be redrafted for later introduction. Parliament prorogued. BDPA died on the order paper. The House Committee had not completed consideration of the proposed amendments. A new proposed Fair Credit and Savings Act was drafted by December 1977. It was not introduced. In August 1978, the Consumer Research Branch recommended that the Department withdraw i t plans to i n i t i a t e omnibus consumer credit legislation. From that point on, action in the consumer credit area, was carried out by other government departments, or by the finance industry. At the provincial level, the work of the Federal-Provincial Task Force on Consumer Credit begun in 1977, continued. 1.3 Methodology Information was obtained through a search of original documents and extensive interviewing. The Department of Consumer and Corporate Affairs generously granted access to i t s f i l e s (with the exception of Cabinet 5 documents, correspondence with ~ the Department of Justice, and correspondence and papers relating to Federal-Provincial meetings). The information gathered from these f i l e s was the primary source of information. As well, interviews were conducted with 40 different participants, many of whom played several roles over the course of BDPA history. (See Appendix I for a l i s t of the "major players".) Those interviewed included: Consumer Research Branch staff and o f f i c i a l s from other areas of the Department of Consumer and Corporate Affairs; o f f i c i a l s from other federal government departments, former Ministers of Consumer and Corporate Affairs and their staff; a Senator; and representatives from the provinces, the finance industry, consumer groups, other interest groups and the academic community. A l l interviews were conducted on an "off the record basis". That i s , permission was granted to use the material obtained through the interview process, but no direct attribution as to source, was to be made in the completed thesis. Those interviewed must, therefore, remain anomymous. The interview technique allowed the unique atmosphere that surrounded BDPA to be recaptured (in part). It also allowed questions concerning motive and impact to be raised. It was during the interviewing process, that ray own hypotheses, arrived at after reading the Departmental documents, were tested. Items of fact and of interpretation have been subject to cross referencing and to external verification where possible. 6 1.4 Structure of the Study There are four sections to this study. Chapter 2 describes the framework adopted for this thesis. Two "worldviews", or perspectives on consumer credit legislation are proposed - the Alpha and Beta Weltanschauung. After a c r i t i c a l review of the literature on policy typologies, the Alpha and Beta perspectives are detailed. Chapter 3 te l l s the story of the policy process surrounding the Borrowers and Depositors Protection Act. Brief references to the Alpha and Beta "worldview" are made throughout the narrative. The end of the chapter summarizes the story in Alpha and Beta terms. Chapter 4 addresses, directly the key question, "Why did BDPA f a i l ? " . It i s a post mortem of the Borrowers and Depositors Act debate. Five reasons for failure are asserted. Chapter 5 presents the "Coroner's Verdict". It offers the conclusion of this case study. The appendices are designed to provide background information useful to the understanding of the text. Appendices I and V, the "major players" and a summary of the highlights of the BDPA policy process are particularly important. 7 NOTES TO CHAPTER 1 1. In the United States, the Consumer Credit Protection Act (known as "Truth-in-Lending") was passed in 19 68. As well, in 19 68, the United States National Conference of Commissioners on Uniform State Laws adopted the Uniform Consumer Credit Code. 2. In the United Kingdom, the Consumer Credit Act was passed in 1974. See Good, 1974. 3. These include b i l l s to revise the Bank Act, the National Transportation Act and new legislation with respect to access to information, to name only a few. 4. Many Canadians believe that Canada has federal "Truth-in-Lending" legislation. In conversation, "Truth-in Lending" i s immediately recognized, whereas, the Borrowers and Depositors Protection Act is not. 5. In March 1970, B i l l C-208, the B i l l s of Exchange Act (amendments) passed Parliament. The amendments to the Small Loans Act and the Interest Act were never drafted during Basford's tenure. < 8 2. THE ISSUES 2.1 Finding a Typology - choosing the appropriate lenses The o r i g i n a l i n t e n t i o n i n t h i s case study was to take three conceptual lenses and use these lenses, i n turn, to analyze the " f a c t s " of the case.(l) It was hoped that a m u l t i d i s c i p l i n a r y approach would lead to a r i c h e r (more varied and comprehensive) understanding of a si n g l e case of " l e g i s l a t i v e f a i l u r e " . As the research progressed t h i s approach became increasingly cumbersome. It became obvious that such an approach was fragmenting the issues and was imposing a structure more r e s t r i c t i v e than i t was useful.(2) A d i f f e r e n t t a c t i c was adopted. The key question remained the same - "why did the proposed Borrowers and Depositors Protection Act f a i l to become law?" Several reason emerged: bureaucratic c o n t r o l , p r o v i n c i a l opposition, i n t e r e s t group i n t e r a c t i o n , changing exogenous factors and problems with the substantive issues. Yet, when the question was pushed farther there remained at the root of the whole BDPA policy debate (i n c l u d i n g the pre and post periods, 1960-1980) an underlying theme. There were two approaches to policy evident i n the debate on c r e d i t reform l e g i s l a t i o n . They d i f f e r e d i n t h e i r basic philosophical and f a c t u a l assumptions, goal preferences and choice of means of policy implementation. For convenience the two perspectives, or Weltanschauung(3), are c a l l e d Alpha and Beta. 9 The Alpha's have as the i r goal and ultimate c r i t e r i a , economic e f f i c i e n c y viewed at a macro l e v e l . They include the three dimensions of e f f i c i e n c y dynamic e f f i c i e n c y (or rate of technological change) a l l o c a t i v e e f f i c i e n c y (optimal output) and X - e f f i c i e n c y (production waste). The Beta's are most concerned about d i s t r i b u t i v e j u s t i c e or questions of equity and "f a i r n e s s " on a micro l e v e l of aggregation. Beta's raise issues l i k e the r e l a t i v e market power among actors, access and a v a i l a b i l i t y of goods and services and price r e l a t i v e to a b i l i t y to pay Alpha's approach a problem w h o l i s t i c a l l y or synoptically search for the i d e a l , and value uniformity and consistency in p o l i c y . Because the market i s seen from a national perspective Alphas are not overly concerned with what they consider "minor" or "rare" instances of market f a i l u r e . In the i r view, the competitive market can best determine s o c i a l and economic needs. The Beta's take a very d i f f e r e n t perspective. Beta's are divided into B e t a i ' s - business or industry Beta's, and Beta2's -consumer Beta's. Beta's view the market from an iso l a t e d aspect or part of the whole system - (that segment involving t h e i r own i n t e r e s t ) . P o l i c y prescriptions are piecemeal, fragmented, s e r i a l , d e liberately ad hoc and designed for s p e c i f i c cases only - very much along the l i n e of Lindblom's (1959) " d i s j o i n t e d incrementalism". To a Beta, the competitive market does not always d e l i v e r the most s o c i a l l y desirable outcome and therefore d i r e c t state intervention i s recommended. This applies to both business and consumer Beta's- The s p e c i f i c policy p r e s c r i p t i o n d i f f e r s between Betai's and Beta2' s> b u t t h e preference f o r ) d i r e c t economic regulation i s cl e a r . The f u l l p r o f i l e of the Alpha's and 10 Beta's w i l l be developed i n the next section. The Alpha and Beta proposition i s not unique. Others have attempted to organize or model the public policy process. To do this a variety of c r i t e r i a have been used as the basis for organization. These include how an issue i s approached, differences in b e l i e f s and assumptions about people, socio-psychological c h a r a c t e r i s t i c s of the players, the process of policy determination between competitiveness i n t e r e s t s and p o s i t i o n a l and process aspects of the d i s t r i b u t i o n of benefits. Lindblom (1959) i d e n t i f i e d a major dichotomy i n the approach to policy making. He systematically juxtaposed what he ca l l e d the "root" method, or r a t i o n a l comprehensive method with the "branch" method, or successive l i m i t e d comparison.(4) With the "root" or r a t i o n a l approach, values are c l a r i f i e d i n advance ( i d e n t i f i e d , ranked and weighted) and means are chosen and evaluated i n l i g h t of ends. A "good" decision can be described without r e f e r r i n g to the policy or i t s a l t e r n a t i v e . That i s , a "good" decision i s absolute, analysis i s comprehensive and synoptic- and policy i s made once and for a l l and is consistent with a well developed theory. The "branch" method focuses on marginal or incremental values only, means and ends are simultaneously chosen, a "good p o l i c y " i s one on which there i s agreement. A "good p o l i c y " i s r e l a t i v e , analysis i s delib e r a t e l y incomplete, comparison i s made on marginal dif f e r e n c e s , choices are s e r i a l and comparative marginal analysis replaces systematic theory. This dichotomy was l a t e r expanded by Lindblom and Braybrooke (1963) into a matrix of four policy approaches. 11 Lindblom and Braybrooke (1963) cri t i c i z e d the synoptic (comprehensive, rational, Utopian) approach to policy analysis and decision making. They proposed a new approach - "disjointed incremental!sm". Lindblom's was a normative typology based on level of understanding of the problem (high to low) and on the degree of change (small to large). While acknowledging that the formulation of the problem and the choice of alternative strategies must be adapted to the p o l i t i c a l circumstances in which the "issue" arose, Lindblom clearly favored "incremental po l i t i c s " that used the disjointed incrementalism analytic strategy. Most problems required small changes based on a restricted understanding of the issue. It i s a characteristic of the p o l i t i c a l process in most governments that any single office, organization, or agency pursues a never-ending series of attacks on more or less permanent, though perhaps slowly changing problems that l i e within i t s f i e l d of interest or authority. Etzioni (1967) critized both the rationalistic approach to decision-making and the Lindblom (1963) alternative - incrementalism. According to Etzioni the rationalistic approach was unrealistic and overly i d e a l i s t i c while the incremental approach was only generally descriptive and normative. Etzioni f e l t that any model of approach to decision making must do more than describe the usual observed behavior. It must include or account for situations of fundamental change and allow for evaluation of past actions. He proposed a "mixed-scanning approach". It combines a "high-order", fundamental policy-making process to set basic directions with an incremental process which prepares or moves toward "fundamental" decisions and works them out after they have been 12 reached. Mixed-scanning, argues E t z i o n i , i s r e a l i s t i c and f l e x i b l e , and o f f e r s opportunity for s t r a t e g i c ' considerations i n designing the p a r t i c u l a r scan-mix and for evaluation. Power r e l a t i o n s h i p and dynamic environmental factors rather than values or substantive issues are most determinative of the s p e c i f i c mix i n the mixed-scanning approach. This i s very d i f f e r e n t from Lindblom and Braybrooke's (1963) v a r i a b l e s - degree of understanding and l e v e l of change. The three approaches, rationalism, incrementalism and mixed scanning have been considered three a l t e r n a t i v e s - a typology of approaches to pol i c y determination. Lindblom (1959, 1963, 1979) and E t z i o n i (1967) are primarily p r e s c r i p t i v e . Lindblom discusses at length only one of the four p o l i c y approach options, and E t z i o n i c l e a r l y favors the mixed-scanning approach. Mintzberg (1973), however, i s d e s c r i p t i v e . In order to view i n a more systematic way, po l i c y or strategy making by government and business, Mintzberg i d e n t i f i e d what he c a l l e d "modes"- the "entrepreneurial" mode, the "adaptive" mode, and the "planning" mode. Each represents the c h a r a c t e r i s t i c s of one approach to p o l i c y , including motivation, goals, time horizon, means, impetus and power. B r i e f l y , the "entrepreneurial mode" i s characterized by a proactive stance, i n which the overriding goal i s growth. The decision maker i s an i n d i v i d u a l entrepreneur who bases decisions on i n d i v i d u a l judgment aimed at long term objectives. Decisions are t y p i c a l l y bold and made under uncertainty which i s the entrepreneur's preferred environment. The 13 "planning mode" i s eit h e r reactive or proactive and aims primarily at growth and e f f i c i e n c y . Managers make long term decisions under conditions of r i s k using a n a l y t i c a l tools f o r assessment. Decisions take the form of well integrated "global s t r a t e g i e s " that o f f e r a l i m i t e d number of a l t e r n a t i v e s . The "adaptive mode" i s re a c t i v e , goals are indeterminant, evaluation i s judgmental. Decision are short term, arrived at through bargaining, and t y p i c a l l y d i s j o i n t e d , adaptive and incremental. Although the t y p i c a l " i d e a l " conditions for each "mode" are d e t a i l e d , Mintzberg recognizes that the modes are not mutually exclusive. Thus Mintzberg's "modes" are more consistently developed as a l t e r n a t i v e policy approaches than Lindblom's (1963) " d i s j o i n t e d incrementalism". Mintzberg makes no assumptions about ideology of world view nor are his "modes" p r e d i c t i v e of substantive p o l i c i e s . His "modes" do however allow f o r innovation and change or "novelty" (that which i s q u a l i t a t i v e l y d i f f e r e n t from the status quo and i s not based on e x i s t i n g assumptions, or p r e v a i l i n g a l t e r n a t i v e s ) . Short of revol u t i o n or war, Lindblom's typology does not explain "novelty". Mintzberg applied h i s modes to both government and business, whereas McGregor (1966), developed Theory X and Theory Y from a business perspective. McGregor's (1966, p.256) was a d e s c r i p t i v e dichotomy of how economic decisions ("organizing the elements of productive enterprise -money, materials, equipment, people - i n the i n t e r e s t s of economic ends") are based on assumptions about people and assumptions about means of deci s i o n making and c o n t r o l . Theory X assumes that people are by nature indolent, lacking i n ambition and i n i t i a t i v e , r e s i s t a n t to change, 14 unwilling to assume responsibility and gu l l i b l e . According to Theory X people (employees) must be directly controlled in a situation where action i s achieved through the hierarchical persuasion of reward and punishment. Theory Y, on the other hand, assumes that people are not by nature passive or resistant to organizational needs, but rather, could be conditioned to reflect Theory X assumptions as a result of Theory X management. Therefore, Theory Y management works to create an environment and experience for employees to develop motivation, responsibility and actions congruent with organizational goals. McGregor clearly favored Theory Y. His theory i s normative and lacking in parallel development. Rather than being a theory for business decision making and policy development, i t i s a prescription for achieving goal concensus between an organization and i t s employees. Downs (1967) created a typology of bureaucratic o f f i c i a l s based on observed psychological proc l i v i t i e s . He described five "types", two single motive - "climbers" and "conservers" and three mixed motive o f f i c i a l s - "zealots", "advocates" and "statesmen". "Climbers" seek to maximize personal power, income and prestige and therefore seeks promotion, aggrandizement" or new job opportunities. "Conservers" try to maximize personal security and convenience by retaining current income, power and prestige. "Conservers" are biased against change and have a low expectation that attitudes or structure w i l l improve. 15 The mixed motive "types" are ide a l i s t i c and optimistic, and seek goals consistent with their own peculiar concept of the "public interest". For "Zealots", the public interest means promotion of very specific policy goals regardless of the level of antagonism. Their conception of the problem is narrow in focus, and stable in content, both over time, and over changing circumstances. "Zealots" are very optimistic, energetic, aggressive, imperialistic, "inner directed", fanatically loyal, and relish conflict. "Advocates" align the "public interest" with the promotion of the goals of the "advocate's" current position or office. "Advocates", while optimistic and energetic, are more "other-directed" and influenced by superiors, co-workers and subordinates. An "advocate" can be aggressive and partisan externally ( i f supported) but i s an arbiter internally and a strong supporter of fellow workers. For the "statesman", the "public interest" means promotion of very broad policy goals that are used as guidelines for decision-making regardless of the particular position they occupy. "Statesmen's" conceptions are broad and stable, their energy level varies from quiescent to hyperactive. They are less optimistic, more "inner directed", philosophical, and academic. They avoid conflict and seek reconciliation. Down's typology was developed as an aid to explain and predict the behavior of government bureaucracy through descriptive classification of the motives of the players. Although Downs typology describes general 16 policy styles and approaches to policy, i t i s not predictive or specific about substantive policy. Maccoby (1976) created a similar cast of business "types" which he called "dominant social character types" — the "craftsman", the "company man", the "jungle fighter" and the "gamesman". The "craftsman" values production and work, quality and t h r i f t . A "craftsman" is sincere, quiet, modest, self contained and a perfectionist, judging co-workers in terms of whether they help or hinder "production". As a subcategory to the "craftsman" Maccoby adds the "scientist", who i s like the "craftsman" but is more narcistic and dependent on a key decision maker for support. The "company man" identifies with the company for power and protection and i s concerned with the human side of the company. "Company men" are: at their worst, weak, fearful, submissive and concerned primarily with security; or at their best, creative in sustaining an atmosphere of cooperation, stimulation and responsibility. A "jungle figher's" goal is power and fellow workers are either enemies or accomplices. A "jungle fighter" comes in two varieties, the "lion" or conquerer and the "fox", winner by stealth. The "gamesman" is motivated by challenge and competition. A gamesman likes to take risks, to work hard, to learn new ideas, techniques or approaches. Winning the game is the most important. The "new gamesman", an evolutionary offshoot the "gamesman", puts costs and innovation before winning and puts the company ahead of personal ego. Maccoby like McGregor (1966) aimed his typology at understanding people in order to engage support for successful a business operation. Maccoby's "types" are not 17 designed to r e l a t e to a "policy framework". The normative and evolutionary nature of the " i d e a l " ("new gamesman") precludes i t s use as an aid i n a n a l y s i s . The bargaining patterns and r e l a t i o n s h i p between , the major pa r t i c i p a n t s i n public policy formation has been the focus of several approaches to modelling the public policy process. There have been four i d e n t i f i a b l e models using t h i s focus - the p l u r a l i s t model, the accommodation model, c l i e n t model and the corporation model. P l u r a l i s t s (Downs, 1967) assume that' no one group exerts overriding influence across a l l issues. Policy i s determined by the government acting as neutral judge to determine the "public i n t e r e s t " from the aggregation or c o l l e c t i o n of the v a r i e t y of i n t e r e s t s representing narrow s e l f i n t e r e s t . The e l i t e accommodation model as elaborated by Presthus (1973), describes a process of j o i n t government through i n t e r e s t group e l i t e determination of p o l i c y . It i s a process of accommodation where the pa r t i c i p a n t s represent l e s s narrow and l e s s divergent views than those i n the p l u r a l i s t model. E l i t e s tend to be "middle of the road" representatives of groups with more divergent views. Policy i s a product of j o i n t consultation, negotiation and compromise. There are no overriding claims or p r i o r i t i e s inherent i n the process of "elite-accommodation". 18 The client-patron model is also described by Presthus (1973). In this situation a special client-patron relationship i s formally established, usually through the creation of a government department whose concerns corresponds with those of a particular interest group (e.g., Department of Agriculture and the farming community, the Department of Finance and the federally regulated financial institutions). This i s a symbiotic relationship, with the client providing a constituency and valuable "street" and expert information and the patron or agent providing access to government decision making, influence and status. The "client-patron" relationship becomes the conduit for policy bargaining at the interdepartmental level. The "client-patron" model can be seen as a variation of the "elite accommodation" model. The fourth model, "corporatism", i s also a form of accommodation (Panitch, 1977). When government-interest group relationships become highly institutionalized the interest group acquires a special status and gains direct access and influence over policies that affect and concern that interest group (even to the point of control through government delegation of power). Nadel (1975) argues that private interest groups (corporations) make public policy both through interaction with government and on their own in i t i a t i v e . Nadel defines policy as an allocation of values that i s authoritative, binding ' and intentional. While not denying the appropriateness (in given circumstances) of any of the four models just discussed, his proposition i s that not a l l public policy i s mediated 19 through or with government. He therefore argues for an expansion of the "corporatism" model to include policy determination by non-governmental organizations, (see Figure 1 for an i l l u s t r a t i o n of these four "models" of representation.) While these "models" describe the nature of the relationship between the major policy making participants, they do not predict level of conflict/accomodation, nor do they predict policy outcome, either in terms of substantive provisions or of procedural approach. While each of these models i s descriptive for particular circumstances, no theory has been developed to link these models together (Chandler, 1979). The question of who benefits lead Blau and Scott (1962) to devise a four part typology of organizations that relate benefit to major goal trade-off issues. Thus "mutual benefit" organizations, where the members are the prime beneficiaries, have as their major concern, internal democracy characterized by the trade off between apathy and oligarchical control. "Business concerns", where owners are the prime beneficiaries, have as their dominant problem, efficiency, that i s balancing gain versus cost for survival and growth. "Service" organizations serve clients. Clients by definition, according to Scott and Blau, do not know their own best interest and a "professional" must serve the client's needs or interests but not necessarily the client's wishes. A "service" organization must therefore strike a balance between despotism and subservience. "Commonwealth" organizations have the public at large as beneficiaries. The major issue revolves around external democratic control versus efficiency and the non-democratic nature of 20 FIGURE 1 FOUR MODELS OF INTEREST GROUP REPRESENTATION IN THE DEVELOPMENT OF PUBLIC POLICY PLURALIST NGO G -PO . ELITIST NGO NGO NGO a t . NGO NGO NGO * PO CLIENTISM NGO NGO ft NGO M G PO CORPORATISM V PO G == *== C - 3 i r w ' NGO - non-governmental organization G - government PO - policy output 21 bureaucracies. Blau and Scott have related beneficiaries to key policy dichotomies for each organizational type. Their approach, however, says nothing about how policy or decision making is approached ("modes") or about the psychological disposition of the participants ("types"). Nadel (1971) changed Blau and Scott's question - from who benefits? to how are benefits distributed? He divided consumer policy into two types, "collective benefits" and "differential benefits". "Collective benefit" policy offers benefits undifferentiated with respect to income. Such policies do not change the power structure significantly and the cost of compliance i s normally marginal and passed on to consumers with no net cost to industry. There i s l i t t l e opposition (relatively) to policies offering "collective benefits". "Differential benefit" policies attempt to change the existing power structure by increasing competition in order to reduce price (especially to the poor), or to correct specific abuses that f a l l disproportionately on the poor. "Differential benefit" policies face heavy opposition from industry or f a i l , either at the legislative stage or before, as they never get onto the agenda. Nadel's division of collective versus differential benefits was a less developed and more narrowly focussed attempt at classifying policy than had already been developed by Lowi (1966).(5) By 1972 Lowi had expanded his 1966 policy types from three to four.(6) His approach was comprehensive as the t i t l e of his article suggests, "Four Systems of Policy, Politics and Choice", and was focussed on public policy making. The bases for his taxonomy were types of policy (benefit category) and level of government coercion. He isolated key 22 variables in the public policy process and developed a descriptive taxonomy. The key variables involved the type and number of actors (e.g. primary units, trade association, single individuals), the nature of the relationship between actors (private dealing, collective bargaining, ideological conflict), the degree of stability among actors, and the role of business versus professionals in lobbying committees, Congress, and the executive. Lowi's called his four policy types; "distributive", "regulatory", "redistributive" and "constituent". "Distributive" policies involve t a r i f f s and subsidies and are characterized by individual participation, minimal government coercion, decentralized and disaggregated decisions, and stable relationships among participants. "Regulatory" policies involve elimination of substandard goods, unfair competition, and fraudulent advertising and are characterized by government coercion and interest group organization and bargaining, and l i t t l e stability among actors. "Redistributive" policies, such as the income tax and social security, are characterized by government coercion, ideological debate, multilevel participation with stable membership. "Constituent" policy involves reappointment, creating a new agency and propaganda. These policies involve l i t t l e direct government coercion, and a centralized, status oriented function involving electoral organization. Lowi therefore created a framework that accounted for differences in substantive policy (allocative effect) and differences in the exercise of power.(7) Aucoin (1971), supportive of Lowi's (1972) typology that made policy type an independent variable, proposed that the model must' go further. That i s , i t must not only include "allocative" effect, but i t must also 23 consider "positional" effects. Positional effects involve the relationship between individuals or groups and affect the structuring of influence on the policy process. While Aucoin's "positional" effect and Lowi's "coercion" factor appear to be very similar, Aucoin (1971, p.28) was primarily concerned with the role of government. By raising this point concerning the limitation of existing policy-making models in regard to positional policies, we are in effect saying "government" must be brought back into policy analysis. In fact i t might be argued that the distinctive role of the p o l i t i c a l science policy analyst i s to focus on positional policies insofar as they are often the c r i t i c a l policy issues for subsequent allocative policymaking. After surveying the most widely used policy making models. Aucoin (1971, p.33) concludes that, "there is not an accepted paradigm for the study of policy making as yet". Simeon (1972 and 1976), a p o l i t i c a l scientist like Aucoin, developed a framework for policy analysis. Simeon (1976, p.566) saw, Policy as a consequence of the 'environment' of the distribution of power, of prevailing 'ideas', of 'institutional' frameworks and of the 'process' of decision-making. This framework is very much concerned with "positional" aspects (structure and process), and relies on extraordinarily general i f not obscure categories such as "ambience" (environment and ideas).(8) While providing topics around which to focus analysis, Simeon's classification of policy variables, offers l i t t l e else. For instance, i t i s not possible to predict either the nature of the participants, the level of conflict, 24 or the substantive output (or issues). Simeons categories put ^policy type as a dependent variable. Doern (1980) uses a similar categorical framework to Simeon (1976). Policy type, however is an independent variable, the specific policy output being the dependent variable. Independent variables or "determinants" include: 1.ideology - general belief about the proper role of government; 2.objectives - the more specific purposes of public policy; 3. paradigms - principles of that embody assumptions about the procedural aspects of public policy; 4. physical and technological r e a l i t i e s - those related specifically to the problem (spatial, technical and material); 5. economic - domestic and international allocative and distributional aspects; 6.intergovernmental relations - degree of conflict; and 7.interagency (group) relations - degree of conflict. Doern after studying three policy decision in the nuclear industry, concluded that none of the determinants in themselves, are predictive. Cairns (1980), an economist writing in the area of regulation has attempted to be much more specific.(9) He developed a typology of rationales for regulation and effects based on benefits (much like Blau and Scott (1963), Nadel (1971), and Lowi (1972)). Cairns divides the beneficiaries or scope of regulation into the broad public interest, narrow private interest and a balance between the two. He then differentiates the policy and the policy making process on the basis of 25 the participants, the origins of concern, the emphasis in approach, and the allocational and distributional effects of the substantive policy. Cairns' trilogy i s an attempt to describe the myths of the policy process as they relate to regulation. On the one hand Cairns offers a choice of three frameworks for policy analysis, on the other he merely describes what he sees as the evolution of the myths surrounding "regulatory" policy making. The third model, that represents a balance between market (private) and p o l i t i c a l (public) objectives, i s not well defined either in terms of "allocative" or "positional" effect (to use Aucoin's (1971) classification). Cairns describes the actors in this policy model as "human", the emphasis of policy i s on "imperfections and power in the market" and the allocational and distributional effects aimed "to improve the functioning of markets given their power". None of these descriptions are precise in their definition or predictive of either the players, the process or the issues. Cairns' (1980, p.vi) objective however, i s not to be precise but to i l l u s t r a t i v e that regulation should not be oversimplified by s t r i c t classification. ...regulation is far from as simple phenomenon. Analysts would do well not to oversimplify their theories. While this may be true, i t is not at a l l helpful to those seeking to understand or describe the policy process. Wilson (1978, p.393) appears to agree with Cairns (1980) when he says: a single explanation theory of regulatory po l i t i c s i s about as helpful as a single explanation of politics generally, or of disease. The major variables in a regulatory policy decision, according to Wilson, 26 include the perceived distribution of costs and benefits of the proposed policy, the views and motives of the participants individually and corporately (as agencies, corporations and coalitions), and the p o l i t i c a l environment including technological change, economic conditions, institutions, politics and ideas. Wilson (1978) proposes two typologies, one based on the distribution of costs and benefits, and the other based on the behavior of individuals within an agency (regulatory body). "Majoritarian" policies are those where costs and/or benefits are widely distributed and a l l or most expect to benefit or to lose. There is l i t t l e incentive for groups to form around majoritarian regulation. With "interest group p o l i t i c s " , costs and benefits are narrowly concentrated, each side has a strong incentive to organize and to engage in activity to exercise p o l i t i c a l influence. The resultant legislation usually has something to please each of the interest group participants. In "client p o l i t i c s " benefits are concentrated and costs are widely distributed. Here a small, easily organized group w i l l lobby for benefits. Often those who pay are unaware of any change in policy. "Entrepreneurial p o l i t i c s " involves policy that bestows general though small benefits (collective benefits), paid for by a small segment of the public. Such policies rely on the attitudes of third parties and require a skilled entrepreneur to mobilize latent public opinion. There i s some resemblance between Wilson's (1978) typology for regulatory politics and Lowi's (1972) classification of policy types. 27 Wilson's "interest group po l i t i c s " could be described as a "regulatory" policy using Lowi's term. "Client p o l i t i c s " resemble "distributive" policies in their narrow range of beneficiaries and preference for "private" policy making. Entrepreneurial p o l i t i c s , that offer diffuse benefit for higher cost to a limited number, parallels Lowi's "redistributive" policy. "Majoritarian" politics i s similar to the widespread noncontroversial nature of "constituency" policies as described by Lowi. This i s not to say that the classifications are interchangeable. Wilson's classification i s more oriented to the relationship of the cost and benefit to participants rather than the distributional effect of the benefits and costs. Wilson's (1978) typology based on individual behavior is focussed broadly on position and narrowly on the behavior of individuals within regulatory agencies only. It does not include, like Maccoby (1976), corporate archtypes, or like Downs (1967), characterizations of bureaucrats. Wilson identifies three regulatory agency "types" -"careerists", "politicians" and "professionals". Bureaucratic "careerists" require no external job source or external constituency. To maintain the agency and their position is of primary concern. Such individuals are extraordinary risk averse. Bureaucratic "politicians" seek eventual elective or appointive office and often take the "underdog" or "public advocate" role. Bureaucratic "professionals" may or may not seek employment outside an agency but, none the less, look to their profession for rewards and approval. 28 These two typologies are not limited and do not include Wilson's third variable in regulatory policy - the external p o l i t i c a l environment. Wilson, therefore, acknowledges the combined importance of a number of variables in the policy process (distribution of costs and benefits, values and motives of participants, and p o l i t i c a l environment), but f a i l s to blend them together into a common framework or a series of alternative models. This lack of overarching framework i s not unusual, as Aucoin (1971) observed in his survey of public policy making models. Some, like Cairns (1980) and Wilson (1978), writing about regulatory policy argue that no sufficient single theory exists. Allison and Halperin (1972) would seem to lend support to this perspective. Policy, they argue, i s a result of "pulling and hauling" and not of rational choice by informed decision makers. The two most important variables according to Allison and Halperin (1972, p.43) are organizational process and shared values. What a government does in any particular instance can be understood largely as a result of bargaining among players positioned hierarchically in the government . . . Both the bargaining and the results are importantly affected by a number of constraints, in particular, organizational process and shared values. They include in their paradigm or organizational concept, three key question: who plays?; what determines each players stand (position and interest)?; and how are players stands aggregated to yield governmental decisions and actions? These variables are constrained by organizational considerations (standard operating procedures and programs), as well as by shared attitudes. His emphasis on bargaining among "positioned" 29 players supports the Aucoin (1971) view of policy as both "allocative" and "positional". The concern for the effect of interests and attitudes relates to Downs (1967) theory of bureaucratic "types" based on motivation and goal orientation. By approaching organizational process and operational procedures and as an independent variable, Allison and Halperin reverse the perspective of Mintzberg (1973) and Lindblom (1972), who see policy style or approach to policy affecting the outcome in terms of organizational process. It does not appear to be a fundamental difference, as i t differs only in the identification of cause and effecti while agreeing on the variables. Allison and Halperin do not, however, have anything in their model or paradigm of "bureaucratic p o l i t i c s " that considers the question of the distribution of benefits. Power, or to use Lowi's (1972) term "coercion", i s important and Allison and Halperin refer to i t as "influence".(10) Bacharach and Baretz (1962) have brought a different perspective to the development of a policy making framework. They focuss on the "dominant values, the myths and the established p o l i t i c a l procedures and rules of the game" as a basis for analysing the two "faces of power" -that i s decision making and non-decision making. This i s much like the shared values and organizational processes of the bureaucratic politics model of Allison and Halperin (1972). Once the values and rules of the game are identified and there i s an analysis as to which persons or groups, i f any, would gain or lose by the existing "bias", the policy analyst can investigate to what extent status quo-oriented persons and groups influence community values and p o l i t i c a l . institutions and process. Thus, for Bachrach and Baratz, the policy process consists not 30 only of exploring how issues and identities are raised, and how policies are determined and implemented, but also how to identify those issues that are not raised, those issues that are taken off the agenda or supressed, those decisions that are Ignored, postponed or vetoed and those that are selectively implemented or simply not implemented. Bachrach and Baratz (1962) offer a double aspect approach to policy that considers values or "bias" and distribution of benefits as the key variables. Their's i s a theoretical perspective that is prescriptive and not fully elaborated, systematic or well described. Like Aucoin (1971), Simeon (1972) and Cairns (1980), Bachrach and Baratz suggest an approach to analysis, without offering a systematic theory. Of those surveyed, only Lowi (1972), Mintzberg (1973) and Wilson (1978) offer more elaborate frameworks. S t i l l none i s entirely comprehensive and indeed Wilson argues against the search for "the theory" claiming that i t does not exist. Lindblom (1968, p.101) would argue that indeed, such a system cannot exist. The policy making system is not in any regime merely a process that turns out policies. For any policy-making system has a prodigious effect on the very preferences, opinions and attitudes to which i t i t s e l f also responds . . . The machine actually manufactures both policies and preferences. If the discussion has demonstrated anything about devising a theory of the policy process i t i s that policy formulation is a complex and mobile process and any attempts at modelling must be undertaken with care and humility. 31 2.2 The Alpha and Beta Weltanschauung Having set out the argument that there i s no accepted or comprehensive model for "policy analysis" we return to the proposed typology of the Alpha's and Beta's. It includes statements about approach to policy; values and beliefs (social, personal and economic); goals or cr i t e r i a ; the policy process (strategy); and substantive policy proposals. While i t takes into consideration positional effects (poor vs rich, consumer vs supplier, government vs market) i t does not predict level of conflict or power relations. It does, however, identify those issues on which there w i l l be disagreement or conflict. While not specifically including a socio/psychological typology of the players or a framework of the player relationships within the policy process the Alpha and Beta characterization does not preclude the use of either of these dimensions in analysis. With respect to the Lowi typology, the BDPA story i s a "regulatory" policy. In this particular case history, the Borrowers' and Depositors Protection Act (BDPA) was a "legislative failure" and as such might well be considered a demonstration in "non decision making" in Bachrach and Baratz's (1962) terms. Indeed, one might argue that the mobilization of "bias" and organizational process, while not preventing BDPA from reaching the legislative agenda, was successful in preventing i t s enactment. A different view would be that articulated by Nadel (1975) and some of the BDPA participants themselves, that i s , BDPA was not a failure in public policy making. A failure occurred at the legislative level, but despite i n i t i a l legislative failure, policy was developed through 32 decision and non-decision. It was developed by deliberate non-decision, by industry or corporation activity, and by subsequent related legislation. The Alpha and Beta perspective does not capture this aspect of the policy process. On the other hand the typology does not prevent the testing of either proposition. While acknowledging that public policy on consumer credit reform was developed during the period 1960-1980, this case study addresses specifically the legislative i n i t i a t i v e of the Department of Consumer and Corporate Affairs (the Department) and seeks to answer "why wasn't the Department successful in passing reform consumer credit legislation?" The Alpha and Beta Weltanschauung i s c r i t i c a l for the understanding of this key question. As with a l l constructs, i t cannot reflect a l l the nuances of the approach to a policy in the area of consumer credit. Alpha and Beta as we have described them, are archtypes. Needless to say there are Alpha/Beta blends that arise from combinations and permutations of the major Alpha and Beta categorizations. The Alpha and Beta Weltanschauung has been observed in the debate surrounding credit reform legislation aimed at assisting the consumer side of the market. Much of the elaboration of the Alpha and Beta perspective i s issue specific and therefore i t can be argued that the two viewpoints are determined primarily by the subject matter under review, and do not represent a generic perspective or general approach to public policy formulation. I would like to argue otherwise. That i s , that the Alpha and Beta typology is at least characteristic of "consumer" policy formulation and perhaps even representative of many public policy 33 debates. That question cannot be decided on the basis of one case study. It is enough to hope that by the end of this thesis the reader would be willing to agree that the Alpha and Beta "worldviews" and their interaction reflect the underlying motivation behind the failure to enact Borrowers and Depositors Protection Act action and that the typology is worth testing on other public policy debates. The Alpha and Beta philosophy represent two divergent "worldviews". (11) Beginning with the assumptions embodied in these two approaches to consumer policy making, the Alpha's assume a "root" type policy process while the Beta's assume a "branch" mode. According to Lindblom's (1959) classification a root approach assumes: 1. Values should be cla r i f i e d (identified), ranked, given weights) in advance of generating policy alternatives. 2. Means are chosen and evaluated in light.of ends. 3. A "good" decision can be described without referring to the policy or its alternative, but without agreement on objectives there is no test of a "good" decision. 4. Analysis should be' comprehensive (synoptic) with every relevant factor-taken into account-5. Policy is made relatively infrequently with application of theory the most systematic and economical way to bring relevant knowledge to bear on a specific problem. The "branch" approach that characterizes the Beta style assumes: 1. The only practical way to disclose one's relevant values even to oneself is to describe the policies one chooses to achieve them. 34 2. Means and ends are simultaneously chosen. 3. "Good" policy secures agreement of objectives not ends, i f there i s no "better" policy a policy with agreement i s "good". 4. Analysis should be deliberately incomplete leaving out important possible outcomes, al t e r n a t i v e s and values. 5 i Policy-making i s a marginal and frequent a c t i v i t y Comparative analysis i s a systematic a l t e r n a t i v e to theory where comparison and policy choice proceed in a chronological s e r i e s . "Results" of i n t e r a c t i o n should help shape p o l i c y . If the two approaches could be summarized i n a word, the "root" approach would be absolute while the "branch" approach would be r e l a t i v e . Alpha's and Beta's make d i f f e r e n t assumptions about the market, about the nature of c r e d i t , about the use of c r e d i t , about consumers generally, about poor consumers i n p a r t i c u l a r , about cost and price and about the nature of correct c r e d i t l e g i s l a t i o n - Alpha's view the market from a macro l e v e l . Net benefits at a national l e v e l are more important than net benefits for any one i n d i v i d u a l or firm, or group of i n d i v i d u a l s or firms. If market transactions are occuring, i t i s assumed that they are voluntary and are b e n e f i c i a l to both parties. The market i s assumed to generally work well and without p a r t i a l i t y for lender, vendor, borrower, depositor and deposit taking i n s t i t u t i o n . Individual problems are viewed r e l a t i v e to the entire national f i n a n c i a l market, both i n terms of number of a c t i v i t i e s and type of a c t i v i t i e s . S p e c i f i c problems are not generalized unless there i s evidence to support the assertion that the complaint i s widespread and of major concern. 35 Beta's on the other hand view the market from a micro perspective, - from the perspective of the individual or firm. Net benefits (costs) conferred on an individual or group of individuals or group of firms i s of greater concern than macro level or national net benefits or costs. For the Beta's, i f market transactions are occurring i t is not assumed that they are voluntary. Beta's feel that the market generally discriminates against one segment or another. Naturally the usual target for discrimination i s related to the position of the Beta person. For Beta consumerists the market discriminates against consumers. For Beta industrialists the market discriminates against industry. Problems are thus viewed from the perspective of one specific market segment. Furthermore, specific individual problems are generalized, unless there i s evidence to the contrary, and these problems are assumed to be characteristic of what is happening throughout the market. For the Alpha's, credit i s a commodity like other goods and services and requires only a competitive market environment in order to ensure a socially desirable outcome. Regulation is unnecessary. Credit, in the Alpha's view, i s not unique and does not require special legislative action. Beta's hold quite the opposite point of view - credit is unique and requires special legislative action. According to the Beta's, unregulated markets w i l l not produce socially desirable outcomes. Credit i s not like other goods and services; i t is a derived demand good (12), i t i s used as a p o l i t i c a l tool in the public policy forum (13), i t i s something of a "public u t i l i t y " (14), i t exhibits properties of a joint product (15) and 36 i t i s a complex offering. The Betax's (industry), therefore, believe that there i s a need for restricted entry provisions, price setting and administrative controls. While Beta2's (consumers) c a l l for special institutional and functional provision in credit laws to protect against exploitation of consumers. Regarding credit use, the Alpha's maintain that i t i s generally desirable to make more credit opportunities available to more people, subject to price and income constraints. The Beta's don't agree and hold that making more credit opportunities available to more people i s undesirable. They argue that widespread availability of credit i s not an unalloyed benefit - for some people credit i s inherently bad - like alcohol for alcoholics. Thus, for the Beta's some people should not be allowed to use credit. For Alpha's i t ' s caveat emptor (let the buyer beware). Consumers are the best judges of their own welfare, and barring important cases of information failure, consumers can make decisions in their own best interest. Consumers can use more information to make "better" decisions, that i s , decision that more parallel their preferences. Consumers learn from "poor" purchasing decisions. Furthermore, any loss associated with "poor" decision making i s unlikely to be irreversible. The Beta perspective on consumers i s much more paternalistic. For Beta's, consumers have a limited cognitive capacity, and are seldom the best judge of their own welfare. They do not know their own preferences and cannot make decisions in their own best interest. B's believe that 37 the provision of more or better information w i l l not assist most consumers in making choices that better reflect their preferences because the new information doesn't change the decision-making heuristics, or i t tends to confuse and frustrate ("overload") information processing capabilities. Consumers do not learn from "poor" purchasing decisions \ because such decisions are irreversibly costly and/or cause increasingly severe problems that preclude "better" decisions. The Alpha and Beta position is similarly polarized when i t comes to assumptions about the poor.(16) The problem of poverty, say the Alpha's, is caused primarily from a lack of adequate income and wealth and not from stupidity, mendacity, manevolence and profligate behaviour. According to the Alpha's, the best way to help the poor is to increase their wealth and income. The poor may pay more for legitimate reasons -in that serving them may result in increased costs and risks for the lender and they may prefer or require different market offerings. For the Alpha's, restructuring the market to allow the poor to pay the "same" in the short term may result in the poor paying "much more" because: 1. attempts to increase competition, where lack of competition has been falsely assumed, may destroy an already competitive market (and Alpha's can characterize a market as competitive and yet recognize that the poor may not enjoy a l l the benefits of competition); and 2. direct market regulation by price setting, entry provisions etc., w i l l cause "exclusionary" or "degenerative" effects.(17) \ 38 While the Alpha's claim that market restructuring (18) w i l l not necessarily protect the poor, the Beta2's (consumers) maintain that the market should be restructured to ensure protection of the poor. For the Beta2's the problem of the poor is not only caused by a lack of adequate income and wealth, but also from a lack of education, decision making ability and assertiveness. The best way to help the poor i s to protect them from the high cost of credit, from market exploitation and from their own limited decision making a b i l i t y . According to the Beta2's (consumers), the poor pay more only because there is a lack of competition in the market. The poor could pay the same i f the market were restructured. The Beta^'s (industry) are .a special case with respect to assumption about the poor. They do not believe that Beta2 type market intervention w i l l work, neither do they support direct income transfers as the Alpha's do. Direct income transfers to the poor are not in the short run interest of industry Beta's. With respect to the relationship between cost and price the Alpha's believe that the price of credit should be relative, the ideal being, in - a l l situations for price to reflect the real economic costs of providing credit. Alpha's assume that the normative ("efficient") price i s determined in _a competitive market where price reflects: the cost of doing business; the cost of money (the basic input); the risk of the transaction; and the demand for funds. Beta's, however, assert that the price of credit should be absolute and believe that a lower price, regardless of cost i s always "better" than a higher price. Beta's feel that the normative ("just") price i s 39 determined by a value judgment independent of the unregulated competitive equilibrium. Therefore Beta's hold the following beliefs: 1. Consumers should not have to pay greater than "x" rate of interest. 2. Low-income consumers should not have to pay greater than "y" rate of interest ("y" being less than "x"). 3. The price of credit should be less than 24% per annum. 4. Rates greater than 45% are usurious independent of the market circumstances. Beta's maintain that higher prices reflect managerial inefficiency, exploitation, and/or usury. Turning to specific assumptions about current (1976) credit legislation, Alpha's believe that interest rate ceiling are useless, and that restrictions put on creditor remedies and specific terms of any credit transaction contract are neither useful nor economically supportable. Regulation of fraudulent practices and misleading disclosure w i l l enhance the efficiency of credit markets and control morally reprehensible practices according to the Alpha's. For the Alpha's usury laws are a simple and uncontroversial e v i l . In their view usury laws and rate ceilings do not protect the needy. They are both exclusionary and degenerative. Competition, the Alpha's say, protects the needy. Similarly restrictions on credit remedies and on the right -to contract freely i s exclusionary and degenerative. 40 The Beta's not su r p r i s i n g l y take just the opposite view point. For the Beta's, usury laws are a simple uncontroversial good. Usury laws and rate c e i l i n g s protect the low-income "necessitous" borrower. Rate c e i l i n g s are r e d i s t r i b u t i v e (19) and are important to the Beta's- Such c e i l i n g s are f a i r . S i m i l a r l y r e s t r i c t i o n s on cr e d i t ' remedies and on freedom to contract are useful, as i s the regulation of fraudulent practices, "high pressure" c o l l e c t i o n practices and regulation of misleading d i s c l o s u r e . Thus the Beta's hold that c e i l i n g s are useful and that laws regulating c r e d i t o r remedies, terms of contract, fraudulent practices and misleading disclosure are f a i r and desirable- Although both consumer groups and industry usually hold these B assumptions about the nature of c r e d i t l e g i s l a t i o n , Betai's often pose as Alpha's in public while arguing for industry-biased "protection" l e g i s l a t i o n with respect to c e i l i n g s , remedies, contract provisions and advertising regulations. With such divergent assumptions between the Alpha and Beta Weltanschauung i t should come as no surprise that there is as well a difference between the Alpha's and Beta's with respect both to o v e r a l l c r i t e r i a of e f f i c i e n c y (equity) and to the means for achieving objectives. The preeminent value of the Alpha's i s economic e f f i c i e n c y i n a l l i t s dimensions - a l l o c a t i v e e f f i c i e n c y , X - e f f i c i e n c y and dynamic e f f i c i e n c y . With respect to consumer cr e d i t law, the Alpha's s t r i v e f o r "a c t u a r i a l r e c t i t u d e " . (20) The Beta's, on the other hand work toward d i s t r i b u t i v e j u s t i c e - micro l e v e l equity that argues for evenly d i s t r i b u t e d market power, widespread c r e d i t a v a i l a b i l i t y , and universal access to cr e d i t at a low p r i c e . Beta's s t r i v e for "moral rectitude" (the d e f i n i t i o n of which varies between the Betai's and the Beta2's). (21) 41 Efficiency i s an all-embracing goal, that while recognizing certain cognitive limitations, attempts to maximize benefits across as many dimensions as possible. Alpha's prefer a one step, omnibus approach that offers radical and rapid change on a systemic basis. The synoptic ideal (Lindblom, 1959 and 1963) i s the Alpha's preferred method of analysis. Beta's however look to serve the needs of the individual (or particular groups of individuals). They seek to satisfy several objectives simultaneously - even though they recognize, in some cases, some of the goals are in conflict. Beta's prefer a piecemeal and serial approach to policy making. They favour the incremental approach and gradual or slow change. Beta's policy i s fragmented, of an interim nature and topical, even cosmetic, in that i t often addresses symptoms rather than causes. The Beta's mode of analysis is deliberately incomplete, ad hoc and case-specific. It i s , in short, "disjointed incremental!sm" (Lindblom, 1959 and 1979). In substantive matters, Alpha's prefer a pricing situation where the price paid by or to the borrower equals marginal social cost and where there i s no discrimination or cross subsidization. Beta's on the other hand advocate both cross subsidization (Beta2*s) and price discrimination (Betai*s), even within a competitive market situation (although this i s technically impossible). The Beta's, therefore, w i l l argue for regulation of competitive markets. 42 On questions of uniformity, across credit institutions, types of credit and t e r r i t o r i a l boundaries, Alpha's prefer maximum levels of uniformity. Betai's (industry), prefer t e r r i t o r i a l uniformity (at the provincial level), where Beta2*s (consumers), argue for uniformity across both institutions and types of credit. With respect to the nature of preferred intervention the Alpha's believe that social control by competitive forces w i l l regulate the market. They prefer "preventative", "permissive" and general legislation. Legislation should be designed to increase competition either through increasing the number of competitors, the number of services offered, the number of pricing options and the amount of information available to consumers, competitors and to the government. Beta's believe that the state should exercise social control through direct or delegated regulation. They prefer "remedial" and "prescriptive" and specific legislation, legislation that w i l l increase protection through direct control of credit availability, service offerings, price and information disclosure. 2.3 Other Minor Themes As with any typology there are issues that either do not f i t neatly into the model or tend to clutter the model's main elements. This section then, sets out, what w i l l be called minor themes, the major theme being that of the Alpha and Beta dichotomy. There were two such minor themes; need for new legislation (a non-issue), and jurisdiction (a major issue). 43 On the question of need, a l l participants to the policy process were in agreement that there was a problem caused by outdated legislation, and that there was a need for new legislation. This i s not to say that a l l players concurred with BDPA as the answer to this perceived need. Almost without exception (22) the major interest groups found fault with the legislation. S t i l l , most f e l t a change in legislation was needed; i t was on the specific provisions, on which issues were to be addressed or were not to be addressed and on method of legislative enactment, that disagreement was most vigorous. 2.3.1. Jurisdiction Jurisdiction was not so sanguine .a theme. Jurisdiction with respect to credit was addressed from two perspectives: the federal-provincial perspective and the federal intra and inter-departmental perspective. At the federal-provincial level the jurisdictional questions centered around questions such as: who raises the key credit issues?; what i s the appropriate solution to the issues raised?; which government should deal with the issues?; and which government w i l l administer and which enforce any legislative initiatives? On a l l these points there was conflict, discussion and negotiation that f e l l outside the Alpha and Beta characterization. While the Alpha perspective tended toward a strong federalist or even "unitary state" position, this was not entirely true. There were, as well, federalists among the Beta's. Others from both the Alpha and Beta viewpoint held a variety of responses to the key questions. Some, while acknowledging the importance of joint 44 federal-provincal agenda setting and solution determination, gave clear legislative jurisdiction in a l l matters to the federal government. Others argued for shared legislative jurisdiction and s t i l l others argued for joint or cooperative legislation through interdelegation of powers (23) and reference statutes.(24) Questions of jurisdiction between t h e federal and provincial government did not lack for variety or conviction in t h e alternatives presented. They lacked, however, any unifying factor that could be assimilated in t h e Alpha and Beta W e l t a n s c h a u u n g . Intra and interdepartmental jurisdictional conflict at the federal level arose over the same key questions as that in the federal-provincial arena. The question of which issues should be addressed was not only a matter of intradepartmental discussion, but involved interdepartmental conflict as well. The same was true for generating the solution alternatives and deciding on which government department and which branch within a department should be responsible for carrying out the solution. Administration and enforcement similarly were points of jurisdictional disagreement particularly at the interdepartmental level. An important aspect of the federal jurisdictional issue centered around the client-patron relationship that typified the relations between the major federal government departments and their constituencies. New boundaries or areas of disputed jurisdiction arose - this time based on client groups: banks vs credit union vs r e t a i l outlet vs consumers. These were clearly questions of paramountcy (25) but were not drawn along traditional federal-provincial boundaries. At issue were not simply questions of who (which department) should negotiate or bring legislation 45 to regulate whom (consumers, banks, financial institutions), but also question as to what issues should be addressed and in what way. Are banks or consumers to be given more weight? Within the Alpha and Beta perspective these questions ran as a very strong undercurrent that did not respect the neat Alpha and Beta dichotomy. 2.3.2. Timing The other factor that remained important throughout this policy process, was timing. While stable as theoretical constructs representing the major positional differences, the Alpha and Beta viewpoints were not held consistently throughout the debate by the players or by particular groups of players. Thus over time a group of players would switch their " o f f i c i a l " policy stance as players either changed their mind, or new personnal or new power structures emerged.' In some cases both Alpha and Beta perspectives emerged from the same group of individual at different times because both and perspectives were used in argument to defeat the B i l l . (Those seeing BDPA as an e v i l worse than the present inadequate legislation were willing to use both Alpha and Beta perspectives in creating a case of total opposition.) This was less a matter of timing than i t was tactical option. A related tactic was the Beta in Alpha clothing (or vice versa), where a Beta would use an Alpha argument to protect a narrow Beta interest. A third version was the " a l l things to a l l people position" where the policy stance pleased no one, either through ignorance or design. 46 While representing the most fundamental arena of conflict and while supplying a common basis for analysis, the A and B W e l t a n s c h a u u n g , i s not sufficiently encompassing to address within i t s model either questions of jurisdictional dispute, or factors relating to the timing and tactics of Alpha versus Beta positions. Thus the jurisdictional, timing and tactical issues superimpose a dynamic factor on the BDPA history. The next section w i l l try to identify those dynamics within the Alpha and Beta conflict as they change througout the 20 year period spanning the Borrowers and Depositors Protection Act's conception, birth, death, attempted resurrection and eventual genetic mutation. 47 NOTES TO CHAPTER 2 1. The model of Allison (1971) in his Essence of Decision was a tempting one. It offered the possibility of making a simple case study more useful and relevant, in that i t provided the opportunity to test the relevance of a series of "policy models" and the possibility that one or more of the analyses could be compared with existing literature. 2. Just as Allison and Halperin (1972) later merged the models of bureaucratic politics and organizational process into a single model of inter and intra organizational politics so i t seemed that a more composite approach was needed for the BDPA debate. A single theory i s thus proposed (Alpha and Beta policy typology), while a number of other important factors are discussed as integral, but nonsystematic concerns (jurisdiction and timing). This i s supported by Jenkins (1978, p.248), "...adequate policy theory seems to demand a merging of disciplinary perspectives". 3. We11ans chauung i s a German word, lib e r a l l y translated as "worldview". 4. Lindblom used as the basis of his "root" approach, the rational step wise appproach to policy making as described by Harold Lassell (1956). That i s : (1) recognize the problem; (2) explore the nature of the problem; (3) create alternatives for action; (4) rank alternatives by priority; (5) evaluate alternatives based on predicted risk and consequences; and (6) make a decision by combining quantitative and qualitative properties of the problem. 5. Lowi's (1966) three policy types include: 1. Distributive - one shot, independent, disjointed and individualistic decisions to benefit one group. Winners and losers never meet. 2. Regulatory - Allocates benefits between^ parties on a case by case basis. Individual decisions are part of an ongoing and cumulative rule or policy. Participants tend to be groups and issues involve one sector of the economy. 3. Redistributive - Characterized by conflict between the haves and the have-nots, involving property and possessions. Conflict i s stable and continual along class lines. 6. lowi's (1972) four stratiegies include: high understanding, small change strategies suitable for some "technical" and administrative decisions; high understanding, large change strategies suitable for revolutions and U t o p i a n decision-making; low understanding, large change situations of war, revolution and crises; and low i 48 understanding, low change situations of incremental politics where "disjointed incremental!sm " i s appropriate. 7. Chandler (1974) added a further dimension to the Lowi (1966) typology. She allowed the degree of particularity of each of the policy types (distributive, regulatory and redistributive) to range from highly particular (micro) to very general (macro). This expanded typology relied on' the "elite-accomodation" model of relationships among policy players. Although Chandler proposed that levels of conflict, evalution of the policy process and probability of success could be predicted with this expanded framework, her propositions are not supported by her later research (Chandler, 1979). Using the opposite approach, Nadel (1975) simplified the Lowi (1972) typology from four into three - regulatory, constituent, and an new inclusive category called resource transfer. Resource transfer combined the Lowi distributive and redistributive policy types. The rationale for doing this was that the difference between distributive and redistributive policies was primarily the level of awareness among the beneficiaries and the donors. 8. Simeon's (1976) framework includes socio-economic, environmental and provincial p o l i t i c a l forces, federal-provincial relations and provincial institutions. This i s a framework, or set of constraints and opportunities that: 1. defines a set of problems considered to be important; 2. defines a set of acceptable solutions or policy responses; and 3. defines a set of procedures and rules by which they w i l l be considered. 9. Regulation i s defined as "the imposition of constraints; backed by government authority, that are intended to modify the behavior of individuals in the private sector significantly" (Economic Council of Canada, 1979, p.13). Regulation i s only one aspect of public policy, other aspects include the formulation of incentives and the development of goals and c r i t e r i a . 10. According to Bachrach and Baratz (1963), influence i s like power, i n that i t i s rational and relational (not possessive or substantive) and i s used without tacit or overt threat of severe deprivation. Influence does not depend on sanctions and there i s no disguise involved in the nature or source of the demands. 11. Sources for the compilation of this typology are too numerous to mention. The history of the Borrowers and Depositors Protection Act and the debate that surrounded i t s progress suggested the two "worldview" approach. Other writings that were particularly helpful include: David Carne and JM.J. Trebilcock (1973), "Market Considerations in the Formulation of Consumer Protection Policy", University of Toronto Law Journal, Vol. 23, pp.396-430; William D. 49 Warren (1975), "Consumer Credit Laws; Rates, Costs and Benefits", Stanford Law Review, February 1975, pp. 951-968; William C. Whitford (1973), "The Function of Disclosure Regulation in Consumer Transactions", Wisconsin Law Review, pp. 400 - 420; M.J. Trebilcock (1976), "Pathology of Credit Breakdown", McGill Law Journal, Vol. 22, pp. 415-467; C.E. Lindblom and David Braybrooke (1963), A Strategy of Decision, New York: Free Press; Henry Mintzberg (1973), "Strategy - Making in Three Modes", California Management Review, Vol. XVI, No. 2, pp. 44-53; Amitai Etzioni (1967), "Mixed Scanning: A third Approach to Decision Making", Public Administration Review, Vol. 27, No. 6, December, pp. 385-392; Charles E. Lindblom (1979), " S t i l l muddling, not yet through", Public Administration Review, Vol. 39, Nov./Dec, pp. 517-526. 12. "Derived demand" is the term used to acknowledge the fact that "money credit" is seldom bought or sold for i t s own sake. Rather money transactions are usually a precusor to market transactions involving other goods and services. 13. The federal and provincial government offer incentive and compensation schemes to small business, export trade, farmers and students that reduce the cost of credit. 14. If credit i s a "public u t i l i t y " then i t becomes a right - credit availability and the cost of credit become key concerns and proposals for cross-subsidization are often raised. 15. Credit i s a joint product in that the cost of money, the cost of doing business and the cost of the risks involved in any transaction can be shared in a variety of ways between buyer and seller in determining an appropriate cost of credit. Similarly for sales credit, the price of the goods and the cost of credit become substitutable and the true cost of money may not be readily identifiable. 16. The discussion in this paragraph i s based on an article by David Carne and M.J. Trebilcock (1973). 17. "Exclusionary" effect occurs where increased costs of constraints imposed on a merchant w i l l lead to a variety of responses including increasing the price, varying the quality, and finally withdrawing from the market voluntarily. "Degenerative" effect occurs when an exclusionary rate leads to criminal market activity or where non-criminal rule violators remain, for the most part, unsanctioned (Carne and Trebilcock, 1973). 18. Restructuring the market in this context means altering the number, size or market segment of the firms currently operating. 19. "Redistributive" effect occurs when excess profit, previously earned by the merchant, i s redistributed to consumers (Carne and Trebilcock, 1973). 50 20. "Actuarial rectitude", as used by those in the Consumer Research Branch of the Department of Consumer and Corporate Affairs during the preparation of the BDPA, refers to a s t r i c t adherence to accounting of interest owing using an actuarial formula. Effective annual rate of interest ( i ) i s calculated using the formula (l +j)l2=(l+i) > where (j) i s the monthly rate of interest. The formula can be generalized to (l+j)n=(-'-+:i-)» where (n) i s the number of periods in a year. In calculating the effective rate of interest applicable to a credit contract, i t i s the effective annual rate of interest that w i l l equate the discounted value of future payments to the net principal sum. Thus NPS=FMP(l+i)_n where NPS i s the net principal sum (amount borrowed), and FMP i s the amount of the future monthly payments. 21. For the Betai's (industry), "moral rectitude" i s adherence to standard business practises as exercised by the financial community. For the Beta2's (consumers), "moral rectitude" i s equated with low cost of credit, which Is defined as anything under 24% per annum. 22. The Montreal Urban Police did not fault the Borrowers and Depositors Protection Act. Their primary interest was in establishing a clearly defined criminal rate. Section 37 of the proposed BDPA allowed for regulations to establish an interest rate, above which i t would be considered i l l e g a l to lend money under any circumstances. 23. Interdelegation i s the transfer of authority by one level of government in which such authority i s vested to some other level of government. (See Abel, 1973, pp. 2-10 and Hogg, 1977, pp. 223-227.) 24. Reference Statutes are "statutes which refer to other statues and make them applicable to the subject of legislation. Their object i s to encorporate into the act of which they are a part the provisions of other statutes by reference and adoption", (Black's Law Dictionary, 5th ed.). (See Hogg, 1977, pp. 228-231.) 25. "The rule which has been adopted by the courts i s the doctrine of "federal paramountcy": where there are inconsisitent (or conflicting) federal and provincial laws, i t i s the federal law which prevails." (Hogg, 1977, pp. 101-114 at p.102.) 51 3- HISTORY OF BDPA The process of developing what was to emerge as the Borrowers and Depositors P r o t e c t i o n Act can be seen as a sequence of events not unlike that of the b i r t h process. The period from 1960 to 1974 was the period of conception. It was during t h i s time, that the idea of major reform- to ex i s t i n g federal c r e d i t l e g i s l a t i o n , was put on the public policy agenda. The center of a c t i v i t y during this time of conception s h i f t e d from the public arena to the Consumer Research Branch of the Department of Consumer and Corporate A f f a i r s i n 1968. Yet i t was not u n t i l 1975 that the B i l l showed r e a l signs of l i f e - With a new Minister (Andr Ouellet), and a new team of o f f i c i a l s , the b i l l neared the end of . i t s gestation period. On October 27, 1976, BDPA was introduced into the House of Commons. C r i t i c i s m came from a l l sides: from the finance industry (banks, trus t companies, c r e d i t unions, caisses populaires, sales finance and loan companies); from the provinces; and from consumers. The B i l l was no sooner born than i t s c r i t i c s were out to seek i t s early demise November 1976 to January 1977 was a time when BDPA was struggling to survive. At the Parliamentary l e v e l the B i l l was closely scrutized by the Senate Committee on Banking, Trade and Commerce, and by the House of Commons Standing Committee on Health, Welfare and S o c i a l A f f a i r s . Within the Department of Consumer and Corporate A f f a i r s there were renewed e f f o r t s at consulation with a l l those parties affected by the B i l l . 52 The next phase was the period of metamorphosis. With mounting c r i t i c i s m on a l l sides, there was a concerted attempt by the Department to prepare amendments to the B i l l . The object was to amend the l e g i s l a t i o n and get the B i l l to t h i r d reading before the summer recess. Amendments were prepared from February to June of 1977. Parliamentary time ran out The B i l l died on the order paper i n June 1977. With the death of BDPA a new period began. v The Department of Consumer and Corporate A f f a i r s attempted to resurrect t h e i r B i l l . From June 1977 to March 1978 the Department was op t i m i s t i c that a new b i l l would be introduced. The proposed F a i r Credit and Savings Act, a revised version of BDPA, was prepared. By December 1977 i t was ready to be introduced. The B i l l (revised) did not resurface. By August 1978 the Department of Consumer and Corporate A f f a i r s abandoned i t s attempt to introduce an omnibus consumer c r e d i t reform act. A new strategy was adopted. It was decided that the Department would not i n i t i a t e another b i l l on consumer c r e d i t . It would encourage and work with others, other Departments, the provinces and industry. S p e c i f i c a l l y i t would work to obtain the objectives of cr e d i t reform l e g i s l a t i o n through revisions to e x i s t i n g b i l l s , the introduction of new non-omnibus l e g i s l a t i o n , and through the adoption by industry of more innovative market practices. The period from March 1978 to June 1981. was then, a time of "genetic mutation". 53 This chapter traces the b i r t h process of the Borrowers and Depositors P r o t e c t i o n Act from conception, in 1960, to the genetic mutation stage (March 1978 to mid 1981). The chapter's focus i s on the story - the dynamics and timing of the BDPA debate. The r e l a t i o n s h i p between the BDPA history and the Alpha and Beta W e l t a n s c h a u u n g model i s discussed only b r i e f l y throughout the narration. At the end of the chapter the major events are summarized from the point of view of the Alpha and Beta dichotomy. 3.1 Period of Conception 1960 to 1974 3.1.1 Period of Study and P r o v i n c i a l Action 1960 to 1968 From i t s introduction i n the Senate i n 1960 through to the appoint-ment of Ron Basford as Minister of the new Department of Consumer and Corporate A f f a i r s i n 1968, the concept of c r e d i t cost disclosure sparked i n t e r e s t , action and controversy. In 1964, the center of attention moved from the Senate and the House of Commons to the public arena through a Royal Commission, a Special Task Force, and a special conference. These a c t i v i t i e s i n turn, lead to further federal government i n i t i a t i v e s . In March 1960, Senator David C r o l l (1) introduced a private members' b i l l into the Senate c a l l i n g for mandatory cr e d i t disclosure, including both the t o t a l d o l l a r cost of c r e d i t and the simple annual i n t e r e s t rate (Ziegel and Olley, 1966, pp. 139-143). After four successive attempts to introduce s i m i l a r private members' b i l l s , both public and parliamentary i n t e r e s t was aroused (2). Interest groups quickly took 54 sides, with consumer groups, credit unions and caisses populaires favoring the legislation and the rest of the finance industry actively lobbying among the Senators against the b i l l s (Ziegel and Olley, 1966). By 1964 there were eleven private members' b i l l s on the order paper, a l l dealing in some way with credit disclosure (Ziegel and Olley, 1966). Also in 1964, the Report of the Royal Commission on Banking and Finance (referred to as the Porter Commission Report), was issued and i t was the year of the formation of the special Joint Committee of the Senate and the House of Commons on Consumer Credit. The Porter Commission had a broad mandate to study capital markets, foreign capital and financial institutions, including security trading. Analysis done at a macro or industry level concluded that there were increasing levels of competition in financial markets brought about through innovation and an increasing overlapping of functions between institutions. The Commission found personal finances to be well managed. Despite these indications of a healthy credit granting industry, the Commission's recommendations were aimed toward fostering greater competition through uniformity of regulation while reducing the anticompetitive impact of current protectionist legislation. The Commission's recommendations included: 1. raising the ceilings under the Small Loans Act and for a l l personal loans, to $5,000 from $1,500, 2. maintaining a maximum interest rate of 2% per month for loans made under the SLA (under $300). And 1% per month for a l l amounts greater than $300 (rather than 1 % per month for loans from $300-$800), 3. removing the chartered bank lending rate ceiling of 6%, \ 55 4. updating the Bank Act in order to cover a wider group of financial institutions, to limit horizontal directorship, and to remove restrictions that inhibit innovation, and 5. requiring special government lending agencies to loan at market rates. The Porter Commission took the Alpha approach to policy making in the area of credit. The incremental nature of its proposals, contrasted with the all-embracing approach of the pure Alpha, was a merely a reflection of the belief that more thorough analysis was necessary before more comprehensive changes could be effected. The Commission assumed that the competitive market would determine the most acceptable social outcome. It was this belief that placed the Porter Commission firmly in the Alpha camp. v We have argued that the public dealing with financial institutions and markets can never be guaranteed against loss, but that the best safeguard against this possibility is legislation which provides for adequate disclosure and sets high standards of self-regulation backed up by stong government supervision and powers to enforce proper practises-.-.Hence our stress on the importance of the proper co-ordination of policy, our recommendations for strengthening the policy making staff of the federal government and our urging that more careful consideration be given to the immediate and long-run costs and benefits of following one policy rather than another. (Report of the Royal Commission on Banking and Finance, 1964, p.565) No sooner had the Porter Commission issued their report than a Special Joint Committee of the Senate and House of Commons on Consumer Credit was set up under the joint chairmanship of Senator David Croll and Member of Parliament, J . J. Greene. This was a "peoples" committee which 56 t r a v e l l e d across Canada r a i s i n g the issue of consumer c r e d i t . It lis t e n e d to many s t o r i e s of i n d i v i d u a l c r e d i t problems, i n j u s t i c e s personal instances of hardship caused by r i s i n g i n t e r e s t rates, and abusive c r e d i t p r a c t i c e s . In February of 1966 the Committee was re-established with an ad d i t i o n a l mandate - the Cost of L i v i n g , and a new co-chairman, Ronald S. Basford, to replace J . J . Greene, M.P. Hearings continued into May and in January 24 1967 a Report on Consumer Credit (known as the Croll/Basford Report) was issued. The emphasis of t h i s report r e f l e c t e d the Committee's concern for i n d i v i d u a l consumer transactions. Of the many problems a r i s i n g out of consumer cr e d i t which were brought to our attention during the hearings, two have been i d e n t i f i e d which appear i n various forms and which stand out above the others. The f i r s t concerns the troubles besetting those who buy on c r e d i t without understanding the price they are paying for borrowing. The second concerns the plight of low-income families who are from time to time i n desperate need of cr e d i t for necessary goods or services but to whom commercial c r e d i t i s either not readily available or not avai l a b l e at a l l . While the Croll/Basford Report echoed the Porter Commission recommendations with respect to consumer c r e d i t , Croll/Basford went much further. They recommended: 1 .disclosure, of both the lump sum and the simple annual in t e r e s t rate, 2. amendments to the Combines Investigation Act, the B i l l s of Exchange Act, and the Bankruptcy Act, 3. a scheme for guaranteed loans to high r i s k borrowers, 4. a three day cooling-off period for consumer transactions, 5. regulation of c r e d i t c o l l e c t i o n practises and wage assignments, 57 6. establishment of independent agencies to give financial advice and counselling, and 7. preparation of "objective and authoritative" general information for a l l potential credit buyers. It also made recommendations to the provinces. It proposed a central registry for a l l cars to fa c i l i t a t e the setting of maximum rates for finance charges for used car purchases and the adoption of unconscionable transactions relief legislation. Further action was foreseen as the Committee recommended both i t s own continuation in order to investigate policy options and to propose consumer credit legislation, and the establishment of a continuing federal-provincial committee on consumer credit at the technical level. The Beta type characteristics of piecemeal and incremental policy proposals, of paternalism, of a proclivity for absolute pricing and restrictions on creditor remedies, of attention the details of the terms of contract and of a concern for particularized consumer transactions were apparent in the Croll/Basford Report. The Croll/Basford approach was one of social control through state intervention. While not denying the relevance of any of the recommendation in the Porter'Commission Report, Croll/Basford took a very different approach. Partly, this could be attributed to i t s more specific mandate and to the personalities of those who comprised the Committee, but part must be attributed to the activities and writings of Professor Jacob S. Ziegel.(3) In 1966, in the midst of the Croll/Basford hearings, the University of Saskatchewan hosted a Conference on Consumer Credit organized by 58 Professors J.S. Ziegel and Robert E. Olley (Ziegel and Olley, 1966). The part i c i p a n t s included academics, people from a l l segments of the finance industry, and from government, both federal and p r o v i n c i a l . In summarizing the proceedings, Ziegel i d e n t i f i e d the f i n a n c i a l and non-financial aspects of c r e d i t agreement problems, and while acknowledging that both aspects must be considered for any solution to be e f f e c t i v e , he argued that the "time is ripe for a uniform consumer cr e d i t act". Ziegel i s o l a t e d those s p e c i f i c problems that had to be addressed immediately. For example: 1. The Small Loans Act was i n need of r e v i s i o n with respect to c e i l i n g s , the regulation of the number of o u t l e t s , security requirements, advertising and disclosure, 2. The Bank Act s i m i l a r l y needed amending with respect to loan rate c e i l i n g s , advertising and d i s c l o s u r e ( 4 ) , and 3. There was no provision for s i m p l i f i e d bankruptcies or provisions to prevent cut-off clauses in promissory notes ( B i l l s of Exchange). The approach to new l e g i s l a t i o n was urged to be incremental and consultative, and the policy making process continuous, i n order that new p o l i c i e s might evolve i n response to changing market conditions (Ziegel and Olley, 1966). As t h i s Conference fed into the Croll/Basford Report on Consumer Credit, so too did the Report lead into further discussions and even to l e g i s l a t i v e changes. On March 3, 1967, the Federal-Provincial Conference of Ministers of Consumer and Corporate A f f a i r s met. "Consumer c r e d i t " was the major item on the agenda. The following year, the Government of 59 Ontario convened an I n t e r - P r o v i n c i a l Conference on Consumer Credit- At the federal l e v e l , the 27th Parliament gave a considerable amount of time to discussions on c r e d i t , i n t e r e s t and banking.(5) Eight private members b i l l s r e l a t i n g to cr e d i t and int e r e s t were introduced.(6) On November 16, 1967 the Bank Act regulations were changed to remove the 6% c e i l i n g on consumer loans and to provide for rate d i s c l o s u r e . ( 7 ) It i s important to r e a l i z e that there were events taking place at the p r o v i n c i a l l e v e l , and i n the United States, during this period of study and public discussion at the national l e v e l . Between 1955 and 1963, both Alberta and Manitoba t r i e d , unsuccessfully, to introduce l e g i s l a t i o n to require c r e d i t charges for a l l consumer transactions to be stated i n terms of e f f e c t i v e rate of int e r e s t as well as in d o l l a r s and cents ( Z i e g e l , 1966). The b i l l s were opposed vigorously by c r e d i t grantors. But by 1966, both Saskatchewan and Manitoba had l e g i s l a t i o n which allowed a "cooling-off" period for consumer sales contracts with intinerent s e l l e r s , and most provinces had some form of unconscionable transactions r e l i e f l e g i s l a t i o n that allowed the court to reopen and revise consumer transactions deemed to be harsh and unconscionable. In 1966, Quebec and Nova Scotia had b i l l s before t h e i r respective l e g i s l a t u r e s to cover both vendor and lender c r e d i t ( Z i e g e l , 1966).(8) Furthermore, Manitoba, Nova Scotia and Ontario had issued recent reports on consumer c r e d i t ( Z i e g e l , 1966). In 1965 Nova Scotia passed the Credit Act, which among other things, established a Registrar of Credit who would licence and supervise a l l c r e d i t grantors, administer the regulatory l e g i s l a t i o n and engage in public education 60 respecting credit.(9) The Ontario Government introduced two b i l l s early in 1966, one to e s t a b l i s h a consumer protection bureau and one to create the Consumer Protection Act (10) Many provisions of this proposed act related d i r e c t l y to consumer c r e d i t , for example, mortgages, debt counselling, consumer fraud, misleading advertising, e t c The provinces had recognized that there were problems in the area of consumer c r e d i t and several had passed or were i n the process of passing new l e g i s l a t i o n to address consumer c r e d i t issues. S t i l l , these i n t i a t i v e s were not uniform i n t h e i r coverage, nor were they evenly d i s t r i b u t e d among the provinces, B.C. and New Brunswick being outstanding exceptions ( Z i e g e l , 1966).(11) While i t was true that awareness of consumer issues and s p e c i f i c a l l y of consumer c r e d i t issues was growing among Canadians both nationally and p r o v i n c i a l l y , the strength of public support for federal l e g i s l a t i v e i n i t i a t v e s did not match that evidenced in the United States of America. By 1968, i n the United States, the momentum of public sympathy to the consumer perspective i n market transaction had accelerated to the point where the Consumer Credit P r o t e c t i o n Act (known as Truth-in-Lending Act) was passed into law. The history of the U.S. Truth-in-Lending l e g i s l a t i o n p a r a l l e l e d that of Canada u n t i l 1967. Nadel (1971, pp. 130-137) i n his book, The P o l i t i c s of Consumer Protection, described the h i s t o r y . It began in the Senate with the persistent introduction of a private b i l l to require c r e d i t d i s c l o s u r e . Beginning in 1960 and continuing u n t i l 1966, Senator Paul Douglas continued to press for t o t a l c r e d i t d i s c l o s u r e . The requirement to express the f i n a n c i a l cost as simple annual i n t e r e s t calculated on the unpaid balance through time became the r a l l y i n g point 61 for vigorous opposition. The opposition argued that i t would be d i f f i c u l t to c a l c u l a t e , that there wasn't agreement on a formula, and that the e f f e c t of stating an annual rate would create fear, doubt and d i s t r u s t because of the change and the psychological reaction to discovering the "true" annual i n t e r e s t rates. Typical of the reaction of the U.S. business community, Brooks Schumaker of the National R e t a i l Merchants Association argued that the b i l l , propagates fear, doubt and d i s t r u s t through junking... the well understood monthly terms for monthly transactions and substitutes new and l i t t l e understood simple annual rates for monthly transactions - requiring i n turn a r a d i c a l readjustment of the consumer mind - p a r t i c u a l l y the female mind. (Nadel, 1971, p.131, o r i g i n a l l y i n Congressional Quarterly Almanac (1962)) From 1963 to 1964, public hearings were held and support for c r e d i t disclosure l e g i s l a t i o n was given increased public support. S t i l l , the 1963 b i l l introduced by Senator Douglas never got passed out of committee stage.(12) By 1967 Senator William Proxmire introduced the Truth-in-Lending B i l l . It had strong administrative backing and went to a Senate Committee, no longer chaired by W i l l i s Robertson, a powerful and h o s t i l e opponent of Truth-in-Lending. The B i l l passed unanimously a f t e r being amended to provide exemptions for revolving charge cards and for contracts where the finance charge was less than $10 (Nadel, 1971). The same year Leonor S u l l i v a n introduced into the House of Representatives, a much more extensive c r e d i t disclosure b i l l . It included coverage of revolving charge accounts, contained provision for i n t e r e s t rate c e i l i n g s and banned wage garnishments. A much weaker b i l l emerged from committee On i t s return to the f l o o r of the House, the b i l l 62 was significantly strengthened. Amendments eliminated the exemptions passed previously by the Senate and encorporated a ceiling on wage garnishments and made loan sharking a federal offence. On May 29, 1968 the President of the United States signed into law the Consumer Credit Protection Act• This Act not only had his personal support, but also had the support of the average American voter, both p o l i t i c a l parties, the credit unions and mutual savings banks (long time supporters), and the banks (recent supporters) (Nadel, 1971). Meanwhile, in Canada, two months after the passage of Truth-in-Lending legislation in the United States, Ronald S. Basford was appointed Minister of Consumer and Corporate Affairs.(13) With this appointment the progess of consumer credit legislation in Canada took a new turn as i t moved from the public forum into the womb of government bureaucracy• 3.1.2. The Department Takes on the Issue - July 1968 to December 1969 Once Ron Basford was the Minister of Consumer and Corporate Affairs, he picked up the i n i t i a t i v e for consumer credit reform on three fronts; within his own Department, through the Canadian Consumer Council(14) and through public speaking engagements. On October 28,1968 the Department presented three position papers prepared by Director of Research, Dr. Warren James, to the 63 Federal-Provincial Conference of O f f i c i a l s . The paper on "Federal and Provincial Credit Disclosure Requirements" concluded that there was no need for s t r i c t legal or legislative uniformity where there was no documented evidence of consumer problems. Institutions that would be regulated, argued Dr. James, were not uniform in structure or in function. Without reference to either the Porter Commission Report or to the Croll/Basford Report, he concluded that credit disclosure legislation was unnecessary. The paper, "Federal Policy Respecting the Interest Act" discussed the constitutional issues surrounding the Interest Act(15) and the current issues raised by this piece of antiquated legislation.(16) The paper was written from a legal viewpoint, and although i t provided some amusing words about ancient attitudes to credit, i t did not recommend or even suggest any policy options. On the issue of promissory notes and conditional sales contracts, the subject of the third paper, Dr. James concluded that there was no need to amend the B i l l s of Exchange Act to prevent the holder-in -due-course from supplanting normal remedies of redress- James observed that there was no information on the injustice, i f any, under the present law and fe l t that any amendment to current legislation would be dangerous, inadequate and inequitable. From that less than enthusiastic response from within the Department, Basford next received the Report to the Minister of Consumer and Corporate Affairs on Consumer Credit (1969) from the Canadian Consumer Council. It recognized the dual problem of shared jusrisdiction and lack of federal consumer credit specialists to formulate policy. 64 The inadequacy of the existing federal legislative framework is in part due to the division of jurisdiction among several government departments -Justice, Finance, Department of Consumer and Corporate Affairs - but even more in our opinion to the absence at the federal level of specialists in consumer credit who can competently advise the goverment with respect to its politicies in this area and supervise the administration of the regulatory legislation.(The Report, p.21) The Council recommended revisions to the Small Loans Act through the creation of a two part "Consumer Loan Act". Part One would apply to a l l consumer loans made by professional lenders up to a maximum amount of $25,000 and would cover disclosure requirements, rebate rights, and regulation of unconscionable terms. Part Two would deal exclusively with regulated loans (up to $7,500) and licencing would be requird. It would also deal with such things as wage assignments, after-acquired property clauses mortgages for loans less than $2,500 and seizure of property. The report recommended that responsibility for the Small Loans Act be transferred to the Department of Consumer and Corporate Affairs. Furthermore, the Council study recommended that the federal Interest Act be repealed in favor of a cost of credit disclosure act that would apply uniformly across institutions, types of credit and jurisdictions, and that the B i l l s of Exchange Act be amended to regulate promissary notes for consumer sales credit transactions. The Report recommended that action on credit card problems and on bankruptcy and creditor relief be commenced as soon as jurisdictional questions were cleared. The Council i was clearly in favor of comprehensive omnibus legislation. It recognized, however, that the route to that goal might be accomplished more expeditiously through a piecemeal, incremental joint action approach prior to amalgamating everything into one act. 65 The various points on which we have recommended l e g i s l a t i o n though they give the impression of being disparate i n character, i n fact cover many of the e s s e n t i a l landmarks of a comprehensive consumer c r e d i t act. They w i l l require much detai l e d d r a f t i n g and ca r e f u l consideration of some d i f f i c u l t policy questions. While as a matter of p o l i t i c a l expediency i t may not be possible to introduce a l l the desirable changes at once we see no loss and much gain i n the i r eventually being brought together under one roof, and we so recommend.(Report on Consumer Cred i t, 1969, p.21) This was an a r t i c u l a t e proposal from the Beta perspective. In A p r i l 1969, the Honorable R.S. Basford (1969) spoke at the Isaac Pi t b l a d o Lectures on Continuing Education i n Winnipeg. Here he gave the f i r s t public i n d i c a t i o n of contemplated changes to the Interest Act, when he said, We are undertaking a complete study of the fede r a l Interest Act to determine i t s s u i t a b i l i t y to modern lending, mortgaging and financing practises and i t s r e l a t i o n s h i p to p r o v i n c i a l laws. On November 11, 1969, the Department of Consumer and Corporate A f f a i r s was i n v i t e d to be guest at the convention of the Federated Council of Sales Finance Companies (FCSFC).(17) Mr. Gordon Ostaldeston, Assistant Deputy Minister, spoke to the convention about proposed amendments to the B i l l s of Exchange Act and the Interest Act that were to be introduced i n the f a l l of 1970 or spring of 1971. This dialogue between the Department and FCSFC continued thoughout 1970 as Mr-Osbaldeston, Dr. Warren James and Mr. Carne Bray, President of FCSFC, considered i n depth the conceptual questions of "what i s i n t e r e s t and what i s c a p i t a l ? " . 66 In the eighteen month period from July 1968 to January 1970, Basford saw four Department of Consumer and Corporate A f f a i r s b i l l s through to Royal Assent(18), while a l l a c t i v i t y on consumer c r e d i t l e g i s l a t i o n y i e l d e d no tangible r e s u l t s . S t i l l the issue was firmly implanted within the bureaucracy and there were signs, i f only from within the Department, that the concept of consumer credit reform l e g i s l a t i o n was indeed a l i v e , i f not kicking. 3.1.3. The Fetus Shows Signs of L i f e -there's kicking in the womb January 1970 to February 16, 1972 Within the next two years there were a number of signs i n d i c a t i n g that new c r e d i t l e g i s l a t i o n would be passed. These included the passage of related l e g i s l a t i o n the h i r i n g of new personnel with the Department of Consumer and Corporate A f f a i r s , and indications of co-operation at the f e d e r a l - p r o v i n c i a l l e v e l . This progress, however, was marred by a series of fundamental problems not the least of which was the transfer of the l e g i s l a t o n ' s mentor, Ron Basford, to another department.(19) In March of 1970 the B i l l s of Exchange Act was amended to provide that any holder-in-due-course for consumer cr e d i t purchases could not demand payment i n the event of a dispute between the o r i g i n a l buyer and s e l l e r . This Act had no Minister named to be responsible for i t s administration. Basford took the i n i t i a t i v e to amend i t " i n the consumer i n t e r e s t " . The fe d e r a l Cabinet and the Department of Finance were against 67 the Department of Consumer and Corporate Affairs sponsoring such an amendment, but finally acceded in the absence of any strenuous objections from the chartered banks. This amendment to the B i l l s of Exchange Act was viewed as a victory for the Department of Consumer and Corporate Affairs. On the 9th of July, 1970, Cabinet authorized the transfer of responsibility for the Interest Act and the Small Loans Act from the Department of Finance to the Department of Consumer and Corporate Affairs, effective on the revision of these acts. Consultation with the provinces in the co-ordination of the administration of the consumer credit law was prescibed. Cabinet authorized, as well, the preparation of amendments to the Criminal Code in respect of "loan sharking".(20) In November, the Speech from the Throne referred to measures that would be introduced to further protect the users of consumer credit and promised that legislation would be introduced to amend both the Interest Act and the Small Loans Act. Looking from the outside in, the prospect for legislative action was promising This bright future was very much dimmer when viewed from within the bureaucracy. Earlier in the year Mr. Jim Grandy, Deputy Minister of Consumer and Corporate Affairs, conveyed to Dr. James, the Ministers desire to amend the Small Loans Act and to curtail loansharking. Dr. James (21) noted in his personal diary: March 23, 1970 Made my f i r s t acquaintance with the Pawnbrokers 68 Act. I am sure I w i l l l i v e to regret ever finding out about i t . Grandy intimated today that the Minister f e e l s that something must be done about loansharking and the Small Loans Act. There i s no joy i n either of these areas. A p r i l 27 1970 The" minister mentioned that he wanted l e g i s l a t i o n on small loans, a d v e r t i s i n g , lobbying, Interest Act and I l a t e r learned from Grandy that he wants to take over the Small Loans Act and increase the l i m i t s . If he p e r s i s t s i n th i s he w i l l undoubtedly damage a great many poor people. He seems to be unable or unwilling to recognize that many consumers are poor c r e d i t r i s k s and that they w i l l have to pay a f a i r l y high rate to get credit at a l l . The imposition of c e i l i n g s simply dries up the funds and a s i g n i f i c a n t number of people w i l l be forced into the hands of the loan sharks • How he f a i l s to make the connection between competition i n ordinary markets and i n the market for loanable funds i s beyond me.(22) Nevertheless, Dr. James commissioned Professor W.R. Waters of the University of Toronto to prepare a paper e n t i t l e d , "Interest Rate L e g i s l a t i o n : Problems and P o s s i b l e Directions".(23) Professor Waters worked from the premise that unconscionable conduct must be prevented with minimal interference with i n d i v i d u a l rights to negotiate contract terms, and that to f a c i l i t a t e a clear understanding of c r e d i t transactions, contract terms must be expresed in everyday language with regulations of general a p p l i c a b i l i t y . He recommended complete removal of c e i l i n g s under the Small Loans Act, provision for an "unwarranted" rate and for variable i n t e r e s t rate mortgages, d i f f e r e n t disclosure requirements for d i f f e r e n t types of c r e d i t , and government guaranteed loans. He argued that penalty and prepayment terms should be subject to negotiation between borrowers and lenders. In other words th i s report represented a mixed Aipha and Beta^ approach. It met Dr. James' view that 69 i n t e r e s t rate c e i l i n g s were unnecessary (an Alpha p o s i t i o n ) , while proposing recommendations that would allow each segment of the finance industry to meet i t own needs i n negotiating contract terms and arranging for suitable d i s c l o s u r e (a Beta p o s i t i o n ) . The introduction of va r i a b l e i n t e r e s t rate mortgages (an Alpha approach to increase market offerings) and government guaranteed loans(an i n t e r v e n t i o n i s t policy favored by the Beta school) combined to address the need both of the loan industry and of consumers. Dr. James', "Observations on the I n t e r e s t Act and Small Loans Act", prepared for Basford just prior to a f e d e r a l - p r o v i n c i a l conference i n 1971, endorsed Waters recommendations. But these were not the recommendations for which Basford was looking.(24) In 1971 three new people were hired to work in the c r e d i t area. In January, Dr. James hired Mr. Jim Mann to investigate and review current p r o v i n c i a l l e g i s l a t i o n r e l a t i n g to c r e d i t . In May Mr. Basford took on two young lawyers, Mr. Harvin P i t c h and Mr. Andrew Roman. As s p e c i a l a s s i s t a n t s , they were to write a policy document for Cabinet on the amendments to the Small Loans' Act and the Interest Act. Also i n 1971, the May 25th general agreement of the provinces at a Federal-Provincial Conference of Consumer A f f a i r s Ministers, to possible revisions of the Interest Act and the Small Loans Act provided that there would be f u l l consultation on the s p e c i f i c s p r i o r to l e g i s l a t a t i o n being introduced. It was soon clear that things were not going well. On June 6, 1971, Mr. Basford 1s sp e c i a l a s s i s t a n t , Mr. Tex Enemark, a f t e r observing the a c t i v i t i e s and progress of the Consumer A f f a i r s Branch, sent a memo to the Mi n i s t e r . In view of the lack of a c t i v i t y and lack of co-operation on 70 the part of the Consumer Research Branch, Enemark recommended that revisions to the Small Loans Act be transferred to the Corporate Affairs side of the Department.(25) Pitch saw the validity of the argument, but countered with a proposal for a Consumer Credit Bureau under Consumer Affairs, staffed with people from outside the existing Consumer Affairs personnel or, alternatively, to set the Bureau up within the Corporate arm. (26) Basford, too, sensed that a l l was not well, and at an informal gathering of the Consumer Affairs personnel, pressed for a rethinking of Departmental goals and pr i o r i t i e s . One specific suggestion that emerged was that the Department should develop a "true primary research capacity". Neither of these initiatives had any effect. No Consumer Credit Bureau was set up, and no new Departmental goals were formulated. Meanwhile, based on the work of Harvin Pitch, a Cabinet Document was prepared. It proposed the revision and consolidation of the Interest Act, the Small Loans Act and the Pawnbrokers Act into a new act to be called "The Interest and Consumer Credit Act". This act would provide for credit charge and advertisement disclosure regulation, court relief from excessive rates, updating of the Small Loans Act interest rate ceilings, a government-backed loan program for the poor, licencing for a l l who charge more than 12% per year rate of interest, no l i a b i l i t y for unsolicited credit cards, and amendments to the Criminal Code to outlaw abusive credit collection practices. It was anticipated that legislation would be introduced in the 1971 to 1972 Parliamentary Session (or in any case before the next election). Consultation had already begun with the Departments of Finance and Justice and discussions with the Department of 71 Insurance had been extensive. It was estimated that this legislative proposal would increase expenditures for the Department of Consumer and Corporate Affairs by $200,000 or by 100%. Pitch presented a Beta2 proposal emphasizing consumer protection and direct intervention in the market in order that regulations could determine the socially acceptable outcome. The idea of an omnibus act, although usually an Alpha position, was adopted here without detracting from the clear Beta perspective of the substantive portions of the act proposed by Pitch. The memorandum never got to the Cabinet as Basford was moved from the Department. In January 1972 the Honorable Robert Andras took over as Minister and another, but very similar, Cabinet document was drafted-(27) This time the document was co-sponsored by the Department of Finance and the Department of Consumer and Corporate Affairs. This, too, never reached Cabinet, as Parliament dissolved was February 16, 1972. A general election was held and the Liberals were returned but with a minority government. During the third session of the 28th Parliament, the Department of Consumer and Corporate Affairs saw six b i l l successfully through to Royal Assent.(28) A seventh, B i l l C-256, amendment to the proposed Competition Act (to replace the Combines Investigation Act) was introduced but the reaction was swift, strong and negative and i t died on the order paper (Stanbury, 1977). The "Interest and Consumer Credit Act" never even got as far as Cabinet. The most obvious question is "why?". 72 3.1.4. Years of I n a c t i v i t y - perhaps i t w i l l be s t i l l born February 1972 to May 1974 From the end of the 28th Parliament i n February 1972, to May 8, 1974, when another general e l e c t i o n was c a l l e d , the Department of Consumer and Corporate A f f a i r s did not introduce a single b i l l into the House of Commons. S i m i l a r l y , progress on consumer c r e d i t reform l e g i s l a t i o n was slow and hesitant. The 27 month period of the L i b e r a l minority government saw, against a background of changing faces, only tentative and minimal movement i n the area of consumer c r e d i t . In November 1972 a draft Memorandum to Cabinet was prepared but never submitted. This memo was seen to be a follow-up from the July 9, 1970 Cabinet document, although i n fact the 1972 memo dealt only with revisions to the Interest Act. Shortly after t h i s , Mr. Herb Gray was appointed Minister of Consumer and Corporate A f f a i r s , taking over from the Honorable Robert Andras who had been minister for only 10 months.(29) Four months l a t e r , on March 1. 1973, Mr. Michael P i t f i e l d was named Deputy Minister. He took over from Gordon Osbaldeston who had held the pos i t i o n for exactly one year. Therefore, 1972 produced only one attempt at submitting a Cabinet document, and the appearance of a new Minister and a new Deputy Minister. On July 19, 1973 Cabinet approved, i n p r i n c i p l e , the amendment of section 6 and sections 11 to 13 of the Interest Act. It agreed to postpone any decision on vari a b l e i n t e r e s t rate mortgages (VIRM) and i t 73 authorized that any and a l l l e g i s l a t i o n be drafted only a f t e r appropriate consultations with the Departments of Finance, J u s t i c e and Urban A f f a i r s (to which Mr. Basford had been moved), as well as with the Superintendent I of Insurance, the Bank of Canada and the Department of Consumer and Corporate A f f a i r s . The postponing of any decision on variable i n t e r e s t rate mortgages was s i g n i f i c a n t . Many of the interdepartmental consultations with the Department over the l a s t year or more had concerned VIRM's.(30) Dr. Warren James was very committed to the concept. When the Minister, Herb Gray, was persuaded by his colleagues(31) during Cabinet committee's consideration of t h i s document to withdraw the VIRM provisions, Dr. James walked out of the Cabinet committee meeting i n anger and disgust.(32) The t a l l y for the year 1973 can only be registered as p a r t i a l success. The exclusion of VIRM was seen as a very serious defeat within the bureaucracy• On January 14, 1974 the Department of Consumer and Corporate A f f a i r s presented Cabinet with a Working Paper o u t l i n i n g i n more d e t a i l proposed amendments to the Interest Act. A Cabinet order of February 28, 1974 approved the document. Key d e f i n i t i o n s were proposed. The " e f f e c t i v e rate of i n t e r e s t " was to be the rate determined by the a c t u a r i a l equation where the sum of the discounted payment equalled the net p r i n c i p a l sum. The "net p r i n c i p l e sum" was the p r i n c i p a l amount of the mortgage less amounts paid for the benefit of the lender, including such things as l e g a l fees, a p p l i c a t i o n fees, bonuses, discounts appraisals, 74 r e g i s t r a t i o n , and insurance. Benefits of the lender covered both y i e l d and any items designed to reduce r i s k or increase security. Furthermore, a mortgage contract would have to disclose e f f e c t i v e annual rate of in t e r e s t although the rate could be adjusted downward as a r e s u l t of subsequent knowledge of the absolute quantum of the benefit to the lender. About t h i s time, Michael P i t f i e l d , Deputy Minister, i n i t i a t e d responses from the f i n a n c i a l industry on a number of fundamental points: the need scope and timing of revisions to the Small Loans Act and the Interest Act; the appropriateness of the omnibus versus the incremental approach; understanding of the true nature of competition currently within the industry; lenders versus borrowers r i g h t s ; and the need for uniformity. By March 12, 1974 the Department had completed proposals for "Federal Interest and Credit L e g i s l a t i o n " that was to be released as a "Green Paper".(33) Although t h i s was primarily the work of Warren James, he had consulted closely with Mr- D.M. Humphrys of the Department of Insurance, and had also conferred with Canada Mortgage and Housing Corporation(CMHC). The provinces received an advance copy of the "Green Paper" i n order to prepare for f e d e r a l - p r o v i n c i a l consultations scheduled i n A p r i l . The contents of the "Green Paper" were i n summary form: Purpose: -to abandon many of the ancient prejudices about i n t e r e s t , i n t e r e s t rates, and c r e d i t and to approach c r e d i t r a t i o n a l l y . 75 -to engage in close co-operation between federal and provincial government especially in the areas of constitutional uncertainty and shared jurisdiction. -to clearly recognize the mutual responsibilities of a l l parties involved in credit transactions. -to keep pace with advances in the technology of money transfers and instutitional changes. This was an attempt to revise the Interest Act in the following areas: -disclosure -protection to a l l forms of credit -prepayment of mortgages -credit/interest calculation -usurious transactions -treatment of the poor Substantive recommendations for ; Section 6 included: requirement for disclosure for effective rate of interest, broadly defined; and specified computational methods for calculating interest. Substantive recommendations for Section 4 included: provision for uniform disclosure of effective annual credit rates and how the amount was derived; and coverage of interest on revolving charge accounts, credit card, and statement of accounts. It is doubtful whether there is anything to be gained by maintaining special regulations applying only to the banks.(34) Generally i t was recommended that: -the effective annual rate of interest shall be disclosed whenever any rate of return is offered in an advertisement, 76 prospectus, or other representation to the public, or whenever any limitation or condition of interest is put on saving deposits or saving certificates. Daily interest rate is suggested as the ideal method of interest accrual; -the rule of 78's (35) be abandoned and that a prepayment and late penalty of no more that 1% be recommended as "reasonable" for the "majority of cases"; -a sliding scale of penalties for mortgage prepayment, when the date of the original mortgage is applicable; and -when the demand by a mortgagee for prepayment at the end of a term that is less than the amortization period, that the amount of the mortgage repayable is less six months interest. New regulatory mechanisms to deal with specific problems associated with borrowing and lending included the following: -no usurious lending rates w i l l be estabished but legislation should allow courts to reopen and revise credit contracts where cost is not commensurate with risk. The onus of proof is to be on the lender; -except for specified exemptions money lenders and pawnbrokers w i l l be registered and licenced and required to f u l l f i l l reporting obligations; -licencing requirements w i l l include discounting anticipated receipts -exemptions w i l l include banks, those licenced under the Small Loans Act or provincial government agencies and, trust loan and mortgage companies. 77 Small Loan Act amendment alternatives were set out along with a discussion of the trade-offs between freemarket deregulation versus protection. The alternatives listed were discussed. -abolition of the loan ceiling -keeping ceilings off loans less than $1000. -adjusting rates so that loans greater than $1,500 cost between 1 1/2 -2% per month. No recommendation among these alternatives was offered. There was a vague recommendation for consideration of a voluntary loan insurance scheme created by premiums payable by the lenders on the basis of total consumer loans made. It was acknowledged that the scheme would have to have government support and many of the mechanical details would have to be worked out. Thus, only amendments to the Interest Act were covered by the "Green Paper". The approach was Beta, and the proposed changes were minor, incremental and mainly in the area of disclosure and unfair terms of credit contracts. In the United States, 1972 and 1973 were not years of inactivity. On December 31, 1972 the National Commission on Consumer Finance (1972), after three years of study, issued i t s Report on Consumer Credit in the United States. The Report contained 100 recommendations to improve consumer credit legislation. The Commission approached i t s task from two perspectives. One was a structural/economic perspective where the concern was with restraint of trade, barrriers to entry, and economies of scale. The big question was "Is there sufficient credit?". The second was a 78 consumer protection perspective where concerns were with information disclosure and unfair transactions. Here the big question was "Can consumers make the best choices themselves?". From the nine-member Commission there were five dissenting statements, four of the five objecting to the recommendation to raise interest rate ceilings. Reasons, however, differed. The very obvious lack of agreement among commissioners was blamed on the time pressures brought on by the ending of the 92nd Congress, which necessitated the substantial 1 involvement and influence of Commission staff.(36) The recommendations covered a very wide range of credit related issues, most of which were not subject to disagreement•(37) Then, in November of 1973, the United States National Conference of Commissioners on Uniform State Laws, Committee on Uniform Consumer Credit Code issued a "Tentative Final Draft". This document discussed amendments to the original 1968 Uniform Consumer Credit Code (U3C) in light of practical experience and changing trends, for example, credit cards and recent U.S. court decisions. It recommended: revisable ceilings in a step structure that stipulated maximum allowable interest rates on consumer loans; licencing of a l l lenders dispite the implications for reduced ease of entry to the industry; and action on the extensive 20 year problem associated with consumer sales credit and holders-in-due-course.(38) Thus, as the United States moved to improve on i t s 1968 consumer credit legislation, the Department of Consumer and Corporate Affairs in Canada slowly moved over the course of 27 months to the preparation of a "Green Paper" on "Federal Interest and Credit Legislation". This was a 79 paper that posited many broad philosophical objectives, such as abandoning prejudice, engaging i n co-operative f e d e r a l - p r o v i n c i a l action and keeping current with changing technology, but that o f f e r r e d few s p e c i f i c recommendations and suggested very l i t t l e i n the way of al t e r n a t i v e policy positions.(39) 3.1.5. Fast Changes - sharp kicking, the pregnancy i s obvious June 1974 to December 1974 The c a l l i n g of a general federal e l e c t i o n thrust the consumer cr e d i t issue back into the public forum. Reform cr e d i t l e g i s l a t i o n switched from an undeveloped discussion document issued from within the bureaucracy to a f u l l blown L i b e r a l Party platform policy used to garner votes. This move set a new course for c r e d i t l e g i s l a t i o n i n Canada-On June 24, 1974 the Prime Minister declared that the proposed "Green Paper" on "Federal Interest and Credit L e g i s l a t i o n " would be adopted as government policy and would be issued as a "White Paper" to form part of the L i b e r a l Party e l e c t i o n platform. And so i t was that the "Green Paper" turned "White". During the course of the i r campaign the L i b e r a l s promised: l e g i s l a t i o n requiring disclosure of the e f f e c t i v e rate of i n t e r e s t i n a l l i n t e r e s t bearing transactions (and) l e g i s l a t i o n allowing the buyer to pay o f f r e s i d e n t i a l mortgages during the f i r s t 5 years of the agreement without excessive penalties. ...plans for a low income insurance plan to help' e s t a b l i s h c r e d i t for low-income , steadily employed wage earners. 80 ...consumer-help storefront o f f i c e s the number of which would be increased to 20 by the end of 1974.(Gray, 1976) July 8th saw a L i b e r a l Government re-elected with a cle a r majority of 141 seats to the Conservative Party's 95. Exactly one month l a t e r Andre Ouellet was named Minister of Consumer and Corporate A f f a i r s . At the same time, Dr. Warren James resigned as Director of Consumer Research. There was no immediate replacement and Mr. E.C. Savage served as Acting Director. The following month, on September 30th, 1974, the Speech from.the Throne promised amendments to the Interest Act aimed at e s t a b l i s h i n g a standard system of disclosure of i n t e r e s t rates for borrowers and depositors. To help home buyers... -better disclosure provisions for the true i n t e r e s t rate of mortgages To protect consumers ... - a comprehensive overhaul of consumer c r e d i t l e g i s l a t i o n , i n c l u d i n g disclosure by a l l lending i n s t i t u t i o n s at e f f e c t i v e rates of i n t e r e s t on a l l loans. The Honorable Andre* Ouellet, anxious to move on reforming c r e d i t l e g i s l a t i o n , reopened discussion on the merits of i n t e r e s t rate c e i l i n g s . While the bureaucrats continued the debate within the Department, and with other federal department (Justice, Finance and CMHC), Ouellet (1974) started to speak out about proposals dealing with amendments to the Interest Act.(40) Many things were happening at once, and a f u l l speech on "The Introduction of the Interest Act Amendments", dated November 29, 1974 was never delivered. Instead, discussions with industry on the idea of a comprehensive consumer c r e d i t b i l l were begun. Mr. Clare Bolger, Acting Deputy Minister (Consumer A f f a i r s ) , met with representatives of the Canadian L i f e Insurance Association, the Trust 81 Companies Association of Canada, the Canadian Bankers Association and the FCSFC, as well as with CMHC No agreement on the nature of rate d i s c l o s u r e was reached through these meetings.(41) One month l a t e r , however, the Department of Consumer and Corporate A f f a i r s decided that the proposed amendments to the Interest Act, as approved by Cabinet on February 24, 1974 would be incorporated into the o v e r a l l l e g i s l a t i o n dealing with the Small Loans Act and the rest of the Interest Act (not j u s t sections 6 and 11 to 13). The action had swung back to an omnibus approach. Ouellet had shown that he intented to lead a concerted e f f o r t to see the b i r t h of comprehensive consumer c r e d i t l e g i s l a t i o n - a new phase had begun. 3.2 B i r t h - 1975 to October 1976 3.2.1. New Leader, New Team - prenatal preparation January 1975 to December 1975 The year 1975 saw a complete turn of events. A new consumer c r e d i t reform advocate emerged i n the person of Andre Ouellet. M. Ouellet, together with a new team of bureacrats (42), began a fresh round of consultations with a l l interested p a r t i e s . By the end of 1975 the i n t e r n a l and external consultation process had persuaded the Department to r a d i c a l l y change i t s p o l i c y approach. 82 For four successive months the Honorable Andre Ouellet spoke p u b l i c a l l y about the imminent introduction of l e g i s l a t i o n i n the area of consumer c r e d i t . On January 28th he talked about a series of l e g i s l a t i v e amendments to be introduced within 6 to 9 weeks.(43) This l e g i s l a t i o n would: -prevent undue e x p l o i t a t i o n of c r e d i t and e s p e c i a l l y c r e d i t cards; -provide for c r e d i t information disclosure; -provide for consumer class action; - prevent unsavory c r e d i t c o l l e c t i o n p r a c t i s e s ; -ensure accuracy i n c r e d i t b i l l i n g ; and -amend the Bankruptcy Act. In an address to the National Anti-Poverty Organization on March 18, 1975, Ouellet said that he intended to release proposals for a "Borrowers Protection Act"(BPA) within a month. In March 1975, the i n t e r n a l Department of Consumer and Corporate A f f a i r s ' Task Force on Consumer Credit (44) issued i t s report. I t recommended, i n p r i n c i p l e , l e g i s l a t i o n to: 1. e s t a b l i s h the e f f e c t i v e annual rate of i n t e r e s t as the u n i v e r s a l basis of computation and disclosure i n a l l consumer c r e d i t transactions; 2. reduce or eliminate practices whereby i n t e r e s t charges may not be i n accordance with disclosed i n t e r e s t rates; 3. provide protection for consumers against unreasonable penalties on late payments or prepayment of a l l loans, including mortgages. 4. enable courts to correct contracts which include i n t e r e s t charges, excessive under the circumstances; 83 5. ensure that a l l money lenders are licenced by appropriate authorities so abuses such as loansharking can be detected and punished; 6. discourage lenders from requiring homeowners to a pay large amount of principle at the end of a mortgage; 7. make more dollars available for cash loans of less than $1,500; and 8. reduce certain undesirable practices in the operation of credit card systems. It also recommended that the Department study an integrated scheme to f a c i l i t a t e access to credit by certain classes of low income borrowers.(45) Then on April 28th 1975, Ouellet (1975), outlined in a speech to the Junior Chamber of Commerce in Rimouski, Quebec, the major ingredients of the BPA. A uniform system of disclosure and credit definition and licencing scheme and provisions against loansharking were discussed. So as a fi n a l step we hope to bring about a standard system of disclosure of annual interest rates. This system w i l l apply to every lender for the protection of every borrower . . . and to every transactidn ranging from mortgages to finance company loans to r e t a i l credit transactions where the consumer winds up owing money. Acting Deputy Minister Clare Bolger was alarmed at Ouellet's boldness and cautioned against such hasty and comprehensive action-Ouellet was undeterred. 84 Then on June 5, 1975 Cabinet approved a Department of Consumer and Corporate Affairs memorandum dated May 29, 1975. It proposed a "protectionist" (Beta type) legislation aimed at regulating the individual terms of contract between borrower and lender for transactions of loan and finance companies. Banks, credit unions, caisses populaires and trust companies were excluded from the proposed legislation. Interest rate ceiling were to be retained. The objectives of the legislation were: -to protect borrowers against grossly excessive interest rates; -to enforce disclosure of effective annual rates of interest; and -to protect borrowers who mortgage real estate. Authorization was given to: 1. develop plans to encourage responsible lending institutions, to make loans at reasonable rates to low-income consumers; and to 2. develop legislation as outlined in the ' Green (White) Paper with the following modifications: (a) exclusion of those institutions that are already regulated (banks, credit unions, caisse populaires and trust companies); (b) maintenance of a rate ceiling on cash loans up to $1000 (2% per month on the f i r s t $300 and 1% per month on the loan portion $700-$l,000.); (c) licencing of a l l lenders under the Small Loans Act; (d) provision for a penalty to be paid to the mortgagor i f mortgage renewal is denied and mortgagor has a clear record of good behavior; (e) an unwarranted rate concept whereby a consumer could challenge the appropriateness of the interest rate charged. For rates below 35% the onus of proof would be on the borrower, above 35% the onus reverses and lies with the lender; 85 ( f ) the date the mortgage was o r i g i n a l l y negotiated rather than the mortgage renewal date would be used for the purposes of c a l c u l a t i n g mortgage penalties; and (g) creditors would be required to take substantive action should a c r e d i t dispute a r i s e This proposed l e g i s l a t i o n was not only from the Beta school, i t went further than previous recommendations for " p r o t e c t i o n i s t " l e g i s l a t i o n . By June of 1975 a new bureaucratic team had been assembled to see th i s l e g i s l a t i o n through the House and Senate. On February 19th Dr. S y l v i a Ostry moved from head of S t a t i s t i c s Canada to become Deputy Minister of Consumer and Corporate A f f a i r s . In May, Mr. M.M. Goldberg, f from the Department of J u s t i c e came to Consumer A f f a i r s as a special l e g a l advisor to a s s i s t i n the d r a f t i n g of the proposed Borrowers Prot e c t i o n Act. F i n a l l y , i n June, Dr. John L. Evans, (previously assistant professor of finance i n the faculty of Commerce at the University of B r i t i s h Columbia) , was hired as the Director, of Consumer Research, replacing Dr. Warran James who had r e t i r e d 10 months e a r l i e r . Evans' primary mandate was to prepare an omnibus consumer c r e d i t b i l l for early introduction into the House of Commons. With a new team, a newly-approved Cabinet memorandum, and a consumer c r e d i t reform advocate as Minister, a c t i v i t y i n t e n s i f i e d . Much of that a c t i v i t y involved widespread and simultaneous consultations. As noted i n the Cabinet document of June 1975, consultation had taken place primarily 86 between the Department of Consumer and Corporate Affairs and the Department of Insurance and Canada Mortgage and Housing Corporation. S t i l l v agreement was not unanimous. While complete agreement was anticipated from the consumer sector, i t was expected that the financial community would complain about the added costs and risk obligations. Strong differences of opinion on jurisdiction were already apparent from federal-provincial consultations.(46) In June 1975, two teams of Consumer and Corporate Affairs and Department of Finance o f f i c i a l s were formed.(47) They visited financial institutions across Canada.(48) As well, during July the Minister met with representatives of the Canadian Life Insurance Association, Mutual Life Company, London Life Company, SunLife Company, Prudential Insurance Company, Bank of Nova Scotia, Banque Provinciale, and the Canadian Bankers Association. Then in August a Consumer and Corporate Affairs team visited Nova Scotia, Quebec, Ontario, Alberta and British Columbia. During these consultations the Department stated that i t s major concern was for consumers and that the proposed legislation would cover three areas: protecting consumers against excessive rates; disclosure of interest rates, and provision of certain other consumer rights. Interest was proposed to be broadly defined and calculated actuarially. There would be licencing of a l l credit grantors unwarranted rate provisions, and disclosure and record keeping provisions. A l l transactions and a l l financial institutions would be regulated. 87 Internal reports compiled as a r e s u l t of this i n d u s t r i a l consultation indicated that there was strong opposition to: the a l l i n c l u s i v e d e f i n i t i o n of i n t e r e s t the d e f i n i t i o n of lender; the e f f e c t i v e , as opposed to the nominal rate c a l c u l a t i o n method; the removal of prepayment penalties; and average daily balance c a l c u l a t i o n s On July 30th, d r a f t i n g i n s t r u c t i o n s for what was to be the Borrowers P r o t e c t i o n Act were issued to the Department of J u s t i c e . Consumer and Corporate A f f a i r s was predicting an early f a l l 1975 introduction of the new l e g i s l a t i o n into Parliament. Occurring simultaneously with these "outside" discussions with the provinces and industry, were " i n t e r n a l " discussions and consulations. Dr. Evans wrote a lengthy memo to Dr. S y l v i a Ostry on July 15th, arguing the merits of removing the i n t e r e s t rate c e i l i n g s . Dr- Ostry, meanwhile, had arranged for Mr. Derek Hyde, Assistant Secretary, Consumer Credit Branch, Department of P r i c e s and Consumer Prot e c t i o n of the United Kingdom to v i s i t Ottawa and to t a l k with Consumer Research s t a f f about the draft BP A l e g i s l a t i o n i n l i g h t of his experience with the B r i t i s h Consumer Credit Code (1974).(Good, 1974) Several d e f i c i e n c i e s in the current draft l e g i s l a t i o n were discovered. The r e s u l t i n g decision was to take a more glo b a l , all-embracing look at c r e d i t , to develop model c r e d i t l e g i s l a t i o n , and to deal with the j u r i s d i c t i o n a l problems separately-This would mean lengthy negotiations with the provinces as to implementation, administration and enforcement. It was f e l t that t h i s approach would mean that Canada would have complete and e f f e c t i v e consumer cr e d i t l e g i s l a t i o n . Co-operation from the provinces on this approach was f e l t to be a t t a i n a b l e . 88 The resulting recommendations included: 1. that licencing provisions be expanded to include vendor credit, 2. that the unwarranted rate concept be revised to eliminate an explicit criterion rate, and instead an implicit criterion rate set at zero percent be adopted by providing that; -any lending contract is re-openable by the courts, and -the burden of proof as to whether or not a particular lending transaction is warranted is always on the lender,; 3. that a l l interest rate ceiling provisions be eliminated.(49) The position of the Department had switched, from the Beta approach approved in a Cabinet Memorandum of June 1975, to an Alpha approach the following month. The drafting of a new memorandum to Cabinet to incorporate major changes in the legislation resulting from a l l interdepartmental consulations was in progress by August of 1975.(50) The Department realized that this redrafting would mean a delay in the introduction of of the legislation in order to allow for further consultation and for joint federal-provincial action.(51) On November 7,1975 the f i r s t f u l l scale interdepartmental committee met to discuss the "Borrowers and Depositors Protection Act".(52) Areas of progress were minimal, while the points s t i l l under discussion were substantive and numerous. Generally, there was dissatisfaction on the part of the Departments consulted that there were too many provisions 89 l e f t to regulations- More s p e c i f i c a l l y , there was disagreement on app l i c a t i o n of the Act, d e f i n i t i o n of interest and lender, the need for l i c e n c i n g , appropriate disclosure for future receipts the form and requirement f o r notice of changing rate and the method of rate c a l c u l a t i o n . The interdepartmental forum was not the only one where the Department received c r i t i c i s m and opposition. P r o v i n c i a l opposition was growing. In a memo to the Deputy Minister, dated September 3, 1975, Mr. Goldberg cautioned against the early introduction of BDPA, holding that i t would be p o l i t i c a l l y disasterous to move without the f u l l co-operation of the provinces. The next month the Consumer Research Council issued a report e n t i t l e d , "Federal P r o v i n c i a l Relations i n the F i e l d of Consumer Pro t e c t i o n " , by Louis J Romero (1975), professor of law at the University of Saskatchewan. Romero noted increasing competition between the two le v e l s of government i n the race to pass consumer l e g i s l a t i o n . As more l e g i s l a t i o n was passed both fe d e r a l l y and p r o v i n c i a l l y , the areas l e f t for l e g i s l a t i o n became fraught with problems of c o n s t i t u t i o n a l j u r i s d i c t i o n and overlapping administration and enforcement. After tracing the history of f e d e r a l - p r o v i n c i a l relationships i n the area of consumer l e g i s l a t i o n , Romero proposed a plan for reform, "New Machinery fo r Federal P r o v i n c i a l Relations".(53) With the caveat that a t t i t u d e , rather than s t r u c t u r a l or procedural changes, were more determinative of co-operation i n decision-making, Romero suggested one possible format for that "New Machinery". (54) 90 Certainly words of caution had been dispensed, both from within the bureaucracy and from outside government circles. Subsequent events proved them prophetic. On December l v 1975 a Federal-Provincial Conference of Ministers of Consumer and Corporate Affairs met in Ottawa. The preamble to the conference emphasized the importance of the federal government "as partners" with the provinces, reasserting their influence so that consumers would be protected against "the powers of the big institutions". The purpose of the meeting was to set out the federal proposals, receive provincial reaction and to arrange for follow-up in "two v i t a l l y important aspects of the legislation: the cooperative administration of the licencing and inspection provisions of the legislation, and in the appropriate harmonizing of disclosure requirements."(55) The provincies were not happy with either the substance of the legislation or the federal goverment's approach to securing i t s passage. This response was not unanticipated. Before the Conference, and based on input they had already received, the federal government prepared responses to a number of issues the most salient being the need for the legislation, the consultative process, jurisdictional rights, the unwarranted rate and licencing provisions. It was noted in the course of the proceedings that in the face of possible duplicaton or contradiction between federal and provincial disclosure regulation, "We cannot 'expect' the provinces to do anything we hope they would change their own statutes or regulations."(emphasis not added). 91 In the midst of these very fundamental changes and intensive consultations, several old issues resurfaced and were blended into the policy process. The f i r s t issue was that of loan sharking. As far back as 1968, Ron Basford proposed that legislation be drafted to curb loan sharking. More than five years later after intensive study into the problem by the special loan shark squad of the Montreal Urban Police, Messrs. Marchessault and Legault of that squad met with Department officials.(56) Marchessault convinced the Department of Consumer and Corporate Affairs that not only was loan sharking an insidious and antisocial activity that caused widespread problems, but that the Department could, by changing the law to establish a "criminal" rate of interest and criminal sanctions for abusive collection techniques, curb the unsavory operations of the loan shark. Marchessault recommended that a criminal rate of interest be established at approximately eight times prime and that penalties imposed by the lender must not exceed 10% over the effective annual rate of any loan. A v i s i t by the Department of Consumer and Corporate Affairs o f f i c i a l s to the offices of the Montreal Urban Police convinced the Department that the law could and should be strengthened to curb loansharking activity. Variable interest rate mortgages (VIRM), rejected by the Cabinet in 1973, were again recommended by the Department of Finance at the November 9, 1975 interdepartmental meeting. M. Ouellet was not willing to have his Department introduce VIRM, but said that he would be amenable to having another ministry introduce the concept in a separate piece of legislation. Later the same month, following a letter dated November 18, 1975 from the Honorable Barney Danson, Minister of Urban Affairs, to 92 Andre Ouellet, S y l v i a Ostry wrote to M. Ouellet recommending the i n c l u s i o n of VIRM i n the BDPA. She noted that VIRM were, i n e f f e c t , c u r r e n t l y being offered.(57) Thus, VIRM were again on the agenda. The t h i r d concern was that of the c o n s t i t u t i o n a l i t y of the BDPA. In December, the Department of Justice cautioned that regulations or provisions dealing with terms of contract must be phrased i n r e l a t i o n to i n t e r e s t i n order to be v a l i d federal l e g i s l a t i o n . ( 5 8 ) The fourth item was a matter of i n t e r n a l Departmental organization and d i r e c t i o n . In July of 1971, Ron Basford raised the question of the need to re-evaluate the goals and a c t i v i t i e s of the Consumer A f f a i r s side of the Department. No action resulted from t h i s i n i t i a t i v e . So the Minister took matters into his own hands. He hired outside consultants. In November 1974, the Canada Consulting Group completed a study of the Department of Consumer and Corporate A f f a i r s . It recognized the need for a s h i f t i n emphasis "from developing consumer protection l e g i s l a t i o n to f i n d i n g solutions and representing consumer i n t e r e s t s i n a wide range of problem areas". This was the beginning of a second attempt to look at d i r e c t i o n for the Department. Then, i n December of 1975, Mr-. Jonathon Cloud was appointed Acting Assistant Director of the Consumer Research Branch. One of Mr. Cloud's r e s p o n s i b i l i t i e s was to prepare a " B r i e f i n g Book" for the Assistant Deputy Minister. This book was to assess the current organizational and program plans along with recommendations for d i r e c t i o n s for future development. The issue of i n t e r n a l structure and d i r e c t i o n was again a concern. 93 Added to these recurring and f a m i l i a r problems, loansharking, VIRM, c o n s t i t u t i o n a l i t y , i n t e r n a l Departmental d i r e c t i o n and organization, were three new l e g i s l a t i v e i n i t i a t i v e s . A l l arose out of and reinforced general concern for c r e d i t related issues. In September 1974, ju s t a f t e r the Li b e r a l s were returned to power, Finance Minister John Turner, i n preparation for the d i e n n i a l l e g i s l a t i v e review, c a l l e d for b r i e f s on changes to the Bank Act. Then on May 5, 1975, Andre Ouellet introduced into the House of Commons, for study by the government, B i l l C-60, "An Act respecting Bankruptcy". This "exposure" b i l l proposed a new p o s i t i o n of "bankruptcy administrator". The administrator could authorize the acceptance of proposals from overcommitted debtors for eit h e r an extension or an amalgamation of debt obligations that would be binding on a l l c r e d i t o r s . Then i n November of 1975, the Honorable Donald S. Macdonald, Minister of Finance, tabled i n the House of Commons, a p o l i c y statement c a l l e d "Attack on I n f l a t i o n : a Program of National Action".(59) Price and wage controls were subsequently enacted (Maslove amd Swimmer, 1980). By the end of 1975 l e g i s l a t i v e reform i n the area of consumer c r e d i t was a new game. There was a new name, Borrowers and Depositors Protection Act; a new mentor, Andre Ouellet; a new team of supportive departmental bureaucrats, Dr. J.L. Evans, Mr. M.M. Goldberg, Mr. J.K. Mann, and Mr. J . Cloud; a supportive Deputy Minister, Dr. Sy l v i a Ostry; a new manadate for an omnibus Alpha approach; and a new environment for proposed federal l e g i s l a t i o n r e f l e c t i n g public concern for high i n f l a t i o n and i n t e r e s t rates. The old issues of loan sharking, variable i n t e r e s t rate mortgages, c o n s t i t u t i o n a l i t y and the role of the Department were 94 re injected into the process while, i n d u s t r i a l , interdepartmental and p r o v i n c i a l consultations continued with increased i n t e n s i t y but without enhanced resolut ion. Thus i n the span of less than one year, there was a fundamental change in policy approach from Beta to Alpha p o s i t i o n , an increase i n the number of substantive issues to be addressed and a concerted e f f o r t to consult simultaneously with other departments, the provinces and industry. 3.2.2. The Race to be Ready - genetic engineering January 1976 to October 1976 The rapid changes and plethora of consultations and a c t i v i t i e s that characterized 1975 were repeated during the f i r s t 10 months of 1976. There were differences though, as the rate of change accelerated and the number of changes increased. The welter of consultations, primarily with the provinces and with other federal government departments, resulted in a number of substantive and technical amendments in the draft b i l l . The Department had three d i f f e r e n t Ministers and a new Assistant Deputy Minister during t h i s 10 month i n t e r v a l . Added to t h i s were changes i n personnel and organization at the lower l e v e l s Two things, however, did not change. The Alpha approach to consumer cr e d i t l e g i s l a t i o n remained firm, and the timetable for a 1976 introduction of omnibus consumer cr e d i t l e g i s l a t i o n remained f i x e d . The period ended with a s o l i d i f i c a t i o n of p r o v i n c i a l opposition and an increase in the number of arenas i n which cre d i t related issues were being discussed. 95 By January 14, 1976 Dr. John Evans, Director of Consumer Research Branch had prepared a "Position paper on the Borrowers and Depositors P r o t e c t i o n Act". This paper set out very c l e a r l y that, in the opinion of the Department of Consumer and Corporate A f f a i r s , a competitive c r e d i t market would provide the most s o c i a l l y desirable outcome. Any imperfections i n c r e d i t markets were caused by information inadequacies and govermnent action was therefore appropriate only in so far as i t would redress information f a i l u r e s . The position paper stated: Any consumer protection l e g i s l a t i o n may be thought to have one or both of the following functions: to inform and to protect. In a free and competitive market environment, adequate consumer protection could be achieved through complete and accurate information alone. Consumers action in the market place would then ensure that they receive optimal treatment. However, markets are not f u l l y competitive and consumers are not capable of obtaining or digesting the mass of information that i s required to make wise decisions on the myriad of products which they purchase- The vast amounts of information confronting consumers (much of i t i r r e l e v a n t ) frequently leads to "information overload", and impulse buying behavior. In s i t u a t i o n s such as t h i s , i t i s appropriate for the government to respond by e s t a b l i s h i n g "rules of the game" to f a c i l i t a t e consumer decision making. In the f i e l d of consumer c r e d i t , t h i s e n t a i l s s p e c i f i c a t i o n of that provision, regulation of the nature and content of standard agreements and provision of a means for ensuring compliance by providing e f f e c t i v e penalties and remedies i n s i t u a t i o n s where v i o l a t i o n s occur. Five objectives for federal intervention were l i s t e d : l.The increase and the improvement of the flow of relevant and related information, that i s accurate disclosure i n every phase of lending ; 96 2. The elimination of unnecessary complexities i n the c r e d i t f i e l d , that i s : develop a standard notion of c r e d i t from borrowers perspective and require.a standard disclosure; 3. The reduction of the incidence of excessive c r e d i t charge rates, that i s : enhanced competition and d e f i n i t i o n of an unwarranted rate and a criminal rate; ' 4. The r a t i o n a l i z a t i o n of federal l e g i s l a t i o n and the creation of a uniform high standard of protection for Canadian borrowers, that i s up-to-date federal c r e d i t l e g i s l a t i o n ; and 5. The establishment of a national data base on the extension and use of consumer c r e d i t , that i s , require records and reports by lenders. Eight items were designated as "key issues- They included: 1. Establishment of an unwarranted rate; 2. Establishment of a maximum (or Criminal) rate - suggested as 7 times the prime rate; 3. Licensing and the designation of an Administrator; 4. Disclosure ( a l l aspects of a c r e d i t transaction); 5. No D i s t i n c t i o n between Vendor and Lender Credit; 6. Removal of Interest Rate C e i l i n g s ; 7. Mortgage Provisions (prepayment, VIRM); and 8. Application of the law to a l l lenders and a l l non-corporate borrowers. On January 16th 1976, Dr. S y l v i a Ostry chaired the Federal-P r o v i n c i a l Conference held i n Ottawa. Here o f f i c i a l s reviewed the 97 "Orange Book", a detailed section-by-section review of the BDPA that included notes on the relevant p r o v i n c i a l l e g i s l a t i o n . The fede r a l government presented a number of substantive changes that were made as a resu l t of December 1975 consultations. The suggested changes were very s p e c i f i c i n the area of mortgages, l e s s s p e c i f i c i n the area of d i r e c t s o l i c i t a t i o n transactions and abusive c o l l e c t i o n p r a c t i c e s , and del i b e r a t e l y nonspecific ( l e f t to regulation) i n the case of d e f i n i t i o n of "net p r i n c i p a l sum", "deposit", c a l c u l a t i o n of c r e d i t charge and deposit i n t e r e s t , and information disclosure (contractual and i n ad v e r t i s i n g ) . Time pressure and p r o v i n c i a l opposition to proceeding with BDPA were evident at this meeting. In her opening remarks Dr. Ostry said that she regretted, ...that i t was necessary to postpone this meeting by one week and that the documentation for the meeting was not ava i l a b l e e a r l i e r . . . . I apologize for the lat e a v a i l a b i l i t y of this document, and I suggest that a f t e r we have reviewed and f i n a l i z e d the agenda, we break u n t i l coffee time to give you an opportunity to review and digest the document.(60) These remarks were followed by a declaration from the B r i t i s h Columbia delegation lead by Mr. W.A.W. Neilson (the Deputy Minister of Consumer and Corporate A f f a i r s ) , that B.C. was not prepared to accept the feder a l government's j u r i s d i c t i o n (61), and that the proper procedure would be to f i r s t i d e n t i f y the issues and next to deliberate on who should e f f e c t a solu t i o n . Neilson's position was not adopted and the meeting continued to discuss the federal goverment proposals. 98 One week l a t e r , Ostry wrote to the Minister, Mr. Andre Ouellet, and suggested modifications to the BDPA, to take account of the major areas of p r o v i n c i a l concern. These were; 1.licencing and administration, 2. d u p l i c a t i o n and administrative overlap, and 3. c o n s t i t u t i o n a l j u r i s d i c t i o n . The o v e r a l l negotiating p o s i t i o n of the federal government was outlined i n the memo. It i s important to note that i f we do not hold firm on the e s s e n t i a l aspects of the proposed B i l l : e.g. the basic administration, the unwarranted rate and disclosure, the B i l l w i l l tend to collapse and w i l l be of questionable value. Further, i f we do not move with dispatch, the provinces w i l l move to adopt the best of our proposals and remove much of the rat i o n a l e for our B i l l . We know that B.C., Quebec and Nova Scotia are already moving i n this direction.(62) The federal proposals were incorporated into a revised " P o s i t i o n Paper on the Borrowers and Depositors Protection Act", dated February 5, 1976. The objectives remained the same as those a r t i c u a l t e d i n the January 16th version, but the means had changed as a r e s u l t of consulations. The following changes were recommended: 1. to abandon l i c e n c i n g provisions; 2. to reduce and r e d i r e c t the duties and powers of the Administrator, 3. to delete proposals respecting d i r e c t s o l i s i t a t i o h ; 4. to modify the d e f i n i t i o n of "borrower" so as to exclude borrowers who receive loans for the purpose of purchasing goods for resale (trade c r e d i t ) or for other business uses; 5. to modify the d e f i n i t i o n of " c r e d i t charge" to e x p l i c i t l y include a reference to assignment of future benefits; 6. to provide for a review of the act every 10 years; 99 7. to modify procedures for crediting payments to a borrower's account, so that the payment applies according to the order of purchasing, the oldest debt eliminated f i r s t ; 8. to delete the minimum term for a fixed-rate mortgage; 9. to change the index for adjustments in credit charge rate in variable rate transactions to reflect the lender's cost of funds rather then a lending rate; 10. to change the definition of a mortgage to specifically include "hypothec"; 11. to change the day a payment is made to the day of receipt by lender; 12. to modify the penalty for late payment so that there is a $2 ceiling; and 13. to modify the definition of deposit to exclude certificates or other instruments for which issuing institutions are liable. Having conceded these points i t was stated that a reconciliation between federal and provincial position should be possible. ...We believe that the modified proposals now before you represent the best available approach, given a cooperative environment, to the attainment of the specified objectives. While there is room for additional refinement with regard to specific details and there w i l l certainly be thorough and detailed consultations concerning the regulations under, and administration of the Act, the following fundamental features must be maintained: 1. the unwarranted rate 2. the maximum rate 3. effective administration 4. disclosure at a l l phases of the lending transaction 5. mortgage provisions 100 The r e c o n c i l i a t i o n that was hoped for did not m a t e r i a l i z e . On February 16th, j u s t one month af t e r t h e i r l a s t meeting, the Federal and P r o v i n c i a l Deputy Ministers of Consumer A f f a i r s met i n Toronto. Mr. Sid Handlemen, Ontario Minister of the Department of Consumer and Commercial Relations chaired the meeting. Andre Ouellet heralded the imminent introduction of BDPA. The government of B r i t i s h Columbia was quick to reply. The Government of B.C. took the p o s i t i o n that a continuing technical committee of senior o f f i c i a l s should be established to communicate with one another and to meet re g u l a r l y on questions of importance to federal and p r o v i n c i a l governments on consumer matters. (63) It warned the federal government not to go beyond i t s j u r i s d i c t i o n i n the matter of c r e d i t l e g i s l a t i o n . Rafe Mair, the B.C. Minister of Consumer A f f a i r s challenged Ottawa to exercise i t s leadership and to, - h i t the banks - they have 70% of the consumer c r e d i t market - h i t the tax rebater - h i t the cheque discounters ' - h i t the loansharks (64) As t h i s p r o v i n c i a l - f e d e r a l dialogue was taking place, there were a number of changes occurring within the federal Department of Consumer and Corporate A f f a i r s . In January, the Consumer Research Branch put forward an analysis of i t s operations, with proposals for change to a more pro-active managerial research model based on a broad (but as yet unarticualted) philosophy of the the consumer i n t e r e s t . In February, the P o l i c y Analysis Group was reorganized and then disbanded before the month was out. Changes within the Branch, as proposed i n January, were s t i l l under discussion. Then on February 6th, Michael McCabe was named Assistant Deputy Minister, Consumer A f f a i r s . He replaced Mr. Clare 101 Bolger. Also i n February, the c r e d i t l e g i s l a t i o n project acquired the f u l l time services of Mr. Jean-Pierre Toupin, who was previously associated with the P l i c y Analysis Group. A l l the while, the Department was targeting i t s a c t i v i t i e s to introduction of the l e g i s l a t i o n into the House of Commons early i n 1976. (65) By March 4th, as time was running out for introduction before June. An o p t i m i s t i c and a pessimistic c r i t i c a l path for the l e g i s l a t i v e progress of BDPA was charted. The opt i m i s t i c view was premised on the a b i l i t y of the Minister, Andre" Ouellet, to negotiate an arrangement with the Opposition p a r t i e s to l i m i t time the B i l l would be discussed i n the Standing Committee of the House to four weeks i n order to enable passage by June 30th. The pessimistic view had the B i l l dying on the order paper i n the summer to be revised and to go through lengthy committee hearings i n the f a l l . A t i g h t l e g i s l a t i v e timetable necessitated frequent interdepartmental meetings. They were held monthly i n the f i r s t quarter of 1976.(66) Often several of the departments would confer on s p e c i f i c points between the f u l l scale monthly meetings. By February, i t was clear that there was major interdepartmental disagreement over the unwarranted rate concept, the scope of the regulatory powers under the act, and the duties and powers of the administrator. On March 4th, as a r e s u l t of strong representation from the Department of Finance, the following changes were made to the d r a f t form of the Borrowers and Depositors Protection Act: -trade c r e d i t was excluded i n the d e f i n i t i o n of borrower; 102 -the l i s t of factors to be considered by the court in determining i f a rate is warranted was expanded and left very open ended; and -information required by the Administrator could be submitted through other public regulatory and/or administrative authorities. Other provisions were strenghtened: -mortgage insurance was specifically included as a charge in calculating the credit charge rate; -prepayment of mortgages provision ensured that the prepayment protection of variabble rate mortgages was not circumvented by lenders by simply writing short-term fixed rate mortgages; -lenders were prevented from applying an increased credit charge rate to balances outstanding prior to that increase; and -lenders must prove the date of payment in case of dispute. (67) These concessions allowed work to begin on a new 'memorandum to Cabinet. On April 8th such a memorandum was signed by Bryce Mackasey.(68) It represented extensive revisions to the Cabinet document of May 29, 1975 (approved June 5, 1975). The following provisions were recommended for inclusion in the Act: 1. that a l l credit transactions be included in the scope of the Act; 2. that lenders include discounters and that a l l lenders be required to make available s t a t i s t i c a l data; 3. that i t be an offence to f a i l to keep records; 4. that a l l terms and conditions concerning credit charges for deposit and for lending transaction be fully disclosed; 5. that advertising of credit related information and of information relating to deposit interest be regulated; 103 6. that courts be empowered to re-open any credit transaction and place the onus on the lender to prove rate is warranted; 7. that there be prepayment without penalty on a l l non-mortgage loans; 8. that courts be empowered to grant relief to the borrower whenever the rate in a lending transaction has been held to be unwarranted; 9. that the criminal rate be 7 times prime; 10. that there be substantial penalties for offenders; 11. that variable lending transactions be permitted; 12. that the original date of a mortgage amortization over 5 years, but with a 5 year term, or less, be the date used in any prepayment after the 5 years, so that each renewal of a residential mortgage i s not subject to treatment as i f i t were a f i r s t time mortgage; 13. that individuals who assume a mortgage held i n i t i a l l y by a corporation have the same rights of prepayment as other individual mortgagors; 14. that credit charges be calculated according to regulations; 15. that interest on deposits be calculated and payable according to regulation; 16. the the Interest Act, Small Loans Act, and the Pawnbrokers Act be repealed; 17. that there be a uniform manner of charging interest on judgment debts 18. that there be provision for the charging of interest and for the rate of accrual in situations where no interest rate is mentioned; and 19. that there be penalties for violations of the Act. 104 It looked l i k e June passage may have been be possible, but unforeseen events changed the course of the Borrowers and Depositors Protection Act. On A p r i l 9th, the Honorable Andre" Ouellet was charged with contempt of court i n the A t l a n t i c Sugar Refining case. On May 19, 1976 Mr. Bryce Mackasey took over as Minister of Consumer and Corporate A f f a i r s and as Post Master General. The same day Mr. Neilson, Deputy Minister of Consumer A f a i r s i n B r i t i s h Columbia wrote to Dr. Sylvia Ostry urging that the purpose of the scheduled A p r i l 27th meeting be changed. He argued that i t would have a very detrimental e f f e c t on the course of f e d e r a l - p r o v i n c i a l r e l a t i o n s i n consumer a f f a i r s i f j u r i s d i c t i o n a l questions were not to be addressed before the regulations to BDPA were discussed. The Consumer Credit Subcommittee of the Committee of Federal and P r o v i n c i a l Deputy Minister of Consumer and Corporate A f f a i r s met on A p r i l 27, 1976. The minutes of the meeting, chaired by Mr. McCabe, recorded substantial disagreement as to the purpose of the subcommittee. From the f e d e r a l perspective, i t s purpose was to achieve harmony between regulations to be proposed under the new federal act and e x i s t i n g or revised p r o v i n c i a l c r e d i t l e g i s l a t i o n . The provinces f e l t the committee was to explore the the question of the sharing of r e s p o n s i b i l i t y for l e g i s l a t i n g i n the area of c r e d i t . Agreement was reached whereby B r i t i s h Columbia and Quebec p a r t i c i p a t e d as observers only while the other provinces continued the discussion on the federal proposals, with the 105 understanding that their participation would not be construed as acquiesence to the federal position. It was anticipated that the federal legislation would be implemented starting in January 1 9 7 7 . The meeting ended with the Department having made a series of undertakings to revise the legislation. ( 6 9 ) There were some issues s t i l l underconsideration-They were: deemed date of future benefit (discounter); disclosure in lending transactions; and the role of the Administrator. The very next day, the Western Premiers met and issued a press release which, among other things, expressed concern with regared to recent federal legislative in i t i a t i v e s into areas of provincial constitutional jurisdiction. Later, an analysis appeared as the "Intrusions Reports". The concern over jurisdiction was not confined solely to the Western premiers. After a f a l l Interprovincial Conference of Consumer Affairs Administrators, Mr. H.M. Mcllroy of the Nova Scotia Department of Consumer Affairs, wrote to Mr. McCabe to say that the provinces were feeling overwhelmed by proposed federal law in the consumer f i e l d . He said that the confrontational atmosphere of federal-provincial relations was counterproductive and suggested that a move toward disentanglement was necessary. The Department of Consumer and Corporate Affairs might approach the enactment and enforcement of the Borrowers and Depositors Protection Act, he suggested, in a way similar to Part X of the Bankruptcy Act. ( 7 0 ) 106 Drafting of the proposed federal legislation continued under Mr. M.M. Goldberg. During this time, the timetable shifted to an early f a l l introduction of the b i l l . As the months passed, there was increasing concern on the part of several bureaucrats within the Department, that the pro-competitive and non-paternatistic ^philosophy adopted in 1975- was shifting to a more protectionist stance. In July 1976, John Evans returned early from French immersion leave and a major shake-up in staffing positions occurred within the Department of Consumer and Corporate Affairs. With i t came a change in philosophy. Mr. Buff McCook left the Department. Mr. Mel Goldberg, Consumer and Corporate Affairs Justice Officer who joined the Department of Consumer and Corporate Affairs as Director of the Consumer Credit Branch just six month earlier was replaced by Dr. John Evans. Goldberg was now made assistant to Evans. Mr. J.K. Mann, previously a researcher directly under the director of Consumer Research became Goldberg's research assistant. The protection/regulation bias of the Borrowers and Depositors Protection Act was arrested at this point, and as much as was possible, i t was replaced by a free market economic philosophy (Alpha). (71) In August the drafting of the regulations to accompany the BDPA was started. The task was divided among the staff, including J.K. Mann. J-Bagnall and M.M. Goldberg. By October 25th regulations were s t i l l in the drafting stage. The outstanding issues included: inclusion of insurance in the calculation of credit charge rate; National Housing Act mortgage rate adjustment mechanism; deemed date of future benefit; and advertising of credit terms. 107 Consultations with the Department of Insurance and with CMHC, on drafting details and on substantive provisions for BDPA continued right through into late October. On September 16, 1976, Mr. Antony Abbott was sworn in as the new Minister of Consumer and Corporate Affairs replacing Bryce Mackasey. Mr. Abbott was to hold the position for only one year. Much of the period between January to October 1976 involved internal and in camera consultations, with provincial governments or, inter or intradepartmental meetings. The Ministers of Consumer and Corporate Affairs didn't speak out during 1976 with the same frequency or vigor as did M. Ouellet in 1975. (72) Nevertheless, the issue of consumer credit was s t i l l very much a public concern. The Department recognized this when i t began commenting on the need to explain their proposed legislation to the general public. In a memo to M. Ouellet dated February 5th, Dr. Ostry remarked that the provinces appeared confused about the concept of maximum rate (that i t was a rate established to assist in criminal prosecution not a rate to set a "f a i r " market ceiling.) She observed that: "a positive public relations job w i l l have to be done to ensure that the public understands the intent of this provision". , / On February 18th, again in a memo from Ostry to Ouellet, i t was noted that with the imposition of wage and price controls (introduced in October 1975) that i t would be even more important for the Department of 108 Consumer and Corporate Affairs to have a strong, clear statement explaining why the Department chose the unwarranted rate concept over the more obvious solution of explicit rate ceilings. Then in the April 8th Cabinet Document i t was observed that education and information compaigns, both on First Reading and after Proclamation, would be essential for the effective implementation of the B i l l . It is clear that the Department had the intention of making the public aware of the new credit reform legislation, i t was really just a matter of time. If the Department of Consumer and Corporate Affairs was not very active publicly i t did not mean that there was a shortage of opportunities for public discussion of credit-related issues during 1976. On January 1, 1976 B i l l C-2, The Stage I of the Amendments to the Combines Investigation Act became law (Kaiser, 1976). By July 1, 1976 a l l sections were applied to services as well as to goods. This meant that for the f i r s t time financial services would be included in provisions regulating misleading advertising and anticompetitive practises. In March, the Minister of Finance released the "White Paper on the Revision of the Canadian Banking Legislation". By August 24th there was a revised edition. The emphasis of the proposed changes was on fostering competition within the banking and near-banking communities. BDPA and the Bank Act revisions were therefore related, as both sought to increase competiton in financial markets. The Departments of Consumer and Corporate Affairs and Finance recognized this t i e . Originally the banks and trust companies were excluded from coverage under BDPA, but when i t appeared that the BDPA was going to get to Parliament f i r s t and, when i t was appreciated that the provinces saw no merit in a federal credit 109 disclosure law that did not include the federally regulated banks and trust companies, Finance agreed to the inclusion of the banks. (73) During September the Economic Council of Canada released a study entitled, Efficiency and Regulation - A Study of Deposit-Taking Institutions. The study was a functional (rather than an institutional) approach on how to reduce interest rates for borrowers, to increase interest rates for depositors and to increase the variety and number of financial service options through competition and a flexible regulatory framework. The recommendations were aimed at structural changes and the thrust was for a gradual, decentralized approach to enact a major structural change, that was, a shift from institutional to functional regulation- The objectives coincided with those of the Department of Consumer and Corporate Affairs, even i f the means to achieve those objectives did not. The province of Quebec was concerned about loan sharking On October 9th Judge Jean Dutil, Chairman of the "Quebec Police Commission Inquiry into Organized Crime", made his report to Solicitor General Fernand Lalonde. Lalonde replied, "the report gives me almost completely the documentation I needed for legislation". (74) Shortly after, the Montreal Urban Police Force released a study which showed that 80 percent of loan shark customers live on a low income and cannot find credit. 110 Credit was a topic in many forums• On October 6th Maxwell Henderson, former Auditor-General of Canada, summed up what was on the minds of many when he said, Credit buying is the main cause of inflation and credit must be brought under control i f the anti-inflation program is to work. The f i r s t step must be to put a moratorium on the use of credit cards. It would create a hell of a row but i t ' s the only answer.(75) By the f a l l of 1976 many of the provinces had enacted legislation dealing generally with business or trade practices and thus, incidentally with consumer credit (Belobaba, 1977, p.334). The British Columbia Trade Practices Act was proclaimed in force on July 5, 1974. (76) The same year the Ontario Business Practices Act became law. (77) Alberta followed suit in 1975 with the Alberta Unfair Trade Practices Act. (78) In the f a l l of 1976 the Saskatchewan Trade Practices Act was in b i l l form. It was rumored that Manitoba, Quebec and Newfoundland were preparing omnibus consumer trade practices legislation (Cohen and Ziegel, f 1976, p.17). The B.C. Trade Practices Act extended coverage to money lending transactions; the Ontario, Alberta and Saskatchewan legislation did not. None of the four covered credit that was extended solely on the security of real property (mortgages). Only in the case of vendor credit (sales credit) was there undisputed inclusion in a l l four acts. Remarking on this inconsistency in application, Belobaba (1977, p.342) said, the potential for deception and unconscionability is no less significant in the lender-credit f i e l d than in the area of vendor-credit- Yet only the latter transaction is indisputably subject to the provisions of the provincial enactments. I l l During the time the provinces were enacting trade practices legislation, 1974-1976, the Department of Consumer and Corporate Affairs saw two pieces of legislation through Parliament, the Canadian Business Corporations Act (1975) and the Stage I Amendments to the Combines Investigation Act (1975). The Borrowers and Depositors Protection Act, by October 1976, was close to being introduced into the House of Commons. It was almost fully drafted, work on the regulations was in progress, the second session of the 30th Parliament was about to begin, and the new Minister, Tony Abbott, was anxious to be successful in his f i r s t Cabinet posting. 3.2.3. Birth - rush delivery October 1976 The Borrowers and Depositors Protection Act, ignored in the formalities of the opening of a new Parliamentary session, was thrust onto the floor of the House of Commons. It received quick support in the press and got as far as Second Reading before the opposition started to build. Tony Abbott was sworn in as Minister of Consumer and Corporate Affairs on September 16th. Less than one month later the second session of the 39th Parliament opened on October 12, 1976. There was no mention of consumer credit legislation in the Speech from the Throne, despite both promises and expectations to the contrary. On Oct 15th Abbott spoke to the Association of Canadian Financial Corporations on the subject of 112 consumer credit and particularly about on the proposed, and "soon to be introduced", Borrowers and Depositors Protection Act. On October 22nd the Honorable Herb Gray, Liberal M.P. and a former Minister of Consumer and Corporate Affairs, c r i t i c i z e d the government for not including the BDPA in the Speech from the Throne. He was quoted in the Windsor Star as follows: It makes no reference to "a comprehensive overhaul of consumer credit legislation", which was mentioned in the 1974 throne speech, even though reports indicated the government is ready to introduce a b i l l to achieve this aim,...(79) Five days later, the Honorable Tony Abbott introduced B i l l C-16, "An Act to provide for the protection of borrowers and depositors, to regulate interest on judgment debts, to repeal the Interest Act, the Pawnbrokers Act, and the Small Loans Act and to amend certain other statutes in consequence thereof". The timing was a surprise to everyone, including the Honorable Antony Abbott.(80) The B i l l was presented as a "protection" act and these aspects could be identified in the objectives of the B i l l , the "thrusts" as outlined by Abbott, and in the provisions that were changed from the March 1976 position presented to the provinces. The objectives as outlined by Mr. Abbott were: 1. to protect borrowers against loan sharking; 2. to provide the public with more and better information on a l l credit and deposit dealings; 3. to eliminate unnecessary complexities and confusion in the credit f i e l d ; and 113 4.to define strict and uniform rules to protect a l l borrowers and depositors to rationalize federal credit legislation.(81) The B i l l had two "thrusts": to regulate legitimate credit transactions of a l l kinds; and to outlaw i l l e g a l or criminal actions involving loansharking. Tabled with the B i l l was a detailed "backgrounder" outlining the need for the B i l l , i ts scope and purpose, and its main features, along with a "Guide for Consumer Help Officers and Funded Groups on the Borrowers and Depositors Protection Act", and a series of plain language explanations of current credit practices that act against the consumer interest, (see Appendix II) B i l l C-16 incorporated substantive changes from the draft of March 1976. These included: 1. Deletion of the disclosure of penalty provision; 2. Provision for c i v i l remedies so that third parties suffering loss or damage could recover by bringing a c i v i l suit. Further, i f the person being sued was convicted of an offence under the Act the proceedings of that t r i a l would be admissible evidence. Injunctive and other remedies to compensate loss were available through this new inclusion; and 3.Shopping l i s t s of offences related to collection practices included: coercion and threat; oppressive and abusive or harassing conduct; unreasonable publication or communication of information; and use of false, deceptive or misleading representation. 114 Corporate Affairs had promised the provinces there would be reconsideration, the following was provided: 1. The definition of "credit charge" was to include insurance that protects the lender against default or other credit loss; 2. The following was le f t to regulation: -deemed date of future benefit, -definition of deposit institution, criminal rate and credit charge, -NHA home ownership loan rate, -determination of non-chequing savings rate and prime rate, -variable rate, -advertising form for credit/deposit, -calculation of interest earned on deposit; 3. A "closely held corporation" was one that had less than 15 shareholders; 4. Where the per annum rate was not specified, the prime rate would be charged; 5. Advertising was to cover representation of availability as well as that relating to specific credit charges; 6.If a lender was already governed by other federal authorities, the Administrator could only audit or examine the lender's records i f there had been a complaint. If the Administrator wanted to search or seize information, but the lender was governed by another federal department, then the Minister of the other department could authorize someone in his/her department, or the Administrator, to do the search, audit, etc.; 115 7. The sunset clause was omitted; and 8. For payments sent by mail the date of the postmark would be the date that the payment would be deemed to have been made. For a l l other the deemed date of receipt would be the day the payment is received. As Mr. Abbott stated in the October Departmental press release, Any Canadian who needs to put his personal credit on the line has the right to demand a high minimum standard of protection. And the same right to protection belongs to the many millions of people who are trying to earn a l i t t l e interest on their savings. I n i t i a l press reaction was mixed, but generally favorable. Several papers took a "positive, but" position. That i s , BDPA was seen as a move in the right direction, in that i t was aimed at protecting consumers, but i t didn't go far enough, or i t was "too l i t t l e too late", or i t attempted too much in one step. On October 29th the following news items appeared in the press. In the Globe and Mail the Canadian Bankers Association was reported as calling the Borrowers and Depositors Protection Act (BDPA) confusing and dislocating to consumer finance because, -foreign precedents and procedures have been adopted; -the cost and availability of credit to consumers would be adversely affected because of the administrative burden and the problem of matching funds; and -there was no public discussion prior to massive proposals for change.(82) 116 A Canadian Press story reported that there was mixed reaction to the B i l l , positive on disclosure 1 and prepayment and negative on interest rate ceiling removal. S t i l l , i t declared, "The B i l l i t s e l f appears to be a winner". (83) CP stated that the Consumers' Association of Canada predicted strong opposition from lending institutions. I can only hope that the government w i l l stand up to the pressures from business and that the b i l l can truly become an act to protect borrowers and depositors," said CAC President Ruth Lotzkar. Commenting only on the loansharking aspect of BDPA, the Toronto Sun >read: ...This legislation might help. Now comes the obvious ending, delivered not so sotto voice: Huzzah for Antony Abbott.(84) In the Sudbury Star, Vincent Egan (85) wrote: The Borrowers and Depositors Protection Act, as i t now stands, is something of a paper tiger, notable more for its caution than for i t s ferocity in defence of consumers. Egan argued that because most consumers don't deal with loan sharks and won't l i t i g a t e , the BDPA should offer more protection or clout for consumers. A Cape Breton Post editorial declared, with a few minor criticisms, i t is an excellant b i l l , and i f the banks and trust companies don't succeed in emasculating i t before i t gets through Parliament, the b i l l should result in a tremendous strengthening of the consumers' position in the credit market. One can scarcely await the howl of protest these entirely sensible proposals w i l l evoke from the money lending institutions. It wi l l be interesting to see whether their complaints w i l l succeed i n preserving a system that, up until now had operated exclusively in their favor.(86) The Calgary Albertan stated: So sensible are the disclosure provisions of the b i l l that the only wonder is that i t has taken the government so long to put them into law.(87) 117 The weakness, continued the Albertan, is in the requirement of how interest is to be calculated. Industry should be able to react to competitive spurs and to do the detail work without government interference. The next day news items were somewhat less p o s i t i v e , more "yes, but". The Toronto Star c i t i c i z e d the Borrowers and Depositors P r o t e c t i o n Act claiming that i t would increase the cost of consumer loans and duplicate p r o v i n c i a l laws. It c a l l e d for opposition to c e i l i n g removal. Ottawa's sol u t i o n was not to take the obvious approach and simply r a i s e the c e i l i n g to a more r e a l i s t i c level...but, f o r some perverse reason, to abolish the c e i l i n g altogether.(88) The Edmonton Journal commented: The act seems custom-made for rec i p i e n t s of w i n d - f a l l - such as a l o t t e r y prize - with which to clear up t h e i r debts. But i t w i l l do nothing about high i n t e r e s t rates other -than force t h e i r d i s c l o s u r e . . . to f i g h t loansharking i s good but i t doesn't help people get money easier. Headlines i n the Montreal Star read, "The Borrowers B i l l Lacks Impact". The federal government has taken too long to enter the f i e l d and the provinces have f i l l e d the gap, claimed Peter Thompson of the Star. Furthermore, the cost/benefit r a t i o of daily i n t e r e s t rate c a l c u l a t i o n i s dubious. One ef f e c t of the b i l l may be that consumers w i l l borrow less because of a dampening effect on the economy, he said. Michael Grenby of the Vancouver Sun,^at the end of his series of three p l a i n language columns explaining BDPA (90), asked i f consumers would r e a l l y benefit from the l e g i s l a t i o n . The average consumer might never notice the dif f e r e n c e . 118 After a l l , why bother holding an umbrella over somebody i f he or she doesn't even know i t s raining? There's no point. Or is there? (91) By the time of Second Reading, November 1. 1976, there was direct and forceful opposition. Heward Grafftey (P.C.- Brome-Missisquoi) adopted the position argued by the Consumers' Association of Canada, that i s , the removal of the interest rate ceiling would be detrimental to low-income consumers. The Daily Commercial News of Toronto reported that the Ontario Mortgage Brokers Association and the Metropolitan Trust said BDPA would drive up the cost of mortgages because of the daily interest and prepayment provisions.(92) On November 1st 1976 the Honorable Antony Abbott (1976) spoke to the House of Commons on Second Reading of B i l l C-16. He spoke in terms of three objectives which were, 1. to impose uniformity in calculating, crediting, describing and disclosing interest for both borrowers and depositors; 2. to f a c i l i t a t e the proper functioning of the market, by encouraging more vigorous competition and by providing consumers with avenues of recourse; and 3. to deter loansharking by establishing a clear and easily provable criminal offence. The next day, a former Minister of Consumer and Corporate Affairs, Herb Gray (1976), speaking during debate on Second Reading, cr i t i c i z e d the B i l l for removing interest rate ceilings and for establishing a criminal rate so far in excess of the normal lending rate. The 119 unwarranted rate would not provide protection to the average or low-income consumer, he charged, because consumers are loath to use the court system. However, i n spite of the impression conveyed by these words i f the B i l l simply i s passed i n i t s present form, no lender w i l l be obliged to make any loan he i s not obliged to make now. Lenders have never been obliged to make loans! No borrower w i l l have any greater r i g h t to obtain c r e d i t - to obtain a loan a f t e r the B i l l i s passed than he has at present. Gray c r i t i c i z e d the lack of provision for l i c e n s i n g , for class actions (Pritchard, 1979), and for a low-income insurance scheme or system of federal government guarantee for low-income steadily employed persons, and for the large number of provisions l e f t to regulation. He also took exception to Abbott (1976), who saved the banks harmless i n the c r e d i t granting f i e l d . At the same time, Rafe Mair, Minister of Consumer and Corporate A f f a i r s i n B r i t i s h Columbia, charged that the BDPA threatened c i v i l l i b e r t i e s because of the pote n t i a l for abuse i n the provisions for a national c r e d i t data bank. He vigorously protested the lack of consultation with the provinces, and said that the Act would cause d i f f i c u l t i e s with the provinces despite i t s laudatory goals.(93) The press continued to report the controversy surrounding BDPA. On November 3nd, Canadian Press said that Herb Gray f e l t that a criminal rate of 80% was too high. Abbott agreed, but said that rates would be set by regulation. (94) Another Canadian Press story read, M.P.s from the three major p o l i t i c a l parties 120 Indicated yesterday there are several d e t a i l s they don't l i k e i n the Government's proposed new consumer c r e d i t b i l l . ( 9 5 ) Ron Huntington (P.C.) predicted disruption, Arnold Peters (NDP) said i t didn't help low-income consumers, while P i e r r e DeBane (L-P.Q.) and Tom Hebert (L-P.Q.) claimed that daily i n t e r e s t rate c a l c u l a t i o n would be d i f f i c u l t . The Toronto Star, i n an e d i t o r i a l , suggested that BDPA should keep i n t e r e s t c e i l i n g s and simply raise the allowable rate otherwise the market i n t e r e s t rate w i l l r i s e to just below the criminal rate. (96) The Canadian Press reported that: Consumer Credit l e g i s l a t i o n i s proving too complicated for some M.P.'s - they lashed out at the House of Commons yesterday at points that are not contained i n it.(97) Professor Jacob Zi e g e l , i n a F i n a n c i a l Post a r t i c l e said that the Small Loans Act c e i l i n g removal would r e a l l y hurt low-income consumers.(98) Ben Malkin of the Ottawa C i t i z e n welcomed the BDPA, but f e l t that i t was very l i k e a program that razes a condemned buiding without putting up anything i n i t s place.(99) Herb Gray (L), Beno Friesen (PC), John G i l b e r t (NDP), and Marcel Lambert (PC) a l l c r i t i c i z e d the B i l l , stated the Canadian Press.(100) The Regina Leader Post reported that Saskatchewan Consumer A f f a i r s M inister, Ned S h i l l i n g t o n , was concerned about the ef f e c t s on low-income consumers of removing the c e i l i n g i n the Small Loans Act. He favoured r a i s i n g the c e i l i n g s with provision for updating. He didn't believe that the industry was s u f f i c i e n t l y competitive and therefore f e l t that BDPA would have the effect of r a i s i n g i n t e r e s t rates.(101) 121 The Borrowers and Depositors Protection Act is "not good enough" claimed the Victoria Times. It may protect against loan sharking but not against everyday credit/deposit transactions with financial institutions.(102) Angela Barnes of the Globe and Mail reported that Roland Frazee, President of the Canadian Bankers Association, spoke out against BDPA.He claimed that a White Paper should have been issued. One of Mr. Frazee 1 s main objection to the b i l l is that there was no effective consultation with financial institutions before i t s introducation. "The banks had been aware over the past 18 months that the government was drafting consumer credit legislation but the objectives and the philosophy of the legislation were not discussed with them," Mr. Frazee said.(103) The Borrowers and Depositors Protection Act passed Second Reading on November 5th, 1976, with only the New Democratic Party voting against the B i l l . The vote came after four days of debate. There was a lot of heat generated by the 70% criminal rate figure, which Abbott denied as being the true criminal rate proposal. Yet, an article by Canadian Press (105), stated that o f f i c i a l s from the Department of Consumer and Corporate Affairs appeared to contradict their Minister and affirmed the intention of' establishing a criminal rate around 70% per annum. The Banks crit i c i z e d the daily interest calculation. The Consumers' Association opposed the removal of interest rate ceilings and the lack of provision for substitute action. (104) The New Democratic Party voted against the b i l l because i t did not protect consumers from high interest rates. The same CP story quotes John Rodriguez (NDP - Nickel Belt), The b i l l would take low income earners out of the 122 hand of the loansharks and into the hands of the barracudas. Rodriguez wanted an insurance scheme for low income consumers and a ceiling on small loans along with provision for credit counselling.(106) After the B i l l passed Second Reading Mr. Abbott announced that he was receptive to constructive amendments.(107) The B i l l was now cleared to be sent to committee. (108) A tumultuous four months was about to begin. 3.3. STRUGGLE FOR SURVIVAL November 1976 to January 1977 3.3.1. Parliamentary Committees and the Press - skeptical relations November 1976 to December 1976 As the two Parliamentary Committees prepared to s i t to consider the Borrowers and Depositors Protection Act, the press coverage reflected the united opposition to the B i l l . Now the criticizm of a l l three sectors the finance community - prominent participants in the early 1970's, the provinces - most active in the 1975-1976 period and consumer groups -just recently involved, converged. The reasons differed, but the message was the same, "We don't like the B i l l " . The only item of agreement by a l l parties came on the unanimous condemnation of loan sharking a c t i v i t i e s . S t i l l , there was no agreement on the best approach to curb loan 123 sharking. Only the Montreal Urban Police were wholeheartedly in favor of the B i l l . (109) Uncertainty, unnecessary restraints on legitimate lenders, higher costs reduction in the flow of funds for loans and mortgages - the industry message was articulated in many different ways. On November 6, 1976 Sonita Horvitch of the Financial Post reported: The banks and trust companies say there was insufficient consultation with them in drafting the legislation. Both agree that i t is good in i t s attack on loan sharks, but they complain of the considerable restraint on legitimate lenders - new advertsing and disclosure rules, to say nothing of the unwarranted loan rate and new mortgage rules. These could affect the cost and availability of credit, some trust company o f f i c i a l s and bankers say . "They have used a sardine net to catch the sharks," a trust man quips. Only the finance companies admit they have had considerable input in designing the b i l l . The finance companies would welcome one governing act, vs the various provincial laws under which they now operate, an industry spokesman says. That doesn't mean the finance companies are happy about the entire b i l l although there's s t i l l confusion about many aspects of the proposed legislation, the finance industry is concerned about the c r i t e r i a for the unwarranted rate and many other provisions.(110) On November 17th the Daily Commercial News of Toronto reported that P h i l l i p Armstrong, Vice-President, Mortgages for Metropolitan Trust Company threatened to withhold funds i f the trust companies didn't get input into BDPA Committee hearings. He noted that even now the B i l l had introduced uncertainty into financial markets.(Ill) 124 The next day, Mr. Stewart Riply, President of Metropolitan Trust told the Progressive Conservative caucus committee on finance that BDPA would lead to increased mortgage costs due to front end fees such as those applied in the United States. He said, A l l the disclosure in the world • won't help consumers pay the costs of strangling trust companies in yards of red tape.(112) He claimed that low mortgage rates on one and two year mortgaes w i l l cease, and that mortage terms wi l l be for three years. He also objected to the fact that the B i l l covered small business as well as consumers. Professor Seymour Friedland writing on December 3nd in the Financial Times stated: ...the consumer and corporate affairs minister has confused the symptoms of inflation with those of borrowers being gouged by lenders. A stabilized rate of inflation would do more to protect consumers than would generally misguided intentions of the proposed legislation.(113) On December 16th J.L.A. Calhoun, President of National Trust said that BDPA could increase loan sharking.(114) Five days later T.R. Suttie, Chairman of the Canadian Life Insurance Association, warned that BDPA could cause a drop in the number of residential mortgages.(115) The only dissenting voice in this steady barrage of criticism came from Mr. Ming President of Canada Trustco. He fe l t that his company could live with BDPA despite what other trust companies were saying.(116) Saskatchewan, Ontario, Nova Scotia and Quebec made strenuous objections to the actions of the federal Department of Consumer and Corporate Affairs Most took exception to BDPA's intrusion into areas of 125 provincial jurisdiction. Ontario though, echoed the industry argument that the unwarranted rate with the reverse onus provision would lead to sufficient uncertainty that lenders would have to withdraw from the market. Saskatchewan Consumer and Corporate Affairs Minister, E.B. Shillington c r i t i c i z e d BDPA and predicted that i t would be challenged in court. He claimed that although the federal legislation was superior to provincial legislation, i t was a question of intrusion. In addition there was the impracticality of the Small Loan Act revisions.(117) Ontario Consumer and Commercial Relations Minister, Sid Handleman, charged that the BDPA could create more problems than i t solved. It might be a "classic case of well intended legislation backfiring". The unwarranted rate might drive people to loan sharks or i t might deny them access to conventional sources of money because lenders would not risk court cases.(118) The same day, Mr. A.C. (Guy) Brown, Minister of Consumer and Corporate Affairs in Nova Scotia, was concerned that financial institutions woulds use BDPA as an excuse to raise interest rates. He applauded the loan sharking provisions, but fe l t that the disclosure section had the possibility of redundancy.(119) On December 22nd, the Winnipeg Free Press, quoting La Presse, described the intention of the Parti Quebecois to abolish a l l private financial companies involved in personal lo ans and sales financing, and to commit a l l consumer credit transactions to public financial institutions and co-operatives.(120) The consumer response had one common theme - the interest rate ceilings should not be removed. On November 5th the editorial of the Moncton Times stated the position succinctly. It noted that while there were positive aspects to the Borrowers and Depositors Protection Act, the 126 removal of the loan ceiling was not one of them. (121) The most positive note was voiced by Michael Grenby writing the next day in the Vancouver Province. But at the risk of suffering a reduction in the number of letters I get from readers with deposit and credit problems, I hope most of the BDPA proposals do become law.(122) This remark came at the end of a series on the fundamental provisions of BDPA and the t i t l e of the last column was, "At last they're going to make the banks play f a i r . " On November 18th the Toronto Star argued that the criminal rate was set too high and that this, combined with the removal of the small loans interest rate ceiling, would be disastrous for consumers.(123) The removal of interest rate ceilings was attacked by Herb Gray (L) and John Rodriguez (NDP). If the government can establish fixed rate loans for farmers, export development and students, the two Members of Parliament suggested, then i t could do i t for low interest consumers.(124) The Windsor Star observed that Mr. Gray was particularly concerned with the false impression created by the Borrowers and Depositors Protection Act. He fel t that BDPA would not increase credit availability to an increased number of consumers.(125) Michael VanDusen of the Financial Times tried to sum i t up in an. article headed, "Consumers, bankers, retailers, find faults in new borrower bill".(126) He wrote that the Canadian Bankers Association objected to the method of calculating interest, while the trust and insurance Companies didn't like the requirements for statements of accounts to be given to customers, provision for reduced mortgage terms and lower prepayment penalties. The Consumers' Association of Canada was 127 basically happy with the B i l l , VanDusen stated, but i t was not in favor of removing the interest rate ceilings. Retail stores on the other hand, did not really know just what the effect of the b i l l would be. On November 10th the Woodstock Sentinal Review printed the views of Dr. Bruce Halliday (M.P.) on why everyone was opposed to BDPA. While most supported some aspect of BDPA, observed Halliday, no one found i t without fault. He gave four reasons: -the government promised, but didn't deliver, an insurance scheme (127); -the government promised, but didn't deliver, more store front offices; -the b i l l didn't protect low-income consumers; and -there was too much regulation in the bill.(128) By December, quietly supportive articles on BDPA, written early in November for December publication, clashed violently with the current newspaper headlines that carried banners such as, "Interest Ceiling of 70 %", "Rough Passage", "Not tough enough", "Unconstitutional", and "NDP wants change". These conveyed a very different message than articles in the publication, Canadian Banker and the Canadian Churchman. The Canadian Banker reported Mr. Frazee, of the Royal Bank of Canada, saying that financial institutions should have no problems meeting the demands of the Borrowers and Depositors Protection Act although i t would mean extra costs for increased computation. The Canadian Churchman, while arguing for the maintenance of interest rate ceilings, f e l t that the B i l l was positive even i f i t was not sufficiently comprehensive. Although Mr. Abbott's B i l l presents some 128 d i f f i c u l t i e s ( c r i t i c s suggest that the protection of the "unwarranted rate" concept may be rather elusive), i t has had a generally good reception. At best i t deals with one side of a growing social problem.(130) In the midst of the public debate surrounding BDPA the committee hearings began. On December 2, 1976, under the chairmanship of Senator Salter A. Hayden, the Senate Committee on Banking, Trade and Commerce reviewed B i l l C-16 with the assistance of Mr. Dawson H. Tilley, a chartered accountant in the firm Thorne, Riddell and Company. On the 16th of November the Committee voted i t s e l f authorization "to examine and report upon the subject-matter of the B i l l C-16, ...in advance of the said B i l l - coming before the Senate."(131) The objectives of their deliberations were to provide recommendations of "ways in which the stated objectives could be attained other than in the manner proposed", so as to: 1. avoid the clash of constitutionality, 2. ensure a fair balance of the interests of a l l parties affected; 3. avoid the unnecessary disturbance of borrowing markets, mortgage markets, and conventional business practices; and 4. ensure that rights and obligations created are clear, understandable and capable of enforcement within our present constitutional framework. During its eleven days of deliberations on this matter, from December 2, 1976 to May 12, 1977, the Senate received 13 briefs and one letter and heard directly from 13 groups which had submitted written briefs. It also heard from the Department of Consumer and Corporate Affairs, represented by: Mr. Michael McCabe, Assistant Deputy Minister, Bureau of Consumer 129 Affairs; Dr. J.L. Evans, Director, Consumer Research Branch; and Mr. J-P. Toupin, Economist with the Consumer Research Branch.(132) Five days later, on December 7,th, the House of Commons Standing Committee on Health, Welfare and Social Affairs held its f i r s t of 36 sittings on the Borrowers and Depositors Protection Act.(133) The Honourable Antony Abbott, Minister of Consumer and Corporate Affairs, addressed the Committee on its f i r s t day. The B i l l died on the order paper before the committee could submit its report. A total of 44 briefs and letters were received, and 28 individuals and groups made personal presentations to the Committee. While BDPA was struggling for survival in the public arena, there were anxious and intense consultations going on within the Department. 1.3.2. Departmental Consultations and Analysis - anxious parents November 1976 to January 1977 Immediately after the introduction of the Borrowers and Depositors Protection Act, the Department of Consumer and Corporate Affairs began a process of re-examination of the proposed legislation. The f i r s t step was to prepare what was known as the "Contingency Book" or "Blue Book"• Completed under the direction of Dr. John Evans, this detailed reference book outlined the purpose of the Act and provided detailed analysis on the major credit issues and areas of concern. As well, i t summarized and responded to the criticisms of the Borrowers and Depositors Protection 130 Act raised during the House of Commons Debates on Fir s t and Second Reading. By November 29th the Department had completed i t s reevaluation of the provisions of the B i l l as a result of comments by consumer groups, the business community and provincial governments. Ten changes were proposed: 1. the definition of borrower and depositor would exclude closely held corporations; 2. the definition of lender would exclude occasional loans made by family and friends, but the criminal rate would apply to a l l lenders; 3. the definition of lending transaction would be a loan less than $25,000 or one secured by real property and would exclude transactions in securities or commodities acccounts and time transactions that do not involve credit charges; 4. a substitute action by the Administrator would be possible with respect to the unwarranted rate provision; 5. the definition of credit charge would exclude: over draft charges; insurance for mortgages, fees for t i t l e search and related property surveys; and fees for preparation of deeds and other documents; 6. the date a payment is made would be the date of receipt by the lender. Up to five days grace period before and after the payment due date would be allowed before interest accrues; 7. the definition of deposit held would be restricted to money held by a financial institution; 8. there would be detailed revisions to the mortgage provisions that include changes relating term and i n t i a l amortization period, c a l l and put options, interest rate charges, prepayment, and penalties; 131 9. the Administrator could seek a voluntary compliance and compensation to the borrower, and to the government, from a lender * i f that lender had contravened the Act; and 10. access by the poor to credit should be pursued separately and not under the Borrowers and Depositors Protection Act.(134) Areas that remained under consideration for amendment included the definition of deposit interest, and the criminal rate. The next step occurred in January when a number of detailed, cross-referenced briefing books were prepared. The system consisted of three sets of clause-oriented briefing books. One listed each clause, its rationale, constitutional considerations, comments and proposals for changes. Another listed comments raised in the two standing committees. A third listed comments raised by Members of Parliament in the House and Senate and in the Standing Committees. It was suggested at this time that the "Contingency Book" continue to be updated and that briefing material be prepared on a l l submissions to the Standing Committee.(135) The two months, November and December 1976, marked a transition from in i t i a t i o n , action and leadership by the Department of Consumer and Corporate Affairs to reaction, response and accommodation. During these two months opposition to BDPA grew. The Department retrenched and prepared to begin a fresh round of consultations with the hope of arriving at a set of amendments that would allow BDPA to clear the House before the Spring recess. 132 Consultations resumed, beginning on January 16th with the Federal-Provincial Meeting of Consumer and Croporate Affairs O f f i c i a l s . During the next three months, consultations interdepartmentally, intradepartmentally and at the Ministerial level intensified. Discussions with interest groups such as the financial institutions, police, consumers and the provinces were renewed with the aim of amending the B i l l and preparing draft regulations. 3.4 Metamorphosis February 1977 to June 1977 3.4.1. Amemdment Process There was a frantic scramble to consult and amend in time to see the Borrowers and Depositors Protection Act through to Royal Assent in the period February to June 1977. During this time the Consumer Research Branch was, figuratively speaking, doing ten jobs at once. Not only was i t preparing specific and precisely worded amendments for consideration of the committees but i t was also engaging in some substantive rethinking. This rethinking was occurring on four fronts: on the major provisions of the B i l l ; on the research underpinnings of the B i l l ; on alternatives for action and on options for harmonious implementation. Simultaneous with these internal a c t i v i t i e s , consultations with the financial community, the provinces, other government departments and consumer groups continued. In May, the Department was optimistic as i t presented i t s proposed amendments to the House Standing Committee on Health Welfare and Social Affairs. Later events reversed that mood. 133 Activity was Intense during the amendment process. On February 8th the Minister sent a letter to the House Standing Committee indicating that modifications to B i l l C-16 were being prepared in relation to the mortgage provision, the unwarranted rate concept, the inclusion of closely-held coporations and the deemed date of payment. The same month the Department drew up a detailed action plan to cover the period February 22nd to April 8th. It addressed seven major areas of work: the B i l l ; regulations; administrative framework; federal-provincial strategy; information and education programs; consumer credit data base and access to credit; and consumer indebtedness, research, and experimental programs.(136) In a memo dated February 24th, the Department requested the assistance of the Department of Justice in preparing a detailed legal analysis of the impact of the Borrowers and Depositors Protection Act on provincial law in the credit f i e l d . The task was to be completed by March 4th and a meeting to discuss the request was scheduled for the 24th of February at 2:30 p.m.(137) Memoranda on alternatives started to appear. On February 28th a paper was circulated within the Consumer Affairs Department•(138) It diagnosed the problem behind BDPA as one of "misleading advertising", and proposed three possible remedies. The B i l l was sold as consumer legislation when, in fact i t was primarily a piece of fiscally-oriented legislation. This divergence is now beginning to . cause problems as the department attempts to deal with and react to some of the effects which the b i l l would, have on the highly complex consumer 134 credit market. What was supposed to be a piece of consumer legislation has become instead, a playground for economists. Three options were discussed: 1. Update the Small Loans Act, with or without a guaranteed loan program for low-income consumers, and with or without a separate higher (80%) criminal interest rate (no unwarranted rate). This option would involve considerable delay due to the need for f u l l consultation. The Department of Finance would be opposed, the document stated; 2. Update the Small Loans Act using a modified rate structure for a sub-set of the lending community while maintaining the unwarranted rate and criminal rate provisions for application to those lenders not included under the Small Loans Act. Practical and perceptual problems i t was noted, could well occur because of the complicated nature of this option; and 3.Introduce to BDPA an "administrative/enforcement package" consisting of the unwarranted rate, substitute actions, assurances of voluntary compliance (AVC's), and cease and desisit orders. The paper stated that, this option preserves the component which would provide the closest link and immediate aid to consumers, but i t s t i l l leaves the other "flashy" components in place which may appeal to consumers even more. Option three was recommended because, in the words of the paper, i t provided: ...the best way to f i l l the void of "consumerism" in the B i l l without arousing undue business opposition and most importantly, without prejudicing the economic foundation of the B i l l designed to maximize competition and orderly market operation in the consumer credit f i e l d . 135 It was noted, that the Department should be prepared to implement the t h i r d option, without p r o v i n c i a l administration or enforcement. ...The provinces may attack the goverment for proposing a scheme which i t knows i t cannot e f f e c t i v e l y administer across the country, and then attempt to get the provinces to carry the b a l l . This document constituted a very frank discussion of the possible reaction of business and of other government departments. One of i t s c l o s i n g remarks was, "Once again, the c r e d i b i l i t y of the B i l l and the Department are on the l i n e : " . Option 3, as recommended by this paper was adopted by the Department. The debate as to whether the BDPA should be based on an Alpha or a Beta perspective was thus reopened. The major c i t i c i s m that the Department leveled against i t s e l f was that an Alpha b i l l was sold as a piece of Beta l e g i s l a t i o n . The remedy was to i n j e c t some substantive and i l l u s i o n a r y ("flashy") Beta s t y l e provisions. This proposal sparked an even more fundamental concern within the Department. Could BDPA clear Parliament i f c e i l i n g s were not removed? In March, however Dr. Evans, i n an i n t e r n a l memo, proposed a modification to the chosen option. It would allow a c e i l i n g to be set for loans from $100-3,000 for registered "Small Lenders". The "allowed charge" would consist of: a fixed cost plus a monthly service charge and a graduated percentage rate up to $600; and from $600 to $2,500, a f l a t percentage rate c e i l i n g would apply. Registered Small Lenders would be immune from the unwarranted rate sections of the Act for a l l loans issued under the new Small Loans Act provisions. This a l t e r n a t i v e was discussed 136 with Prof Ziegel (139) He favored the enhanced administration package but was not at a l l supportive of the revised small loan provision with i t s "allowed charge" and concommitant differential exemption of the unwarranted rate concept. No further action on this new suggestion was taken. About the same time, another memorandum was circulated within the Department of Consumer and Corporate Affairs. It outlined the status of research into "Problems and Prospects in Relation to Consumer Credit". Noting that a literature search had begun, i t set out possible areas for further research. Those areas were access to and use of consumer credit overburdened debtors, and solutions to debt problems. It was recommended that the methodology for further research be decided upon after the literature search was complete, and that the in i t i a t i o n of any programs such as loan insurance schemes or co-operative ventures with other institutions in fields like debt counselling should be considered only after the completion of the research.(140) Research continued on alternatives for improving the accessibility of credit. A June 24th press release stated: Consumer and Corporate Affairs Canada is developing an experimental program which w i l l improve low-income borrower' access to credit, through credit counselling and other assistance services.(141) On June 16th the Department initiated the "BDPA Problem Identification Project". Its objectives were to to l i s t those problems that BDPA was designed to address, to identify the volume and concentration of such problems, and to determine the class of consumer affected. 137 As late as April 1977, the Minister was optimistic about getting BDPA passed before the Spring recess.(142) Two developments caused the Department to be less optimistic and to rethink its strategy for BDPA. These developments included the uncertainty of the federal government's position vis-a vis Quebec, and the pending Supreme Court decision in the case of Tommel Investments Ltd v. East Marstock Land Ltd et al •, regarding the constitutional validity of sections 6 through 10 of the Interest Act.(143) The Department was optimistic that the outcome of the Supreme Court case would be favorable to the federal government. S t i l l , i t did feel that there was a strong possibility that the Government would want to have the B i l l modified in areas that were felt to be contentious, or modified in the manner of proposed implementation, or both. Consumer and Corporate Affairs f e l t that in any case the, "modifications must be carefully balanced so as to placate the provinces yet continue to provide consumers with a high and uniform national standard of protection". It was, therefore, recommended that BDPA be passed with a provision for two phased proclamation. The f i r s t phase provisions would be proclaimed immediately, and would therefore apply universally, and in a uniform way. The second phase provisions, including regulation of advertising, disclosure, the unwarranted rate, and the provision of c i v i l remedies to borrowers, would undergo a f u l l range of negotiations with the provinces. Once most of the provinces (eight was suggested) agree as to provisions, the second phase would be proclaimed. With the alternative implementation strategy the Department of Consumer and Corporate Affairs was confident that the B i l l would have a greater chance of passage during the current session. The Department of Justice saw this to be a unique, 138 but constitutionally viable, option. Other alternative positions were discussed, including retrenchment to a much "slimmed down" version of BDPA that relied on a more st r i c t interpretation of the Interest head and the Criminal Law head of the British North America Act . These were rejected. Then, on April 13th, Mr. Abbott announced that he would delay implementation of BDPA until disagreements with the provinces could be sorted out. This was said to represent a "whole new approach to trying to get into a f i e l d where there was shared jurisdiction". The Minister promised changes in the following areas: -delegation of administrative power to the provinces; -substitute action; and -a matrix of payment penalties for mortgages that w i l l depend on the interest rate differential and on the term remaining on the mortgage.(144) Consultation continued with progress at the interdepartmental level, but with l i t t l e sign of co-operation in the federal-provincial arena. With the number and frequency of consultations and changes i t was often confusing. For example, Patrick Durrant of the Vancouver Province reported on the controversy surrounding the daily interest rate calculation. Abbott, observed Durrant, said that he was sympathetic to the banks, and that he hadn't said yet that there would be a requirement for daily interest calculation. On the other hand, the same reporter noted that Abbott's Assistant Deputy Minister, Michael McCabe, had given strong indications that there would indeed be regulations requiring daily 139 interest rate calculations and further that such regulations w i l l be put through as soon as possible. Yet, a further contradiction was evident as Abbott said of the banks: I suggest they are u t i l i z i n g this point in their brief to cause wide alarm in the community. It is both unjustified and inappropriate.(145) Interdepartmental positions were coming closer together. The same month HUDAC cr i t i c i z e d BDPA claiming the proposed mortgage provisions would cause a rush on funds in a market of failing interest rates. It did not realize that changes in this direction had already been proposed. In a confidential letter to Dr. John. Evans, Hirsh Tadman, of the Department of Finance, requested that BDPA provide for the proposed forthcoming amendments to the Bank Act where i t would refer to disclosure and to some administrative functions. In writing the memo, Tadman anticipated that BDPA would be passed before the Bank Act amendments.(146) The provinces did not display the same degree of co-operation. On March 19 1977 Mr. Sid Handleman Minister of Consumer and Commercial Relations for Ontario alleged that BDPA treated business as an antagonist not as a partner. Speaking at a conference of the Credit Grantors' Association he said of BDPA: ...low-income consumers w i l l find i t more d i f f i c u l t to obtain credit and w i l l be forced to turn to the very people the Borrowers and Depositors Protection B i l l i s supposed to remove from the market - the loansharks and their competitors, the tax rebaters and cheque discounters.(147) He also asserted that BDPA was an intrusion into provincial jurisdiction. He predicted that i f i t became law that i t would be challenged. 140 On May 5th when the Western Premiers released the report of their "Task Force on Constitutional Trends" i t was clear that the western provinces did not want to see BDPA passed into law. B i l l C-16 is a very comprehensive, i f not over-reaching measure which purports to cover every aspect of consumer credit interest rate calculations, mortgage payments and prepayments, income tax rebating, loansharking, credit advertising and credit cards. Linked to the recent amendments to the Combines Investigation Act, the proposals for a new Bank Act and the developments of an Electronic Payment System, the BDPA is an integral part of an all-encompassing federal attempt to regulate most features of the credit-payment-financial institution system. ...Within the larger context of federal-provincial relations, there is merit in making common representations that the federal B i l l be left in it s present state and that the whole question be re-examined in new provincial-federal talks. Delays forecasted for the Bank Act and the Electronic Payment Systems may be noted as providing another reason for affording time to reconsider the f u l l constitutional and economic costs of the proposed BDPA. (Report of the Western Premiers' Task Force on Constitutional Trends, 1977, pp. 20 and 23.) BDPA was hot popular with the provinces. On May 12th the Department of Consumer and Corporate Affairs presented its final position to the House Committee on Health Welfare and Social Affairs. At that time, the Minister gave a strong statement in support of the B i l l . He commented on the criticism that had surrounded the B i l l ' s passage thus far: I continue to believe in the merits of this B i l l . I am convinced that the basic principles are sound and that through apppropriate amendments we can produce an effective piece of legislation. While the volumes of specific comments may have obscured this fact this belief was shared by the vast majority of individuals and groups appearing before the committee. Rarely was there argument with the basic priciples. Rather, the arguments were with the means by which principles would be translated into practise.(148) He attempted to answer the question, "Why then has critism arisen from 141 both the lending community and consumer groups?" I believe the answer to this lies with the fact that this legislation is oriented toward correcting market deficiencies f i r s t and toward direct intervention second.(149) After commenting on the dif f i c u l t y in focussing on the principles of the B i l l while i t was being cr i t i c i z e d from a l l sides, Abbott reviewed the B i l l ' s objectives. They were f i r s t , to improve market mechanisms, through: upgrading the quality and quantity of information, (examples included, disclosure provisions, advertising provisions, credit treated as a single concept without separating vendor and lender, creditor and depositor, standardized terminology and calculation methodology); and through making more real choice available in credit transactions, (examples included, prepayment provision, removal of interest rate ceiling). The second object was to provide a significant set of protective measures, for example, the criminal rate the unwarranted rate, penalty limits, and setting conditions of variable rate mortgages. The nature of the amendments proposed was said to be more technical than substantive. The basic principles of the B i l l were left unchanged. The only substantive changes i t was said, were in the area of improving consumer protection. The new provisions were outlined generally, and included: 1.provision for mortgage prepayment for part or a l l of a mortgage loan on any payment date subject to the payment of a penalty that would be scaled to reflect the present value of the loss to the lender; 142 2. treatment of junior mortgages, used as security for large consumer loans, as consumer loans on which no prepayment penalty would be allowed; 3. provision for delegation of administrative authority to federal and provincial bodies who have a supervisory position over lending and deposit taking instututions in their specific jurisdictions; 4. elimination of the Administrator and substitution of the "Minister" as the designated authority; 5. provision for assurance of voluntary compliance, power to take substitute c i v i l actions, ability for a court to issue a cease and desist order and for the publication of reports on enforcement activities; 6. requirements for borrowers to pay a l l their debt commitments even i f the rate was being challenged as unwarranted; 7. provision for unwarranted rate actions to be heard in small claims court; 8.inclusion of the criminal rate in the statute.(The Committee was asked to provide their comments on the appropriate rate.); 9.proclamation in stages with those portions re-enacting and updating federal law to be implemented f i r s t , and those section which might create duplication to be proclaimed after further discussion with the provinces; 10 exclusion of closely held corporations from the definition of "borrower"; 11. exclusion of infrequent and irregular lending transactions between family members; 12. exclusion of certain types of business institutions from the deposit regulations; 143 13.inclusion of a due diligence test for lenders and media publishers; 14. deemed date of receipt of payment to be the day the payment was received; 15. new penalty structure for improper disclosure; and 16. a limit set on the time that records need to be retained The Minister assured the Committee, that they would have before them sufficient information on the regulations, so that they could proceed with the clause by clause review. The regulations presented to the House of Commons Standing Committee on Health, Welfare and Social Affairs on May 12th, 1977, were divided into three categories: 1.Narrative description only because detailed discussions must occur with the provinces; 2.Some detail provided with narrative description because some further consultation was s t i l l neces ary; and 3.Full draft regulations. Herb Gray responded to Mr. Abbott's presentation to the House Standing Committee on Health, Welfare and Social Affairs. He supported Abbott's f l e x i b i l i t y and approach, especially the decision to continue to press for passage of an omnibus federal consumer credit act. While Gray was happier with the unwarranted rate now that the enforcement provisions had been augmented, he s t i l l f e l t that the Department of Consumer and Corporate Afairs had not adequately justified abandoning the credit ceilings. The concern of the low income-consumer was yet to be addressed 144 according to Mr. Gray. Loans for low-income consumers would not increase, and there had been no mention of an insured loan program for low-income people. His other major concern was that the federal-provincial negotiations on the regulations might substantially alter the intent of the Bill.(150) Others agreed with Mr. Gray. Opposition members lead by Heward Grafftey called for Abbott to with draw BDPA in favor of two or three separate b i l l s . Remarks were also made about the large nunber of amendment s.(151) On May 16th the Deputy Ministers of Consumer Affairs held a Federal-Povincial meeting. One discussion paper presented by the federal Department, was entitled, "Conceptual Framework for Federal-Provincial Rationalization", and was aimed at developing an overall strategy to encourage a greater federal-provincial mix of policy development and program administration in the consumer and corporate affairs sectors. Another more specific background paper developed by the Department, and used in the meeting deliberations was entitled, "Rationalizating Federal/Provincial Interests in the Consumer Protection Field". Under the •heading "BDPA", the major topic was administration and enforcement by the provincial governments. At this meeting the Deputy Minister, Dr. Sylvia Ostry, sought, "to look objectively at the question of rationalization in areas of importance to the federal government", and "to stimulate further thinking". The ideas was to think procedurally rather than substantively. It was proposed that an ad hoc committee under the Permanent Committee of Deputy Ministers meet regularly to discuss 145 legislative p r i o r i t i e s , responsibility for legislative i n i t i a t i v e s , and the allocation of responsibilities between governments. It was suggested that the Borrowers and Depositors Protection Act be divided into two parts. Part One, to be those provisions that update existing federal law, plus other non-contentious provisions. It would include: l.The criminal rate, criminal collection practises and administrative and enforcement provisions; 2.Interest Act provisions, including, judgment debts, penalty provisions, rate calculation methods, and mortgage prepayment; 3.Small Loans Act provisions, including non-mortgage prepayment and penalty provisions; and 4.Deposit provisions. Part Two would consist of those areas where there is the greatest provincial concern. These included: 1. Advertising and disclosure provisions for both lending and depositing transactions; 2. Unwarranted rate provision; 3. C i v i l remedies sections; and 4. Requirement for provision of statements to depositors and borrowers. Provinces could opt in or out of a l l Part Two provisions i f "substantially similar" legislation was in force or was contemplated by them by a specific date. Despite this attempt at compromise, federal-provincial relations 146 were s t i l l very strained. One newspaper reported: Consumer Affair Minister, Tony Abbott, said today he places high priority on ending .the tension and distrust which has characterized federal-provincial relations in the consumer f i e l d for the last several years.(152) The fin a l version of the BDPA was complete by June 9th. The Department had prepared 60 motions of amendment covering 23 of the 44 sections that comprised the B i l l . Sinclair Stevens (P.C. - York Simcoe) summed i t a l l up when Abbott introduced a second and final set of amendments to the House Standing Committee. We don't have to obstruct it...the inept handling of this b i l l and the 75 amendments are doing i t for us.(153) Death was in the air, a l l that was needed was for i t to be o f f i c i a l l y declared. 3.5. Death Without Resurrection June 1977 to March 1978 3.5.1. Euthanasia Recommended and Enacted June 1977 to July 1977 While the volume of proposed amendments heralded the eventual demise of the Borrowers and Depositors Protection Act, the B i l l did not really die until Parliament broke for summer recess on June 21st. With the formal release of the report of the Senate Committee on Banking, Trade and Commerce, on July 6th, there was no doubt in anyone's mind that BDPA could ever be resurrected without substantial changes having to be made. 147 During the four weeks between the introduction of the amendments and , the Senate Committee's report, there was no shortage of helpful advice. At its annual meeting, the Consumers' Association of Canada passed a resolution, calling for a delay in the implementation of the Borrowers and Depositors Protection Act until the problems of consumer credit could be studied in depth. The Association called for a Royal Commission to study the "social, economic, and legal" aspects of credit. Writing in the Financial Times, Professor Jacob Ziegel gave two reasons why there had been so much opposition to BDPA: delay on the part of the federal government; and failure of the federal government to give adequate warning of i t s intentions. The b i l l i t s e l f is in danger of being heavily diluted. Two developments could restore some balance to the debate and prevent the consumer interest from being unfairly sacrificed. One would be a much more vigilant and analytical press. The other would be a more resourceful parliamentary committee. Unhappily, neither prospect looks very promising.(154) The same day, June 20, 1977, the Vancouver Province advised: Please Ottawa, no more pieces of legislation which double up on jurisdiction. And i f you and the provinces cannot agree then lets have the debate in the open - before the b i l l comes into the Commons.(155) On June 27th the Ottawa Citizen wrote that although the BDPA was warmly received in November, i t had received rough passage in the House Standing Committee. BDPA was further handicapped by going before the Health, Welfare and Social Affairs Committee, for whom consumer credit was 148 unfamiliar territory. Furthermore, the Committee had no research staff of their own and, therefore, couldn't even attempt to verify the representations made.(156) A Toronto Star July 5th headline read, "Put the loan sharks out of business". x For nearly four years, the federal government has been promising action against loansharking. The net result is an inadequate b i l l now making a leisurely way through Parliament, while police say loan sharking is the biggest and fastest growing racket in Canada. ...Why is Ottawa so slow and so weak? (157) A Canadian Press story speculated on why the b i l l was unpopular. It quoted Reward Grafftey, the Progressive Conservative consumer c r i t i c from the Quebec riding of Bromo-Missisquoi, ...the b i l l ran into s t i f f opposition from banks finance and mortgage companies and other credit grantors as being too cumbersome and too drastic in its influence on routime business practices. "They just tried to do too much in the one b i l l , " Abbott said Tuesday he would have preferred that more groundwork had been done before the b i l l had been introduced. "P erhaps some of these things in the b i l l were done without enough study of how they would impact [sic] on the real world," he said.(158) On July 6, 1977 the Senate Committee on Banking, Trade and Commerce under the chairmanship of Senator Salter A. Hayden, presented i t s Report and recommendations on the BDPA. The Committee's overall recommendation was that the B i l l should not be proceeded with further, and that with the amendments proposed by the Department of Consumer and Corporate Affairs, i t should be considered as a new B i l l . The Senate Committee also urged that the consultative process recommence. 149 The Committee made 23 specific recommendations, some of which were answered by the amendments proposed by the Department of Consumer and Corporate Affairs (after the Senate Committee hearing process had been completed). More specifically the Committee recommended that: I. the B i l l apply only to borrowers who are natural persons and only for noncommercial applications of loans; 2.only in those areas of demonstrated credit abuse should there be legislation; 3. sophisticated borrowers should not be able to take advantage of the B i l l ; 4. the B i l l be referred to Supreme Court to test i t s constitutionality; 5. the onus for the unwarranted rate should not be on the lender; 6. courts be able to determine a warranted rate; 7. a one year, limitation be put on claiming that a rate i s unwarranted; 8.insurance policy loans should be exempt; 9. the daily interest provision be deleted; 10. deposit taking institutions should cover only those where deposit taking is the principle function II. advertising regulations should not apply where only the availability of credit is mentioned; 12. advertisers advertising in good faith should be protected; 13. c i v i l actions should be restricted to instances where privity of contract is breached; 14. search and seizure powers should be incorporated in the B i l l and should be restricted to establishing the credit charge rate; 150 15. a l l those matters related to judgment and policy should be incorporated in the B i l l and not le f t to regulation; 16. the B i l l and regulations should conform closely to provincial legislation for credit disclosure. Thus there should be a model federal disclosure provision which eliminates any conflict and/or duplication between federal and provincial legislation and which can be incorporated by reference into the various provincial statutes; 17. provisions aimed at loansharking should be in the Criminal Code; and -18. the prepayment provision be redrafted With BDPA a dead b i l l , the Department of Consumer and Corporate Affairs moved from a position of reaction, response and accommodation, to one of renewed action and i n i t i a t i v e . 1.5.2. Attempts at Resurrection July 1977 to March 1978 For the nine month period July 1977 to March 1978 the Department of Consumer and Corporate Affairs focussed on two ac t i v i t i e s : 1. establishing a better working relationship with the provinces through a special "Task Force on Consumer Credit", and 2. rewriting an omnibus consumer credit b i l l in consulation with the finance industry, consumer groups and the provinces. While these two activities progressed, concerted opposition by the Progressive Conservative Party continued to prove effective in preventing 151 the early introduction of the new b i l l . On July 7, there was a Conference of Consumer and Corporate Affairs Ministers at Montebello Quebec. It was announced that the Borrowers- and Depositors Protection Act would be reintroduced in the f a l l as a new b i l l . Here, the Federal-Provincial Task Force on Consumer Credit was^ created, and was given i t s terms of reference. Its purpose was to identify, and to take steps toward reaching agreement on consumer credit legislation, that would benefit from a concerted parallel federal/provincial approach.(159) In the words of Mr. Abbott, The restraint policies adopted by a l l governments and the shift in public opinion against excessive government bureaucracy added to the arguments for federal and provincial governments to work together to overcome their problems -(160) A Canadian Press news story appearing the same day noted: Consumer ministers at a federal-provincial conference agreed Thursday the federal government should move quickly to implement legislation against loansharks (161) The Task Force on Consumer Credit (TF) began its work immediately. It met in Toronto on August 15th, in Winnipeg on September 20th, and in Halifax on November 7th. Through the work of the Task Force, the Department of Consumer and Corporate Affairs agreed to a new appoach. At the general level a special task force was created to assist in federal-provincial co-operation on forthcoming legislation. More specifically, i t was agreed that the problem of loan sharking should be dealt with separately by the federal government.(162) 152 On September 6th, a new Minister was apppointed. Warren Allmand became Minister of Consumer and Corporate Affairs as well as Solicitor General. He was the fourth Consumer and Corporate Affairs Minister in two years.(163) During late summer and throughout the f a l l of 1977, the Consumer Research staff prepared studies in expectation of introducting new consumer credit disclosure b i l l in the f a l l . At the same time, opposition was growing stronger and more effective. On August 1st the Consumer Research staff completed a background paper, "Implementation Administration". It forecast almost exclusive provincial responsibility for f i e l d administration with the federal government acting as co-ordinator only. The "Rights and Remedies" section concluded that the remedies (the unwarranted rate, reduction to prime rate for misdisclosure and the right of c i v i l action for recovery of damages) were both fair and consistent with the objectives of the BDPA. It recommended two-part proclamation for BDPA. Part 1, or the non-controversial part was to be proclaimed f i r s t - Part 2 would be proclaimed at the request of each province. Uniformity was not to be a major issue or theme in the new b i l l , as i t was in the original BDPA provisions. On the other hand, the provinces would be able to go further to protect consumers once a minimum level of protection was established. The background paper stated: If everything works out properly, the federal legislation w i l l use standards which w i l l be parallelled in provincial legislation. There w i l l obviously be some variations but the greater the similarity, the fewer the problems for everybody. 153 In each province where there is the similarity of protection afforded to consumers, the provisions of Part 2 of BDPA w i l l not be proclaimed except in respect of the federally chartered financial institutions- Provincial law w i l l be the only law of general application in the province and w i l l be the primary source of protection in the consumer credit fie*ld. There need not be duplication nor overlap of federal and provincial legislation in the consumer credit f i e l d i f this implementation program is successful. Provinces w i l l be able to attain their own legislative authority and improve the level of protection which they offer to residents in the province. Their position in this regard w i l l be unchallenged by federal legislation. Their ability to take these steps and to make such significant gains w i l l be aided by the application of similar standards to federal institutions through the BDPA. However the study did not preclude unilateral federal action. If the consultations are stalled for some reasons, and no progress has been made for some time then the federal government w i l l have to take the necessary steps to ensure that the legislation is eventually put in place. "A Study of the Proposed Truth-in-Savings Legislation in the U.S." was completed on September 12th- The purpose of this Consumer Research staff report was to seek "lessons" ( i f any) for Canada, arising out of the discussion surrounding the U.S. "Truth-in-Savings B i l l " . The major issue was the recommendation concerning the nature of the credit information disclosure - whether single measure or up to three measures should be disclosed and whether a supplementary l i s t of "back-up" or auxilliary information must accompany disclosure- The study concluded that: Three rate disclosures are likely to be overwhelming and confusing for consumers. Two rate disclosures , accompanied by standardization of interest payment and compounding systems, would do much to remove confusion and f a c i l i t a t e rate comparisons. One rate disclosure, accompanied by daily compounding of interest may not, however, be 154 much more onerous in terms of compliance d i f f i c u l t i e s or costs than the "two-disclosure" method. On November 24th a Consumer Research staff report on mortgage prepayment penalties was completed. It recommended: 1. no prepayment penalty i f the mortgage rate was four or more percentage points above the "index rate"; 2. prepayment only on a day in which the terms could vary, or on the 5th anniversary of the effective date of the mortgage; and 3. penalties as provided in the prescribed maximum charge tables that equate penalties to the present value of the expected loss to the lender. While the Department staff was addressing the specific criticisms i t had received on BDPA, opposition from the House of Commons to an early introduction of a revised b i l l , was growing. Although i t was anticipated that the B i l l would be mentioned in the Throne Speech, i t was predicted that any new b i l l would receive a rough ride. The Conservatives had already served notice that they would oppose a revised BDPA. Economic issues, especially unemployment and inflation, are expected to dominate the new session and legislative oddsmaker give such economic measures as the borrowers b i l l l i t t l e chance of becoming law before the next election.(164) Sinclair Stevens didn't give i t a "snowball's chance in h e l l " of surviving, even though he agreed with the disclosure provisions, the b i l l contained too much, a lot of i t was cumbersome and i t was an invasion of provincial jurisdiction. I take great exception to academic c i v i l servants 155 saying they have empirical evidence that there is a need and when you press them you find that 0 there are one or two cases.(165) Liberal Member of Parliament, Tony Abbott, who was now Minister of Small Business, while not echoing the Conservative position, provided his party with a word of caution, "If you go too stongly against the business community you inherit a lot of very influential bad will".(166) On October 18th the Third Session of the 30th Parliament was opened. There was no mention of the revised Borrowers and Depositors Protection Act. The Department was not discouraged by this oversight. On November 1 a memo entitled, "Issues surrounding the re-introduction of the Borrowers and Depositors Protection B i l l " , was sent to the Deputy Minister, from the Director of Consumer Research, Dr. J.L. Evans. It assessed the current situation with respect to reintroduction. It concluded, based on an assumption that the B i l l would be reintroduced, that the Department must be braced for industry opposition, and at the same time be prepared to take the offensive in demonstrating to consumers the benefits that v. BDPA would bring. The memo assessed the current position of the three key participants, the consumer groups, the Federal-Provincial Task Force on Consumer Credit, and the finance industry. On consumer groups the memo stated that: [the] b i l l was attacked by certain consumer groups on the grounds that i t did not go far enough toward the ideal state of consumer protection. It is clear that this lack of support from a natural constituency contributed to the d i f f i c u l t i e s which the b i l l encountered. 156 It was now felt that that the consumer groups had been sold on the fact that their "ideal" legislation was not attainable. The memo reported that the Task Force on Consumer Credit had had a meeting of the minds on a strategy for implementations ...legislation would be enacted and proclaimed as a whole with regard to a l l institutions in a l l provinces. Should a province so desire, i t could then opt out of any one or a l l of the specific provisions. This was felt to be a "cleaner" proclamation strategy. Of the finance industry, the memo stated that the main business opponents had been and continued to be the Canadian Bankers' Association and the Canadian Bar Association.(167) No face-to-face consultations had occurred since June 1977 amendments had been made in response to proposals and concerns from these associations. It was felt that acommodation could only go so far and that the standardization of certain basic practices and procedures such as, the interest rate calculation and crediting, and the right to have interest rates reviewed by the government must not be sacrificed. The Minister continued to be briefed on the new b i l l and consulations were held with the major financial industry groups, including the Canadian Bankers' Association, the Association of Canadian Financial Corporations, the Trust Companies Association, the Canadian Insurance Association, and four major advertising associations. Only the fi r s t two groups continued to make substantive objections to the b i l l . (168) 157 A meeting of the Permanent Committee of Deputy Ministers of Consumer and Corporate Affairs (PCDM) was held December 6th. They received the report of the Task Force on Consumer Credit - The Report noted substantial federal-provincial agreement on a number of points. Unresolved issues included the unwarranted rate concept, enforcement mechanisms and the components of a credit charge. Right after this meeting i t was decided that the draft federal credit legislation, what had been referred to as the "Unofficial June 1977 Version of the BDPA", would be called the "Fair Credit and Savings Act" (FCSA). By March 7th, 1978 the Ministerial clause-by-clause briefing book on the FCSA was complete. On March 16th the Federal-Provincial Conference of Consumer and Corporate Affairs Ministers ratified the work of the Task Force to date. The three outstanding issues remained unresolved.(169) At this meeting. Departmental members of the Task Force explained that the new credit act had not been introduced because of a heavy schedule of items relating to unemployment, inflation and other pressing national issues, and because the timing of the next federal election was uncertain. It was important, for the Department, that the b i l l not f a i l again.(170) P o l i t i c a l and economic pressures were beginning to raise serious problems for FCSA, and the Department of Consumer and Corporate Affairs was beginning to recognize this reality. Example of pressures occurring during the 1977 to March 1978 period included: l.No mention in the Speech from the Throne of the Department's two key b i l l s : the third version of the Stage II amendments to the Combines Investigation Act, and a revised BDPA; 158 2.Only one b i l l introduced into the House of Commons by the Department (171), a l l others were introduced f i r s t in the Senate (172); 3. The passage of the British Columbia Consumer Protection Act, to regulate Tax Discounters and contracts with Dance Studios Health Spa's and food plans, to provide a cooling-off period for credit sales, to regulate credit disclosure, to allow for a reversal of onus for unconscionable mortgage transactions and for prepayment of consumer loans without penalty (173); 4. The tabling in December 1977 of a draft b i l l on consumer protection by the National Assembly of Quebec. The b i l l covered a l l aspects of consumer credit in conformity with the c i v i l law system; and 5. The February 16, 1978 c a l l by the First Ministers' Conference for a reduction of government regulation of the public sector and of the overlapping functions of the federal and provincial governments. The issue was to be referenced to the Economic Council of Canada for study and for recommendation for action (174). Not withstanding the improved relations between the Department of Consumer and Croporate Affairs and the provinces, industry and other government departments, the proposed Fair Credit and Savings Act was not introduced. Reading the signs, the Department decided to change its approach to accommodate the new developments just outlined. 159 3.6. Genetic Mutations March 1978 to July 1981 3-6.1. Which Way to Go March 1978 to September 1978 With a new recognition that the approach to federal credit disclosure legislation had- to be changed, the Department of Consumer and Corporate Affairs spent the next six months searching for a workable strategy. During this intradepartmental struggle, relations with the Department of Finance deteriorated significantly. Yet, publicly, the promise of imminent introduction of new and improved consumer credit legislation was maintained. i On March 30, 1978, the Director of Consumer Research, John Evans, suggested that i t was an appropriate time to re-examine the federal government ,'s legislative proposals in the f i e l d of consumer credit in light of current economic and p o l i t i c a l r e a l i t i e s . We must re-establish the prime goals and objectives of our proposed interventions - in the consumer credit f i e l d and then determine i f the approach which we are proposing stands a r e a l i s t i c chance of achieving these goals in the least cost fashion.(175) Specifically, the merits of the omnibus approach and the extensive administrative component of the Borrowers and Depositors Protection Act, were questioned. Interdepartmental co-ordination started to be a concern. On April 18th, 1978, in a memo to the Minister of Consumer and Corporate Affairs regarding the criminal rate of interest, Mr. Jon Guss (176) warned Mr. Allmand that Mr. Ron Basford, now the Minister of Justice, was about to 160 introduce to Cabinet, a proposal for a Criminal Code amendment to set a criminal rate of lending at 45%. Guss fel t that to have such a b i l l tabled before the House prorogued would seriously undercut the Department of Consumer and Corporate Affairs' i n i t i a t i v e for credit legislation for the next session of Parliament. The memo recommended that the 45% criminal interest rate amendment be omitted from the omnibus b i l l for three reasons: 1. the 45% rate may be low and may dry up the market for small, short term loans; 2. the issue of having to define "interest" had been avoided thus far and i t might jeopardize the desired credit reforms of the Consumer and Corporate Affairs to have the Department of Justice take a narrow definition at this time; and 3. the use of criminal provisions in a smaller more slimmed down version of BDPA would need to include a criminal rate provision in order to be secure in the federal jurisdiction for the proposed legislation. By May 8th the Assistant Deputy Minister, Michael McCabe and the Deputy Minister, Sylvia Ostry, had developed a plan of action. It included recommendations for the Department in general, and for FCSA in particular. They concluded that there was a necessary and legitimate role for the federal government to play in the consumer credit f i e l d . Reasons included: 1. clear federal jurisdiction with respect to interest; 2. anomolies in the market caused by outdated federal legislation relating to interest; 161 3. problems created by the provincial initiatives that are neither uniform nor comprehensive; 4. different regulations affecting competing financial institutions; and 5. the need for improved quality and quantity of information for researchers and policy makers. They further concluded that the five objectives stated at the introduction to Parliament of the Borrowers and Depositors Protection Act (177) should be retained and that attention should be focused on the vehicles for implementation and allocation of responsibility between the federal and provincial governments. Specific recommendations included many accommodations to the position of the provinces and a shifting of the criminal provisions to the Criminal Code. The plan recommended the retention of certain basic principles, namely: that borrowers should pay interest only on the actual amount borrowed and only for the actual time during which they have the use of the borrowed funds; that the credit charge rate quoted to borrowers and applied to the borrowed funds should reflect the total cost of credit, where the total cost of credit is defined as the difference between what an individual would pay i f a transaction were consummated on a cash basis and that which he would pay i f i t were consummated on a credit basis; that the credit charge rate disclosed to the borrower should be the effective annual rate as opposed to the nominal or some other rate. The final recommendation with respect to the f a l l session of Parliament, was to introduce a Consumer Credit B i l l , reduced in scope and coverage, in line with the outlined recommendations. The options of a reintroduction of the Borrowers and Depositors Protection Act, or the adoption of a piecemeal approach through a series of amendments were rejected. It was also recommended than an intensive re-analysis of the 162 consumer credit proposals be done along with futher consultations with industry, consumers and the provinces. Furthermore, McCabe and Ostry recommended that the Task Force on Consumer Credit and the Department of Consumer and Corporate Affairs be reformulated and that an effective marketing plan be designed. (A proposed reformulation of the structure and activities of a Consumer Credit Branch was also presented.) Others were not so optimistic about the reintroduction of the FCSA. Writing in the Vancouver Sun financial columnist Michael Grenby argued that consumers didn't know and didn't care that BDPA was being watered down in the process of formulating a new b i l l called the Fair Credit and Savings Act. Grenby predicted that the new b i l l might not surface, "With an election not too far off, unpopular, controversial legislation w i l l certainly not be a priority with cabinet".(178) Grenby's words proved to be prophetic-On June 27th a memorandum was sent to the Cabinet Committee on Economic Policy. Presented by the Department of Consumer and Corporate Affairs the memo sought Cabinet authority to draft proposed Credit and Savings Legislation. New or amended features (from B i l l C-16, BDPA) included: 1. the right to prepay any loan or mortgage; 2. no prepayment penalties except for low interest mortgages; 3.limitation on prepayment mortgage penalties to reflect potential ecomonic loss to lender 4. improvement in the comparability of the rates and deals being offered, consonent with existing provincial disclosure legislation; 163 5. credit charges calculated to reflect the f u l l cost of a loan; 6. prohibition of misleading contractual terms; and 7. repeal of the Small Loans Act, Interest Act, and the Pawnbrokers Act. It was noted in the memo that because of recent representations from the trust companies the Department of Finance was not fully satisfied and recommended a rethinking of certain provisions. Further consultations were envisaged prior to fi n a l drafting and introduction in the F a l l . Consumer support was anticipated, and the proposed amendments to the Bank Act were seen to be complementary to the proposed credit legislation. Continuing negotiation with the provincial governments was felt to be the key to success On July 12 the Cabinet Committee decided that further study should be given to the proposed "Credit and Savings Act". The delay was due, primarily, to the need for further negotiations with the Department of Finance on key aspects of the b i l l . Finance and Consumer Affairs were not in agreement. The Department tried a new strategy. On August 16th a letter was sent to a l l provincial Ministers of Consumer Affairs asking for their agreement, in principle, to the proposed Credit and Savings B i l l The federal government made i t clear that provincial support "in principle" would in no way prejudice the final position of any of the provinces. The Department saw such support as a tool to outweigh the other contrary voices that were delaying cabinet approval. Provincial support was felt to be c r i t i c a l . 164 When the provinces failed to respond, Dr. Evans proposed an alternative strategy. In a memo dated August 24th he recommended: 1. no further initiatives with respect to Cabinet; 2. encouraging the Department of Finance to adopt the main principle of the proposed Act in the Bank Act revisions; 3. continued efforts to encourage and assist credit unions and caisses populaires to introduce consumer oriented innovations, to force market action by other institutions; 4. notifying provinces at the September meeting in Halifax that federal initiatives in consumer credit would be delayed indefinitely; and 5. preparing an analysis of provincial legislation in the credit f i e l d with suggestions for modification in view of Consumer and Corporate Affairs research results. These recommendations were made in light of: provincial intransigence, industry opposition to new legislation and industry initiatives to improve the credit market(179); objections from the Departments of Finance and Industry Trade and Commerce; and low government priority for consumer related credit reform; and diminishing resources within the Department of Consumer and Corporate Affairs due to budget cuts Evans, had in fact, now responded to his own memo of March 30th. He advised abandoning any legislative initiatives in the area of consumer credit sponsored by the Department of Consumer and Corporate Affairs. Instead, he advised relying solely on indirect tactics, and recommended initiat i v e s to persuade others to legislate or to change their market 165 behavior on a voluntary basis.(180) This was a rather s u b s t a n t i a l change i n p o s i t i o n . In a memorandum of September 14th Paul Wong, l e g a l advisor to the Consumer Research Branch, suggested a two-phased approach to maintain the federal i n i t i a t i v e i n the area of consumer c r e d i t i n l i g h t of the current opposition and impending e l e c t i o n . Wong proposed ta b l i n g a revised d r a f t of the Fair Credit and Savings B i l l i n the F a l l session. After the e l e c t i o n the Department could proceed with reform v i a a series of d i s t i n c t amendments to e x i s t i n g l e g i s l a t i o n . This would ensure incorporation of a number of key provisions, while d e f l e c t i n g some of the c r i t i c s who had united to oppose B i l l C-16, The Borrowers and Depositors Protection Act. S p e c i f i c a l l y i t was proposed that: 1. cost of c r e d i t disclosure and disclosure pertaining to i n t e r e s t paid on deposit earnings be incorportated into the Bank Act; 2. amendments be made to the Interest Act by changing the d e f i n i t i o n of i n t e r e s t , allowing variable i n t e r e s t rate mortgages, p r o h i b i t i n g late payment panalties, and changing prepayment provisions; and 3. the Small Loans Act be repealed. I t was evident that a change i n d i r e c t i o n was needed. The l e v e l of disagreement between the Department of Consumer and Corporate A f f a i r s and the Department of Finance was strong enough by September 1978, for the Minister of Finance, Jean Chretien, to write to Warren Allmand. Following up on the Cabinet decision of July 12th 1978, Chretien d e t a i l e d his concerns with repect to the proposed c r e d i t l e g i s l a t i o n . On the strength of the objective of improving competition i n the consumer loan and 166 deposit market Chretien had agreed to have l e g i s l a t i o n apply to the chartered banks, yet several provisions now appeared to Chretien, to be capable of s t i f l i n g competition and of creating i n e q u i t i e s for the f i n a n c i a l i n s t i t u t i o n s . Chr^tein elaborated on four points.(181) Throughout these i n t e r n a l introspections and i n t e r c i n e discussions, the public p o s i t i o n of the Department was e x t r a o r d i n a r i l y o p t i m i s t i c . Perhaps the Department of Consumer and Corporate A f f a i r s was bouyed by the rapid passage of B i l l C-46, the Tax Rebate Discounting Act.(182) This Act was developed at the urgent and unanimous request of the provinces, and was scheduled to be administered during the 1979 tax year by the Department (assisted by the Bureau of Competition Po l i c y , Revenue Canada, the p r o v i n c i a l departments and the R.C.M.P).(183) Whatever the reason, Warren Allmand continued to promise l e g i s l a t i o n . On May 26th he spoke to the Association of Canadian F i n a n c i a l Corporations. He said that the government was i n the process of d r a f t i n g a new set of proposals i n response to the representations of interested p a r t i e s , including the provinces. The new Fair Credit and Savings Act (December 1977) was said to embody the objectives of the old Borrowers and Depositors Protection Act, but to be more p r a c t i c a l i n i t s provisions. The Minister (Allmand, 1978) said that "...now that the ground work has been done, the time has come to give the l e g i s l a t i o n the* green l i g h t and bring about i t s speedy passage into law". On June 10th the F i n a n c i a l Post quoted Allmand as saying that the BDPA would become a new and very modified b i l l c a l l e d the Credit and Savings Bill.(184) On August 3nd, Michael McCabe l e f t the Department and 167 Mme. Kathleen Francoeur-Hendriks was appointed Assistant Deputy Minister of Consumer Affairs. At the September meeting of the PCDM, she maintained Allmand's optimistic stance with respect to the Credit and Savings B i l l and its introduction into the House of Commons.(185) Notwithstanding the public optimism, the period March to September of 1978 was characterized by internal conflict and discussions about strategy. September marked the end of any concerted attempt by the Department of Consumer and Corporate Affairs to regain the i n i t i a t i v e in the f i e l d of consumer credit legislation. The actions of others came to dominate future developments and the Departmental role, for the most part, as that of observer and occasional f a c i l i t a t o r , rather than that of leader. 3.6. Genetic Mutations March 1978 to July 1981 3.6.2. Piecemeal Approach October 1978 to July 1981 If there was a key player in the October 1978 to July 1981 period i t was the financial community. Both through voluntary action initiated by various segments of the industry and by government action necessitated by industry concerns, there was a gradual series of ad hoc changes that affected the entire market for consumer credit. As with most gradual, piecemeal and ad hoc policy changes, this particular two year process was marked by failures and a series of shifts, not only of governments and personnel, but also of substantive policy and the locus of activity. 168 At various times throughout this 26 month period the finance industry announced new policy provisions. Often the Minister of Consumer and Corporate Affairs would praise the action. For example, on November 31, 1978 Warren Allmand commended certain major bank and trust companies for introducing open mortgage plans whereby, with 3-5 year mortgages consumers can pay off their debts, in whole or in part at any time without an interest penalty.(186) In March 1979 the Toronto Dominion Bank began lending money for mortgages under FLIP (Flexible Loan Insurance Program).(187) Under the scheme the mortgagor would set aside a lump sum of money. The mortgage would increase by the lump sum set aside and this reserve of money set aside would be used to subsidize the mortgage payments in the f i r s t year. In April, the Bank of Nova Scotia introduced, on a t r i a l basis in British Columbia, special plain language loan forms.(188) On September 5th Consumer and Corporate Affairs Minister, Allan Lawrence, welcomed the recent decision of several chartered banks to introduce accounts on which interest accrues on the daily deposit balance.(189) By January, the Canadian Imperial Bank of .Commerce and the Bank of Montreal introduced multibranch banking, a concept that allows customers to withdraw and deposit at any bank branch through the application of computer technology.(190) Then in March of 1980 the Bank of Montreal and several trust companies introduced "no charge chequing" accounts with daily interest rates (provided a minimum deposit was maintained).(191) These innovations affected -the consumer credit market. On November 10th the Financial Times noted that "the controversial graduated payment mortgage seems to be carving a niche for i t s e l f in Canada's housing 169 market".(192) It that reported mortgages valuing $784 m i l l i o n , or s i x percent of a l l r e s i d e n t i a l mortgage transactions i n Canada i n 1979, were financed through Canada Mortage and Housing- Corporation's "Graduated Mortgage Payment Plan". From November 1978 to July 1979 there were a series of unsuccessful attempts to change e x i s t i n g l e g i s l a t i o n . On November 21st, B i l l C-21, "An Act to amend the Criminal Code, the Canada Evidence Act and the Parole Act", was introduced by the Department of Justice and was given F i r s t Reading i n the House of Commons. ,Sec 43 of the b i l l allowed sec 305 of the Criminal Code to be expanded to include a "Usurious Credit Charge Rate" (sec 305.1) where i t would be a criminal offence to charge i n excess of 60% per annum. The Department of Consumer and Corporate A f f a i r s drafted, during November and December, proposed regulations "concerning cost of borrowing disc l o s u r e " for incorporation into the new Bank Act.(193) On January 10, 1979 Finance Minister, Jean Chretien released d r a f t regulations for B i l l C-15, the new Bank Act. These included regulations providing for disclosure of information to customers with respect to the cost of borrowing from the bank and for disclosure of charges and rates of i n t e r e s t on deposit accounts. It did not, however, include a l l items proposed by the Department of Consumer and Corporate A f f a i r s . On February 15th, i n question period, Mr. Allmand r e i t e r a t e d h i s int e n t i o n of introducing amendments to the Interest Act. None of these proposals or i n i t i a t i v e s achieved success, as the government of Pierre E l l i o t Trudeau was defeated.(194) 170 In June 1979, the Honorable Allan Lawrence was named Minister of Consumer and Corporate Affairs and Solicitor General, in the newly elected Progressive Conservative Government. Agreement on regulations for disclosure under the Bank Act and the amendment of the Small Loans Act were the major issues. The f i r s t , the perogative of the Department of Finance, was resolved with the tactical assistance of the Department of Consumer and Corporate Affairs. The second issue was never brought to fruition. On July 10th, the Federal-Provincial Task Force on Consumer Credit met in Quebec City. The principle agenda item for the Task Force was the "Cost of Borrowing Disclosure Regulations drafted by the Department of Finance. Representatives from the Office of the Inspector General of Banks and of the Department of Finance were present. The proposed regulations were drafted so as to be the most simple, least costly and least controversial alternative. To gain acceptance and not put chartered banks at a competitive disadvantage, the least demanding provincial standard was recommended. It was agreed, however, that i f the provinces could decide upon and would be prepared to introduce uniform requirements, a Bank Act regulation adopting those requirements would be readily forthcoming. There was, then, the following accord: ...the provincial and federal governments agree, in principle, to the adoption of the effective annual rate as the basis of computing interest and that the timing of the introduction of such a measure be reseved for future discussion.(195) The provincial concensus and subsequent strengthening of the proposed disclosure provisions under the new Bank Act, was the result of behind the scenes negotiating by o f f i c i a l s of the Department of Consumer and Corporate Affairs. 171 On September 11th, Minister of Finance, Mr. John Crosbie, wrote to Allan Lawrence, Minister of Consumer and Corporate Affairs suggesting that immediate action be taken to repeal the Small Loans Act, or in the alternative, to amend the statute. Crosbie had already directed the Superintendent of Insurance to contact the Department of Justice with a view to exempting credit unions caisses populaires, and trust and mortgage companies from the Small Loans Act. By the 30th of November, there was general agreement between the Departments of Consumer and Corporate Affairs, Finance and Industry , Trade and Commerce that the Small Loans Act should be repealed and the Criminal Code be amended to establish a usurious lending rate by way of a single act of Parliament. Provisions relating to prepayment rights could them be included in subsequent amendments to the Interest Act. The Cabinet Committee on Legislative and House Planning was to disrupt this general agreement of November 30th The Minister of Consumer and Corporate Affairs was advised that the Miscellaneous Statute .Law Amendment Act (MSLAA), which was up for discussion before the Cabinet Committee, could involve problems of coverage, timing and reaction from specific interest groups such as the Association of Canadian Financial Corporations. The proposed Act would exempt the credit unions, caisses populaires and mortgage companies from the Small Loans Act. It was argued that the department was presently drafting proposals for repeal or amendmemt to the Small Loans Act, and that the proposals of the MSLAA might confuse and frustrate the intent of government policy. Furthermore, the draft MSLAA tabled in the House earlier and presently proceeding 172 through committee review by both the House and Senate was due to be reported early in the New Year. The Minister was advised to support the MSLAA because of the great urgency in amending the Small Loans Act. It was, therefore, recommended that the MSLAA go forward, subject to the following provisos: 1. that there be an undertaking to bring a l l lending institutions under the revised Small Loans Act i f i t were amended again as a result of CCAC [Consumer and Corporate Affairs Canada] proposals, in ord er that no group of lending institutions would be at a competitive disadvantage; 2. that you or the Minister of Finance be authorized to advise the relevant associations of plans for this amendment and for the Small Loans Act after Cabinet approval of this amendment but before the MSLAA would be tabled in the House; and 3.if main elements of an all-party agreement for interim amendments to the Small Loans Act could be agreed before this amendment were made public, then this amendment would be dropped from the MSLAA before the MSLAA would be made public.(196) On November 30th a letter was sent from the Minister of Consumer and Corporate Affairs to sixteen other Cabinet ministers. It set out the Department's proposals with respect to amendments to the Small Loans Act. Specifically, Mr. Lawrence suggested: 1. removing licencing requirements from deposit taking institutions; 2. allowing non-banks to enter the f i e l d of variable credit and to issue credit cards; 3. placing rate ceilings in the regulations rather than in the statute; and 4. raising interest rate ceilings to 2% per month for loans up to $5,000. It was anticipated that a l l but one province would support these amendments. The banks would object to being covered by the Small Loans Act and the financial community would be unhappy about the raised dollar 173 coverage. Consumers, the letter stated, should be pleased with this coverage. About the same time the Minister issued a press release describing this proposal. The Department of Finance was not happy. Allan Lawrence asked his Department to prepare briefing notes for a meeting with Finance Minister John Crosbie. The notes upheld this complete switch in the Departmental policy position. 1. Why no repeal? -insufficient competition in isolated areas of the country and for low-income high-risk borrowers -several provinces favor retention -able to maintain right to prepay without penalty for consumer loans 2. Why coverage increased to $5,000? -trade-off for increasing the allowed interest rate -to extend coverage of repayment without penalty -expected "demand" from opposition party and provinces 3. Why banks included? -banks s t i l l exact a prepayment penalty -fairness that a l l institutions be treated the same -painless for the banks -favored by provinces (197) Without having resolved this disagreement between departments, on December 11, 1979, the Department of Consumer and Corporate Affairs presented to Cabinet, a memorandum for "Amendment of the Small Loans Act". The issue died. The Progressive Conservative Government went down to defeat on December 13th, and was replaced by a majority Liberal Government.(198) John Evans, who had resigned earlier from the Consumer Research Branch for a by-election, became John Evans, Member of Parliament, and shortly after, executive assistant to Finance Minister, Allan MacEachen. 1 74 In March, Andre Ouellet was named Minister of Consumer and Corporate A f f a i r s . The s i t u a t i o n of March 1980 was, undoubtedly, very f a m i l i a r to Mr. Ouellet as there were so many s i m i l a r i t i e s between 1980 and the 1975 period when he was f i r s t Minister of Consumer and Corporate Affairs.(199) .By June 17, 1980 the decision to repeal the Small Loans Act had been taken. Because of t h i s , the Department of Consumer and Corporate A f f a i r s recommended amendments to B i l l C-6 (Bank and Banking Law Revision Act) to: -confer the r i g h t to prepay loans and mortages; -eliminate prepayment penalties on a l l non-mortgage consumer loans; and - p r o h i b i t late payment p e n a l t i e s . The Departments of Finance and Insurance concurred and were prepared to introduce the appropriate amendments. On July 22, B i l l C-44, "An Act to amend the Small Loans Act and to provide for i t repeal and to amend the Criminal Code making i t an offence to charge more than a 60% annual rate of i n t e r e s t " , was sent for study to the Senate- Committee on Banking, Trade and Commerce. This was a Department of Finance b i l l supported by the Association of Credit Finance Corporations, the c r e d i t unions, les caisse populaires and the banks. By the end of the year both the Bank and Banking Law Revision Act, and the act to amend the Small Loans Act (etc) was passed into law. (200) Neither act was i n i t i a t e d or directed by the Department of Consumer and Corporate A f f a i r s . Rather, both s a t i s f i e d major and pressing problems i d e n t i f i e d by the f i n a n c i a l community. The Bank Act revisions which 175 affected banks and a l l other lending and deposit taking institutions, finally settled the uncertainty caused by a three year process of re-enacting and updating the Bank Act.(201) The Small Loans Act repeal and the Criminal Code amendments met the needs of the ACFC, whose members could no longer economically extend loans under the Small Loans Act and the needs of the credit unions and the caisses populaires who, because of rising interest rates were being forced into being licenced under the Small Loans Act.(202) Throughout the period 1978 to 1981, the Department of Consumer and Corporate Affairs continued to be involved in the ongoing deliberations of the Task Force on Consumer; Credit.(203). Moves toward a federal consumer credit reform b i l l were not reinstituted.(204) 1.7 History in terms of the Alpha and Beta Weltanschauung The period of conception, from 1960 to March 1974 was a time of switching back and forth between the two world views. Taken overall, there was a trend toward the Beta and piecemeal approach, but the pathway to that eventual position was not without deviation. The private members' b i l l s , introduced in 1960's by Senator David A. Croll, were aimed at "protecting consumers". They did not propose removing interest ceilings, nor did they propose broad coverage (banks were excluded in some of these b i l l s ) . It was, then, Beta-style, piecemeal legislation. The Royal Commission on Banking and Finance (the Porter Commission), aimed their recommendations at increasing competition in financial 176 markets. Theirs was a macro level study that aimed recommendations at rationalizing the legislation surrounding money transactions, by type of transaction (function), rather than by institution. The Porter Commission recommendations were Alpha-style, and the implementation process recommended was piecemeal and incremental. In the academic community Prof. J.S. Ziegel, at a Conference on consumer credit, called for a uniform consumer credit act. His objective was to protect consumers. This was the f i r s t c a l l for a Beta omnibus approach. The Report of the Special Joint Committee on Consumer Credit (Croll/Basford Report) recommmended both Alpha and Beta-style reforms to be carried out in a piecemeal fashion. While the Report did not recommend removing the interest rate ceilings under the Small Loans Act (a "classic" Alpha-style position), i t did make recommendations to increase competition in financial markets. As well, i t s proposals were very sweeping, and made reference to several aspects of credit reform. From this Beta to Alpha back to Beta and finally to an Alpha/Beta blend of recommendations, the impetus for consumer credit reform moved, from the public arena, to the newly created Department of Consumer and Corporate Affairs. The f i r s t recommendations eminating from the Consumer Research Research Branch called for no action. This may be construed as an Alpha point of view, where the world is viewed nationally, and individual, isolated problems offer insufficient evidence to warrant legislation. Knowing that Dr. Warren James, author of these 1968 recommendations,'was opposed to interest rate ceilings, and knowing that James knew that his Minister (Basford) was in favor of ceilings, the "no action" recommendation might well be considered an Alpha voice. 177 During the next two years, the i n i t i a t i v e for credit reform rested with Mr. Basford. The Canadian Consumer Council, in 1969, in i t s Report the Minister of Consumer and Corporate Affairs on Consumer Credit to recommended a Beta ("protectionist") approach. The Report suggested an omnibus b i l l , perhaps enacted through a series of amendments before being brought together into one statute. In April 1970, the B i l l s of Exchange Act was amended - a positive Beta-style piecemeal action Further, in July of 1970, the Cabinet authorized the amendment of the Small Loans Act, the Interest Act and the Criminal Code, to allow for reforms in the area of Beta-style consumer credit reform. Activity was, then, peicemeal and clearly from the Beta school. In 1971, Dr. James presented an Alpha/Beta(industry) paper to the Minister, entitled "Observations on the Interest Act and Small Loans Act". It recommended a piecemeal approach. By June 1971 Harvin Pitch, Special Assistant to the Minister (Basford), proposed a Beta perspective omnibus paper. On July 19, 1973 Cabinet authorized specific Beta-type amendments to portions of the Interest Act. The focus was back to piecemeal action. Even the March 12, 1974 "Green Paper" was piecemeal in its approach. Its recommendations (where such were offered) were from the Beta camp. There were no recommendations with respect to the Small Loans Act. Again, Dr. James may not have wished to propose an Alpha approach., The Beta W e l t a n s c h a u u n g continued to be the dominant position within the Department of Consumer and Corporate Affairs (particularly within the Consumer Research Branch) from March 1974 to November 1974. By December, however, Departmental o f f i c i a l s were successful in getting the Beta 178 peicemeal approach switched to a Beta omnibus stand. This Beta omnibus perspective was reflected in the report of the Task Force on Consumer Credit in March 1975 and in the Cabinet Memorandum of June 5, 1975. By August 25, 1975 another switch had occurred. As a result of consulations with o f f i c i a l s from the United Kingdom, and of the economic background of the 1975 "new Team" of o f f i c i a l s , the Minister (Ouellet) was persuaded to take an Alpha approach to omnibus consumer credit reform legislation. On October 27, 1976 the Borrowers and Depositors Protection Act was introduced into the House of Commons by Antony Abbott, Minister of Consumer and Corporate Affairs. B i l l C-16 was omnibus and addressed primarily Alpha-type concerns (removal of interest rate ceilings, disclosure provisions, uniformity). It was, however sold as a Beta-brand ("protectionist") piece of legislation. It's Beta provisions were minimal according to those from the Beta2 (consumer) perpective, and were impractical according to those from the Betal (industry) perspective (for example unwarranted rate and prepayment provisions). By February, Departmental o f f i c i a l s recommended adding more Beta-style provisions ("enhanced enforcement package") to BDPA, while retaining the Alpha oriented sections. The next month, an attempt for a unique Alpha/Beta compromise b i l l was suggested. The proposal involved retaining ceilings while providing a more risk sensitive level, and rate structure for interest rate ceilings (to encorporate fixed and variable cost functions into the level and rate designations). This proposal was short lived. The omnibus approach was s t i l l clear, up to May 12, 1977, when the Minister (Abbott) introduced to the House Committee on Health- Welfare 179 and Social Affairs, a package of amendments to BDPA. These amendments augmented the number and strengh of Beta-type proposals. The f i r s t hint of a move away from omnibus legislation came May 16, 1977 at the Federal-Provincial Conference of Deputy Ministers of Consumer Affairs. Here i t was proposed that BDPA be adopted (enacted) in two parts. Two months later, the Senate Committee on Banking, Trade and Commerce, recommended that BDPA be completely revised (presumably as an omnibus b i l l ) . By November of 1977 the Federal-Provincial Task Force on Consumer Credit recommended that the Criminal Code be amended with respect to loan sharking. This was a move in the direction of a piecemeal approach. The next month, the Department completed i t s draft of the proposed, Fair Credit and Savings Act, an omnibus Alpha/Beta-style blend piece of legislation. From the granting of Royal Assent to the Tax Rebate Discounting Act, on April 20, 1978, the Department was definitely acting in a piecemeal or stepwise fashion on consumer credit concerns. By August 1978, the Director of the Consumer Research Branch recommended that no further action be taken with respect to the omnibus proposed Fair Credit and Savings Act. He proposed a new strategy of encouraging the i n i t i a t i v e of others (other departments, the provinces and industry), to reform the credit market. Thus there was a strategic switch, from omnibus to stepwise action. The perspective, though, remained clearly Alpha. It must be presumed, judging by the advertising, that the innovations adopted by the banks (interest savings accounts, "multibranch" banking, and "no charge" chequing), were cost effective and were, therefore more 180 Alpha-type than Beta-type offerings. B i l l C-6, the Bank Act (revisions) and B i l l C-44, Small Loans Act and Criminal Code (repeal and amendments) were most certainly from the Alpha perspective. The only divergence in the post April 1975 (Alpha and piecemeal) approach, was a brief period around November 1980, when Consumer Research Branch o f f i c i a l s recommended, for reasons of p o l i t i c a l expediency, the revision (not repeal) of the Small Loans Act interest ceiling and rate provisions. Throughout the period 1960 to 1981 the piecemeal approach predominated. The perspective changed radically, however, from the 1960's Beta-style to the 1975 and onward Alpha-style. The question, that emerges from this sweeping look at credit reform legislation is - Would piecemeal Alpha-type legislation have been successful in 1976? \ 181 NOTES TO CHAPTER 3 1. In 1960 David C r o l l was the "new boy" i n the Senate 2. In 1962 Senator C r o l l ' s t h i r d "Consumer Credit B i l l " included a preamble. His second b i l l had been c r i t i c i z e d for f a i l u r e to include this optional feature. It should be noted that further b i l l s s p e c i f i c a l l y excluded banks and trust companies in t h e i r applicat ion. 3. Professor J.S. Ziegel was teaching at the Uni v e r s i t y of Saskatchewan before moving to his present p o s i t i o n at the University of Toronto (1981). The influence of Professor Ziegel's writing and a c t i v i t i e s in the area of consumer credit was acknowledged by several of those interviewed for this thesis. See Ziegel and Olley (1966) and Zieg e l (1962, 1966b> 1968, 1975). As well, see the Report on Consumer Credit of the Special Joint Committee (1967, pp. 63-66). 4. The regulations for rate disclosure under the Bank Act were considerably less stringent than those under many provncial consumer cr e d i t laws. Thus, f i n a n c i a l i n s i t i t u t i o n s operating in the same province were governed by d i f f e r e n t disclosure regulations. Non-bank cr e d i t grantors were d i s s a t i s f i e d by what they c a l l e d "discriminatory" regulations. See the F i n a n c i a l Post, November 18, 1967 . 5. Record of the House of Commons Debates includes the following record of discussion on credit during the 27th Parliament, F i r s t Session (January 18, 1966 - May 8, 1967): Credit: consumer pp.419, 7316; rates pp.2949, 2997. 4416, 5610-1 5695, 7317; disclosure pp. 8243, 8300, 2735-7 5527, 5529, 5532, 7316, 7323, 8390, 8418, 11825; p r o v i n c i a l j u r i s d i c t i o n pp. 5431, 73.9-22, 8227; Interest rates: control pp.2735-7, 8383, 8390-2, 8401, 8416-8 consolidating i n t e r r e l a t e d l e g i s l a t i o n pp.1122-30; Fi n a n c i a l i n s t i t u t i o n s : c o n t r o l l i n g pp. 10111, 10888-92, 11221-4 11286, 11290, 11292-5, 12981,13003: cooperation with provinces on l e g i s l a t i o n pp. 11289-90 11361, 11589, 13004, 13041, 7233-4, 13012, 13024, 11672; hidden costs protecting consumers pp.419, 469, 1123-6, 12295-6; protection of borrowers pp. 12293-4, 11361-2; and during the Second Session of the 27th Parliament (May 8, 1967 -A p r i l 23, 1968): Credit: c r e d i t assignment agreement pp. 440-1, 3337; consumer credit committee recommendation pp. 113-5, 257-8, 826, 1444-5, 3090-3, 3209-14, 3232, 3272, 3282-3, 3302, 4389-402, 4418-21, 6849-50, 6855 credit commissioning est a b l i s h i n g pp. 475-5: f e d e r a l - p r o v i n c i a l j u r i s d i c t i o n pp.3106, 3214-5, 3231-3, 3242, 3281, 3292-4, 3303 3322-7, 3335, 3339-
UBC Theses and Dissertations
The Borrowers and Depositors Protection Act : a case history in legislative failure Burns, Susan Kathleen 1981
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