The Marcotte Trilogy
On September 19, 2014, the Supreme Court of Canada issued its decisions in Bank of Montreal v. Marcotte, 2014 SCC 55 (“Marcotte”), Amex Bank of Canada v. Adams, 2014 SCC 56, and Marcotte v. Fédération des caisses Desjardins du Québec, 2014 SCC 57 (collectively, the “Marcotte Trilogy”). The Marcotte Trilogy arises from appeals of decisions related to three class actions, all launched to seek repayment of the conversion charges imposed by several credit card-issuing financial institutions on credit card purchases made in foreign currencies. The representative plaintiffs in the class actions sought repayment of the conversion charges and punitive damages on the basis that the conversion charge violated the provisions of the Quebec’s Consumer Protection Act, CQLR, c. P-40.1 (“CPA”), which required the disclosure of the foreign exchange conversion charge to consumers. The financial institutions asserted that, among other things, the CPA does not apply to them because, as banks, they are exclusively to federal jurisdiction pursuant to the Constitution Act, 1867.
Unanimously, the seven sitting Justices of the SCC held that, although banks are federally regulated, they are obligated to comply with the provisions of the CPA that require the disclosure of the conversion charge. The reasons in Marcotte were adopted in the other cases in the Marcotte Trilogy. There were a number of credit card issuers involved in the Marcotte Trilogy, but they can be divided as follows: a) the group with cardholder agreements that stated that an exchange rate is applied to foreign currency transactions, but either did not mention the conversion charge or did not provide details about it (the “Group A Banks”); and b) those with cardholder agreements that stated that an exchange rate or a conversion rate would be applied to purchases in foreign currencies and described the applicable conversion charge (the “Group B Banks”). The Court dismissed the claim in damages against the Group B Banks on the basis that those banks had complied with the requirements of the CPA and ordered the Group A Banks to repay over $100 million in conversion charges plus $25 in punitive damages per affected cardholder for failing to disclose the conversion charges on the exchange transactions in compliance with the CPA.
Application of the CPA
The analysis of the conversion charge begins with its classification under the CPA as either “credit charges” (the amount the consumer must pay under the contract in addition to the net capital) or “net capital” (the sum for which credit is actually extended). If the conversion charge qualifies as a credit charge, then, according to the CPA, it would have to be disclosed on its own, included in the disclosed credit rate, and be subject to a 21-day grace period. If the conversion charge qualifies as net capital, it would not be included in the credit rate or be subject to the 21-day grace period, but would still have to be disclosed under the general s. 12 disclosure provision of the CPA applicable to all consumer contracts. The Court held that the conversion charge should be categorized as “net capital” under the CPA since the conversion charge is distinct from the conversion rate and credit is actually extended for that amount. Further, the conversion charge is an additional fee for an optional service that is not required to be paid under the contract in order for the consumer to access the credit, unlike a credit charge. As such, the conversion charge should have been disclosed pursuant to the CPA’s general disclosure provision.
Interjurisdictional Immunity
The banks argued that the doctrine of interjurisdictional immunity renders the CPA inapplicable to their credit card activities, since Parliament enjoys exclusive jurisdiction over banking. In the SCC’s analysis, the Court applied the approach in Canadian Western Bank v. Alberta, 2007 SCC 22 (“Canadian Western Bank”), which held that the doctrine must be applied “with restraint” and only to situations for which a precedent already exists. The Court held that the provisions of the CPA did not touch on the core of the federal banking power and did not impair that federal power. The Court also noted that a precedent does not exist wherein the doctrine of interjurisdictional immunity is applied to the credit card activities of banks. In so holding, the SCC followed Canadian Western Bank in denying the banks’ submissions suggesting a rigid demarcation between federal and provincial regulations. Rothstein and Wagner JJ. wrote for the Court as follows at paragraph 68:
Banks cannot avoid the application of all provincial statutes that in any way touch on their operations, including lending and currency conversion. Provincial regulation of mortgages, securities and contracts can all be said to relate to lending in some general sense, and will at times have a significant impact on banks’ operations. However, as this Court concluded in Canadian Western Bank, this is not enough to trigger interjurisdictional immunity. The provisions of the CPA do not prevent banks from lending money or converting currency, but only require that conversion fees be disclosed to consumers.
Paramountcy
The banks also argued that the doctrine of paramountcy should be applied such that federal law prevails and the provincial law is rendered inoperative to the extent of the conflict. In particular, the banks argued that the provisions of the CPA frustrated the purpose of the federal banking scheme. The Court held that the applicable provisions of the CPA are not inconsistent with the Bank Act and do not frustrate any federal purpose, therefore paramountcy is not engaged. This appears to be true especially since the Group B Banks were able to comply with both the provincial requirements found in the CPA and the federal requirements. The Court held as follows at paragraph 84:
There are many provincial laws providing for a variety of civil causes of action that can potentially be raised against banks. The silence of the Bank Act on civil remedies cannot be taken to mean that civil remedies are inconsistent with the Bank Act…,
Implications
The SCC’s decision in Marcotte makes it clear that some provincial legislation applies to federally-regulated activities. Certainly, provincial consumer protection legislation should now be applied in the area of lending and currency conversion, but it remains to be seen whether the decision has any broader application. Some commentary on this case has suggested that regulators of the financial services and other federally-regulated industries are reviewing the decision with a view to clarifying its implications. Some consideration of provincial legislation by federally-regulated entities seems to be prudent, particularly in the areas of consumer protection and consumer contracts, but also with respect to provincial laws that “in any way touch on their operations” as the SCC suggested at para. 68 of Marcotte, as cited above.
The SCC’s decision in Marcotte makes it clear that some provincial legislation applies to federally-regulated activities. Certainly, provincial consumer protection legislation should now be applied in the area of lending and currency conversion, but it remains to be seen whether the decision has any broader application. Some commentary on this case has suggested that regulators of the financial services and other federally-regulated industries are reviewing the decision with a view to clarifying its implications. Some consideration of provincial legislation by federally-regulated entities seems to be prudent, particularly in the areas of consumer protection and consumer contracts, but also with respect to provincial laws that “in any way touch on their operations” as the SCC suggested at para. 68 of Marcotte, as cited above.
