The problems associated with high costs for accessing funds from government cheques are not unique to Ontario. A variety of initiatives have been undertaken in other jurisdictions, including:
Consumer Education: Generally this is aimed at ensuring consumers have the skills and information to make choices about available financial services, but there may also be a broader focus on enhancing financial capability.
Encouraging Use of Mainstream Financial Institutions: Individuals who hold accounts with banks or credit unions can deposit and withdraw funds at minimal cost, as well as receiving a number of other benefits. Steps that encourage usage of mainstream financial services, such as providing access to low-cost identification, will therefore also assist in ensuring access to government benefit funds at low cost.
Alternative Methods of Government Payments: There is an inherent risk of fraud when payments are made by cheque. Fees, cheque holds and identification requirements are methods adopted by financial services providers to manage these risks, but all can create barriers to low-income consumers. Alternative methods of payment, such as direct deposit and benefit cards can reduce risks and potentially ease access to funds.
Indemnification Agreements: Indemnification agreements essentially transfer the risk of cheque-related fraud to government (i.e., the taxpayer), and thereby enable financial service providers to cash government cheques without charging fees.
Regulation: Several jurisdictions have regulated either cheque cashing fees or cheque cashing service providers. Regulation generally takes one of three forms: licensing and monitoring schemes for cheque cashing businesses, prohibitions on fees for cashing government cheques, or regulation of cheque cashing fees.
Recent years have seen considerable activity in Canadian jurisdictions on this issue. A description of initiatives across Canada can be found in Appendix C.
There have also been many reform initiatives in the United States, where the cheque-cashing industry has a long history. These are described below at section IV.F.2
A. Considering Options for Reform
Considering the wide range of reforms that have been adopted in other jurisdictions, there is likely no single best approach to ensuring low-cost access to government benefit payments. Reforms must be responsive to the financial history and culture of the particular jurisdiction where they are implemented, taking into account current regulatory frameworks and any local aspects of the issue. This section of the Report examines the various reform alternatives, weighing the benefits and disadvantages of each approach, and highlighting any issues unique to Ontario.
In considering potential reforms, it should be kept in mind that the issue is, as outlined in the previous section, complex and multi-faceted. Therefore, any single initiative is likely to be inadequate on its own. Most jurisdictions have opted for a package of reforms rather than a single initiative, and it is helpful to consider how various initiatives may interact with each other.
It is a reality that there are costs and risks associated with providing access to government funds – the risk of fraud most importantly, but also costs in time, effort and administration. The current system places much of the burden of these costs and risks on the shoulders of low-income individuals. One of the key questions in assessing any reform is where it allocates those costs and risks, and whether that apportionment is fair and effective.
In considering risks and costs, it must also be remembered that AFS businesses, like mainstream financial service providers, are businesses, and are providing services in the expectation of a reasonable opportunity for profit.
To be successful, reform must be sensitive to the circumstances of those whose lot it seeks to better: in this case, recipients of government benefits. These individuals are generally living on extremely low incomes, far below the Low Income Cut Offs, and their priority is often simply day-to-day survival. Many are lone parents; as well, recipients of Ontario Disability Support Program (ODSP) benefits are, of course, living with the challenges associated with their disabilities. They already face multiple barriers and challenges. Reforms must offer realistic and practical solutions for those living in such circumstances.
A fundamental principle of any reform should be respect for the dignity, privacy and autonomy of social assistance recipients, who make up a significant proportion of those cashing government cheques. This is a group already often heavily stigmatized, marginalized and excluded. As well, it should be recognized that low-income individuals are a diverse group, with an array of needs and resources. The circumstances of a single person with mental health issues living on the streets of an urban environment are different from those of an Aboriginal mother living in a remote community in Northern Ontario, and different again from those of a newcomer family struggling to find their footing in a new country.
Reforms should, to the degree possible, recognize this diversity.
As noted in the previous section, the issue of low-cost access to government benefit payments is closely tied to the larger issue of financial exclusion and access to financial services. The aim of this Report, however, is not to solve the very broad and complex issues associated with financial exclusion, but to develop pragmatic recommendations for addressing the narrower question. For practical purposes, one must assume that, for the near future and for a variety of reasons, there will continue to be some unbanked individuals. Decreasing the number of unbanked Ontarians will reduce the number of individuals paying high fees to cash their government cheques, as well as addressing broader social justice issues. However, reforms should also take into account the needs of those who remain unbanked.
B. Consumer Education and Financial Literacy
1. Consumer Education as a Strategy
Consultees generally agreed that low-income consumers are often unaware of the true costs of cheque cashing fees and of the alternatives available to them.
“There is a significant contingent of consumers who are not aware of their rights with respect to mainstream financial institutions, the comparative costs of using cheque cashing services, and their recourse should they have a concern or complaint with respect to bank services.”
– Thunder Bay Social Service Administration Board
“As many credit unions already offer low cost alternatives, especially when compared to alternative financial services (AFS), the issue does not seem to be the necessity of mandating low costs. Rather it would seem to be educating people to the alternatives available to them and inducing them to take advantage of those alternatives.”
– Central 1 Credit Union
It is likely that some type of consumer awareness or education measures are essential to ensure the success of any initiative to facilitate access to low-cost cashing of government cheques. Consumers must have the information and skills to understand the options available to them and how to access them, evaluate the benefits and disadvantages of various services in light of their own particular circumstances, and be able to advocate for their rights where necessary.
For example, the relatively low level of awareness about the right to cash a federal government cheque without fee at any bank and to make a complaint to the Financial Consumer Agency of Canada (FCAC), and the number of individuals cashing federal government cheques at AFS businesses despite the availability of free services through the banks highlights that even the best initiatives will have limited success unless there is adequate consumer education.
However, consumer education is not enough by itself to solve the issues. It will not remove barriers to use of mainstream financial services, such as lack of identification or cheque hold policies.
“Consumer education alone does not address other systemic issues such as lack of banking services in certain geographic areas and stringent identification requirements for opening a bank account.”
– Ministry of Community and Social Services
Consumer education is therefore best considered as one component of any initiative to ensure low-cost access to government benefits.
2. Providing Effective Consumer Education and Financial Literacy Programs
The provision of financial literacy and consumer education programs to low-income individuals raises some complex issues. Low-income individuals are diverse, and there is a broad spectrum of educational needs. Some low-income individuals have good general financial skills and knowledge and need only access to appropriate information, while others will face barriers related to basic literacy (for example, those who use English as a second language), technological literacy, or lack of understanding of basic financial concepts, such as comparison shopping. Some will have multiple needs.
“The target audience (in this case, low-income and unbanked/underbanked Ontarians) can be elusive and resistant to most standard consumer education methods. That means one must look at alternatives to the standard consumer education models. Our member credit unions suggest that the best consumer education is word of mouth within the low-income community…. That one-on-one education could occur through social workers, government employees and others who work closely with low-income Ontarians.”
– Central 1 Credit Union
The LCO heard that financial literacy and consumer education programs must be:
It may be beneficial to have programs that “train the trainer”. If front-line staff in organizations that serve low-income individuals are themselves not well-informed about rights and resources, not only will opportunities to provide advice and information be missed, but incorrect or inadequate advice may be provided.
As well, the LCO heard that front-line staff of financial institutions may need further information or training related to the rights and entitlements of low-income individuals in order to provide appropriate advice or assistance.
The LCO received many practical suggestions regarding methods of reaching out to low-income individuals with financial information:
· Education should be carried out as early as possible; for example, the high school curriculum could include the fundamentals of financial literacy.
· Cheque cashing businesses could be required to post, in a highly visible manner, information on fees, such as the total cost of cashing cheques for common amounts, such as $500 or $1000.
· Inserts could be sent out with government cheques, informing recipients of their rights and choices when cashing their cheques.
· An education fund could be established to assist programs and organizations that work with low-income communities to increase financial capability.
With respect to the last suggestion, Ontario’s Bill 48, the Payday Loans Act, 2008, requires licensed payday lenders to contribute to a public education fund, the purpose of which is to educate the public regarding rights and responsibilities under this Act, as well as with respect to financial planning in general. The creation of this fund may offer opportunities for education relevant to issues of cheque cashing fees.
The non-profit Social and Enterprise Development Innovations (SEDI) provides several interesting examples of programs aimed at encouraging asset-building and financial capability among low-income individuals. For example, the Learn$ave Program, offered in partnership with the Social Research and Demonstration Corporation and funded by Human Resources Development Canada matches the savings each participant puts aside in an Individual Development Account. SEDI has also piloted the use of Independent Living Accounts to assist individuals and families living in transitional housing facilities to save for first and last months’ rent or other needs, while simultaneously providing life-skills training. Finally, SEDI’s “My Child’s Future” project aims at increasing the number of low and moderate income Canadians who use RESPs to save for their children’s education.
The 2008 Government of Ontario Budget announced a $10 million, four-year investment in a pilot program to help low-income Ontarians to build equity. Details are expected to be announced later this year by the Ministry of Community and Social Services.
C. Encouraging the Use of Mainstream Financial Institutions
As noted earlier, the major banks all provide low-cost basic bank accounts that provide deposit and withdrawal services. Individuals can maintain a bank account at a fraction of the cost of the fee for cashing cheques through a cheque cashing outlet. Encouraging the use of mainstream financial institutions is one means of reducing the costs of accessing government benefits.
The issue of financial exclusion is a large one, and it is beyond the scope of this project to attempt to resolve it. However, issues surrounding the costs of accessing government benefits cannot be fully understood or addressed without considering the issue of access to mainstream financial services. To the degree that they are relevant to resolving the issues raised by this project, barriers to financial inclusion must be addressed.
The major reasons why low-income consumers may not use mainstream financial institutions have been outlined in detail at section III.D.2. To summarize:
1. Location: This is an especially significant barrier for those living in remote communities, and has therefore a particular impact on First Nations individuals. Some low-income urban communities may also lack convenient access to a mainstream financial institution.
2. Identification Requirements: Low-income individuals may have difficulty obtaining adequate identification due to cost or complex processes. As well, transient individuals may not have an address to send documents to, and are disproportionately likely to have their identification lost or stolen. Health cards are not used as identification in Ontario, and Ontario does not currently provide an alternative photo-identification to the driver’s license.
3. Cheque Hold Policies: Cheque hold policies enable financial institutions to manage the risk of fraud inherent in transferring funds by cheque. Where a cheque hold applies, the financial institution will not release the funds until it has been able to verify that the cheque will be covered. Individuals who maintain enough money in their accounts to cover any cheques being cashed will generally not be affected by cheque hold policies. However, low-income individuals are generally operating under very tight cash-flow requirements. They usually will not have sufficient funds in their accounts to cover their government cheques, but at the same time cannot afford to wait until the funds are released. Cheque hold policies essentially transfer the risk of fraud from the financial institution to the individual cashing the cheque. Where low-income individuals resort to cheque cashing services to access the funds from their government cheques, the costs for those individuals can be quite high, relative to their overall incomes.
4. Attitudinal Barriers: The LCO heard that 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 a mainstream financial institution.
5. Garnishment and Set-off: The risk that social assistance payments, once placed in a bank account, may be garnisheed or set-off is a significant deterrent to use of a chequing account for some individuals.
6. Hours of operation: For individuals who are reliant on the individual services that are provided by tellers, hours of operation may have an impact on their choice of a financial services provider.
All of these issues were raised repeatedly by organizations that serve low-income individuals. Access to identification and holds on government cheques were generally agreed to be the most pressing issues in urban environments; lack of physical locations was highlighted as a particularly important issue for remote communities.
Some of the above-mentioned issues, like lack of identification, seem amenable for the most part to fairly straightforward solutions. Others present considerable difficulties. There have been various attempts to address the dearth of mainstream financial institutions in remote and rural communities, with only limited success. Cheque hold policies present another difficult issue, as they are a response to the risk of fraud; essentially mainstream financial institutions respond to this risk through cheque holds, while AFS businesses respond by charging relatively high fees for their cheque cashing services. Cheque hold policies cannot simply be abolished without providing other security for the risk of fraud.
The LCO received many suggestions for increasing the use of mainstream financial institutions by low-income individuals:
There was also very considerable discussion about the possibility of outreach initiatives from financial institutions to low-income and other marginalized communities. RBC’s Cash & Save outlets in Toronto were often cited as a model for outreach to low-income communities and a significant success. Another model is the partnership between the Provincial Alliance Credit Union (PACU) and CAMH. The LCO also heard praise from the Ontario Federation of Indian Friendship Centres for RBC’s practice of using Aboriginal outreach and education staff in communities with significant Aboriginal populations. The key elements in the success of Cash & Save and the PACU initiative were seen as their location (convenient presence); sensitivity to the clientele they serve; and tailoring of their services to the needs of the community.
In a recent report, the Ontario Association of Food Banks advocated for the establishment of a network of community development credit unions, as a means of addressing financial exclusion. These are credit unions with a mission to serve low and moderate income people and communities, providing services and benefits targeted to the needs of these communities. They effectively function as peer lenders, and are non-profit, tax-exempt and non-charity. Community development credit unions are fairly widespread in the United States, but less common in Canada, with VanCity Credit Union in Vancouver as the pre-eminent example. 
D. Direct Deposit and Benefit Cards
One way of ensuring low-cost access to government funds is by avoiding the use of cheques altogether. Most commonly this has been achieved through the use of direct deposit. Recently, some jurisdictions have been experimenting with reloadable benefit cards as an alternative or addition to direct deposit programs.
1. Direct Deposit
Several jurisdictions actively encourage the use of direct deposit for social payments, whether through voluntary policies or more mandatory programs. Direct deposit is seen as beneficial for clients, as it increases use of mainstream financial institutions and avoids cheque cashing fees. It is also considered beneficial for government and taxpayers, as it reduces administrative costs and the risk of fraud. From the perspective of financial institutions, direct deposit reduces the number of lost or stolen cheques and unlike indemnification agreements, does not involve time-consuming processes for dealing with lost or stolen cheques. The Ministry of Community and Social Services noted that:
DBDs (Direct Bank Deposits) are cost effective for the Ministry, easier to reconcile, and enable the provision of financial assistance in times of emergency, such as a black-out or postal strike. DBDs are confirmed transactions, eliminating:
· Potential fraud whereby clients may receive more than one social assistance cheque for the same period; and
· Stale dating of social assistance cheques, which expire after six months if not cashed.
Since 1997, direct deposit has been mandatory in Alberta for payments to Income Support clients, unless they are specifically exempted. In practice, this means that direct deposit is the primary method of payment of funds, but that front-line workers have the discretion to exempt clients where they believe there are sound reasons for doing so (such as a lack of the appropriate identification to open a bank account). Currently, 63 per cent of those receiving Alberta Employment and Immigration benefits do so through direct deposit, while 78 per cent of those receiving the Assured Income for the Severely Handicapped receive direct deposit.
An application for direct deposit is provided as part of the Intake Application package and clients are encouraged to have this completed by their bank prior to meeting with an Employment & Income Support Adviser. Direct deposit forms and information regarding the direct deposit policy are systemically included in mailings to users of various government services.
The Alberta direct deposit program was undertaken in the context of a number of other initiatives. The Alberta government already had an indemnification agreement with deposit-taking financial institutions and initiatives to ensure the populace had access to low-cost identification were in place. For example, health cards could be used as identification, and Alberta Registries provided alternative photo identification equivalent to a driver’s license. As well, Alberta already had an extensive bank branch network across the province.
A 1998 study of the effectiveness of the Alberta initiative noted that it appeared to have the positive effect of increasing the number of banked people in Alberta. Major financial institutions adopted basic banking products that reduced the cost of banking services for direct deposit users, although the question remained as to whether some people who have very minimal banking needs are in fact disadvantaged by having to pay for such services. One troubling issue was the limits placed by some financial institutions on withdrawals through ABMs, which meant that some social assistance recipients were not able to access the full amount of their payments through an ABM. As well, some social assistance recipients had difficulty in evaluating the various pricing options at banks, and made financial service decisions based mainly on location. Initial hopes that social assistance case workers would help clients to open accounts proved difficult to implement due to the heavy workloads of case workers.
In Ontario, social assistance providers at both the provincial and municipal level have made efforts to encourage direct deposit among their clientele, mainly through education and assistance provided by front-line staff. In the early 1990s, initiatives were undertaken by the Ministry of Community and Social Services to encourage clients to use direct deposit. By 1997, approximately 83 per cent of the recipients of the provincially distributed Family Benefits and 44 per cent of the recipients of the municipally distributed General Welfare benefits were receiving payments through direct deposit.
The Ministry of Community and Social Services informed the LCO that both Ontario Works and ODSP currently encourage clients to create bank accounts and receive their assistance through Direct Deposit. The Ministry provides over four million direct deposit payments for social assistance each year, as compared to three million payments via cheque. Use of direct deposit may vary depending on local circumstances. The Thunder Bay Social Services Administration Board (SSAB) indicated that although they have made efforts to encourage direct deposit, currently only 20 per cent of their Ontario Works clientele receive their benefits in this way; the remainder continues to receive payment via cheque. The Waterloo SSAB estimated that approximately half of their clientele receive benefits through direct deposit, a significant drop from a decade ago, again despite efforts to promote direct deposit. The reasons for this drop are unclear, although staff indicated that clients appeared to prefer to use the local indemnity agreement to cash cheques, rather than maintain a bank account for the purpose of receiving direct deposits.
City of Toronto Social Services has a long-standing and heavily promoted direct deposit program, as part of its overall objective to integrate clients into the mainstream. The City developed and maintained an integrated communication, education and assistance strategy to encourage clients to sign up for direct deposit, and where necessary, to assist them with obtaining accounts with mainstream financial institutions. At the present time, approximately two-thirds of Ontario Works clients receive their benefits through direct deposit, down slightly from a one-time high of around 70 per cent. The feeling of City staff was that there is a natural threshold to the utility of direct deposit: there will always be a significant percentage of the client base, likely around 25 to 30 per cent, for whom direct deposit does not provide a workable solution.
Central 1 Credit Union, which represents nearly 200 credit unions in the provinces of Ontario and British Columbia, suggested that given the administrative savings that accrue when benefit recipients select direct deposits, it might be possible to offer recipients who select this payment method a modest financial incentive to do so, noting that this would be both revenue neutral and a benefit to those who need it the most. It could also allow recipients to pay for the nominal costs of establishing and maintaining an account with a bank or credit union.
The Task Force on the Future of the Financial Services Sector recommended that governments increase the use of direct deposits for all government programs that offer regular benefits. The Canadian Bankers Association has also publicly indicated its support for direct deposit programs.
While there was concern that mandatory direct deposit programs could act as a barrier to the receipt of benefits for low-income individuals who do not have identification or who are unbanked, LCO consultees generally supported voluntary direct deposit programs. ACORN stated:
We support increased use of direct deposit as a mechanism to ensure low income consumers retain the maximum amount of their entitlements. We would like to see a strongly encouraged voluntary direct deposit system.
However, for direct deposit programs to succeed, they must address the barriers preventing some individuals from obtaining and maintaining bank accounts, such as lack of identification. The Thunder Bay SSAB recommended that direct deposit programs be paired with efforts to remove barriers to banking for payment recipients.
The Ministry emphasized that, practically speaking, it is in any case impossible to get all social assistance clients on direct deposits, whether because of the risk of garnishment of funds for some clients, or lack of physical access to a bank (for example, in remote areas). As well, it is difficult to distribute emergency funds via direct deposit. Direct deposit can therefore only provide a partial solution to the issue.
The Nishnawbe-Aski Legal Services Corporation noted that, because of the minimal presence of mainstream financial institutions in many First Nations communities, the practical utility of direct deposit programs is very limited in these locations.
2. Benefit Cards
Another alternative to the use of cheques is to provide benefits through debit cards. The federal government, as well as Alberta and British Columbia, have been experimenting with the use of debit cards as a delivery mechanism for government benefits. Debit cards have been used to deliver Social Security benefits in the United States, through a partnership with Master Card.
Alberta initiated its very recent benefit card program in addition to the direct deposit program discussed above at section IV.D.1. Reasons cited for entering into this program include:
It was pointed out to the LCO that benefit cards essentially operate like bank debit cards; therefore, it may be a better long-term solution to encourage individuals to develop relationships to mainstream financial institutions, through which they could access debit card technology, than to simply provide them with benefit cards.
Benefit cards can provide a solution for unbanked individuals, as they can essentially operate as an alternative to a bank account. For this reason, they are an appealing alternative in remote communities, where access to mainstream financial institutions is minimal and options are limited.
However, benefit card programs would have to be very carefully designed with the needs of end users in mind. For example, since cash would generally be accessed through ABMs, and ABMs generally issue funds in units of $20.00 or $50.00, it may be necessary to adjust benefit levels to ensure that recipients are able to access all of the funds on their debit card each month (i.e., if the benefit amount was $606.00, the recipient may not be able to withdraw the last $6 from the card). As well, there are concerns about fees: if there are fees for loading the card each month and for each transaction, recipients could once again end up losing a significant amount of government benefits to fees.
Another consideration is that transient individuals will be at risk of having their benefit cards lost or stolen. Individuals who have difficulty maintaining a bank account may have similar difficulty managing a benefit card, and those whose literacy issues make ABMs and mainstream financial services intimidating may experience similar concerns in using benefit cards. As one individual working with low-income individuals explained, bank cards will work well for those who “don’t lose stuff” and are comfortable with technology, but there are individuals for whom technology will never provide a solution, because what is needed is more human services, and not less.
The LCO heard that, given the significant social stigma that attaches to receipt of social assistance, and the negative treatment that social assistance recipients often receive, it would be essential that benefit cards be designed in a fashion that did not reveal the status of the card holder as a social assistance recipient.
It would be necessary both to take steps to ensure the privacy of card holders and to communicate those steps to benefit recipients, as there may be concerns that government would or could track expenditures through pinpointing where benefit cards were swiped.
Therefore, any implementation of benefit card programs would have to take into account concerns about stigma and privacy, include training and support for transition to the new technology, and ensure that the cards did in fact provide better and less expensive access to benefits.
E. Indemnity Agreements
Under an indemnity agreement, financial institutions that meet certain standards with respect to identification when cashing a cheque can be assured of payments from the agency issuing the cheque. Indemnity agreements may vary in their structure and terms of coverage. The federal government has a formal indemnity agreement with the major banks, as do the provinces of British Columbia, Alberta and Quebec. The province of New Brunswick has an informal indemnity agreement. Local governments in Ontario have also entered into informal indemnity agreements.
1. Formal Indemnity Agreements: The Federal Initiative
The federal indemnity agreement is the most comprehensive Canadian example of a formal indemnity agreement.
As part of a broader strategy to increase access to banking services, the federal government has entered into a formal indemnity agreement with the major banks with respect to cheques for $1,500 or less. As a result, non-bank customers can cash federal government cheques for amounts under $1,500 at any bank, so long as they present the required identification. This indemnity agreement applies only to cheques to be paid to individuals, not business cheques.
The requirements for identification are set out in the Access to Basic Banking Services Regulations. Ontarians seeking to cash a federal government cheque may present any two of the following documents issued by a Canadian government:
A person who cannot provide two of the above documents can present one of the above documents with photograph and signature, together with a confirmation of the identity of the individual by an individual of good standing in the community.
Financial institutions are not obliged to cash a cheque that:
· is not an item accepted under the rules of the Canadian Payments Association,
· the bank has reasonable grounds to believe is associated with illegal or fraudulent activity, or
· appears to be counterfeit or altered in any way.
Notably, while the indemnity agreement covers cheques that are counterfeit or fraudulently endorsed, it does not apply where a cheque has been fraudulently altered. If the bank’s own processes do not detect the fraudulent alteration prior to cashing, the bank must bear the cost of the fraud.
Where a fraudulent cheque is returned, the bank branch where the cheque was cashed is initially responsible for attempting to recover the funds, prior to making a claim under the indemnity agreement.
Where a bank refuses to cash a federal government cheque, a written notice must be provided to the customer, setting out the reasons for the refusal, and outlining the right of the customer to file a complaint with the FCAC. The FCAC regularly undertakes “mystery shopping” expeditions to monitor compliance with this requirement. The most recent of these surveys revealed a 91 per cent success rate in cashing a federal government cheque. The FCAC noted that the main reason for refusal to cash a federal government cheque was uncertainty on the part of bank employees about identification requirements, and in a number of instances, banks required identification in excess of what was required by the Access to Basic Banking Regulations. The FCAC noted very low levels of compliance with the requirement that banks provide written notice upon refusal to cash a cheque.
The indemnity agreement is paired with a statutory prohibition on bank charges for cashing federal government cheques. This prohibition is discussed at further length in the following section below on Regulating Fees.
2. Informal Indemnity Agreements
The province of New Brunswick has a long-standing informal indemnity agreement with the banks with respect to cheques issued by the Department of Social Development. This indemnity agreement is therefore more targeted than the federal indemnity agreement, covering only social assistance payments. The indemnification agreement requires the cheque-holder to present their health card to the bank teller; the Department ensures that benefit recipients have this identification. In order to facilitate the indemnification agreement, benefit cheques are colour-coded. Together with the fact that all cheques are issued at the same time each month, this makes it easy for the banks to know which cheques are covered by the indemnification agreement.
In Ontario, several local governments administering the Ontario Works social assistance program have entered into informal indemnity agreements. These agreements are entered into with a single branch of a bank or credit union; generally a branch near the service provider’s offices, and where the service provider deposits its own funds. Because of privacy concerns, the service providers do not verify the identity of social assistance recipients, but will commonly issue a letter verifying that the named individual was issued the cheque in question. As noted elsewhere, social assistance providers also commonly provide assistance to clients in obtaining valid identification to assist in obtaining bank accounts and in cheque cashing.
The City of Toronto has an indemnity agreement with the Royal Bank that covers, not only social assistance cheques, but all cheques issued by the City. Through this indemnity agreement, social assistance recipients are able to cash their benefit cheques without fee at any Royal Bank branch (as well as the two Cash & Save outlets) upon presentation of appropriate identification.
3. Evaluating Indemnity Agreements as an Option
Consultees were widely supportive of indemnity agreements as a method of improving the ability of low-income individuals to access government funds without cost. There was broad consensus that indemnity agreements are a very promising option. The Task Force on the Future of the Canadian Financial Services Sector recommended that governments that have not yet entered into indemnity agreements should do so and the Canadian Bankers Association has indicated its support for these types of agreements.
Community Legal Services Ottawa pointed out that indemnity agreements with mainstream financial institutions will encourage low-income individuals to approach and develop relationships with these institutions and to view them as relevant to their needs, thereby also contributing to a broader objective of encouraging low-income individuals to become and remain banked.
However, indemnity agreements will only be relevant where the individuals in question have reasonably easy physical access to a branch of a mainstream financial institution. An indemnity agreement would therefore have little relevance in many remote Northern communities where mainstream financial institutions are non-existent. An indemnity agreement could therefore be only a partial remedy to barriers to accessing government benefits; it would have to be accompanied by measures that would address the needs of these communities.
Concerns have been raised that Ontario’s method of delivery of the Ontario Works program may create an obstacle to a comprehensive indemnity agreement. In Ontario, unlike in other provinces, delivery of social assistance is a responsibility shared between the province and the municipalities. While payments to ODSP recipients are delivered by the province, cheques for recipients of Ontario Works are issued by the municipalities and District Social Service Administration Boards. The question has been raised as to whether an agreement between the province and mainstream financial institutions would cover cheques issued to Ontario Works recipients.
Under current cost-sharing agreements, the provincial Government funds 80 per cent of the benefit costs of the Ontario Works program and 50 per cent of its administrative costs. The provincial Government funds 100 per cent of the benefit costs of ODSP and 50 per cent of the administrative costs of that program.
The Ontario Works program is governed by provincial statute, the Ontario Works Act, 1997. This Act gives the Minister authority to designate delivery agents (including municipalities, bands and prescribed boards) to exercise powers and duties under the Act, within a specified geographic area. Delivery agents are responsible for receiving applications for assistance, determining eligibility, directing the provision of assistance, and carrying out other prescribed duties. Delivery agents are responsible for developing processes to prevent and control fraud, and otherwise prevent the misuse of social assistance. Section 45 permits delivery agents to enter into agreements with regard to any matter relating to the administration of the Act or the provision of assistance in the relevant geographic area. Presumably, section 45 is the authority under which delivery agents enter into local indemnity agreements.
The Director of Ontario Works, appointed by the Minister, is responsible for supervising the administration of the Act and the provision of assistance by the delivery agents, and determining how the payment of costs of administering the Act and providing assistance are to be allocated. The Director also has the power, parallel to that provided to delivery agents under section 45, to enter into agreements with regard to any matter relating to the administration of the Act or the provision of assistance. That is, it does not appear that the powers provided to delivery agents supersede the powers of the provincial government to enter into similar agreements.
There are four key considerations for ensuring the success of an indemnification agreement:
1. Identification Requirements: Indemnity agreements rely heavily on identification requirements as a method of preventing fraud and thereby controlling the costs of the agreement. In order to be successful, indemnity agreements should therefore be paired with initiatives to improve access to identification. Otherwise, individuals who are unable to open bank accounts due to lack of identification will for the same reason be unable to take advantage of the benefits of the indemnity agreement. The Public Interest Advocacy Centre’s submission stated that “[T]he entire premise of these agreements hinges on the fact that the consumer will have the appropriate or acceptable identification to receive service from the banking institutions.”
2. Consumer Awareness Initiatives: Consumers will only take advantage of indemnity agreements if they are aware of them: as noted earlier, a 2006 survey for the FCAC found that three-quarters of respondents did not know whether it costs something to cash a federal government cheque, and only 22 per cent knew that it was free of charge. A 2005 survey for the FCAC found that 26 per cent of respondents who had used a cheque cashing outlet had done so to cash a federal government cheque, although the survey did not ask whether or not these individuals were aware that they could have cashed the cheques without charge at a bank. Social assistance providers could, for example, send inserts with information about the indemnity agreement with benefit cheques. It may also be effective to provide training and information for those who provide front-line services to recipients of government benefits.
3. Coverage of the Indemnity Agreement: The terms of the indemnity agreement should provide realistic coverage. The Ministry of Community and Social Services noted that an indemnity agreement should be based on an analysis of the actual cheques regularly issued – for example, the federal limit of $1,500 would exclude a number of ODSP recipients.
4. Training for the Staff of Financial Institutions: The FCAC’s most recent “mystery shopping” expedition found that almost one in ten of the mystery shoppers attempting to cash a cheque under the federal indemnity agreement was inappropriately turned away. It would therefore be important to ensure that front-line staff receives appropriate training and refreshers to ensure compliance with the indemnity agreement.
F. Regulating Fees
1. Cheque Cashing Legislation Across Canada
While regulation and indemnity agreements can be used as distinctive strategies to deal with cheque cashing fees, they are often linked. In order to address the element of risk in cashing cheques, prohibition of cheque cashing fees is generally undertaken in tandem with indemnity agreements, and regulation will have a different effect depending on whether or not an indemnity agreement is in place.
Regulation of cheque cashing fees has been determined to fall within provincial competence to legislate, as a matter of consumer protection. The first provincial legislation dealing with cheque cashing fees, that of Quebec, was unsuccessfully challenged on constitutional grounds. Money Mart (operating in Quebec as INSTA-cheques), argued that Quebec legislation banning fees for cashing government cheques was not within provincial competence as it dealt with Bills of Exchange, a matter of federal competence under Canada’s constitution. The Quebec Court of Appeal, upholding judgments of the lower courts, rejected Money Mart’s argument. It determined that the legislation was within provincial competence, as its object was consumer protection and it touched only incidentally on Bills of Exchange.
Regulatory schemes will differ in their impact depending on who is regulated, the type of cheques covered, enforcement mechanisms, and other measures taken in tandem. Five Canadian jurisdictions have regulated or are in the process of regulating fees for cashing government cheques. Each of these jurisdictions has taken a different approach.
The federal government prohibits banks from charging fees for cashing cheques of up to $1,500.00, and has paired the prohibition with an indemnity agreement for these institutions.
Quebec prohibits anyone from charging a fee for cashing government cheques, and indemnifies mainstream financial institutions.
Manitoba has regulated the fees for cashing government cheques by setting maximum rates that may be charged.
British Columbia is in the process of regulating fees for government cheques, in tandem with an indemnity agreement for mainstream financial institutions.
Saskatchewan considers Money Mart and similar businesses financing corporations under its Trust and Loan Corporations Act, 1997 and they are therefore required to be licensed under that Act. Section 30 of that Act applies federal prohibitions on cheque cashing fees to licensees. As a result, cheque cashing services in Saskatchewan may not charge a fee for cashing a federal government cheque.
Federal Regulatory Framework
There is a lengthy history to the federal prohibition on fees for cashing its cheques. The current prohibition is found in the Bank Act, and it prohibits banks from making a charge for cashing any cheque or other instrument drawn on the Receiver General, or for cashing any other instrument issued as authority for payment of money out of the Consolidated Revenue Fund. Since 2001, the Bank Act has further required banks to cash without charge federal government cheques for up to $1,500 for anyone who meets the required conditions, regardless of whether they are a customer of that bank.
This legislation is paired with an indemnification agreement that, as discussed in detail in the previous section, provides protection for banks against some of the risks of fraud for these types of cheques.
It is essential to note that both the prohibition on fees and the indemnification agreement apply only to institutions covered by the Bank Act. AFS institutions are not prohibited from charging fees for cashing cheques and are not indemnified for any fraudulent cheques they may cash. AFS institutions do in fact continue to cash federal government cheques and to charge their regular fees for doing so: a survey conducted by the FCAC in 2005 found that over one quarter of the respondents who had used a cheque cashing outlet had done so in order to cash a federal government cheque.
Since 1978, Quebec has prohibited charges for cashing government cheques. This prohibition applies to mainstream financial institutions, AFS enterprises, and all merchants, thereby also including businesses like pawnshops. This legislation was considered a social justice measure, aimed at providing support to the economically disadvantaged.
The legislation extends not only to cheques issued by the Quebec government, but also to cheques issued by the federal government and the municipalities. It does not extend to cheques issued by other provincial governments. Unlike the federal legislation, Quebec places no limit on the size of the cheques covered.
The penalties for breach of the legislation range from $600 to $15,000 for a first offence, doubling in the case of subsequent convictions.
The Quebec government also has an indemnity agreement with mainstream financial institutions (although not with AFS businesses), which adopts the federal limit of $1,500.
Quebec’s legislation was initially challenged by Money Mart, after one of its INSTA-Cheques centres was charged with cashing two social assistance cheques for a fee. As noted above, INSTA-Cheques unsuccessfully argued that the statute did not apply to them, and was unconstitutional in that it was infringing on federal jurisdiction. The Quebec Court of Appeal found that the legislation fell within the scope of consumer protection frameworks, as it repressed a commercial practice considered to be oppressive, and emphasized the legitimacy of the legislative decision to ban a commercial practice deemed socially unacceptable, particularly because of the absence of risk in cashing government cheques.
Following the decision of the Court of Appeal, INSTA-Cheques announced that it would no longer cash federal, provincial or municipal government cheques and would restrict its cheque cashing to payroll cheques, and closed a number of its branches in Quebec.
Quebec’s approach to this issue should be considered in light of its financial culture, in which a community-driven credit union movement has played a strong role. The caisses populaires have had a mandate to reach out to rural, francophone, and low-income consumers and small businesses and serve their needs. Today, the Mouvement Desjardins Group is the largest integrated cooperative financial group in Canada, with assets of $144 billion. Quebec’s low-income population is more likely to be banked than in other parts of Canada: in 2002, a study by the Public Interest Advocacy Centre estimated that only 2.5 per cent of adults in Quebec with incomes under $25,000 did not have bank accounts, compared to 10.4 per cent in the rest of Canada. A 1996 study by the Montreal consumer protection group, Association Co-opérative d’Économic Familiale, drew a direct link between the flexible policies of the Mouvement Desjardins for opening accounts and cashing cheques, and lower levels of unbanked individuals in Quebec.
The province of Manitoba recently adopted legislation which enabled it to set maximum fees for any institution cashing government cheques. The legislation applies to cheques issued by the federal, Manitoba or municipal governments, as well as any government agency designated by regulation. Non-compliance may result in a fine of between $1,000 and $5,000. The combined effect of the federal and the Manitoba legislation is that federal government cheques may be cashed without fee at a bank, but are subject to the Manitoba maximum limits if cashed at a cheque cashing outlet. In theory, banks, like other service providers, could charge the maximum fees to cash provincial or municipal cheques.
The aim of this legislation was to ensure that consumers receive the maximum benefit from their government cheques, in light of complaints regarding the high fees charged for cheque cashing by AFS businesses. Legislation regulating payday loans was introduced at about the same time, evincing a general concern with the regulation of AFS businesses.
Manitoba’s legislation empowers the Public Utilities Board to set maximum fees, taking into consideration the business operating requirements of those who cash cheques for a fee, the risks associated with cashing government cheques, and any other factors or data that are relevant or in the public interest. The Board Order must be set via public hearing, and must be reviewed every three years, or where there are changed circumstances or new evidence.
The province of Manitoba has not entered into any indemnity agreements. During legislative debates on the Bill, some members expressed concerns that banks and other mainstream financial institutions that had not previously charged fees for cheque cashing would do so under the new legislation. The Public Utilities Board urged institutions that had previously not charged fees or had charged lower fees to continue to do so.
The Manitoba Public Utilities Board made its first order on May 28, 2007. The maximum rate has been set at $3.00 plus two per cent of the face value of the cheque, unless:
· A hold is placed on the cheque, in which case the maximum fee is the lesser of $5.00 or the sum of $3.00 plus two per cent of the face value of the cheque; or
· The cheque is cashed with a requirement that the person purchase goods or services adding up to ten per cent or more of the value of the cheque, in which case no fee may be charged.
This fee is considerably less than that currently charged by Money Mart or CashMoney in Ontario of $2.99 plus 2.99 per cent of the face value of the cheque. For example, a $500 cheque would cost $17.94 to cash at Money Mart or Cash Money in Ontario, compared to $13.00 under the Manitoba PUB order. A lone mother of two receiving her Ontario Works and Ontario Child Benefit cheques amounting to $1,510 per month would pay $577.57 per year to cash her cheques at the current rate, and $398.40 per year to cash her cheques in Manitoba, a difference of $179.17.
The Board placed its mandate to set fees for the cashing of government cheques in the broader context of access to financial services, and in its order made several recommendations aimed at ensuring that Manitobans have the necessary tools to access mainstream financial services, thereby reducing reliance on AFS outlets. The Board recommended that:
The provincial government provide social assistance recipients with:
Banks and credit unions offer low-cost accounts for social assistance recipients.
Government and mainstream financial institutions enter into an indemnity agreement for cheques of a value of $1,000 or lower.
AFS businesses be required to obtain licenses.
The Consumers’ Bureau develop a Code of Conduct for cheque cashers, as well as information for the general public on cheque cashing.
As this legislation is so recent, its long-term impact remains to be determined.
Bill 27, the Business Practices and Consumer Protection (Payday Loans) Amendment Act, 2007, passed in the fall of 2007, but has not yet come into force. Part 6.2 of that Act prohibits the charging of fees for cashing cheques issued by the federal, British Columbia, or municipal governments, except as permitted by regulation.
As in Manitoba, the regulation of cheque cashing fees occurred in the context of a move to regulate payday loans. The Bill which will regulate cheque cashing fees has as its main focus the regulation of payday lenders, and response to the Bill has largely focused on the issues surrounding payday loans.
Public consultations on the rates for cheque cashing fees were held during the winter of 2007/2008, and the results are expected shortly.
Unlike Manitoba, British Columbia does have an indemnity agreement with the major banks. Therefore, consumers will have a choice of cashing their cheques without charge at a bank, or cashing them at an AFS business for a regulated fee.
2. The American Experience
As is highlighted elsewhere in this Report, the American cheque cashing industry is larger, older, and more mainstreamed than that in Canada. Cheque cashing outlets not only cash cheques and issue money orders and wire transfers, they also are often a service centre for municipal services such as public transportation fares, motor vehicle titles, public assistance benefits and food stamp distribution.
Cheque cashing outlets and services are more heavily regulated in the United States than in Canada. Of the fifty-one jurisdictions in the United States, only 15 do not regulate cheque cashing.
Some states require cheque cashing businesses to be registered and licensed. They may also have requirements for disclosure and posting of information, advertising, recordkeeping and other business practices. Ohio’s Check Cashing Act provides a comprehensive example of such legislation. Licenses are required for the main business office and each business location where cheque cashing is conducted. Records must be kept for two years after the date of final entry for each business location and be readily available for inspection by the Department of Consumer Finance. These regulations are aimed at increasing transparency and limiting fraud and potential money laundering. As well, cheque cashing outlets are required to provide receipts for cheque cashing transactions, to clearly state their identity as cheque cashing businesses in any advertisements and to refrain from using unqualified superlatives in such advertisements. Failure to comply with requirements can lead to the suspension or refusal to renew the license to operate.
Some states regulate fees for all cheques, with different rates for government cheques, payroll cheques and personal cheques. Others cap rates for all cheques at a maximum percentage and flat fee. Illinois regulates fees based on monetary categories, with a rate of 1.4 per cent plus a nine cent service charge for cheques under $500, and a 1.84 per cent rate for cheques over that amount. Some states provide for a higher rate for cheques cashed without identification, presumably so that undocumented workers can cash their employment cheques. Rhode Island requires banks and credit unions to cash government cheques for $750 or less without fee for the unbanked, provided proper state identification is presented.
Several states provide for one-time account set-up, membership or new customer fees, of between $5.00 and $10.00.
3. Evaluating Regulation as an Option
In its submission, National Money Mart opposed regulation of fees for cashing government cheques:
Government should focus on broadening access to encashment of government cheques. In consideration for the rights granted by the government to banks, credit unions and trust companies, these institutions are required to provide this service for free up to $1500.00 per cheque. Yet, notwithstanding statements of good intentions, they have taken no effective steps or outreach programs to allow low income Ontarians to quickly and easily cash their cheques. If they in fact do this, low income Ontarians will not feel compelled to pay for this service. That is the problem, and therefore that is where the solution is to be found. It is not a solution to restrict fees of independent cheque cashers because banks have created obstacles to accessing free services. [Emphasis in the original]
Central 1 Credit Union also felt that the solution was to increase access to mainstream financial services through programs such as direct deposit, rather than to impose fee caps. Generally, however, other stakeholders agreed that while broadening access to low-cost cashing of government cheques was essential, whether through indemnity agreements, direct deposit, or removing barriers to the use of mainstream services, regulation is still the most effective means of ensuring low-cost access to government payments, and indeed is an essential step.
There was however, a significant division of opinion as to whether the most appropriate regulatory approach was to prohibit fees altogether, or to cap them:
“[L]egislative approaches to managing cheque cashing fees are the strongest option available today. Through these legislative schemes, Ontario could set a ceiling on the fees applicable and it can have administrative bodies set these standards through public hearings. However, this approach should only come secondary to that followed in Quebec, where there is an outright prohibition on the charging of any fee for a cheque issued by a provincial, federal or municipal government. On its own, this latter approach stands as the most effective and most stable to accommodating the needs of vulnerable consumers in Ontario.”
– Public Interest Advocacy Centre
“We are of the view that cheque cashing agencies are here to stay. We therefore support the introduction of legislation similar to that introduced in Manitoba. This legislation would establish maximum rates these agencies could charge for cashing cheques.”
– Community Legal Services Ottawa Centre
Many consultees representing a variety of perspectives raised concerns that with a prohibition on fees, AFS businesses would cease to offer this service.
“If the government chooses to tamper with the marketplace the necessary result is withdrawal or restriction of access to financial services to some individuals. [T]he Consultation Document sets out an example of a single mother saving $11.53 on a cheque of $1,166.00 under the Manitoba rates. What the Paper fails to consider is the number of individuals that will be unable to cash their cheque because of more restrictive identity requirements and less risk tolerance of companies and fewer locations available to access service because of consolidation or companies withdraw their service from their suite of financial products.”
– National Money Mart
In the view of these organizations, some individuals will always be unbanked; and the withdrawal of AFS businesses from cheque cashing could cause some significant difficulties or hardship. This is particularly true for those in remote communities, where there is little or no access to mainstream financial institutions.
Others felt that the incomes of those on social assistance are so very low that any fee at all to access their benefits is unduly burdensome. In this view, the risks associated with the cashing of government cheques should not be borne by low-income individuals: this is bad social policy.
Further, a prohibition on fees would harmonize well with the federal regime. A regime where some cheques could be cashed for a fee and others could not would likely be a source of confusion, some thought.
If rate-setting legislation for cheque-cashing fees is paired with an indemnity agreement with mainstream financial institutions, as in British Columbia, this would offer a range of options to consumers. On the other hand, it was pointed out to the LCO that generally one regulates the service, not the institution: to have different regimes for AFS businesses and mainstream financial institutions would be incoherent, and again may be confusing for consumers. However, while both mainstream and alternative financial service providers offer services that enable consumers to access funds transferred by cheque, they do so in fundamentally different ways. Mainstream financial institutions provide access to such funds in a relatively low-risk environment, in the context of a set of services related to their deposit-taking functions; while AFS businesses provide a simpler service, but in a relatively higher risk environment.
Rate-setting for fees would require a complex regulatory structure: as the Ministry of Community and Social Services points out:
Legislation may require the creation of a licensing scheme for cheque cashing businesses, a mechanism to determine maximum rates, and inspection and enforcement methods.
However, such a regulatory regime is now being sent up to regulate payday loans services, which are generally provided by the same businesses that provide cheque cashing services. It may therefore be possible to take advantage of the regulatory regime being set up to monitor payday loans in order to regulate cheque cashing services. On the other hand, the impact of the regulation of payday loans on the economics of these businesses should be taken into account when considering capping cheque-cashing fees.
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