EVOLUTION BENEFITS
Federal
Deposit Insurance Corporation
Robert E. Feldman,
Executive Secretary
550 17th Street, N.W.
Washington, D.C. 20429
Re: Comments/Legal ESS--Proposed Stored Value Card Guidance
Dear
Mr. Feldman:
Evolution Benefits
is submitting this letter in comment on proposed rulemaking ("Proposed Rule") to clarify when funds at insured
depository institutions underlying stored value cards would constitute "deposits" under
the Federal Deposit Insurance Act.
We believe that the Proposed Rule is flawed in that it essentially
treats all stored value programs in a similar fashion. As a result,
the Proposed Rule does not focus on the special policy issues that
may arise from particular types of stored value cards, such as those
issued in connection with employee benefit programs. In addition,
we believe that the Proposed Rule will have material adverse impact
on many stored value programs. This would have a chilling effect
on the growth of such programs, thereby denying their benefits to
millions of employees and their families across the nation. As a
result, we strongly oppose going forward with a final rule.
Due to the significant implications that the Proposed Rule will
have on the development and regulation of stored value products,
we urge the FDIC to conduct a comprehensive study of stored value
cards and the Proposed Rule's implications on other regulatory issues,
and to issue a revised proposal that reflects the different ways
in which stored value products may be structured.
Background on Evolution Benefits And Its Programs
Evolution Benefits
markets and manages a card program that enables employees and their
eligible
dependents to pay for qualified goods
and services directly from their employee benefit accounts through
the use of a stored value card. Examples of the types of accounts
that are currently accessed are Flexible Spending Accounts ("FSAs"),
Healthcare Reimbursement Arrangements, ("HRAs"), and Qualified
Transportation Benefits ("QTBs"). Cards represent an alternative
to the traditional method for accessing funds in these accounts,
which generally requires that the employee pay out of pocket for the goods or services and apply to an administrator for reimbursement.
These card programs have become very popular for the added convenience
that they bring to employees and their dependents. The market for
these cards is growing rapidly, and it is estimated that there
are more than one million employees nationwide who have such a
card attached to their benefit program. This represents, however,
well under ten percent of the total number of employees participating
in such benefit plans, and therefore this market can still be characterized
as early-stage.
Policy Implications Ignored
The Proposed Rule ignores the policy implications of deposit insurance
coverage. The purpose of deposit insurance is to protect the banking
system by reducing the incentives for retail product bank runs and
to protect depositors' savings and liquid funds. Implicit in both
of these policies is that the depositor is relying on the security
of the banking system, including the Federal Deposit Insurance system,
to protect his or her funds. While some stored value products may
have these characteristics, others are more purely payment vehicles
that serve as substitutes for cash. However, instead, of focusing
on the policy reasons for subjecting certain products to deposit
insurance, the FDIC focused on whether funds are received by an insured
depository institution in exchange for stored value cards and whether
that institution uses a subaccount accounting methodology to track
the value remaining with respect to each cardholder.
While it may be appropriate to characterize certain stored value
cards as insured deposits, such as certain payroll cards, for deposit
insurance assessment purposes, we believe that the FDIC should take
into account the policy rationale for characterizing the underlying
funds contained in certain stored value products as deposits. The
structure and design of stored value products vary widely. Stored
value products include gift cards, payroll/employee cards, single-purpose
prepaid cards, employee benefit cards, telephone cards and promotional/incentive
cards. Moreover, the funding and settlement of stored value products
also vary. Some stored value products are funded by consumer credit
or debit cards and ACH transfers while other products are funded
by companies through a batch process.
For instance,
most employee benefit cards fundamentally differ from bank deposits.
Employee
benefit cards serve as a more efficient substitute
for other forms of payment. At the same time, these cards generally
are more limited than deposit accounts in terms of the parties to
whom payment can be made — payments generally can only be made
to providers or retailers of qualified goods and services. For example,
a card issued in connection with a healthcare benefit plan can generally
only be used at healthcare provider locations and pharmacies. Further,
the recipients of employee benefit cards do not choose the financial
institution issuing the card, nor is the employee benefit card produced
on the assumption that it is backed by the deposit insurance system.
Similarly, employee benefit cards are not viewed by the employee
as an investment or savings vehicle. Rather, the value underlying
these cards is viewed by the employee as being an obligation of the
employer, who is liable for making payments under the plan, and not
the depository institution. In fact, the employee retains the right
and ability to access plan funds through the traditional, paper-based
reimbursement method (that is, by means other than the card) should he or she so choose or should it become necessary
(e.g. the provider does not accept cards).
Another important point is that federal tax law governing many of
the employee benefit accounts currently accessed via a stored value
card, such as FSAs and HRAs, provides that the funds underlying these
cards belong not to the employee, but to the employer. Federal tax
law specifies that the employer funds the plan and defines how the
employee can qualify for reimbursement from the plan. The employee/cardholder
is responsible for reimbursing the plan for non-qualified expenditures.
The card cannot be ATM accessible because the employee has no right
to cash out of the plan. Moreover, the significant restrictions that
exist in the underlying plan documents give no assurance to the employee
that he or she will ever receive all of the benefit provided by the
employer in the plan. Upon termination of employment, the employee's
right to use the card generally terminates as well.
Proposed Rule Could Affect Other Regulations
While the Proposed
Rule is concerned with whether funds backing stored value cards
constitute
deposits, with all the rights and responsibilities
that would follow, the FDIC acknowledges in a footnote that this
result could raise "a number of other issues," including
reserve requirements, money laundering and application of the electronic
fund transfer rules.1 Indeed, the application of many laws to stored
value products is not clear, and will likely differ significantly,
depending upon the type of product.
Regulation
E Requirements—Electronic
Fund Transfer Disclosures and Other Requirements
The FRB's Regulation
E sets forth the requirements for electronic fund transfers to
or
from a consumer asset account, such as a deposit
account, at a financial institution. The applicability of many Regulation
E provisions, including periodic statements, limited liability for
unauthorized transactions and error resolution procedures, to certain
stored value products is not clear. Section 205.2(b)(1) of Regulation
E defines the term "account" as a "demand deposit
(checking), savings, or other consumer asset account .. . held directly
or indirectly by a financial' institution and established primarily
for personal, family, or household purposes." The FRB has refrained
from adopting final amendments to Regulation E to specifically cover
stored value products out of concern that too much regulation could
inhibit the development of these emerging products. If the Proposed
Rule is adopted, however, the FDIC's characterization of certain
stored value products as deposits could influence an FRB determination
that such deposits are consumer asset accounts under Regulation E.
This would impose significant additional costs on employee benefit
stored value card programs and would drive employers away from this
popular and beneficial enhancement. The FDIC should not proceed with
the Proposed
Rule until it has determined, as part of its comprehensive study,
the resulting Regulation E implications, if any, of the Proposed
Rule.
Mandating Disclosures is not Necessary
Although the Proposed Rule does not set forth any new specific disclosure
requirements, the FDIC solicits comment on whether the Proposed Rule
ought to mandate the clear and conspicuous disclosure, including
disclosures on the stored value card itself, of the insured or non-insured
status of the stored value card. In the supplemental information
accompanying the Proposed Rule the FDIC continued to express concern
that some purchasers of stored value cards may not understand whether
the funds given to an insured depository institution in exchange
for such cards are covered by federal deposit insurance. We urge
the FDIC to avoid mandating specific disclosure requirements given
the fact that there is little evidence to support a need for these
disclosures. For example, employee benefit cards are not purchased
by the employee, but rather are provided by the employer as a part
of the benefit program. As mentioned previously, the employee recipient
does not view the value underlying the card as an obligation of the
depository institution, but rather as an obligation of its employer.
In addition, pursuant to previously issued guidance on the matter,
it is industry practice to provide such disclosures to the extent
such disclosures are needed. Institutions should continue to have
the ability to independently determine whether disclosures are needed
based on the design of the product, consumer confusion regarding
the product and other factors that may arise.
Conclusion
Evolution Benefits
thanks the FDIC for the opportunity to comment on the Proposed
Rule. Because of significant policy implications
and the chilling effect it could have on the development of certain
beneficial stored value programs, including employee benefit cards,
we urge the FDIC not to adopt the Proposed Rule at this time. Rather,
we ask that a through study be conducted and a revised proposal be
issued which takes into consideration the various ways in which stored
value programs can be structured.
Sincerely,
Christopher M. Byrd
Executive Vice President
_____________________________
1 69 Fed. Reg. at 20,559 n.2. Not mentioned
is the possible application of other requirements, such as those
arising under Regulation DD.
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