The issues raised by cheque cashing fees, although simple on the surface, raise complex considerations of law and social policy. The use of cheque cashing services has roots in poverty and marginalization, rapid technological change, and shifting dynamics in the financial services sector. Therefore, 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’s recommendations are therefore divided into two sections: the first focuses on legislative amendments, and the second focuses on complementary initiatives by government and other stakeholders.

The LCO recommends a coordinated strategy for ensuring that recipients of government benefits have improved access to their funds, including:

  • Introduction of legislation to regulate the cheque cashing industry, including the imposition of licensing requirements, mandatory fee disclosure and maximum fee rates;
  • Passage of legislation to improve access to identification for low-income Ontarians;
  • Initiatives to increase education and access to information for consumers;
  • Development of an indemnity agreement between the Government of Ontario and mainstream financial institutions to improve access to low-cost cheque cashing;
  • Exploration of alternatives to the use of cheques in providing government benefits to remote communities; and
  • Long-term initiatives to reach out to communities that have historically had difficulty accessing mainstream financial services.

    The recommendations are interdependent, recognizing that the complexity of the issue requires a multi-pronged approach. These recommendations aim to combine both short-term practical improvements and long-term strategies for addressing the underlying causes of the use of cheque cashing services.

     

     

    A. Legislative Initiatives
    1. Regulating the Cheque Cashing Industry

    The payment of fees in order to cash government cheques has a significant impact on many of Ontario’s poorest and most vulnerable citizens. The Ministry of Community and Social Services issues approximately three million cheques to social assistance recipients each year. While it is not possible to know with any certainty how many of those cheques are cashed for a fee, the municipal delivery agents and community organizations with whom the LCO consulted suggested that the number is substantial. A survey conducted by the Thunder Bay Social Service Administration Board for the month of March 2008 found that over 40 per cent of the cheques it issued were cashed for a fee. Given the very low incomes of those on social assistance, the impact of cheque cashing fees on their ability to obtain the necessaries of life may be substantial. Since expressed concerns have been focused on low-income recipients of government benefits, it is not necessary that regulation cover cheques issued to businesses.

    Mainstream financial institutions include banks, credit unions, trust companies and loan companies. Low-income individuals face a complex set of barriers to accessing mainstream financial services. Barriers may include cheque hold policies, attitudinal barriers, and lack of information and financial capability. In some remote Northern communities, there are no mainstream financial institutions. As well, some low-income urban neighbourhoods may lack convenient access to mainstream financial institutions

    Removal of these barriers is not simple: it requires concerted action over time by government, mainstream financial institutions and community organizations. The LCO has developed recommendations to address these underlying issues. However, for the foreseeable future, there will continue to be individuals who are unbanked or underbanked, and have little option but to resort to AFS businesses to cash their government cheques.

    Regulation of cheque cashing services is therefore a necessary protection for vulnerable consumers.

    The LCO does not recommend a prohibition on fees for cashing government cheques. Cheque cashing services will continue to play a vital role in some communities so long as barriers to accessing mainstream financial institutions continue to exist. Given the current situation, a prohibition would, for example, risk leaving some remote Northern communities without any services whatsoever, and leave many low-income urban individuals with fewer options to meet their urgent need to access their government benefits, for a variety of reasons discussed in this Report.

    However, users of AFS businesses are entitled to basic consumer protections. Financial services are vital to the well-being of the individuals who use them: this is one of the reasons why banks and credit unions have always been subject to significant regulation and superintendence. Low-income consumers who primarily access their financial services from AFS businesses are entitled to the same basic protections as consumers who obtain their financial services from banks and credit unions.

    Ontario (and other jurisdictions) has already begun to move in this direction with initiatives to regulate payday lenders. Bill 48, the Payday Loans Act, 2008, which received Royal Assent in June 2008 but has not yet come into force, provides both a precedent and a model for regulation of the cheque cashing industry, particularly since most cheque cashing businesses also offer payday loans and will fall under the new legislation when it comes into force. For greater efficiency and effectiveness, the LCO recommends that legislation regulating cheque cashing be harmonized with payday lending legislation.

    The LCO recommends that cheque cashers, like payday lenders, be required to obtain a license to operate and to provide fair and full disclosure of their fees, and be subject to effective complaint mechanisms where they fail to comply. Given that the vast majority of cheque cashing businesses in Ontario will be subject to the licensing and complaint mechanisms of Bill 48 when it comes into effect, neither government nor AFS businesses should find such regulation excessively costly or onerous.

    The question as to whether to cap fees for cashing government cheques is a difficult one. The other initiatives recommended by the LCO, if implemented, will over time widen the options available to low-income individuals and reduce the barriers to use of mainstream financial institutions. On balance, however, given the immediate needs of low-income recipients of government benefits, and the considerable challenges inherent in ensuring full access to mainstream financial services for all Ontarians, the LCO recommends that the government pass legislation to set fair and reasonable rates for cashing government cheques. The aim of such legislation is to ensure that vulnerable recipients of government benefits can access their funds at reasonable rates, taking into account their low incomes, while ensuring that cheque cashing services are fairly compensated for their risks and costs. Manitoba and some American jurisdictions have set more than one maximum rate for cheque cashing fees. In Manitoba, the rate varies depending on whether the consumer is expected to purchase goods through the business cashing the cheque, and in some American states the rate differs depending on the size of the cheque cashed.

    Given its nature, informal cheque cashing is very difficult to regulate. However, this does not mean that such services should be exempted from regulation. While most informal cheque cashing may be benign, there is certainly a potential for abuse, and individuals who are victims of abusive practices should not lose the opportunity for recourse.

    The LCO considered whether it would be reasonable to set a limit on the size of the cheques covered by legislation. Most government cheques issued to individuals are for relatively small amounts (under $2,000), but under unusual circumstances, cheques for larger amounts may be issued. The compensation recently provided to Aboriginal survivors of residential schools provides an example of the circumstances under which cheques for substantial sums may be issued. Based on the results of that experience, the LCO has concluded that legislative limits on the size of cheques protected could be the source of considerable injustice.

    There are a variety of models for setting maximum rates for cheque cashing fees. In British Columbia, the government will set maximum rates for cheque cashing fees by regulation, based on public consultation. In Manitoba, the Public Utilities Board was given the authority to set maximum rates for cheque cashing, based on public hearings. This may be more cumbersome than the British Columbia process, but has the advantage of placing the responsibility for rate-setting at arm’s length from the government, enabling open debate and public participation, and establishing a process for regular review of the maximum rate. Under Ontario’s Bill 48, the Government will establish an independent expert advisory board to make recommendations on limits for the total cost of for payday loans, with any limits to be subsequently imposed through regulation. This approach provides the Government with expert advice as well as flexibility; however, there is no provision for regular review or adjustment for the cost-of-borrowing limits.

    In the LCO’s view, it is preferable that a rate-setting process be arm’s length, expert, and open to public debate. However, since Bill 48 has established a viable process for a rate-setting exercise similar to that required for cheque cashing fees, the simplest and most efficient solution may be to use the same process for setting maximum rates for cheque cashing fees.

    As most individuals cashing government cheques at AFS businesses are likely to be low-income and otherwise marginalized, compliance mechanisms that focus on complaints are unlikely to be effective, as these individuals are less likely to be aware of their rights and, being preoccupied with survival are less likely to enforce them. The Financial Consumer Agency of Canada’s (FCAC) model, which focuses on proactive measures such as “mystery shopping”, may be a more effective compliance model in these circumstances.

    The LCO recommends that:

    1. Legislation be enacted to regulate cheque cashing services. The LCO recommends that this legislation be modeled on and harmonized with the Payday Loans Act, 2008, and specifically that this legislation:

  • Require cheque cashing businesses to obtain a license to operate;
  • Require cheque cashing businesses to provide full and fair disclosure of their fees;
  • Include a mechanism for setting maximum fees for cashing cheques issued by provincial or municipal government to individuals. Ideally, this process is arm’s length, expert and open to public input; however, the process adopted under Payday Loans Act offers a viable practical solution;
  • Apply to all institutions, including both formal and informal cheque cashing services;
  • Fairly reflect the costs and risks associated with cashing government cheques, ensuring that cheque cashing services continue to receive a fair return for their services; and
  • Include provisions for a compliance mechanism.

     

     

    2. Information and Education

    Informing Consumers

    The provision of adequate accessible information is essential to ensuring that Ontarians have a meaningful choice in deciding how to access the funds from their government cheque. The FCAC surveys highlighting low levels of public awareness related to the federal indemnity agreement, and the significant numbers of individuals cashing federal government cheques at AFS outlets despite the existence of the indemnity agreement highlight the importance of ensuring that consumers are well-informed about their choices.

    Consumer education can be provided through a variety of mechanisms. There are simple and relatively low-cost steps that can be taken, such as providing written information along with benefit payments. Train the trainer programs can also be effective and relatively low-cost. Training and education programs will be most effective if developed in consultation with organizations that have experience in working with low-income consumers.

     

     

    Training and Education for Service Providers

    The LCO heard from several stakeholders that information and education should be provided, not only to individuals receiving government cheques, but also to those who provide services and advice to these individuals, such as front-line staff in financial institutions and social services organizations.

    Several organizations that work with low-income individuals emphasized the value in financial institutions and social service providers sharing knowledge and skills in order to provide better service and assistance to low-income consumers. Social service providers are very knowledgeable about the needs and circumstances of their clients, but often have only scanty information on financial issues; the opposite is generally the case for staff in financial institutions.

    As well, low-income individuals have unique financial needs and issues, and the LCO heard that financial institutions and social service providers are frequently ill-equipped to provide advice on financial services and products that addresses these needs.

     

     

    The Ontario Payday Lending Education Fund

    Given the close relationship between cheque cashing and payday loans,