Regulatory Creep And Overkill For Closed Loop Payments

The Treasury reports that it received no support for its proposal for voluntary consumer protection codes for ‘closed loop’ or limited network stored value, which are exempt from European E-money regulation. These include store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems - nothing like the collapsed retail pre-payment schemes that have previously lost their customers' money Farepak (Christmas hampers) and WrapIt (wedding gifts).

However, the rejection of the need for voluntary codes arguably opens the way for formal regulation, as the Treasury had seemed to be firmly of the view that more protection is necessary for the reasons summarized below. As a next step:

“The Treasury has asked the Office of Fair Trading (OFT) to provide some advice on the prepaid market, the effectiveness of current self regulatory solutions for protecting consumers, and the interaction between the regulated and unregulated sectors. This advice will be fully considered before the Government decides what, if any, action to take.”

Ominous? Well, it depends on what they mean by "prepaid". If the Treasury means retailers who require people to pay for products weeks or months prior to shipment, then I wonder why it's taken them so long to address a really obvious problem. But if they mean gift vouchers to make sure your nephew spends his birthday money on something educational instead of 5kgs of sweets, then this is over-kill.

I’ve extracted the summary of responses on this aspect below:

"3.10 There was little or no support for voluntary codes as a solution to improving the safeguards for consumers in the unregulated sector.

3.11 Responses fell into two broad categories: those that argued that tougher regulation and enforcement than voluntary codes is necessary to address perceived shortcomings in the unregulated sector; and those that felt that there was no justification for action due to the low risk of consumer detriment. The main reason for the general dissatisfaction with voluntary codes was that, although models vary, supervising and enforcing a voluntary code is often thought to be difficult. There are usually no limits to the number of violations a company might have, no financial incentive to abide by a code, and weak rights of recourse for consumers.

3.12 Some respondents argued that no action was necessary because the perceived risks are low. It was also argued that voluntary codes would be unworkable in practice because the average amounts outstanding on unregulated products (mainly gift cards) are less than £30. These responses concluded that the risk of loss per customer did not warrant a new protection mechanism."