Prepaid credit cards draw Ottawa crackdown

Ottawa is moving ahead with new regulations on prepaid credit cards, bringing an end to expiry dates for their value, and banning the practice of charging an exorbitant fee to keep the card active within the first year.

Kevin Sorenson, minister of state for finance, and Maxime Bernier, minister of state for small business, were at an event in Ottawa on Tuesday to outline the changes.

The new rules will govern all prepaid credit cards in Canada, but will not come into effect until May, which means any sold over the holiday season don't have to adhere to the new standards.

The cards, often given as gifts, are either sold by retailers, or by financial institutions themselves. They can be used anywhere credit cards are accepted, but unlike conventional cards, the balance can't go below zero — users must pay to top up their accounts before they can be used again. 

The prepaid cards don't involve interest charges because accounts don't go into the red, but in exchange for that convenience, the cards often come with exorbitant activation, transaction and maintenance fees that can quickly and quietly eat up their buying power.

After a $5 activation fee, a $3 transaction fee and a $5 annual maintenance fee are factored in, for example, the purchasing power of a $50 prepaid card is often much less than advertised.

Rules aim to protect consumers

Under the new rules, prepaid credit cards will have to clearly display all fees and conditions associated with their use on their exterior packaging.

"These new prepaid card regulations are a timely and effective addition to the consumer toolkit," Bernier said.

The new rules build on a proposed regulations suggested by Finance Minister Jim Flaherty last fall.

The Harper government has made protection of the consumer a key plank of its agenda leading up to the 2015 election campaign.

In last month’s throne speech, the government said it would take steps to reduce cellphone roaming charges, force cable companies to unbundle TV packages and seek ways to reduce the retail price gap between merchants in Canada and the United States.

While relatively new, the prepaid credit card sector is growing and in 2011 was estimated at $850 million.