A call to make gift cards safer

As retailer and bank failures continue to mount, a number of consumer organizations — including Consumers Union, nonprofit publisher of Consumer Reports magazine and this Web site — are calling on the federal government to protect gift card holders.

In separate petitions filed with the Federal Trade Commission and the Federal Deposit Insurance Corp.,  the groups asked regulators to require card issuers to segregate card proceeds into separate accounts to ensure that cards don’t end up as worthless plastic if a bank or retailer fails. The petition also calls on the FDIC to clarify federal rules to ensure that bank-issued cards are backed by federal insurance of up to $100,000 for every card holder.

The petition to the FTC also asks the agency to:
• Prohibit retailers from selling their gift cards after they file for bankruptcy, even for bankruptcy reorganization, in which the company hopes to stay in business.
• Prohibit third parties from selling the gift cards of bankrupt retailers.
• Require bankrupt retailers to continue accepting their cards as long as their doors remain open, as often happens in a bankruptcy reorganization.

The petitions come as several high-profile retailer bankruptcies have stranded gift card holders, including the failures of Sharper Image, Bombay Company, Levitz, and company-owned Bennigan’s restaurants.
Generally, retailers could safeguard gift card revenue by placing it in a trust account on behalf of card holders, something that apparently few, if any, do. In case of a retailer bankruptcy, segregating the money should prevent it from becoming part of the company’s general assets, on which secured creditors have a higher-priority claim than gift card holders and other unsecured creditors.

Similarly, banks could segregate the gift card proceeds to make sure that each card holder is protected with up to $100,000 in federal deposit insurance. But in a recent check, we didn’t find any that did, except in the case of some payroll and other reloadable prepaid cards.

Among the groups joining Consumers Union in requesting the rules changes are the Consumer Federation of America, National Consumer Law Center, and U.S. PIRG.—Anthony Giorgianni