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BFCSA: Senate Inquiry will ALSO ask ASIC to please explain giving airlines the green light to send out millions of unsolicited debit cards.

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Senate inquiry to probe ASIC's role in unsolicited card campaigns

A Senate inquiry will scrutinise how Qantas and Virgin Australia were able to secure private no-action letters from the corporate regulator which gave the airlines a "green light" to send millions of unsolicited payment cards to their members. Senators from both sides of the political divide have asked the Australian Securities and Investments Commission to explain why it allowed the airlines to ignore the laws on unsolicited debit cards. ASIC's no-action letter means it has agreed not to take the airlines to court for potential breaches of s12DL of the Australian Securities and Investments Commission Act over these card mail-outs.

The senators have asked ASIC, Qantas and Virgin Australia to make submissions to the Senate Economics References Committee detailing their justification for the massive unsolicited Visa and MasterCard mail-outs. An investigation by Compliance Complete found the cards were being sent out, potentially illegally, to more than a third of the Australian population. Consumer groups have questioned why ASIC would offer regulatory immunity to the issuers when the cards were already going out successfully on an opt-in basis.

Labor Senator Mark Bishop, who is chair of the Senate Economics References Committee, said s12DL was designed to protect people from unsolicited card mail-outs such as these. Bishop is heading up the Senate inquiry into the performance of ASIC as a
regulator. The inquiry has stopped accepting submissions but will be re-opened to accept submissions from ASIC, the airlines and any other relevant parties on the appropriateness of ASIC's private no-action letters and the general effectiveness of the regulatory system in relation to unsolicited cards.

"No-action letters are regarded by industry as a green light to continue a course of action. I am not sure that this is the intention behind the provision in the ASIC Act," Bishop told Compliance Complete.

He said that major companies such as Qantas and Virgin could cause "concern in the wider community" if they were perceived to be skirting the law with their "stored-value cards".

Liberal senator Alan Eggleston, who is a member of the Senate Economics Legislation Committee, said ASIC's agreement with the airlines was extraordinary in view of the potential consumer detriment. "I think it was quite an irresponsible decision from ASIC
and it puts a lot of innocent Australians at risk," he said.

"Cutting red tape"

ASIC said in a recent report on its decisions to "cut red tape" that it had provided a no-action letter to a loyalty scheme. While the recipient was not identified, Thomson Reuters understands that this was in reference to the airline cards.
ASIC said compliance with the law would have been "disproportionately burdensome in the circumstances, including the uncertainty around the application of s12DL".

Eggleston said this was an astounding justification for the no-action letters, given that both Qantas and Virgin were initially sending their cards to members who had already opted in. The no-action letters had allowed the airlines to send the cards to the 95 percent of their members who had chosen not to take up the offer.

"The claim that it was 'burdensome' is absolute nonsense. The individual must opt in. That's a very basic requirement as far as I'm concerned, in terms of allowing the individual to take fiscal responsibility," Eggleston said.

Eggleston said that any issuer of products such as prepaid cards had an obligation to respect the laws that had been set up to protect consumers, including s12DL of the ASIC Act. If they were unable to bear that "burden" then they should not have the right to issue credit or debit cards in consumers' names, he said.

"I think ASIC shouldn't be making these [no-action] decisions unless the legal position is absolutely crystal clear. It's just grossly irresponsible for them to have done this while there is uncertainty about the application of the law," Eggleston said.

Keeping out of court

Lawyers and compliance practitioners said a court decision on exactly what constituted a debit card under s12DL was sorely needed by the industry. ASIC's decision to grant the no-action letters meant the opportunity had been passed up. They said, rather
than grant a "safe harbour", ASIC should have told the issuers to petition the court for a decision.

ASIC said that s12DL had been created before the types of products being issued by Qantas and Virgin Velocity had come into existence. It said they were "fundamentally different from the cards contemplated when s12DL was being drafted in that they do not give any access to a deposit account, or to credit, when they are sent to the consumer".

"It is arguable that these kinds of cards technically come within the broad definition of 'debit card' used in s12DL, however, that is not entirely clear," ASIC said.

"Apply to activate"

When Qantas and Virgin send their hybrid loyalty cards out to consumers the MasterCard or Visa function is contained on the back of the "chip and PIN"-enabled cards. The chip functionality gives the cards a number of other benefits, including streamlined check-in for frequent flyer members. The cards can be used following a simple online activation process, which requires a driver's licence or another form of customer ID. The process takes about five minutes.

ASIC said it was comfortable that consumers were being protected because "the stored-value card component of the card is completely inactive and only capable of use following an application by the consumer and the consumer subsequently loading value onto the card". This was one of the conditions of the no-action letters.

Security experts said this was largely irrelevant, however, since banks have controls in place to ensure that all credit cards that are posted out must require an activation process. Despite this, the ban on sending these cards out unsolicited still applies to credit

Bishop said there were a range of different grounds for community concern regarding unsolicited cards, and this went well beyond the risk of financial losses.

"Those concerns go to the apparent issuing of unsolicited transaction cards to members, the levying of significant fees when loads on debit cards are exhausted and the apparent shortcoming in the Act, whereby some forms of cards — hybrid cards and loyalty cards — are not covered in the relevant legislation," he said.

Card interception

The biggest risk with unsolicited "prepaid" cards is the possibility that cards may be activated in the event of theft or loss. If the cards are unsolicited then the cardholder would not even know that a card had been sent, and would therefore be unlikely to cancel the missing card.

Raymond Choo, senior lecturer on money laundering and cybercrime at the University of South Australia, said that if these cards were activated they could be used in financial crime or money laundering situations in the cardholder's name. This would be easy if
someone happened to lose their wallet, as it would almost inevitably contain other forms of identification.

"These cards, if they fall into the wrong hands, will result in another vehicle for money laundering or terrorist finance. Criminals with the right level of information could then easily activate the cards," Choo said. "Previously these types of cards have required opt-in consent, which reduces the chance that they would be carried around unactivated."

Choo said the sheer size of the Virgin and Qantas mail-out meant that the risks from a financial crime perspective were needlessly high. He said making the cards opt-in only would have offset the risks significantly.

The low activation rates on these cards have also raised questions about consumers' level of support for indiscriminate mail-outs to all "eligible" frequent flyer scheme members in the country. According to Qantas, around 2 percent of its frequent flyer members have so far activated the MasterCard Qantas Cash facility. A spokesman for Virgin said that the Velocity program was "not in a position to comment" on the conversion rates for the Global Wallet product.

Preventing precedents

Bishop said he was concerned that ASIC's decision to grant no-action letters might create a precedent for other organisations to seek similar relief, regardless of their customers' demand for the product. He called on ASIC and the major prepaid card issuers to lodge submissions with the current inquiry into ASIC outlining their responses to community concerns about unsolicited cards.

"I invite ASIC to make a submission on the regulation of these cards as the law stands and to identify any problems or shortcomings that [ASIC] has been alerted to," he said.

"Similarly, I invite companies such as Qantas, Virgin Australia, Coles and Myer to make a submission to the Senate Economics References Committee addressing their understanding of the law and protections for consumers [that are] embedded in their particular schemes when any of the above-mentioned types of cards are issued to consumers," he said.

Eggleston said the issue affected enough Australians to warrant it being raised in Senate estimates, and also in the broader context of the Senate inquiry into the performance of ASIC as a regulator. He said the Senate mightexplore issues such as whether card issuers were skirting the law by using terms such as "stored-value cards" and "loading funds onto the card" to get around the provisions of s12DL. He said that, ultimately, the regulator should be looking behind this language to the substance of the products and at the overall intention of the ASIC Act.

"ASIC should be savvy enough in assessing the situation to determine exactly what is happening with these cards," he said. "If not, the failure is really with ASIC for not assessing the situation properly."

In its no-action letters and a recent media statement the regulator referred to Qantas and Virgin's products exclusively as "stored-value cards". This is a broad category that covers everything from anonymous phone cards and transport cards through to ATM cards embossed with the cardholder's name.

The specific cards that Qantas and Virgin have issued are known as "open-loop" prepaid cards, which means the funds are held in a separate account that is accessible via the global ATM network, and not stored on the card itself. Lawyers said that this distinction was critical when making an assessment as to whether the opt-in requirements under s12DL applied.

Eggleston said the Senate might be interested in whether the relevant laws needed to be rewritten to keep up with payment system innovation.

In response to a request for comment, the regulator said: "ASIC will provide further details about this issue at the upcoming Senate Inquiry into ASIC."

The Senate Inquiry into the Performance of the Australian Securities and Investments Commission is due to report back on May 30, 2014.


By Nathan Lynch, head regulatory analyst, Australia & New Zealand

Governance, Risk and Compliance
Thomson Reuters


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Guest Wednesday, 30 September 2020