I. Introduction
Governments regularly transfer funds to individuals for a variety of benefit programs. When funds are transferred by cheque, some individuals access those funds through relatively costly cheque cashing services. Is this a matter for public concern, and if so, are there ways to transfer funds more fairly and effectively?
This Report is the result of extensive research and public consultation. The Project was publicly launched in March 2008 with a widely distributed Consultation Paper. The Law Commission of Ontario (LCO) received written responses from 15 organizations and individuals, and organized further meetings and interviews with 25 organizations. Consultees included a wide range of stakeholders, including financial service providers, academics, municipal and provincial governments, legal clinics, and community and advocacy organizations.
II. Key Themes and Issues
While the issue of cheque cashing fees appears narrow, a closer examination reveals that it cannot be understood without considering the effects of a number of broad social trends and complex policy issues:
Poverty Reduction: Recipients of government benefits generally have very low incomes. As a result, the fees for cashing their government benefit cheques can have a very significant impact on their finances. As well, the pressing short-term needs for immediate cash may require individuals who are living on a survival budget to make decisions that cost them more over the long term.
Regulation of Alternative Financial Services (AFS) Sector: While mainstream financial institutions such as banks and credit unions are significantly regulated and superintended for the benefit of consumers and the community as a whole, the emerging AFS sector, which provides most cheque cashing services, has generally been subject to very little regulation or oversight.
Low Income Communities and the Mainstream Financial Services Sector: A small but significant portion of the Canadian population is “unbanked” – that is, does not have an account with a bank or credit union, and by necessity receives their financial services either from the informal economy or the AFS sector. The unbanked are disproportionately low-income Canadians.
Diversity and Differential Impact: Those impacted by fees for cashing government cheques are disproportionately female lone-parents, persons with disabilities, Aboriginal persons, newcomers and youth.
Financial Services and New Technology: The financial services sector continues to undergo rapid technological change, particularly with the growth in electronic banking. These changes offer both opportunities and barriers for consumers.
Effective Allocation of Risks and Responsibilities: There are necessarily costs and risks associated with the transfer of funds from government to individuals through financial institutions, particularly the risk of fraud. Various methods of transferring funds will allocate these costs and risks differently among consumers, financial institutions and government.
Informed Choice: A key question for consideration is whether recipients of government benefits have both meaningful alternatives for accessing their government funds, and the skills and information necessary to choose between them.
III. Nature of the Problem
A. Cost of Cashing Government Cheques in Ontario
Most people who receive funds through a cheque access those funds through accounts with a bank or credit union. Included in the relatively low cost of an account is the opportunity to deposit cheques and withdraw the funds, or to immediately cash the cheque. Funds in an account may be accessed in person through a teller, or through an increasingly wide array of electronic options, such as ABMs, online or telephone banking, or debit cards.
However, a small but significant number of Canadians (approximately seven per cent, as estimated by a recent survey) at least occasionally access cheque funds through the cheque cashing industry. For a charge usually consisting of a flat fee plus a percentage of the value of the cheque, they can immediately receive the funds transferred by cheque.
The rates for cashing a cheque in this manner are relatively high compared to the cost of an account with a financial institution. Canada’s largest cheque cashers, Money Mart and Cash Money, currently charge an item fee of $2.99 per cheque, plus 2.99 per cent of the face value of the cheque. The fee for cashing a $500 cheque is therefore $17.94.
B. Impact of Cheque Cashing Fees
The Government of Ontario issues cheques for a number of social benefit programs, most importantly the Ontario Child Care Supplement (now transitioning into the Ontario Child Benefit), the Ontario Works and Ontario Disability Support (ODSP) social assistance programs, and the Guaranteed Annual Income Supplement for seniors.
There are over 370,000 beneficiaries of the Ontario Works general social assistance program, approximately half of them sole-support parents and their children. There are approximately 330,000 ODSP beneficiaries: this program assists persons with disabilities and their families.
The Ministry of Community and Social Services estimates that over three million cheques are issued each year to Ontario Works and ODSP recipients. There are no firm estimates on how many of these cheques may be cashed for a fee, but the number may be substantial. A survey conducted in March 2008 by the Thunder Bay Social Service Administration Board of Ontario Works clients who received their benefits by cheque revealed that approximately 40 per cent of these individuals cashed their cheque for a fee at an AFS business, or a pawnshop or convenience store.
Social assistance rates are low, falling far below Canada’s Low Income Cutoffs. For example, a single person receiving assistance through Ontario Works receives a maximum of $560 per month, or $6720 per year, while a sole-support parent with one child receives a maximum of $1,180 per month (including the Ontario Child Benefit), or $14,160 per year. Given these low rates, an individual paying $20 to $40 per month to cash his or her social assistance benefit cheque could experience a significant impact on the ability to afford basic necessities such as food or clothing.
C. The Mainstream Financial Services Industry
Given the relatively high costs of accessing cheque funds through AFS businesses rather than through an account with a bank or credit union, why do low-income individuals use these services?
It is estimated that between three and five per cent of Canadians do not have an account with a bank or credit union. Low-income individuals are much more likely to be unbanked than other Canadians, with some estimating that as many as 15 per cent of low-income individuals are unbanked. Those living in Northern regions are also more likely to be unbanked than those in Southern regions.
There are a number of reasons why low-income consumers may not use the services of a mainstream financial institution, and may therefore resort to AFS services:
Location: Frequently, in remote Northern communities there are no mainstream financial institutions, and recipients of government cheques have few alternatives for accessing their funds. Some low-income urban communities may also lack convenient access to mainstream financial institutions.
Identification Requirements: Appropriate identification is required in order to open an account. Low-income individuals may have difficulty obtaining identification due to costs or complex processes.
Cheque Hold Policies: In order to manage the risk of fraud, mainstream financial institutions may place a “hold” on funds deposited by cheque if there are insufficient funds in the account to cover the cheque. As a result, access to the funds may be delayed, a significant difficulty for individuals on a survival budget.
Garnishment and Set-off: In some circumstances, there is a risk that funds placed in a bank account may be garnisheed or set-off to address outstanding debts, and this may act as a deterrent to maintaining an account or depositing funds.
Attitudinal Barriers: Low-income individuals have expressed concerns regarding negative or discriminatory treatment by staff of mainstream financial institutions, or have expressed the perception that they don’t “belong” in such institutions.
Hours of Operation: For individuals who are reliant on the personal services provided by tellers, hours of operation may have a significant impact on their choice of a financial services provider.
D. The Alternative Cheque Cashing Industry
The formal cheque cashing industry is relatively new in Canada, and continues to evolve. Businesses providing cheque cashing services usually do so as part of a bundle of alternative financial services, including payday loans, tax preparation and refund services, and stored value debit cards. It is estimated that there are 750 Ontario businesses providing formal cheque cashing services.
In remote Northern Ontario communities, where neither mainstream financial services nor the major cheque cashing businesses operate, cheque cashing is provided through the network of Northern Stores, which provide cheque cashing, white label ABMs, money transfers and prepaid mastercards, along with a range of retail services.
Unlike mainstream financial institutions (such as banks, credit unions, and trust and loan companies), this “alternative financial services” (AFS) sector is subject to minimal regulation and superintendence. Only recently has there been a move to regulate these businesses in Ontario, with the passage in June 2008 of Bill 48, the Payday Loans Act, 2008. This Act will, when it comes into force, create a comprehensive regulatory scheme for Ontario’s payday lenders, including licensing, maximum cost-of-borrowing caps, a compliance mechanism and a consumer education fund.
IV. Avenues to Reform
Concerns regarding fees for cashing government benefit cheques are not new. There have been a number of initiatives across Canada and in the United States aimed at addressing the problem:
Bans: Some jurisdictions have enacted legislation banning fees for cashing government cheques. In order to ensure that government benefit recipients are still able to access their funds, such legislation is generally paired with other initiatives to encourage use of mainstream financial services.
Regulation: Several jurisdictions in Canada and the United States have passed legislation regulating cheque cashing services, for example by setting maximum fees for cashing government cheques.
Indemnity Agreements: Governments may also enter into indemnity agreements with mainstream financial institutions. Under such indemnity agreements, the financial institutions agree to immediately cash government cheques upon presentation of appropriate identification. In return, the government agrees to indemnify the financial institutions in cases of fraud.
Alternative Methods of Payment: Another option is to reduce reliance on cheques as a means of transferring government funds. Many jurisdictions have implemented programs to encourage benefit recipients to receive their funds through direct deposit. More recently, some jurisdictions have been experimenting with the use of benefit cards.
Improving Access to Mainstream Financial Services: As well, there have been a number of initiatives aimed at increasing use of mainstream financial institutions by low-income individuals, for example, through provision of low-cost identification, or the creation of low-cost bank accounts, or initiatives to increase financial capability among low-income consumers.
V. Recommendations
The LCO, in considering options for law reform, has taken the following into account:
Given the complexity of the issue, solutions must combine initiatives to address immediate needs with long-term initiatives to address the underlying causes of the problem.
Solutions must be pragmatic, recognizing the day-to-day needs of those living on a survival budget, as well as the fact that AFS and mainstream financial institutions are businesses, and are providing services in the expectation of a reasonable opportunity for profit.
Solutions must recognize the diversity of needs among low-income individuals, as well as respecting the privacy, dignity and autonomy of social assistance recipients.
Solutions must recognize the unique dynamics of the situation in Ontario. Solutions that are appropriate in other jurisdictions may need to be modified to address the particular circumstances of Ontario’s low-income community and its financial services sectors.
Given the complex roots of the issue, in order for law reform to be effective, it must be supported by complementary government initiatives to broaden options, provide information and increase access to financial services for recipients of social benefits
The LCO therefore recommends the following (a full listing is provided at Part VI of this Report):
Enactment of legislation to regulate cheque cashing services, including licensing and disclosure requirements, a process for setting maximum fee rates, and a compliance mechanism;
Passage of legislation to provide Ontarians with a low-cost official photo-identification that is an alternative to the driver’s license;
Initiatives to increase education and access to information regarding cheque cashing for low-income consumers;
Development of an indemnity agreement between the Government of Ontario and mainstream financial institutions to ensure that recipients of government benefits can cash their cheques at no cost, and without delay;
A pilot program to explore the use of benefit cards as a means of providing government benefits to remote communities without mainstream financial institutions;
Initiatives by mainstream financial institutions and government to increase usage of the mainstream financial services by marginalized communities;
Collection of data by the Government of Ontario to monitor the success of initiatives related to cheque cashing fees.
