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, the creation of a consumer education fund under Bill 48, the Payday Loans Act, 2008, offers opportunities for public education.

    Section 66 of that Act establishes the “Ontario Payday Lending Education Fund”, which will be funded by payments made by businesses that are licensed as payday lenders under that Act. The purpose of the Fund is:

    [T]o promote the education of persons respecting the rights and obligations of persons and entities under this Act and respecting financial planning, where the education is done through the use of publications, training, advertising, and similar initiatives, including by making grants and transfer payments;

    as well as other objectives consistent with the purposes of the Act and prescribed by the Minister.

    Given the demonstrated need for initiatives related to financial literacy and for specific attention to the issues related to cheque cashing, the LCO recommends that consumer financial education address itself beyond the specific issues related to payday lending. The general reference in section 67 to education “respecting financial planning” may be broad enough to include initiatives that would increase the financial capability of low-income consumers and address issues related to cheque cashing. However, for greater clarity and certainty, the LCO recommends that this provision be amended to specifically include such initiatives.

    The LCO recommends that:

    2. The Government of Ontario amend the provisions of the Payday Loans Act, 2008 with respect to the Ontario Payday Lending Education Fund to specify that education initiatives may address issues related to cheque cashing, as well as broader needs related to financial capability.



    3. Access to Identification

    The LCO strongly recommends that the Government of Ontario take steps to ensure improved access to identification for low-income individuals. Lack of identification, together with cheque-hold policies, was the barrier most frequently identified by stakeholders. Indeed, concerns regarding identification were virtually universal. Not only does the lack of identification form a barrier to accessing mainstream financial institutions, it is a precondition for the success of potential reforms such as indemnity agreements.

    To improve access to financial services for low-income individuals, the LCO recommends that identification initiatives ensure that:

    identification is reasonably easy to obtain, both in terms of administrative requirements and geographic location,
    costs are minimal for low-income individuals, and
    information about the accessibility of identification and how to obtain it is widely disseminated.

    Considering the very low incomes of social assistance recipients, their particular difficulties in obtaining and maintaining identification, and the fact that social assistance recipients currently often access identification through payments from discretionary social assistance funds, a fee waiver for social assistance recipients makes sense.

    A number of jurisdictions provide greater leeway than does Ontario for the use of health cards as identification. Health cards provide an appealing identification option: they are free, they already exist, they are relatively easy to obtain, and as they are a requirement for accessing an essential service, most Ontarians already carry one with them at all times. On the other hand, restrictions on the use of health cards are intended to protect the privacy of medical information, which is in itself an important social policy objective, and one that may be particularly important for some marginalized groups, such as persons with mental health issues.

    As is outlined in Appendix E, most provinces have taken steps to provide access to low-cost identification as an alternative to the driver’s license. The Ontario Government’s recent introduction of Bill 85, the Photo Card Act, 2008, which will provide an alternative photo identification to the driver’s license, is a positive step, and one which the LCO supports. However, the anticipated cost of the new photo identification card, $35.00, will pose a barrier to many low-income individuals, and the LCO recommends that steps be taken to ensure that low-income individuals can obtain this card at minimal or no cost.

    The LCO recommends that:

    3. Legislation be enacted, whether through Bill 85 or otherwise, to provide a form of photo identification that is an alternative to the driver’s license and that:

    A. is available to all Ontarians who do not have a driver’s license;

    B. will qualify as identification under the federal Access to Banking Regulations;

    C. is low cost for all low-income Ontarians, and that is free of charge for persons in receipt of social assistance benefits; and

    D. is reasonably simple to obtain in terms of administrative requirements.



    B. Complementary Government Initiatives
    1. Indemnity Agreements

    At the present time, some recipients of government benefits have little in the way of reasonable alternatives for ensuring low-cost and speedy access to their funds. For example, given the very low incomes of social assistance recipients, it is not reasonable to expect that these individuals can wait for a cheque hold to clear in order to access their funds. While in the longer term, it may cost less to deposit funds into an account and wait for the cheque to clear, realistically, this is not a viable alternative for a person trying to make ends meet on, for example, $560 per month (the maximum amount under Ontario Works for a single person).

    This is not to suggest that cheque holds are improper: they are the financial institution’s method of addressing the risk of fraud. However, it does suggest that better methods of addressing the risk of fraud must be found, as the current system places the cost of those risks on the shoulders of low-income individuals.

    There was strong support among stakeholders for indemnity agreements as a means of increasing the opportunity for low-cost and rapid access to government funds. These essentially transfer the risk of fraud to the government, which has greater capacity to bear that risk. Indemnity agreements provide government benefit recipients with cost-free, rapid and fairly simple access to their funds. They also can potentially encourage low-income individuals to develop relationships with mainstream financial institutions and view them as providing services relevant to their needs.

    However, the success of indemnity agreements depends on the type of coverage provided, access to appropriate identification, and provision of identification and training to benefit recipients and frontline staff at both financial institutions and social service organizations.

    Local informal indemnity agreements, while positive developments, by their nature create a patchwork of coverage. Further, given that there are 147 delivery agents for the Ontario Works program, the creation of a comprehensive network of local indemnity agreements presents considerable administrative and organizational challenges. A formal provincial indemnity agreement is to be strongly preferred.

    A possibility which does not appear to have been explored either in Canada or in the United States is that of including AFS institutions in indemnity agreements. This could have the benefit of widening access and options for low-income individuals, particularly given the proven ability of AFS businesses to attract this clientele. However, AFS institutions differ from other financial institutions in vital respects. They are not subject to the same level of regulation and public monitoring as banks and credit unions. Nor do they have either the quasi-public role of banks or the community-driven mandate of credit unions. Further, it is unlikely that AFS businesses would be able or willing to offer services at zero profit: at most an indemnity agreement would reduce the costs of cheque cashing at AFS outlets. Finally, such an arrangement would be at odds with any broader attempts to encourage low-income individuals to develop relationships with mainstream financial institutions. Therefore, the LCO does not recommend extending indemnity agreements to AFS businesses.

    The LCO requested, but was unable to obtain information on the costs of existing indemnity programs. Based on the information the LCO was able to obtain from service providers, cheque fraud with respect to social assistance benefits is relatively rare, and so the costs of an indemnity program covering such benefits is unlikely to be high. However, given that taxpayers will be assuming the risk of fraud, it is reasonable for an indemnity agreement to place limits on the size of the cheques covered, so long as those limits cover the cheques generally issued by government to social benefit recipients.

    The LCO recommends that:

    4. The Government of Ontario enter into an indemnity agreement with mainstream financial service providers that will allow both bank and non-bank customers to cash government cheques immediately upon presentation of appropriate identification. The LCO recommends that this indemnity agreement:

    Provide coverage for cheques issued by the Provincial Government, and specified service delivery agents, such as the delivery agents for the Ontario Works program.
    Indemnify cheques for up to $2,000, in order to encompass the range of benefits received by social assistance recipients.
    Ensure that training on the indemnity agreement is provided to front-line staff at participating financial institutions and front-line government staff providing services to low-income individuals.



    2. Alternative Forms of Payment

    One method of reducing the number of benefit recipients who pay a fee in order to cash their government cheque is to reduce the number of benefit payments made via cheque. The rise of electronic banking has made it possible to effectively transfer benefit payments through direct deposit, or more recently, through benefit cards.



    Direct Deposit

    Direct deposit considerably reduces the risk of fraud, encourages low-income individuals to use mainstream financial institutions, and provides administrative savings for government. For these reasons, direct deposit has long been encouraged for social assistance recipients in Ontario, with some success.

    However, the utility of direct deposit programs is limited by the current barriers to the use of mainstream financial institutions, such as location, identification requirements, and confusion and anxiety regarding costs and fees associated with bank accounts. Until such barriers are addressed, a significant proportion of low-income recipients of government benefits will continue to be reluctant to use direct deposit. In Alberta, which has extensively promoted the use of direct deposit, use of the program is at about two-thirds for the general social assistance program and three-quarters for the program targeting persons with disabilities. This indicates that there are inherent limits to the extent of direct deposit programs.

    While the current program should by no means be abandoned, given current levels of direct deposit in Ontario, extensive new investment in further promoting this program is unlikely to produce large returns.



    Benefit Cards

    Benefit card programs are new in Canada, and still at an early stage of development. Like direct deposit, benefit cards may result in administrative savings for service providers, as well as reducing fraud and potentially providing easier access to benefits for some recipients.

    While stakeholders responded to the notion of benefit cards with initial interest, there were strong concerns regarding stigma, privacy and fees. These concerns, while significant, could be addressed by a well-designed benefit card program. More seriously, those social assistance recipients who are least likely to have bank accounts and are therefore most likely to be targeted for benefit cards are also the ones who are most likely to face technological or educational barriers to using the cards, or to lose the cards due to their transient lifestyles. Most stakeholders therefore viewed benefit cards as ultimately having limited utility.

    The exception is in remote communities. There are unique challenges in ensuring that members of remote Northern communities can access their benefits at a reasonable cost. Many communities have no mainstream financial service providers at all, and given economic realities, this is unlikely to change. This means that many solutions applicable in urban communities, such as direct deposit programs and indemnity agreements, are of limited or no utility in these communities.

    Given that most of those affected are Aboriginal individuals, the lack of financial services in these communities and the resultant disproportionate costs for accessing basic financial services raises serious equity and human rights issues.

    The LCO recommends that in the long-term, measures be taken to facilitate access to financial services in these communities. This requires sustained effort and creativity. It has been suggested that government assist in facilitating the development of community financial institutions (such as credit unions). Alternatively, efforts could be made to develop relations between these communities and mainstream financial providers, through regular visits and outreach efforts.

    When considering effect of regulating the fees that are currently being charged for cashing government cheques, the particular circumstances of these communities must be taken into account. Financial services are generally provided solely by the Northern Stores, and both communities and individuals are highly dependent on the continuance of these services. Regulation that set fees at a rate below the level considered economic by these providers, and that resulted in the withdrawal of services would have a significant detrimental effect on these communities. Further, given the level of dependence on these services, individuals are unlikely to complain about non-compliance with regulations, making the law very difficult to enforce. Providing alternative methods of receiving government payments therefore becomes very important.

    In the short-term, the most promising option is the use of benefit cards. As the Northern Stores provide access to funds through gift cards, many residents of these communities are already familiar with the technology. The use of benefit cards may provide residents with some options with respect to accessing and spending their funds.

    The LCO recommends that:

    5. The Ministry of Community and Social Services and its delivery agents continue with the current voluntary direct deposit program.

    6. The Ministry of Community and Social Services work with Northern communities to develop a pilot project exploring the use of benefit cards as a means of providing funds to remote communities that do not have mainstream financial institutions. The LCO recommends that this program ensure that:

  • Recipients are able to easily access their funds;
  • The fees for accessing funds from such benefit cards do not exceed the fees paid when accessing funds through a bank account;
  • The privacy of recipients is protected and respected;
  • Consideration is given to the risks of exploitation of benefit card recipients; and
  • Recipients receive appropriate training and support to enable them to effectively use the cards.



    3. Outreach

    Given the multiple benefits to individuals of developing a relationship with a mainstream financial institution, it can be argued that the ultimate goal should be the promotion of more effective access to mainstream financial services by low-income individuals. Certainly, there are significant long-term benefits for low-income individuals in developing relationships with mainstream financial institutions. Arguably, if all low-income individuals had a functioning relationship with a bank or credit union, the concerns giving rise to this Report would not exist or would be minimal.

    Pragmatically, however, such a goal is not likely to be fully achieved, at least not in the near future. There are, for example, very substantial practical difficulties in achieving access in remote areas of Ontario: the difficulties have been repeatedly studied and acknowledged, and a number of potential solutions have been identified, none of which has proved easy to implement.

    This is not to say that efforts should not be made – they should – only that efforts to promote mainstream financial services for low-income individuals should be paired with initiatives to protect consumers who cannot or do not use such services.

    Some of the barriers to the use of mainstream financial institutions are challenging to address. Aboriginal individuals may face a complex mix of linguistic, cultural, historic and geographic barriers, depending on their particular circumstances and residences. Newcomers, as well as individuals with addictions or mental health issues, or other types of disabilities also face a range of unique barriers.

    In developing programs and services addressing the needs of low-income communities, it is important to keep in mind that there is significant social stigma associated with the receipt of social assistance benefits. As a result, recipients of social assistance are often singled out for negative treatment. Programs must therefore be designed to maximize the privacy of social assistance recipients, and appropriate training and education must be provided to front-line service providers.

    The LCO recommends that:

    7. Mainstream financial institutions, including banks and credit unions, take additional steps to reach out to low-income and marginalized communities and to encourage access to and use of their services, including:

    Providing no-fee accounts for social assistance recipients similar to those that some financial institutions currently provide for students and older adults;
    Working with community groups to provide services targeted to specific needs of marginalized communities, modeled on the initiatives undertaken by RBC through its Cash & Save outlets or PACU’s partnership with CAMH; and
    Working with community groups to raise the profile of their institutions and services in Aboriginal, newcomer, disability and low-income communities.

    8. The Government of Ontario work in partnership with the Canadian Bankers Association, credit unions, and First Nations communities to explore means of improving access to financial services in remote communities.



    4. Monitoring

    A variety of measures have been taken across Canada to improve low-cost access to funds for recipients of government benefits. One of the difficulties in evaluating the relative strengths and weaknesses of these various approaches has been the lack of available data. Initiatives will be more effective if data regarding their costs, benefits and impact are collected and monitored, and acted upon.

    The LCO recommends that:

    9. The Government of Ontario collect data to monitor the success of initiatives related to cheque cashing fees.

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