As a follow-up to our piece on British payday lenders and regulation, this article will describe the high-level regulatory framework for payday loans in Canada.

A payday loan is a short-term loan for a relatively small sum of money. Furthermore, payday loans are typically given by non-traditional moneylenders (i.e. businesses that are not financial institutions such as banks or credit unions). It is evident that, by virtue of the existence of the payday lender, there is a clear need being met by the industry not being met by the banks and other financial institutions. However, the reality of this is that these non-traditional moneylenders are often under-regulated and this under-regulation has resulted in an industry that has become well-known for charging exorbitant rates of interest.

Generally speaking, the day-to-day activities of payday lenders are regulated provincially. The regulation of interest rates, on the other hand, is overseen on a federal level. As a result of this, under the previous framework, the provinces were largely left with an inability to regulate the price of a loan due to it being, for the most part, ultra vires – beyond their respective powers.

Upon further analysis, it was seen that this was an overall undesirable regulatory regime. What was necessary was for an increase in provincial regulation of the market. While the regime has altered slightly, the industry itself still does not come to mind when thinking about responsible corporations that treat customers fairly, particularly when it can be seen that some have track records of interest rates that have an APR in the hundreds or even thousands.

One could argue that such a business model is ethically bankrupt. Simply put, it is not a model that is sustainable for the consumer as it does not improve as the consumer’s position improves. As Schwartz and Robinson argue, the payday loan industry is focused on maximizing profit, with some individual lenders even falling in a purely economic domain and outside of the legal domain. Furthermore, the industry itself usually falls outside of the ethical domain.

However, it seems that some more traditional financial institutions may finally be waking up to fill this apparent need. For example, the Vancouver City Savings Credit Union (Vancity), Canada’s largest community credit union with over $17 billion in assets, recently added an alternative to the payday loan to its repertoire.

With far less predatory rates (ex. 19 APR vs 600 APR elsewhere), consumers can more easily break the cycle of debt. This is a clear example of a financial institution working within the regulatory regime that has allowed the payday industry to flourish to the detriment of the consumer. If this trend continues, the overall payday loan industry may see a shift towards being responsible and entering into the legal and ethical domains. It will demonstrate that businesses can expand their offerings, meet consumer needs, and still operate in an ethical fashion.