The former Parliamentary Secretary to the Treasurer, now the Assistant Treasurer, on behalf of the Ministerial Council on Consumer Affairs,1 invites the Commonwealth Consumer Affairs Advisory Council (CCAAC) to conduct a review of gift cards. CCAAC is requested to explore and develop options to better protect consumers who purchase or receive these products.
Defining the problem and formulating solutions
CCAAC considers that policies implemented to address consumer concerns relating to the purchase and use of gift cards should be appropriate to the nature and underlying cause of consumer detriment. Policy solutions should be targeted appropriately and regulatory options should only be considered where they are supported by a cost benefit analysis. CCAAC supports the OECD Consumer Policy Toolkit as a framework through which consumer problems can be assessed and where policy options can be evaluated.
Features of the Australian gift card market
Evidence of a vibrant Australian gift card market demonstrates that gift cards are a popular choice for consumers and that many Australian retailers benefit from offering gift card products. Estimates provided in submissions to the Issues Paper suggest that the gift card market can be valued at between $1.5 to 2.5 billion per year. However, CCAAC acknowledges the difficulty in estimating the size of the gift card market accurately. In addition, it is evident that the market is growing and that new gift card forms and functions are emerging.
Gift cards and consumer welfare
CCAAC finds that gift card products, when used as intended, have the potential to provide significant benefits to Australian consumers. CCAAC encourages policy makers to ensure that any new policies relating to gift cards do not restrict consumers from benefiting through their engagement with the Australian gift card market.
CCAAC has identified some instances of personal consumer detriment with respect to the application of expiry dates on gift cards. There have been some circumstances where consumers have not redeemed the full value of their gift card before the expiry date.
CCAAC has not found any overwhelming evidence of systemic consumer detriment relating to expiry dates, however, there may be some merit in continuing to monitor to see whether any new evidence emerges. It would appear as though most gift cards are redeemed shortly after purchase, with most gift cards in the Australian market offered with an expiry period of at least 12 months. CCAAC also acknowledges that in some cases, depending on the individual circumstances of the gift card issuer, the application of an expiry date—including where it is less than 12 months—may be a reasonably necessary practice to ensure the operational viability of a gift card program.
CCAAC also finds that many gift card issuers offer grace periods and can provide flexibility in accordance with their customer service policies. While many issuers may offer this as a courtesy to their customers, this is not a universal practice. Also, it would appear as though these policies may not always be implemented at the store level with consumers having to elevate a complaint before being offered an extension to their expired gift card. Issuers could consider how grace periods are applied at the store level to ensure that customer service objectives are achieved. CCAAC notes that some consumers may not try to use the card once they realise it has expired, and many will not complain.
Where consumers are aware that expiry dates apply, they are able to select a gift card that is appropriate to the receiver's needs. The existing consumer protections of the ACL and the ASIC Act may assist in reducing the incidence of cases where consumers are misled about expiry dates.
Terms and conditions in the event of insolvency
Companies placed into external administration are required to be administered in accordance with the Corporations Act 2001 (the Corporations Act). Gift card holders are likely to rank as unsecured creditors in the event of insolvency. External administrators have an obligation to maximise any returns to creditors and are not required to honour the terms and conditions applied to gift cards at the time of purchase. This may cause some confusion where in doing so, a business in external administration appears to continue to operate as normal. This may be further exacerbated where a company in external administration offers to accept gift cards under different terms and conditions than were applied at the time of purchase. CCAAC finds that some consumers have limited understanding of their rights in the event of an external administration and while consumers are unlikely to take notice of general information on this topic, those who suffer detriment as a result of insolvency could benefit from access to clear information at that time.
CCAAC is not aware of evidence to suggest that there is significant loss to consumers due to policies relating to the provision of change. Most gift cards are designed to retain any residual balances on the gift card itself. Some issuers, as a courtesy, may provide change in certain circumstances and this may be considered a good business practice. Improved disclosure about gift card policies for the provision of change may assist consumers when choosing gift card products.
Fees and charges
There does not appear to be any reason why fees other than upfront fees should be applied to cover costs where gift card issuers retain gift card breakage and are able to make a return on sales. With the exception of some open loop gift card products, fees and charges do not appear to be common in the Australian market. Where there is transparency around fees, consumers have sufficient choice to allow them to avoid fees if they wish to do so. Most fees applied in Australia are limited to upfront fees paid when purchasing a gift card. Dormancy and other fees are not as common in Australia as they are in other countries.
It would be appropriate for ACL regulators to continue monitoring the Australian gift card market to observe whether there are any changes to the manner in which fees are applied.
Other issues relating to gift card terms and conditions
In relation to restrictions on low value use or limitations with respect to retailers that accept gift cards, CCAAC notes that these restrictions have the potential to create difficulties for the consumer where they are not appropriately disclosed. However, CCAAC is not aware of any overwhelming evidence of structural consumer detriment from these issues.
Lost, damaged or stolen cards
There are some practical difficulties for issuers seeking to replace lost or stolen cards. CCAAC is of the view that compelling issuers to maintain detailed records could be too costly to issuers and may have flow on costs to the consumer. Issuers that facilitate replacement cards where possible do so to the benefit of their customers. CCAAC interprets the current law as requiring issuers to replace cards that are damaged on arrival where a gift card holder can provide evidence of the purchase.
CCAAC is not convinced that this issue warrants the introduction of any kind of new record keeping requirements. However, CCAAC does believe that as a matter of good business practice, issuers should assist consumers to replace lost or stolen gift cards wherever possible. CCAAC notes that some gift card issuers encourage gift card holders to keep a proof of purchase or take note of any serial number so that they can have it replaced in the event that it is lost or stolen. While this may be possible for some gift card programs, CCAAC acknowledges that this may only be appropriate where the risk of fraudulent activity can be managed appropriately.
Furthermore, gift card holders are likely to benefit where the gift card purchaser provides them with a proof of purchase to assist them in replacing lost, damaged or stolen cards.
The use of unspent monies and interest accumulated on gift cards
Gift cards are not intended for investment purposes and gift card issuers should not be expected to transfer interest payments to gift card holders. While the transfer of unredeemed balances to the gift card issuer may be seen as an injustice to the consumer, it is unclear how these concerns can be resolved. Allowing consumers to 'cash out' gift card balances could lead to significant consequences for suppliers of gift cards and it is not clear how applying the principles of abandoned property to gift card balances will benefit the gift card holder. Gift card issuers should encourage consumers to redeem their gift cards as soon as possible.
Gift card holder rights in the event of insolvency
Granting priority status to gift card holders where they are considered to be creditors would merely transfer welfare from one group to another. Gift card balances by their nature, are more likely to be used for discretionary expenditure. Holding gift cards on trust is likely to be more expensive than alternative policy measures. As such, CCAAC does not consider that gift card issuers should be compelled to maintain a trust account for gift card balances. Greater education on the risks of insolvency could be beneficial for consumers who are exposed to these risks.
Enhancing consumer protection for gift card holders
Consumer concerns relating to expiry dates are exacerbated by the product design of gift cards. Here, the tripartite nature of a gift card transaction means that it is not always easy for the recipient of the gift card to be aware of any critical terms and conditions that apply. While gift card issuers may refer to an expiry date within the terms and conditions of the product, this may not always be brought to the attention of either the purchaser or the receiver. The disclosure requirement that expiry dates are to be prominently displayed on the gift card itself, as provided by the ASIC class order, is an appropriate minimum standard.
However, some gift cards (for example those that are limited for use with one business) may not be covered by the ASIC class order. It would be good practice for all gift cards to disclose the expiry date, not a period of validity, on the card itself. CCAAC provides further guidance for businesses on minimum best practice gift cards terms and conditions at page 63 of this report.
While effective disclosure to would assist consumers when purchasing and using gift cards, CCAAC is not aware of any overwhelming evidence of systemic consumer detriment warranting a mandatory minimum expiry date period. The consumer protection framework under the ACL and the ASIC Act provides some protection to consumers in relation to expiry dates of gift cards. Additional regulation may be unnecessary or lead to unintended consequences. This is particularly so given that the application of an expiry date may be a reasonably necessary practice to ensure the operational viability of some gift card programs. Where clearly disclosed to the consumer, expiry dates of less than 12 months should not be prohibited where they are applied to protect the reasonable interests of the gift card issuer.
The ASIC class order relating to gift cards provides some protection for consumers; however, there may be some scope for a review of the class order to ensure that it continues to meet its objectives.
Consumer education and awareness
ACL regulators should continue to explore how consumers can be supported when purchasing gift card products. ACL regulators have already engaged in activities that could benefit consumers who purchase and receive gift card products. CCAAC notes the work of ASIC in educating consumers about insolvency risks as well as consumer rights in the event of insolvency.
ACL regulators could consider issuing a joint media release at key gift giving periods to raise consumer awareness. The effectiveness of this measure could be evaluated after a two year period where the need for any future education activities could be reassessed.
Business education and compliance promotion
CCAAC notes the work of ACL regulators in promoting broader compliance with the ACL. Gift card issuers could be supported by the existing guidance on how the generic consumer protection principles of the ASIC Act and the ACL apply to businesses. Any work to promote compliance should be targeted at businesses that may be less clear about their legal obligations. ACL regulators could explore whether there is broad industry compliance with the existing law in accordance with the relevant compliance and enforcement policies that apply.
Assessing and evaluating consumer and business education campaign proposals.
Education activities should be assessed in accordance with appropriate enforcement and compliance priorities. Any costs associated with these activities should be appropriate to the expected consumer benefits. CCAAC notes that ACL regulators have developed a number of resources to support the implementation of the ACL. CCAAC finds that any activities to increase consumer awareness in relation to gift cards should be integrated into current education activities where possible.
Industry groups are encouraged to develop a set of best practice principles that can be promoted to their members. While industry participation in the ePayments code is encouraged, CCAAC does not consider that a voluntary code of conduct is likely to resolve some of the concerns raised by consumers. To avoid further calls for a regulatory response, industry may wish to explore whether there is any scope to promote best practice terms and conditions. This could be achieved through an accreditation or rating scheme based on a minimum set of requirements.
CCAAC proposes that industry be allowed time to develop and apply best practice standards with regard to gift cards. After three years, industry efforts to address current consumer concerns could be revisited.
CCAAC encourages ACL regulators to monitor any developments, or new evidence of systemic consumer detriment, that may arise. Should any new concerns arise, CCAAC considers that effective self-regulation should be considered as a first best option.
Developing an strategic non-regulatory response
CAANZ and its advisory committees are encouraged to develop a coordinated strategic non-regulatory response, based on the findings of the CCAAC review into gift cards in the Australian market. This response would support gift card holders and assist consumers in an evolving marketplace. Specifically, the Education and Information Advisory Committee (EIAC), the Policy and Research Advisory Committee (PRAC) and the Compliance and Dispute Resolution Advisory Committee (CDRAC) should work together to ensure that activities are coordinated.