Consumers don't get full protection from Fed's new gift-card rules

The Federal Reserve Board has issued new regulations to protect gift card and certificate holders from unreasonable fees, expiration dates, and other issues. The regulations, contained in a 177-page document available on the Federal Reserve Board Web site, apply to cards or certificates issued beginning August 22.

The new rules don't adopt several provisions requested by a coalition of consumer groups, including Consumers Union, publisher of Consumer Reports. Among them are a caps on fees, a strict prohibition on card-expiration dates shorter than five years, and a requirement that issuers provide one free replacement of a lost or stolen card.

Also, the restrictions on fees and expiration dates don't apply to cards issued as part of loyalty, award, or promotional programs, or to "reloadable" cards not labeled or marketed as a "gift card" or "gift certificate."

Finally, the rules don't protect consumers if an issuer files for bankruptcy protection or goes out of business. When the retailer Sharper Image filed for bankruptcy protection in 2008, it first placed restrictions on the use of its gift cards and then stopped accepting them altogether.

The regulations were developed under the federal Credit CARD Act, which imposed new restrictions on credit card issuers. The measure required the Federal Reserve Board to act on gift cards as well.

Among the requirements:

• Inactivity, dormancy, and service fees cannot be imposed for at least one year after the card or certificate is issued or reloaded.

• Such fees, when allowed, cannot be charged more than once every calendar month

• Although cards themselves can expire, the money used to purchase or reload a gift card must be available for use for at least five years. Within that time, issuers must either replace expired cards without charge or refund any balance.

• Disclosure of dormancy and service fees and expiration dates must be made clearly and conspicuously on the card or certificate, and the information must be disclosed before a card or certificate is purchased. Service fees include any recurring account maintenance charges, as well as transaction-based charges, such as those that may be charged when card holders check the card balance, reload it, or use the card at an ATM, as they can with many bank-issued cards.

• The card or certificate must display a toll-free number or Web site that consumers can use to obtain replacements and information on fees.

Bank-issued cards targeted

The rules are most likely to have the biggest effect on bank-issued gift cards. Those are cards that carry a major credit card logo and are accepted by any merchant that accepts that credit card brand. Many retailer-issued cards don't have fees or expiration dates and already are subject to regulation in many states.

In mandating the new rules, the federal law did not ask the Federal Reserve Board to weigh in on whether gift card proceeds should be segregated or otherwise protected when an issuer files for bankruptcy protection or goes out of business.

Retailers can take actions to safeguard the funds or, in the case of financial institutions, make them eligible for federal deposit insurance protection. But there is no requirement that they do so.—Anthony Giorgianni