The fate of the Consumer Financial Protection Agency remains uncertain, with its home and powers still not agreed in the Senate negotiations. Barney Frank, who is Chairman of the House Financial Services Committee, has threatened to try to kill any legislation that does not, in his view, have sufficient independence and powers. It is becoming increasingly unclear who will win this slow-motion dogfight.
One of the concerns expressed by some commentators is that the Senate proposal may strip the Agency of powers it would have under the House version of the legislation to regulate the many non-bank consumer financial service providers that compete with banks or fill niches banks do not serve. Of course, that does not mean that there is no regulation of those entities on the state level, because, although inconsistent from state to state, there is plenty.
The prepaid industry is an example of this, with state licensing laws for money transmission or stored value issuing, and state gift card regulation. However, there have been calls from consumer groups to extend Regulation E fully to prepaid cards, most recently in comments to the Federal Reserves proposal to amend Regulation E to implement the CARD Act gift card provisions. The New Jersey legislature also recently called for further federal regulation of the prepaid card industry. It would seem likely that the prepaid card industry would quickly receive the attention of any robust Consumer Financial Protection Agency, and it is likely to be more responsive to consumer group lobbying than the Federal Reserve has been.
I have to admit to being of two minds on further regulation of prepaid cards. On the one hand, I think the Federal Reserve was wise to defer applying Regulation E to prepaid cards, an issue they first started examining in the mid-1990s, due to concern about stifling development of the then-nascent industry. Perhaps it is still too soon to subject prepaid cards to Regulation E, since while prepaid card sales have taken off and seen substantial success, the rate of innovation indicates a still-young and rapidly-evolving industry.
On the other hand, prepaid card programs are starting to compete for market niches occupied by credit and debit cards, which are subject to extensive consumer protections under Regulation Z and Regulation E, respectively. These regulations were adopted in the late 70s-early 80s, and arguably the consumer protections extended to cardholders under the regulations contributed to the success of cards in displacing cash and checks as a preferred means of payment. The ability to dispute a transaction after the fact and protection against loss from fraud provides peace of mind to consumers using the product, even if too much so in some cases.
In the early days of the prepaid card industry (back then called stored value cards) cardholders were urged to treat the card like cash because if lost or stolen there was, like cash, no remedy. That made sense when the cards were promoted as replacement for cash. If prepaid card program operators seek to offer viable substitutes for checking accounts, debit cards and transactional use of credit cards perhaps coverage under Regulation E would be a marketing plus.
Copyright Broox Peterson 2010. The author is a payments legal specialist with over 25 years in the industry providing legal consulting and transactional support services. www.bwplawyer.com and http://blog.bwplawyer.com