06/15/2010

Financial Services Alert: Implementation of New Gift Card Rules

On August 22, 2010, the new gift card rules issued by the Federal Reserve Board (Fed) on March 23, 2010, will become effective (Final Rules). The Final Rules are available here. Many gift card processors and providers are ramping up their efforts to bring their products and agreements into compliance with the Final Rules now in order to have compliant agreements and plastics in place prior to the August 22, 2010, effective date.

The Final Rules apply to all store and general use gift cards as well as gift certificates. There are some exceptions in the Final Rules, including for cards or devices that (a) are redeemable solely for admission to venues or events, (b) issued only in paper form, (c) not marketed to the general public, (d) reloadable and not marketed or labeled as a gift card or gift certificate, or (e) loyalty or award cards; however, strict standards apply to qualify for each of the exceptions.

There are three primary changes that will have a widespread and substantial impact on the gift card market.

1.  Fees

• • An issuer can only charge a dormancy, inactivity or service fee if there has been no activity for 12 months and can only charge one dormancy, inactivity or service fee per month, and then only if proper disclosures regarding the fees were made on the card.
  • "Activity" for purposes of the 12-month rule excludes fees, chargebacks and the issuance of a replacement card.
  • Service fees include monthly maintenance fees, service fees, ATM fees, reload fees, foreign currency transaction fees and balance inquiry fees. One-time fees or fees unlikely to be imposed more than once while underlying funds are still valid, including an initial issuance fee, cash out fee, or lost or stolen card replacement fee, are not considered a service fee for purposes of the limitation.

2.  Expiration Dates on Cards/Underlying Funds

• • If a card has an expiration date, the issuer must have "policies and procedures in place that provide consumers with a reasonable opportunity to purchase a card that has an expiration date that is at least five years out from the date of purchase." The official staff interpretation provides a safe harbor if (a) there are policies and procedures in place to prevent the sale of a card with less than five years remaining (e.g., the system will not allow a card to be loaded if the expiration date of the card is less than five years on the date sold); or (b) the cards being sold have at least five years and six months remaining. The Final Rules also provide a safe harbor and exception from the requirement to disclose the expiration date of the underlying funds on the front of the card if the expiration date of the card is at least seven years from the date of manufacture.
  • If the underlying funds on a card may expire, they may not expire until the later of five years from the date of the last activity on the card or the expiration date of the card.
  • If a card has an expiration date, an issuer cannot charge a fee to cash out unexpired funds remaining on a card.

3.  On the Card Disclosures

• • If a card has an expiration date and it is less than seven years from the date of manufacture of the card, the issuer must disclose on the front of the card, in close proximity to and with equal prominence as the card expiration date, that the funds either (a) do not expire, or (b) expire at a later time and that the consumer may contact the issuer for a free replacement card.
  • If the card has an expiration date that is at least seven years from the date of manufacture of the card, the issuer must disclose that the funds either (a) do not expire, or (b) a description of when the funds expire. The disclosure may be made on the back of the card and there is no specific requirement as to the size or style of the disclosure other than the general requirement that the disclosure is clear and conspicuous.
  • A card must include a toll-free telephone number and, if the issuer maintains a website for the cards, identify the website for consumers to obtain additional information regarding the card.
  • Dormancy, inactivity and service fees must be clearly and conspicuously disclosed on the card, which may be on the back of the card.

For more information on the legal compliance issues currently facing the financial services industry, please visit our blog (www.bankinbits.com) or call one of our Banking & Financial Services attorneys.