Several provinces are asking Ottawa to honour an intergovernmental agreement on how lenders must calculate the cost of borrowing in their disclosure documents to clients.

And Alberta, supported by British Columbia and Quebec, is leading the way.

Alberta is alleging that the feds took this action on the say-so of federally chartered banks that balked at full disclosure of the cost of borrowing. This, says Alberta, puts provincially- chartered institutions at a competitive disadvantage.

Last November, the province asked Industry Canada’s internal trade secretariat to establish a trade dispute panel – a seldom-used arbitration mechanism – to hear its complaint.

The panel hearing is being held this week in Ottawa. The case is the first involving consumer protection regulation and only the fifth to be convened under the Agreement on Internal Trade (AIT) since Canada’s first ministers signed the pact in 1994.

Alberta and its supporters are challenging the federal Cost of Borrowing Disclosure (Bank) Regulation.

Canada’s provinces thought they had a deal when they adopted a legislative “template” for the disclosure of cost of credit information at their meeting with the federal government in November 1998 in Charlottetown.

But they failed to appreciate the majesty of Canada’s banks and the fealty of their tenants in Ottawa’s corridors of political power.

In 1998, the governments agreed to use the annual percentage rate (APR) method of cost of credit calculation instead of the annual interest rate (AIR) method, which banks prefer.

AIR is based on interest only, while other costs such as insurance and appraisal costs are included in the APR method.

This might sound like regulatory nitpicking, but the difference creates an uneven playing field. Institutions that use the AIR method can come out looking like they charge a rate of interest 1.2 per cent to 1.8 per cent lower than the rate charged by those using the APR method.

A farmer on the razor’s edge of economic survival would consider this a significant difference.

“It’s very important, when consumers are given disclosure of the cost of borrowing, that they get an apples-to-apples comparison,” says Graham Wetter, vice-president and general counsel of Credit Union Central of Alberta.

Alberta, which happened to be putting the finishing touches on its new Fair Trading Act (a consolidation of previous consumer protection statutes), was the first to include the APR method of cost of credit calculation.

“We celebrated that,” recalls a government official. “We were proud of the fact that Alberta was working co-operatively with other jurisdictions.”

However, it didn’t take long for Alberta to feel the shiv, complete with Ottawa’s fingerprints, slip into its back.

The province got the wake-up call early in 2002, shortly after the federal government had revised its Bank Act Regulation following consultations with banks, when provincially-chartered credit unions and trust companies complained that banks were still using the AIR method.

Other institutions, including credit unions and trust companies, joined the protest.

Outraged, the Alberta government contacted the AIT’s consumer measures committee – through which the template was created – and asked it what it intended to do. But this only spooked other provincial governments, which put any legislative change on hold.

“The whole point was to make this stuff the same right across the country,” says Wetter. “And it hasn’t ended up that way. That’s the problem.”

Alberta then asked for the trade dispute panel. The B.C. and Quebec governments joined the action as intervenors, and Saskatchewan, Ontario, Nova Scotia, New Brunswick, Yukon and the Territories wrote letters of support.

The issue of hidden costs has emerged in recent years as lending institutions have taken to obtaining collateral mortgages on lines of credit. This has created the question of non-interest credit costs and whether and how these should be included in disclosure.

The consumer measures committee’s harmonization was aimed at unifying a patchwork of federal and provincial regulations that acted as a trade barrier. Consumer protection was the committee’s overarching concern.

The Agreement on Internal Trade is aimed at promoting east-west trade within Canada. Once a trade dispute panel issues its report, the respondent government is expected to take action to comply within 60 days. If it does not do so, the report is made public.

The wronged parties may take retaliatory action if the offending party has not acted on the recommendations within a year, but only after discussions with the committee on internal trade.

“The Alberta government has been particularly aggressive in using the agreement to resolve issues,” says internal trade consultant Robert Knox of Singhampton, Ont., a former internal trade secretariat executive director.

Knox, who says in a 2000 Fraser Institute report that panel decisions are not binding on governments, told Business Edge that “we all live in hope. We all assume that governments are going to obey the agreements that they make.

“The Alberta government has been particularly aggressive in using the agreement to resolve issues,” he says, citing – as an example – a case a few years ago in which a trade dispute panel ruled against an attempt by Ottawa to ban a motor-fuel additive.

In his Fraser Forum report, Knox notes that the lack of enforceability raises the spectre of retaliatory action.

“The result: More, rather than fewer, trade barriers – and maybe an internal trade war.”

(Brock Ketcham is the director of trade practices for the Better Business Bureau of Southern Alberta. He can be reached at brock@businessedge.ca)