Federal government takes aim at NSF fees

Following a consultation period between the government, consumer groups and the banks, the federal government has acted on a 2023 budget commitment to “crack down on junk fees” through proposed amendments to the Financial Consumer Protection Framework Regulations (FCPFR), which would cap NSF fees at $10 and require a three-hour pre-notification period before an NSF fee can be charged. The amendments would also prohibit the imposition of NSF fees on overdrawn amounts of under $10, and on persons who have been charged an NSF fee within the last 72 hours.

What you need to know

• The proposed amendments would cap non-sufficient funds (NSF) fees at $10, and prohibit the imposition of NSF fees on overdrawn amounts under $10 and on persons who have been charged an NSF fee within the last 72 hours.
• Banks would be required to alert customers that a payment to be drawn from their account cannot be covered by reason of non-sufficient funds, indicate the amount needed to be deposited to avoid the imposition of an NSF charge, and provide a grace period of at least three hours to permit customers to deposit or transfer the required amount to their account before charging an NSF fee.
• The amendments would apply to personal deposit accounts of natural persons held at Schedule I and II banks, as well as authorized foreign banks, but not to accounts held by corporations or for business purposes.
• The consultation period for the proposed amendments closes on December 16th, 2024.

Proposed amendments

NSF fees would be capped at $10, and would not be imposed in respect of a personal deposit account that is in unauthorized overdraft by less than $10, or more than once within a 72-hour period.

Additionally, before imposing an NSF fee, banks would be required to send account holders who are natural persons an electronic alert between 8 am and 4 pm local time indicating:

• the fact that a payment to be drawn from their personal deposit account cannot be covered by reason of non-sufficient funds;
• the fact that a charge could be imposed by the institution by reason of non-sufficient funds;
• the manner in which the person may deposit or transfer funds into their account to avoid the imposition of the charge; and
• the minimum amount that the person must deposit or transfer and the time limit for doing so, which must not be less than three hours from the time the alert is sent.

An NSF fee would not be charged if the customer who was sent the alert deposits or transfers to their personal deposit account the amount set out in the alert within the time limit set out in the alert.

The alert would not need to be sent if the natural person has opted out, in writing, of receiving the alert or has refused to provide their contact information.

The Financial Consumer Agency of Canada (FCAC) would supervise and enforce banks’ compliance with the proposed regulations on a risk basis.

The amendments would also require banks to publicly disclose, within 30 days after the end of the calendar year, the number of NSF fees charged, the number of customers impacted, and the total revenue generated from these fees.

The measures follow a change to the Bank Act in 2022 which required banks to send electronic alerts to their customers when an account or line of credit balance drops under $100, or another dollar value set by the customer.

The amendments would apply to personal deposit accounts of natural persons held at Schedule I and II banks, as well as authorized foreign banks, but not to accounts held by corporations or for business purposes. Collectively, the government estimates that 2.9 million NSF transactions would be eliminated in the first year of the amendments with an estimated total loss in NSF fee revenue of $572 million in the first year.

The amendments follow proposed changes to the Criminal Code which effectively cap dishonoured payment fees charged by payday lenders at $20.

In addition to the lost revenue, the proposed regulations would most likely require banks to incur systems-related costs as they would be required to establish additional monitoring capabilities to track the charging of past NSF fees, send alerts to customers, and provide customers with a grace period to transfer or deposit money to avoid non-sufficient funds. The government estimates that implementation and reporting will cost banks $3.2 million in the first year and then decrease in subsequent years. These alerts would be in addition to existing alerts that are already sent when a bank account falls below a certain threshold amount.

As we noted in a previous bulletin, the government has generally shied away from regulating the pricing of bank products. In accordance with an April 2020 amendment to the Financial Consumer Agency of Canada Act, one of FCAC’s objectives is to “strive to protect the rights and interests of consumers of financial products and services and the public, taking into account the need of financial institutions to efficiently manage their business operations” (emphasis added). The proposed amendments represent another shift in favour of consumer protection.

International priority

The amendments follow recent changes in the United States and United Kingdom, where financial regulators have also moved to restrict “junk fees”.

In the United States, the Consumer Financial Protection Bureau (CFPB) launched an initiative in 2022 to crack down on “junk fees”. Since then, CFPB has issued guidance to limit overdraft fees and boosted supervision over financial sector fees.

CFPB has also proposed rules prohibiting large financial institutions from charging fees on transactions declined in real time. The prohibition would cover transactions involving the use of debit cards, ATMs, or certain person-to-person applications, with the charging of such fees constituting an abusive practice under the Consumer Financial Protection Act.

The Financial Conduct Authority, the lead financial industry regulator in the United Kingdom, has adopted a similarly aggressive stance towards “junk fees”. Recent rules require financial firms to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than for an arranged one, to price overdrafts with a single annual interest rate, and to advertise overdrafts with a representative annual percentage rate. Firms must also identify customers who are showing signs of financial difficulty and implement a strategy to reduce repeat use.

Next steps

As we have outlined in previous bulletins, the proposed amendments are the latest in a line of new consumer protection initiatives at the federal and provincial level. Ontario and New Brunswick recently revamped their consumer protection laws, and we expect consumer protection to continue to be an area of priority for governments across Canada.

The consultation period for the proposed amendments closes on December 16, 2024.