On November 18, the Federal Trade Commission (FTC) issued final amendments to the Telemarketing Sales Rule (TSR) banning payment methods that the FTC believes are disproportionately used by scammers (the Final Rule). The Final Rule follows the notice of proposed rulemaking (NPRM) that the FTC published on July 9, 2013. While the Final Rule makes some modifications to the proposed amendments to the TSR that were included in the NPRM, the NPRM was not modified significantly and continues to ban remotely created payment orders (including remotely created checks), cash-to-cash money transfers and cash reload mechanisms in both inbound and outbound telemarketing.
In particular, the FTC rejected many industry comments on the grounds that the commenter did not provide examples or data to support its claims, highlighting the importance of hard evidence in making a case during the FTC’s rulemaking process. Moreover, although the American Bankers Association (ABA) argued that the proposed rule would be a direct and impermissible regulation of banks that exceeds the FTC’s authority, the FTC rejected the ABA’s position.
This Sidley Update briefly summarizes the key components of the Final Rule and the FTC’s analysis in support of its rulemaking.
The NPRM proposed the prohibition of four nominally “novel” payment methods in connection with telemarketing: remotely created checks, remotely created payment orders, cash-to-cash money transfers and cash reload mechanisms. The FTC suggested that these payment methods were easily used by telemarketing scammers to defraud consumers while limiting the ability of consumers to address fraud by, for example, obtaining refunds. The NPRM also proposed to expand the TSR’s existing prohibition on charging consumers advance fees in certain circumstances. The TSR already prohibited collecting an advance fee for services promising to recover losses incurred by consumers in a previous telemarketing transaction. The NPRM proposed to expand the prohibition to cover advance fees for recovery services relating to losses incurred in any prior transaction, regardless of whether that transaction involved telemarketing.
The Final Rule
The Telemarketing Act authorizes the FTC to promulgate rules to prohibit deceptive telemarketing acts or practices and other “abusive” telemarketing acts or practices. In determining whether an act or practice is abusive, the FTC uses the “unfairness” standard under Section 5(n) of the FTC Act. Under that standard, the FTC conducts a three-part analysis regarding a particular act or practice asking:
- Is the act or practice likely to cause substantial injury to consumers?
- Is the injury readily avoidable by consumers?
- Is the injury outweighed by countervailing benefits to consumers?
Applying this standard, the FTC determined that it was appropriate to prohibit the use of the three payment methods discussed below in both inbound and outbound telemarketing calls. Specifically, the Final Rule amends the TSR to prohibit the use of the following payment methods in payment for goods or services offered or sold (or charitable contributions solicited or sought) through telemarketing:
- remotely created payment orders (RCPOs), defined to include remotely created checks
- cash-to-cash money transfers
- cash reload mechanisms
FTC Analysis Supporting Its Final Rule
Applying the foregoing three-part test, the FTC first found that the covered payment methods are likely to cause substantial injury to consumers. The FTC cites its law enforcement experience, noting that each of these payment methods is increasingly being used in fraudulent telemarketing schemes. The FTC also cites operational weaknesses and the lack of consumer legal protections, as described further below. Finally, the FTC notes that despite investigations and enforcement actions, fraudsters continue to use these payment methods because they make it difficult to detect fraud.
Second, the FTC found that consumers could not readily avoid these injuries. The FTC focused on whether consumers can make informed choices. Despite the fact that the FTC recognized the steps taken by many providers of these payment mechanisms to educate consumers, such as posting warnings about the risks associated with using them to make payments to strangers, it nonetheless found that consumers do not understand the nature of these payment methods, the fact that they lack centralized monitoring to enhance fraud detection or the differences in laws that apply to different payment methods. Further, the FTC takes the position that because consumers do not know when a telemarketer is committing fraud, that makes it difficult for consumers to understand the risks of using these methods to make payments to the telemarketer. Finally, the FTC cites examples of corrupt providers of these payment methods, such as money transfer agents or cash load mechanism providers, who have colluded with fraudsters or who allegedly have a financial incentive not to uncover fraud and thus lose transaction fees. For all of these reasons, the FTC argues that consumers are not able to make informed choices but are at the mercy of fraudulent telemarketers.
Finally, the FTC found that there were few, if any, countervailing benefits to consumers. With respect to RCPOs, the FTC states that because most consumers have debit cards linked to checking accounts, the historical benefits for legitimate telemarketers to use RCPOs are no longer cognizable. For cash-to-cash transfers and cash load mechanisms, the FTC notes that consumers are required to take several burdensome steps after completing a call with a telemarketer (e.g., go to a retail location to initiate the transfer or cash load transaction), and the benefits of these methods, such as being able to send money to family or friends, do not apply in the context of telemarketing. The FTC found that there was little record of legitimate telemarketers using these payment methods and that the prohibition would enhance the effectiveness of efforts taken by responsible providers of cash-to-cash transfer services and cash load mechanisms to deter and detect abuses. For all of these reasons, the FTC determined that the harm to consumers was not outweighed by any countervailing benefits.
Prohibited Payment Methods
A RCPO is any payment instruction or order drawn on a person’s account that is created by the payee or the payee’s agent and deposited into or cleared through the check clearing system. The Final Rule provides that RCPOs include remotely created checks as defined in Regulation CC. The definition of RCPO originally included in the NPRM had specifically referenced the absence of the payor’s signature, but the Final Rule deleted that language to avoid the risk that payees would, for example, apply an image of the payor’s signature to evade the Final Rule. Thus, the Final Rule covers items created by the payee or the payee’s agent regardless of whether the payor’s signature appears on the item.
The FTC explains that it is prohibiting RCPOs because of their operational and regulatory weaknesses. Unlike automated clearing house transactions, which are subject to oversight and monitoring by the National Automated Clearing House Association, and payment card transactions, which are subject to consumer regulatory protections and network rules and monitoring (including for fraud), the FTC’s view is that RCPOs are not subject to centralized and systemic monitoring. Interestingly, the supplementary information accompanying the Final Rule suggests that in the FTC’s view, RCPOs may not be subject to the consumer protections afforded by Regulation E. However, the Consumer Financial Protection Bureau (CFPB) has not yet made a definitive ruling on the application of Regulation E to RCPOs.
Cash-to-Cash Money Transfers
A cash-to-cash money transfer is an electronic transfer of the value of cash received from one person to another person in a different location that is sent by a money transfer provider and received in the form of cash. A money transfer provider is any person or financial institution that provides cash-to-cash money transfers for a person in the normal course of business, whether or not the person holds an account with the money transfer provider.
The FTC’s concern with cash-to-cash money transfers is that once the fraudster picks up the transfer, the consumer has no recourse available to obtain a refund. Although the Final Rule exempts electronic fund transfers and gift cards that are covered by Regulation E, there is no similar exemption for transactions covered solely by Regulation E’s provisions governing remittance transfers to persons outside the United States.
Cash Reload Mechanisms
A cash reload mechanism is a device, authorization code, personal identification number (PIN) or other security measure that makes it possible for a person to convert cash to an electronic form that can be used to add funds to a general-use prepaid card (as defined in Regulation E).
The FTC’s primary concern with cash reload mechanisms is not the card to which the funds are loaded but the means by which they are reloaded. For example, the FTC notes that a consumer can purchase a cash reload mechanism, receive a PIN to authorize the load of the funds, share that PIN over the telephone or Internet to transfer funds onto any existing general-use prepaid card within the same network and apply the funds to a digital wallet or use them to pay a utility or other bill. According to the FTC, fraudsters are increasingly asking consumers to pay with a cash reload mechanism by giving the fraudster the consumer’s PIN, which the fraudster uses to transfer funds to a card or digital wallet held by the fraudster. Once the transfer is completed, the money is gone and cannot be recovered by the consumer.
As with cash-to-cash transfers, the FTC also cites the fact that cash reload mechanisms are not subject to Regulations E or Z and therefore lack the error resolution and liability limits provided to consumers under those regulations. This, the FTC determines, results in consumers’ being exposed to the risk of unrecoverable losses.
The FTC notes, however, that the CFPB has issued a proposed Prepaid Account Rule that would extend Regulation E protections to certain prepaid accounts, which might cover cash reload mechanisms depending on the content of the CFPB’s final regulation. However, the FTC also notes that this likely would only apply to registered cash reload mechanisms (where the consumer provides certain identifying information so that the financial institution can identify the cardholder and verify his or her identity). Unregistered cash reload mechanisms are not likely to be covered. For those reasons, the Final Rule continues to prohibit the use of cash reload mechanisms, although the FTC states that it may revisit the definition if warranted by a final Prepaid Account Rule.
Consistent with the FTC’s concern with the type of fraud that can be conducted using cash reload mechanisms, the Final Rule does not prohibit the use of a general-use prepaid card as a payment method, even one that has been loaded by use of a cash reload mechanism. In addition, in response to comments submitted by several providers of cash reload mechanisms and to changes in the market, the FTC acknowledged that the same risks are not present when a consumer does a “swipe” reload, where the card must physically be present. For that reason, the Final Rule excludes swipe reload processes from the definition of cash reload mechanism.
Other Payment Methods
The Final Rule does not expand the prohibited payment methods from the NPRM. However, if fraudsters migrate to other forms of payment that are irrevocable in nature, such as bitcoin, the rationale supporting the Final Rule suggests that such payment mechanisms could be the subject of future FTC rulemaking.
Generally, the TSR exempts from certain prohibitions inbound telephone calls initiated by a consumer in response to an advertisement. However, as in the NPRM, the Final Rule does not exempt inbound calls from the new prohibitions. According to the FTC, only one commenter objected to applying the new prohibitions to inbound calls, specifically with respect to RCPOs, but the FTC was not persuaded because it believes that the risks and operational and regulatory weaknesses associated with RCPOs and the other prohibited payment methods, such as the purported lack of Regulation E protections, apply equally to inbound and outbound calls.
Expansion of Prohibition on Advance Fees
The TSR already prohibited requesting or receiving payment of a fee or consideration for goods or services represented to recover or assist in the return of money or other items of value paid to a person in a previous telemarketing transaction. The Final Rule adopts the NPRM proposal to expand the prohibition on advance fees, prohibiting such fees for services promising to recover a consumer’s losses in any prior transaction, not just telemarketing transactions. The FTC reasons that the expansion of the prohibition on advance fees would help prevent fraudsters from avoiding liability under the TSR by focusing on victims of other types of online fraud and give law enforcement an additional tool to combat online fraud.
The TSR prohibits assisting and facilitating sellers or telemarketers engaged in violations of the TSR. The standard applied by the FTC is that a party who has actual knowledge of or consciously avoids knowing about a violation may be liable.
Several commenters raised concerns that, given the nature of the prohibited payment methods, this standard of liability could create unwarranted liability for innocent parties. For example, commenters noted that no single party in the “lifecycle” of a prepaid card may have full visibility into a cash reload transaction, which would make it difficult for a cash reload provider to know whether a particular transaction relates to telemarketing. Similarly, providers of cash-to-cash transfer services may have little ability to know that a transfer relates to a telemarketing transaction.
Despite these comments, the Final Rule makes no changes to the TSR’s existing provisions regarding liability. The FTC specifically declined to create safe harbors for cash-to-cash service providers or providers of cash reload mechanisms, finding no reason to afford special treatment to these segments of the industry. Moreover, the FTC takes the position that financial incentives are such that a service provider will benefit from not detecting improper transactions because it will continue to receive transaction fees. Similarly, the FTC cites examples of service providers who have colluded with fraudsters. In the FTC’s view, many service providers have already implemented antifraud measures, and commenters failed to provide evidence that service providers would incur different costs as a result of the prohibitions in the NPRM.
Instead, the FTC discusses with favor steps that MoneyGram has taken to improve its fraud prevention and detection efforts in connection with earlier enforcement actions. While the Final Rule does not adopt or require these measures, the FTC’s discussion suggests that adopting similar measures will help avoid liability for assisting or facilitating violations of the TSR. The measures include (1) providing consumer warnings; (2) providing a mechanism for a consumer to reverse a money transfer if the funds have not been picked up and the consumer alleges that the transfer was induced by fraud; and (3) establishing, implementing and maintaining a comprehensive antifraud program reasonably designed to detect and prevent fraud-induced money transfers and money transfer agents who might be complicit in fraud. In light of the FTC’s commentary, other money transfer service providers, and providers of the other payment methods that are prohibited in connection with telemarketing, might consider implementing similar measures.
Beginning 60 days following publication of the Final Rule, or on January 17, 2016, sellers and telemarketers will be required to comply with the amended TSR requirements, with the exception of the prohibitions against accepting remotely created payment orders, cash-to-cash money transfers and cash reload mechanisms. Those prohibitions will be effective 180 days from publication of the Final Rule, or on May 16, 2016.