An Ounce of Flesh

Jul 31, 2009

Question: Should governments regulate interest rates charged by businesses?

The Case: The Government of Alberta recently moved against excessive interest rates by prohibiting payday loan companies from charging more than $23 in fees and interest for each $100 borrowed. Meanwhile, Senator Pierrette Ringuette of New Brunswick says she will ask the Senate Standing Committee on Banking to investigate credit card interest rates which typically approach 20%. There’s a religious term for charging excessive rates of interest: usury. The practice is morally condemned by all major faiths. In practical terms, though, as governments limit interest rates, regulated lenders may leave their highest-risk borrowers at the mercy of less desirable, unregulated lenders.

The Panel:
Ken Chapman: a lawyer, principal in Cambridge Strategies Inc., a public policy consulting firm, and blogger
Ron Ghitter: a Calgary businessman, retired senator, former Alberta MLA
Janet Keeping: a lawyer and president of the Sheldon Chumir Foundation for Ethics in Leadership

Janet Keeping: It’s a tricky question. I can see why the public wants action taken against companies that impose much higher than usual interest rates. But I have a real question as to whether regulation of interest rates is the answer.

One obvious reason why regulation might not be the answer is that when people need money, and can’t get it through more normal channels where much lower interest rates would be charged, really tight regulations might drive people into the hands of completely illegal sources of such money. And then if they’re not able to meet their debts, really nasty things may ensue. I worry that if you curb legal sources of loans, then what happens to those people who are driven to extraordinarily high-interest loans?

Another reason as to why regulation might not be the answer is that I don’t know how you choose the number above which interest is illegal. I don’t know how you can reasonably figure that out. So if regulation is not the answer, then what is?

What I see as a solution is a serious effort – more serious than any we’ve made to date – to educate the public and empower people on money management. Anyone who can get a line of credit at a bank or credit union, and who is still paying debt on a credit card, is missing a golden opportunity, because the gap in interest rates is really huge. I don’t think some people have the economic or the financial savvy to take the rational way out. I don’t think that the Alberta government stepping in this way is a significant advancement. I think it’s a sop to public opinion. I don’t think this limit of 23% on interest is very meaningful.

Ken Chapman: I think that this is really something that requires regulation, so I’m glad that the government has acted. The idea of regulating interest rates is not new. It goes back to biblical times. Even in recent times, there has been legislation like the Unconscionable Transactions Act, which allows the courts to decide when interest rates are excessive. The question is whether businesses, other than the payday loan companies, should get involved in this. My sense is that they won’t. They will see this as an issue between the payday loan sector and the government. They will not get into it because they will see it as a morality issue. If they did get into it they would have to do it on the basis of the question of when usury begins.

I think that you’re going to see business leaders primarily duck this and not be proactive at all. It’s going to be a regulated situation with the regulations being more and more directly enforced, with more and more inspections. It’s worth noting that payday loan operations are not even allowed in Quebec.

However, I do know that the Government of Alberta did a pretty broad consultation on this issue. They included street people, the working poor, homeless people and others who tend to use these kinds of services. They found that the average income of the big users is between $20,000 and $40,000 a year. These are people who don’t think they can qualify for bank services, or are intimidated by banks. There’s a real need for some fiscal literacy here. If you want to solve this, regulation and legislation is one part, but you have to make sure that people are well taken care of and that they understand that they can go into regular banks and get their cheques cashed and have bank accounts.

What drives people to these kinds of operators is that they want loans, and they don’t think that they can get loans from banks or credit unions. They stay because it becomes faster and easier for them and they don’t realize that they are being used.

The other side of it is that I think that we should be doing a better job of regulating the financial industry, not just interest rates. This recession was caused by the greed and the corruption of the financial sector in the United States. In Canada we take great pride in our banking system because it looks so good compared to everybody else – but only compared to everybody else.