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Part V - Assessing the need for regulatory options

Date

CCAAC has identified that gift card products, when used as intended, have the potential to provide significant benefits to Australian consumers. However, CCAAC has also identified that there may be some instances of personal consumer detriment associated with some gift card transactions. This personal consumer detriment appears to arise where consumers do not redeem the full value of their gift card.

This part of the paper assesses whether there is a need for a regulatory response to these instances of consumer detriment. In doing so, the paper examines the regulatory responses that have been carried out in overseas jurisdictions.

Overseas legislation

Some jurisdictions have implemented regulation in response to consumer concerns relating to gift cards. In particular, legislation in Canada and the United States seek to address some of the same issues considered by CCAAC. Other common law jurisdictions such as New Zealand and the UK rely on generic consumer protection legislation.

New Zealand and the UK

The United Kingdom and New Zealand do not have any specific regulation of gift cards. Gift cards in these jurisdictions need to comply with generic consumer protection provisions similar to the ACL. In New Zealand the Fair Trading Act 1986 prohibits misleading and deceptive conduct and the Consumer Guarantees Act 1993 apply similar standards to Consumer Guarantees under the ACL. These include that the product be fit for any specified purpose for which it was supplied.85 These laws are substantially harmonised with requirements under the ACL.

Canada

In Canada gift cards are subject to regulation at the provincial level. Notably, provincial laws in Canada do not apply to prepaid phone cards or bank issued prepaid purchase cards, as these are regulated at the federal level.86

Prohibition on expiry dates and fees

Prohibitions on expiry dates and fees apply in Canada. Cards that are issued for a specific good or service, and cards that are freely issued as promotions may be exempted by provincial law. As is the case with expiry dates, the use of fees and charges has also been prohibited. Cards that may be exempt from the prohibition include open loop cards that charge small dormancy fees, fees on cards issued for charitable purposes and charges for the personalisation or replacement of lost cards. Quebec is the only province that requires retailers to cash out small residual balances on request.87

Disclosure

Every Canadian jurisdiction provides specialised disclosure requirements for terms and conditions that apply to gift cards. Most provinces require essential terms such as fees or expiry dates to be disclosed on the card itself.88 This approach aims to ensure that the end user receives notice of terms and conditions, as packaging may be discarded by the purchaser.

The United States

Regulation in the United States is focussed on expiration dates and post purchase fees. It should be noted that the federal protections operate as a baseline for consumers. State regulation can provide additional protection for consumers, but cannot be inconsistent with the federal protections.89 This chapter does not attempt to provide a detailed analysis of the operation of gift cards in every US state. Instead it will examine the federal regulations and comment on regulatory trends at the state level.

Regulatory action in the US

The US Federal Trade Commission (FTC) has a history of prosecuting gift cards issuers under generic consumer protection legislation. In 2007, the FTC settled actions against Restaurant Group Darden's and Kmart on behalf of gift card holders. The claims alleged the retailers misled consumers by providing inadequate disclosure of dormancy fees.90 In both cases the fee disclosure was in fine print on the back of the card.91 As part of the settlement, Darden's and Kmart agreed to refund consumers for fees inadequately disclosed on their cards.92 Darden agreed to a number of improvements to its disclosure practices. Kmart had removed fees on its gift cards before reaching settlement with the FTC.93 These actions indicate that regulators have been able to use the generic consumer protection laws to prevent the use of unfair terms and conditions on gift cards.

Federal laws

In 2009 the US Congress passed the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act). These laws limit the capacity of gift card issuers to apply expiry dates and fees on card balances. The US regulations apply to 'general use prepaid cards, gift certificates, and store gift cards.'94 The sale or issue of a gift certificate, store gift card, or general-use prepaid card with an expiration date is prohibited, unless it complies with the following two requirements:95

  1. the expiration date must be no earlier than 5 years from issue; and
  2. the terms of the expiration must also be clearly and conspicuously stated.96

If the card is reloadable it cannot expire less than 5 years from the date on which it was last reloaded.97 The prohibition on expiration applies only to the balance on the card, not the card itself. An issuer may expire a card if it provides a replacement card with the same loaded value at no cost.98

Dormancy fees, inactivity charges and service fees are generally prohibited unless they comply with the strict requirements of the statue. One off issuance fees are permitted,99 as are fees on promotional cards that are provided for free.100

Disclosure

Under the federal regulations, post purchase fees must be 'clearly and conspicuously' disclosed on the card or certificate itself.101 Terms relating to expiry must also be 'clearly and conspicuously stated', however, they are not expressly required to appear on the card itself.102

State regulations

A number of states provide additional protection to consumers using gift cards. Subject to exceptions for some card types, nine states prohibit expiry dates altogether. A further two provide for a minimum expiry term longer than the federal five years.103 In addition, 18 states prohibit any post purchase fees. Eight states require retailers to provide cash change for small residual balances, although the maximum change given varies from less than $1 to $5 to 10 per cent of the remaining value.

Unclaimed money provisions

The most common regulation adopted by states is the imposition of an unclaimed money or 'escheat' provision.104 These provisions require expired card balances and/or balances that have been inactive for a defined period to be remitted either in whole or in part to the state. These provisions usually also provide for the reimbursement of the issuer if the card ho
lder redeems the card after the escheat date but before expiry. Some of these provisions are justified on the grounds that they enable consumers to reclaim funds on gift cards indefinitely. They also arguably operate to remove the incentive on issuers to expire cards as they do not retain any breakage.

Assessing the benefits of overseas regulations

The benefits of overseas approaches can be difficult to assess. While outcomes may vary for United States, Canadian and Australian consumers, it is not clear to what extent differences are due to market differences. For example, different trends exist in the American market such as the demand for reloadable quick service restaurant (QSR) prepaid cards. These cards are popular both as gifts and for personal use but have failed to take hold in Australia. In addition, open loop gift cards are more popular in the US market and fees are less common in Australia than in other jurisdictions. A comparison between markets would need to take account of these differences.

Enhancing consumer protection for gift card holders

From the submissions it is evident that there are two issues in particular, where regulatory responses could be considered. Some consumers have suggested that regulation should be introduced to require a minimum expiry date while others have suggested that consumer rights in the event of insolvency should be enhanced.

In situations of insolvency, there are often insufficient funds to meet the claims of all creditors. In these circumstances not all interested parties will be able to recover the full amount they are owed. Substantive changes to improve the standing of gift card holders would necessarily come at the expense of other creditors. CCAAC is unaware of any compelling arguments as to why gift card holders should be treated differently to other unsecured creditors.

While conerns about expiry dates featured in complaints to ACL regulators, CCAAC has been unable to find any overwhelming evidence of systemic consumer detriment resulting from these concerns. These issues are discussed below.

Requiring minimum expiry dates

It has been suggested that gift cards should have minimum expiry dates. In the Australian market, expiry periods are typically for between 12 and 24 months. Requiring minimum expiry dates requires some consideration as to what the minimum expiry period should be. This could be for a longer period than is commonly provided by gift card issuers, or could provide a floor on expiry periods that is consistent with those currently provided in the Australian gift card market.

Assessing costs and benefits

Longer expiry periods, such as five years, are unlikely to resolve all of the concerns raised by consumers. Wright Express has indicated that 80 per cent of gift cards are redeemed within the first three to six months. Where the majority of gift cards are redeemed shortly after purchase, extended expiry periods are likely to provide only a marginal benefit to consumers. Based on the available evidence, CCAAC considers that longer expiry dates, required by law, are unlikely to benefit consumers.

A minimum expiry date that is consistent with those commonly applied in the Australian market may assist consumers where particularly short expiry dates make it difficult to redeem a gift card. It could assist in achieving consistency across the industry which would provide consumers with certainty with respect to the gift card expiry period.

The issue of expiry periods was also raised as part of a recent review of the Electronic Funds Transfer (EFT) Code. The EFT Code, which has since been replaced by the ePayments Code, requires its subscribers to adhere to the requirements of the code. The consultation process asked if EFT Code subscribers should be required to either:

  • not use an expiry period; or
  • comply with a minimum expiry period of 12 months combined with a right to refund of expired value for a further 12 months after expiry.

Almost all submissions to the EFT Code review agreed with a minimum expiry period of 12 months. The proposal of a further 12 month period in which a consumer could claim refunds for any expired value was rejected. A requirement of no expiry period or the additional 12 month period for refunds of expired value was argued to impose an unreasonable commercial and regulatory burden on some businesses.

While there may be some benefit to a standardised expiry date, a broad based requirement that applies to all gift card issuers could have some adverse consequences, particularly where operational considerations require the issuer to impose an expiry period of less than the standardised period. A 12 month minimum expiry date is discussed in more detail in Box 1. In addition, CCAAC observes that an overwhelming majority of gift cards issued in the Australian market are issued with an expiry period of 12 months or more, and that most gift cards are redeemed shortly after use.105 As such, any new requirement may not provide consumers with any material benefits.

Box 1: The appropriateness of a 12 month minimum expiry date

While most gift cards in the Australian market appear to have expiry dates of 12 months or longer, it is noted that there are some gift cards where short expiry dates—such as three or six months—are applied. These gift cards usually fit into one of the following categories:

  • gift cards, or vouchers, that are for a particular service; or
  • gift cards issued by small businesses.

Given the diversity of businesses in the Australian market, it may be the case that some businesses apply short expiry dates because of their individual circumstances. As discussed in Part III, operational requirements may mean that it is only appropriate for a gift card to be issued with an expiry date of less than 12 months.

However, consumers may experience personal consumer detriment where they are unaware of the short expiry period. Through past experiences, consumers may have come to expect gift cards to have a minimum expiry period of 12 months. Because of this, it is appropriate for gift card issuers to specifically draw the consumer's attention to a short expiry date where it is applied. Improving disclosure for short expiry periods would be preferable to prohibiting expiry dates of less than 12 months as it addresses the underlying cause of the problem.

The ASIC class order

As noted in the Issues Paper, some gift cards can be used to make non-cash payments and therefore can fall under the definition of 'financial products' in the Corporations Act.106 Other gift cards can only be used for payment to a single 'person' and therefore are exempted from the definition under section 763D.107 The Corporations Act imposes strict requirements on financial products, including licensing, conduct and disclosure obligations (as well as the hawking prohibition) set out in Chapter 7 of the Corporations Act. ASIC has provided a class order108 granting unconditional relief from these requirements to gift card facilities that comply with a number of following requirements including that:

  1. the value on the card must be prepaid at the time of issue;
  2. the card cannot be recharged with value except by reversal of a payment made or correction of an error;
  3. cash cannot be withdrawn from the card, except to remove the remaining balance after one or more non cash payments where the amount remaining cannot be conveniently used;
  4. the card can be used to make payments on more than one occasion;
  5. the facility is only promoted or marketed as a gi
    ft product; and
  6. where a card is presented to redeem the balance, the expiry date must be 'prominently set out on the device in a manner that makes it clear that it is an expiry date.'

The class order effectively requires gift cards that are financial products to have an expiry date, or period, clearly provided on the card itself in order to be exempt from product disclosure requirements that apply to other financial products. This requirement would appear sensible; however, CCAAC notes that there may be other ways to achieve effective disclosure such as on a wallet that accompanies the gift card.

Findings

Consumer concerns relating to expiry dates are exacerbated by the product design of gift cards. Here, the tripartite nature of a gift card transaction means that it is not always easy for the recipient of the gift card to be aware of any critical terms and conditions that apply. While gift card issuers may refer to an expiry date within the terms and conditions of the product, this may not always be brought to the attention of either the purchaser or the receiver. The disclosure requirement that expiry dates are to be prominently displayed on the gift card itself, as provided by the ASIC class order, is an appropriate minimum standard.

However, some gift cards (for example those that are limited for use with one business) may not be covered by the ASIC class order. It would be good practice for all gift cards to disclose the expiry date, not a period of validity, on the card itself. CCAAC provides further guidance for businesses on minimum best practice gift cards terms and conditions at part VI of this report.

While effective disclosure to would assist consumers when purchasing and using gift cards, CCAAC is not aware of any overwhelming evidence of systemic consumer detriment warranting a mandatory minimum expiry date period. The consumer protection framework under the ACL and the ASIC Act provides some protection to consumers in relation to expiry dates of gift cards. Additional regulation may be unnecessary or lead to unintended consequences. This is particularly so given that the application of an expiry date may be a reasonably necessary practice to ensure the operational viability of some gift card programs. Where clearly disclosed to the consumer, expiry dates of less than 12 months should not be prohibited where they are applied to protect the reasonable interests of the gift card issuer.

The ASIC class order relating to gift cards provides some protection for consumers; however, there may be some scope for a review of the class order to ensure that it continues to meet its objectives.


85 Fair Trading Act 1986 (NZ) s9, Consumer Guarantees Act 1993 (NZ) s8.

86 Manitoba Consumer Protection Office, Frequently Asked Questions About Prepaid Purchase Cards. Available on the Manitoba Government website (accessed 22 May 2012).

87 Regulation Respecting the Application of the Consumer Protection Act, RRQ, c P-40.1, r 3, s 79.5 (CanLII).

88 Including Alberta, British Colombia, Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador

89 Electronic Fund Transfer Act of 1978, 15 USC § 1693r.

90 United States of America Federal Trade Commission, Complaint Against Darden Restaurants, Inc. Available on the

Federal Trade Commission website (accessed 22 May 2012). United States of America Federal Trade Commission, Complaint Against Kmart Corporation. Available on the

Federal Trade Commission website (accessed 22 May 2012).

91 United States of America Federal Trade Commission, Complaint Against Darden Restaurants, Inc.

92 United States of America Federal Trade Commission, Complaint Against Darden Restaurants, Inc.

93 United States of America Federal Trade Commission, Complaint Against Kmart Corporation

94 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1.

95 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 (c).

96 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 .(c)

97 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 .(c)

98 Board of Governors of the Federal Reserve System website

99 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 (a)(3)(B)

100 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 (b)(4)

101 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 (b)(3)(A)

102 Electronic Fund Transfer Act of 1978, 15 USC § 1693l-1 (c)(2)(B)

103 Massachusetts – 7 years, North Dakota – 6 years.

104 30 States require balances to revert to the state

105 Wright Express has indicated that 80 per cent of gift cards are redeemed within the first three months.

106 Corporations Act 2001 (Cth), s 763A(1)(c)

107 Corporations Act 2001 (Cth), s 763D(2)(a)(i)

108 Class Order Gift facilities [CO 05/738]