10/23/2012 10:09 EDT | Updated 12/23/2012 05:12 EST

Ottawa moves to regulate prepaid credit cards, will ban expiry dates

OTTAWA - Ottawa is stepping in with new rules for the largely unregulated prepaid credit card market.

Finance Minister Jim Flaherty announced Wednesday that in the future, issuers of prepaid cards will not be able to impose expiry dates and must be up front about hidden fees and conditions.

The move is part of the government's expanding code of conduct measures to govern credit and debit transactions, that had previously not applied to the relatively new prepaid market.

"We have done a lot of regulation with respect to debit and credit cards. We haven't done much with respect to prepaid cards," Flaherty said.

While still a small segment of the market, prepaid plastic has become an option for consumers without conventional credit or debit cards, young adults, and for parents who want to introduce their children to using credit while limiting the risk of theft and over-spending.

But the sector has also faced criticism for exorbitant hidden fees that reduced their face value and fooled customers. These can include monthly or annual fees, maintenance costs, as well as ATM charges.

"In our view, it was inappropriate for financial institutions to have cards go dormant. For example, people would get cards as gifts for their birthdays or whatever, not realize that the $200 on the card would expire over a certain period of time," Flaherty said.

"We're addressing that kind of thing, so that it'll be more like currency to have a prepaid card, just as it is to walk around with a debit card or a credit card."

The most notorious example occurred two years ago when Hollywood celebrity Kim Kardashian backed away from endorsing a prepaid card bearing her name after a public outcry over the card's usage fees, including a close to $60 activation fee.

The card even grabbed the attention of the attorney general of Connecticut.

The new regulations in Canada would require an information box disclosing the fees displayed prominently on the exterior package and other documentation prior to issuance.

"We have to make sure we give the agencies, like the Financial Consumer Agency of Canada, the ... regulatory tools they need so that they can enforce reasonable disclosure and actually eliminate some things that are clearly, in my view, quite unfair," Flaherty said.

A government official said the measures are in response to concerns about some features of prepaid cards issued by large financial institutions, adding that in some products, "terms, conditions, fees and limitations" were not always made clear.

The official said the government wants to make sure consumers know what they are agreeing to before making the purchase.

Glenn Thibeault, the NDP's consumer protection critic, called the new rules a "small step in the right direction," but said Flaherty was still ignoring the issues of sign up, usage and reload fees which could cost between $1 and $40.

"Conservatives make these minor announcements when they're feeling the heat in an attempt to distract from other issues," he said.

"The fact is the Conservatives refuse to stand up against the banks and credit card companies."