Loyalty Programs, Consumer Credit and Advertising to Consumers: New Rules for Quebec Merchants
This article first appeared in French in the January 2018 newsletter of the Quebec retailers association (Conseil québécois du commerce de détail).
On November 15, 2017, the Consumer Protection Act (the “CPA”) was amended by An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs1 (the “Act”) which, as its title indicates, imposes new rules and obligations on Quebec merchants regarding consumer credit, as well as a new legal framework for loyalty programs. In addition the Act creates new requirements for merchants concerning their business practices and advertising.
The amendments made to the CPA by the Act will affect many merchants in Quebec, particularly those that offer loyalty programs, and others who directly or indirectly offer consumers credit in the course of their business.
While the amendments to the CPA will likely not come into effect for a few weeks, and regulations are still to be adopted to more specifically define the scope of the Act’s new requirements, Quebec merchants would be well advised to familiarize themselves with the new provisions, given the impact they will have on their operations.
2. The Consumer Protection Act: Recap
The CPA applies to every contract involving goods or services entered into by a consumer (natural persons only) and a merchant in connection with the latter’s business.
The CPA is a law of public order, which means that a merchant cannot avoid its application and must comply with it in the course of its business activities: merchants cannot impose terms and conditions or engage in practices that are contrary to its provisions.
Generally speaking, the CPA creates multiple obligations for merchants, and places limits on their contractual terms and conditions for the sale of goods and services, regarding both the content of the clauses in the contract and, in certain circumstances, the way they are presented.
At the same time, the CPA provides consumers with various rights and recourses against a merchant who does not respect its provisions, including the right to have the contract declared null and void, or to claim damages, not to mention the monetary penalties and penal sanctions that can be imposed by the Consumer Protection Office.
3. Loyalty Programs
Loyalty or rewards programs are now widespread in the retail industry. For a merchant of any size, having such a program is an increasingly important competitive advantage that can influence consumers in their choice of where to purchase goods and services.
A new legal framework for loyalty programs is an important feature of the Act, as such programs have hitherto not been subject to any specific rules.
The new rules for loyalty programs apply to any type of points program, or programs where the consumer receives free products or services upon reaching a threshold of purchases. These programs may be offered by a specialized firm that the merchant associates itself with, or they may be created by the merchant for the benefit of its own clientele.
In light of the information currently available, different rules will apply to such programs depending on whether they are “home-made” or “institutional” (these terms are not found in the Act or the CPA and are for ease of reference only).
A. “Home-Made” Programs
The new rules governing loyalty programs will not apply to the following types of programs:
a) Programs offering free products or services: This type of program offers consumers who, after a certain time as a user of a service, or after purchasing a certain number of products, the right to receive a similar product or service free of charge. Examples include a free cup of coffee after the purchase of five cups, or a free massage after four sessions;
b) Programs offering free products or services with a value of $50 or less: Under this type of program, consumers may, after a certain time as a user of a service or after a specific number of purchases, obtain from the merchant a product or service of their choice having a value of $50 or less. An example of this is a merchant who offers a discount or a coupon redeemable in-store, or a selection of relatively low value goods or services, after a certain number of purchases.
These types of programs are created by merchants themselves in markets for goods or services of modest value, that do not require a complicated contract, or any contract at all.
Such programs can be modified or withdrawn by the merchant at any time without contravening the CPA, and they may have an expiration date for claiming the free product or service.
In order to avoid the much stricter rules applicable to “institutional” programs explained below, a merchant who offers a “home-made” program must ensure that its program clearly indicates the product or service claimable when the program’s conditions are met, and that its value does not exceed $50.
B. “Institutional” Programs
An “institutional” loyalty program provides for the accumulation of points (termed “units of exchange” in the Act) that can be exchanged vis-à-vis the merchant with whom they were accumulated, or other partner merchants, with no value limit.
An “institutional’ program can be an external program run by a specialized company with which the merchant is associated (such as a travel rewards program) or an internal program of the merchant that offers discounts, rebates, products or services with no value limits (such as those of large grocery chains and credit card issuers).
At the heart of the new rules is the prohibition on the expiration of the points accumulated under the program, although it will be possible for points to be cancelled in the case of long-dormant accounts.
“Institutional” programs are thus subject to the following conditions and restrictions:
a) In order to participate in the program the consumer must enter into a contract with the merchant setting out the conditions for obtaining a reward, how to claim the reward, and the conversion factor for exchanging points (e.g. 1,000 points = $10);
b) Points cannot expire on a specific date or with the passage of time, unless the contract provides otherwise and no points have been accumulated or exchanged for at least a year, and 30 days’ prior notice in writing has been given to the consumer.
In addition, neither the number of points accumulated under the program or their value can be modified, nor can their conversion factor be changed.
However, the merchant can modify the following aspects of the program:
a) the number of points required or the conversion factor for obtaining a product, service or sum of money in the future;
b) the partners or merchants associated with the program;
c) the dormant account policy;
In all cases, two notices must be sent to the consumer, the first between four and three months before the modification takes effect, and the second 30 days before that date.
Thus, merchants who currently offer a loyalty program in Quebec will have to change their practices in order to comply with this new legal framework.
4. Consumer Credit
The Act also adds new provisions concerning credit contracts to the CPA. A credit contract is any contract with a consumer that provides for payment with a term or that is for the loan of money. Credit contracts include instalment sale contracts where the merchant retains the right of ownership in the property sold until full and final payment is made, or where payments are to be made in scheduled instalments over time.
The Act’s provisions are primarily aimed at contracts for the use of a credit card or a line of credit, with new obligations regarding the calculation of the credit rate (interest), the establishment of a minimum payment of 5% of the amount due, a prohibition on unilaterally increasing the credit limit and other obligational content of the contract.
Furthermore, any new credit contract or any increase in the credit limit will be subject to an assessment of the consumer’s capacity to repay the requested credit. Failure to make that assessment will result in forfeiture of the right to claim credit charges, primarily interest.
The guidelines to be observed in assessing a consumer’s capacity to repay will be published shortly and should be closely studied by merchants offering any type of consumer credit.
Finally, the Act strictly regulates high-cost credit contracts with merchants who lend money but are not conventional financial institutions, particularly regarding the debt ratio and the obligational content of the contract.
5. New Advertising Rules
The CPA already contains strict rules regarding advertising and commercial practices, prescribing various obligations and prohibitions aimed at ensuring that no false or misleading representations are made to consumers and that the message communicated to them is clear, intelligible and truthful.
The Act adds the following to the list of obligations and prohibitions pertaining to communications with consumers:
a) In an advertisement regarding goods or services, the merchant must present the information in a clear, legible and comprehensible manner;
b) A merchant cannot use the expression “cost price” or any similar expression, unless the expression refers to the price actually paid by the merchant to purchase the goods;
c) A merchant cannot disclose in an advertisement only the amount of the instalments to be paid for the purchase or lease of goods but must also disclose, and lay greater emphasis on, the total price of the goods;
d) A merchant cannot show, in an advertisement, a picture of the goods or services that is not an accurate depiction.
Finally, the Act imposes new rules on advertising the availability of credit, particularly with respect to the effect that the credit may have on consumers’ financial situation or debt problems.
Generally, the amendments to the CPA do not apply to contracts already entered into, and must only be respected by contracts entered into after the new rules take effect in the coming weeks.
All merchants in Quebec should familiarize themselves with the Act and the new obligations imposed on them, especially those with loyalty programs and any merchant offering any type of credit to consumers.