"This is a relatively new product," he said. "We're catching up with some of the practices that were put in place."
Issuers of prepaid cards will no longer be able to impose expiry dates. Now they have to be more clear about previously-hidden fees and conditions.
Flaherty told reporters that the arrival of prepaid credit cards was "both advantageous and welcome in our competitive financial services marketplace."
The cards fill a need, Flaherty said, especially for people who are unable to get conventional credit or debit cards.
"But as a government, we need to ensure that an appropriate consumer protection framework applies to these new payment product offerings so that Canadians can take advantage of them fully aware of all fees and conditions that might apply," the finance minister said.
Some cards carry fees that significantly reduce their face value, including monthly or annual fees, maintenance costs and ATM charges.
Vulnerable consumers benefit
The rules will require the card's fees to be prominently disclosed in an information box on the card's packaging. Other conditions and other important information about using the card must now be provided in "clear, simple and unambiguous language," Flaherty said.
Under the new rules, cards will no longer expire. Financial institutions will not be able to impose maintenance fees or dormancy fees within the first year of the card's activation.
Fee increases or new fees for the card will require advance notice to consumers.
Flaherty said that the proposed regulations for prepaid credit cards will be published shortly. Both industry and consumer groups were consulted in advance.
Flaherty made Wednesday's announcement at a community resource centre that helps vulnerable individuals and families with services that include financial literacy and tax preparation assistance. The finance minister mentioned that his announcement coincides with "financial literacy month," which starts in November.
Financial literacy is a national priority, the finance minister said.
Flaherty said the changes were motivated by the fact that young people are big users of prepaid credit cards. Some parents use these cards to introduce their children to using plastic for payments, while limiting the risk of theft and over-spending.
While the government has done a lot to regulate credit and debit cards, it hadn't done much on the prepaid credit cards, he said.
The move is part of the government's expanding code of conduct measures to govern credit and debit transactions.