Unlike in the US, where gift card expiry dates (or “breakage” as the industry calls it) are tightly controlled by consumer protection laws, the UK had no such legislation. Or at least up until the end of April 2011, when an EU e-money Directive was implemented in the UK. Kate Johnson reports.
Who: The Financial Services Authority ("FSA")
When: 30 April 2011
Where: United Kingdom
Law stated as at: 30 April 2011
The new conduct of business requirements contained in the Second Electronic Money Directive (2009/110/EC) ("2EMD") came into force in the UK through the Electronic Money Regulations 2011 (the "Regulations") on 30 April 2011, bringing with them a combination of new provisions aimed at consumer protection. These include an extended right for e-money holders to get their money back at any time and new restrictions upon redemption fees. At the same time, the "limited network" (or closed-loop) exemption is being broadened.
The FSA is the competent authority for the purposes of the Regulations and its approach to interpreting and applying the Regulations is set out in the document entitled "The FSA's role under the Electronic Money Regulations 2011: Our approach" (the "Approach Document").
2EMD replaces an earlier e-money directive (2000/46/EC) ("EMD") and in doing so introduces certain new conduct requirements for all e-money issuers, including new redemption rules and restrictions on redemption fees. In particular, e-money issuers will no longer be allowed to:
- set a time limit on the e-money holder's right to redeem (although a proportionate fee can be charged in certain circumstances); and
- refuse to redeem e-money if the e-money to be redeemed is worth less than €10.
Under EMD, firms with permission to issue e-money did not have to redeem e-money if it was worth less than €10 and if this was made clear in the contract. Furthermore, if it was made clear in the contract, the e-money could become invalid after a specified period (of not less than one year) and the e-money holder would not have the right to redeem.
Under the Regulations, e-money holders have the right to redeem the monetary value of their e-money at any time at par value. The FSA states in its Approach Document that ”…it is not acceptable to have a term in a contract with an e-money holder under which the e-money holder's right to redeem the remaining balance ceases to apply after a specified period of validity (although the contract can still provide for the e-money holder's right to use the e-money for the purpose of making payment transactions to cease after a specified period)… The contract between the electronic money issuer and the e-money holder must, clearly and prominently, set out the conditions of redemption (or part thereof), including any fees that may be payable. These conditions must be advised to e-money holders before they are bound by the contract."
E-money issuers are not prevented from charging redemption fees, but the circumstances in which redemption fees can be charged are restricted to the following circumstances:
- where redemption is requested before termination of the contract;
- where the e-money holder terminates the contract before any agreed termination date; or
- where redemption is requested more than one year after the date of termination of the contract.
Any fee that is charged must be proportionate and in line with the costs actually incurred by the e-money issuer.
The effect of this is that no fee for redemption may be charged to the e-money holder if he requests redemption at termination of the contract or up to one year after that date. Money held more than one year after the termination of the contract is often referred to as "dormant e-money". An issuer may deduct the amount of any redemption fee from the proceeds of redemption of dormant e-money (as long as the e-money issuer can demonstrate that the redemption fee is clear and prominent in the contract and reflects only valid redemption-related costs).
Limited network exemption
The "limited network" or "closed-loop" exemption has been broadened and should take some e-money issuers, such as gift card issuers, outside the regulatory net. Where, for example, there is a single brand used across multiple legal entities in the same group or where a scheme is linked by a common commercial agreement (eg franchises or shopping malls) this will cease to be regulated, assuming the network is indeed 'limited'. Loyalty (or reward) schemes are unaffected by 2EMD. For schemes falling within a "limited network" the new redemption rules would not apply. This is however a tricky area and determination of whether a scheme would constitute a "limited network" or not needs to be assessed on a case by case basis.
Why this matters:
The extended redemption right and restrictions on redemption fees may be a blow to operators of gift card schemes who will not be able to take advantage of the "limited network" exemption but whose business model has been based upon 'breakage' (ie where unused funds default to the issuer after the expiry of a specified period of time – usually two years). Issuers in the regulated sector will likely look to new fee structures to replace breakage, such as monthly management or inactivity fees.
Gift card issuers in the unregulated sector will be unaffected, although they may find themselves forced to abandon breakage if industry practice renders this the only commercially acceptable approach.
Links to the texts referred to are below:
The Regulations: http://www.legislation.gov.uk/uksi/2011/99/contents/made
The FSA's Approach Document: http://www.fsa.gov.uk/pubs/international/approach_emoney.pdf