OTTAWA - Canada's banks have been warned to work together to respond to customer complaints about credit card practices or face regulations they "are probably not going to like."

Conservative MP Ted Menzies, the parliamentary secretary to the finance minister, told representatives of Canada's banks that constituents have been complaining to politicians enough that something has to be done.

"Our constituents were complaining to us, enough so that we were going to have to do something about it," Menzies said at a parliamentary hearing into credit card practices Thursday.

"And I told you (then), if we end up having to are probably not going to like the regulations we have to put in place. We're still trying to avoid that."

The industry has until June 13 to respond to Flaherty's new regulations on the card industry, which include a mandatory 21-day grace period before interest is charged on new purchases, even for cardholders with outstanding balances.

As well, the new rules would require the banks to give advance notice of interest rates increases and be more transparent.

However, the government has made no moves to put a ceiling on the interest banks can charge on outstanding balances, or on so-called interchange rates that impose fees on merchants for card purchases.

Even so, the Canadian Bankers Association and representatives of several of Canada's big banks argued that some of the proposed regulations would be costly, and come at the worst time, when their operations are being hit by a deep recession.

The mandatory 21-day grace period will cost the banks considerably more than the "tens of millions" estimated by the finance minister, said CBA president Nancy Hughes Anthony, although she did not give a figure.

"For my part, rather than introduce regulations, the best approach is for choice, and for competition and good understand for all participants of the benefits and responsibilities," she said.

However, Hughes Anthony said the banks could not work together on solutions, as suggested by Menzies, because that might be considered collusion under the Competition Act.

One of the biggest complaints against the banks, several MPs identified, was why they continue to charge interest rates of up to 19 per cent on outstanding credit card balances when the Bank of Canada has slashed its trendsetting overnight rate to 0.25 per cent from 4.5 per cent in just over a year.

Hughes Anthony responded that the central bank's overnight rate only represents about one per cent of what the banks have to pay for funding.

"Our interbank funding rates have gone up not down during the period," added Cathy Honor, a senior vice-president of the Royal Bank.

The bankers association added that credit card fraud increased by 34 per cent last year to $500 million, also adding to bank costs.

The bankers also maintained that complaints by merchants about recent increases in so-called interchange rates, particularly with premium credit cards, are exaggerated. Interchange rates, set by the credit card companies, are fees paid by merchants on each credit card purchase.

Bank representatives argued additional interchange costs on a premium card amounts to 20-35 cents on a $100 purchase. They added that only about nine per cent of banks' accounts are "true" premium cards, which offer holders enhanced rewards and benefits.

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