The holiday season is upon us, and with it comes the expected rush of consumerism to get just the right gift for family and friends. For many consumers, the gift card has achieved iconic status as the perfect gift for the person who has everything – or the person for whom it is impossible to buy. Over the last few years, the gift card has achieved such ubiquitous status that it has become a flashpoint for both irate consumers and their advocates, who have targeted the cards for their excessive fees and expiration dates. Not unexpectedly, regulators have responded to these concerns, and just in time for the holidays.
In November, the Federal Reserve Board announced proposed rules to restrict the fees and expiration dates that may apply to gift cards, gift certificates, and prepaid cards. The Board’s proposed rules generally cover both retail gift cards used to buy goods or services at a single merchant or an affiliated group of merchants and network-branded gift cards redeemable at any merchant that accepts the card brand. The proposed rules do not apply to reloadable prepaid cards not marketed or labeled as a gift card or gift certificate, or to prepaid cards received through a loyalty reward or promotional program.
The Board promulgated the rules under Regulation E, which implements the Electronic Fund Transfers Act (EFTA), and the recent amendments to the EFTA pursuant the Credit Card Accountability Responsibility and Disclosure Act of 2009. The proposed rules aim to protect consumers from certain unexpected costs and to require issuers of the cards to clearly state the terms and conditions of their use. The proposed rules would generally ban dormancy fees—also called inactivity or service fees—on gift cards. However, the proposed rules also capture monthly maintenance fees, balance inquiry fees, and transaction-based fees, such as fees to reload value onto a card and point-of-sale fees. Such a ban comes as no surprise, given that consumer advocates have loudly complained over the last few years that such fees only enrich gift card issuers and diminish the value of these gifts to consumers. The Board proposal would allow the imposition of dormancy fees, but only where the gift card issuer provides clear and conspicuous disclosures about the fees, the consumer fails to use the card for at least one year, and the gift card issuer imposes no more than one fee per month.
Although the Board proposal does not ban the use of expiration dates, it does require any expiration date for funds underlying gift cards to be at least five years after the date of issuance, or five years after the date the consumer last loaded funds onto the card. Importantly, the expiration dates restrictions apply to the consumer’s funds, not to the certificate or card itself. The goal of the proposed rules is to ensure that consumers have at least five years to use a certificate or card from the date of purchase. The proposed rules ban the imposition of a fee to replace an expired card or certificate if the underlying funds remain valid.
The proposed rules intend to create a federal floor of protection for consumers with regard to the regulation of gift cards. The proposed rules do not preempt state laws that afford greater protection to consumers. Thus, nationwide issuers of gift cards and certificates must remain watchful of state laws that regulate the use of these devices. As of the date of this Basis Points publication, the Board had not yet published the proposed gift card rules in the Federal Register. Interested persons must submit their comments within thirty days of the date of the publication in the Federal Register.
Catherine Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.