NetSpend Corporation (NetSpend) recently agreed to settle with the Federal Trade Commission (FTC) regarding allegations that NetSpend deceived consumers about certain aspects of NetSpend’s reloadable prepaid cards. NetSpend will pay $40 million in restitution to customers and $13 million to the FTC under the enforcement order. Providers of consumer financial products and services—not just prepaid card providers—should carefully review the FTC’s allegations. The allegations provide insights on practices the FTC perceives to be deceptive, and how to avoid engaging in them.
In its November 10, 2016 complaint, the FTC claimed that NetSpend committed deceptive acts or practices by making certain misrepresentations and omitting material facts in violation of Section 5 of the FTC Act, which gives the FTC enforcement authority over nonbank entities who commit unfair or deceptive acts or practices (UDAP). Specifically, the FTC claimed that NetSpend: 1) failed to provide consumers with promised access to prepaid card funds; 2) denied or delayed consumers’ use of prepaid cards and access to funds during the activation process; 3) denied or delayed access to prepaid card funds after cards had been activated by blocking accounts; 4) delayed access to direct deposits; 5) conditioned approval on consumers meeting unexpected requirements despite guaranteeing approval; and 6) failed to provide provisional credits for account errors as promised.
The FTC’s allegations were based primarily on representations that NetSpend made to consumers in connection with the marketing of NetSpend’s prepaid cards on NetSpend’s website and in retail stores, including:
- NetSpend cards are ready to use “immediately” and will provide consumers with “immediate access to [their] funds” or with “instant access to [their] money with no holds, no waiting”; “use it today”;
- NetSpend customers can “use [their] card immediately”;
- NetSpend cards are “the fast, easy, and safe way to get paid”;
- NetSpend cards ensure that “your money is secure and always available”;
- NetSpend “guarantee[s] approval”; and
- Consumers can receive provisional credit for disputed transactions until the disputed transactions are resolved.
Contrary to these marketing statements, the FTC’s complaint states that NetSpend denied or delayed activation of its prepaid cards and blocked consumers who had already activated prepaid cards from using their cards. Rather than immediately receiving access to their funds as promised, the FTC alleged, consumers were required to complete the customer identification process that is required by the Bank Secrecy Act (BSA) before receiving access to their prepaid funds. Many consumers had already loaded funds onto their prepaid cards but were unable to access those funds, the FTC stated, either because the consumers did not meet the requirements of the customer identification process or because the consumers did meet the requirements but NetSpend subsequently delayed access to funds for up to weeks at a time.
Some allegations also stemmed from inaccurate statements in NetSpend’s Terms and Conditions. For instance, NetSpend’s Terms and Conditions stated that consumers could dispute account errors and that NetSpend would attempt to complete an investigation of the errors within ten business days and then “correct any error promptly.” If NetSpend could not complete the investigation within ten business days, the Terms and Conditions stated, NetSpend would “credit [the consumer’s] Card Account within ten (10) business days for the amount [the consumer] thinks is in error” while NetSpend continued investigating the error, unless the card had been open for less than 30 days, in which case NetSpend would apply a provisional credit within 20 business days.
Despite these provisions in NetSpend’s Terms and Conditions, NetSpend failed to provide provisional credits as promised, the FTC stated, even after NetSpend had notified consumers that NetSpend would provide the credits. In other cases, NetSpend allegedly issued provisional credits in partial amounts rather than the full amounts of the unauthorized or disputed transactions.
In addition to imposing restitution and a civil money penalty, the March 31, 2017 stipulated order between the FTC and NetSpend requires NetSpend to:
- Notify all affected consumers within 60 days;
- Also within 60 days, notify marketers of NetSpend prepaid cards and provide marketers stickers to affix to existing marketing materials to correct misrepresentations identified in the order;
- Ensure NetSpend does not misrepresent the length of time in which customers can access prepaid funds or what is necessary for consumers to be guaranteed approval to open a prepaid card account; and
- Create, retain, and provide certain reports to the FTC for 20 years, including detailed reports regarding NetSpend’s accounting records, marketing materials, consumer complaints, and consumer requests to open, close, place blocks on, and disburse provisional credits on NetSpend’s prepaid cards.
Third-party marketers of NetSpend’s prepaid cards must stop using any NetSpend materials representing that the cards “will provide immediate or instant access to funds, are ready to use today, or provide guaranteed approval.” For certain other marketing materials, third-party marketers must place stickers stating “[y]ou must meet identity verification requirements to access and use this card” on any materials with the above statements.
The NetSpend action offers some useful takeaways for providers of consumer financial services generally—not only providers of prepaid cards—regarding the FTC’s standards for “deceptive” conduct. To mitigate the risk of being perceived as engaging in deceptive conduct akin to that cited in the NetSpend action, there are a number of steps consumer financial services providers can take.
For instance, companies offering any financial product or service should carefully vet all marketing materials, whether displayed in-store, online, through the mobile channel, or on social media. Ensure that all representations made in marketing materials are true. Any promises that something will be made available “immediately” or within a certain period of time must be true for all consumers obtaining the product or service. If there is a material limitation or condition on the terms or availability of a product or service, the marketing materials should clearly disclose all limitations and conditions. For instance, if approval to obtain a product is subject to a customer meeting customer identification program requirements, the marketing material should clearly disclose that requirement.
For companies who sell prepaid cards through third-party retailers, the prepaid card company must ensure that its third-party retailers and their employees do not misrepresent the terms of the product–either in marketing or in conversations with consumers. Employees and third parties interacting with consumers must also receive sufficient training and scripting, as appropriate, so as not to misrepresent any financial product or service.
It is also important that the terms and conditions governing any financial product or service accurately disclose the policies and procedures in place for consumers to follow, and for a financial services company to fulfill any representations made in the terms and conditions. Statements about error resolution procedures, how to report unauthorized transactions, and instructions and requirements for activating products and services must be carefully crafted in a product or service’s terms and conditions to accurately reflect a company’s policies and procedures.
Besides carefully vetting a product or service’s marketing materials and terms and conditions, financial companies should also monitor all consumer complaints filed with the company’s customer service department and against the company through federal regulators, state regulators, and state attorneys general. If a particular marketing statement, section in the terms and conditions, or feature of a product or service is repeatedly being raised in customer complaints, that should be a red flag for the financial company to investigate the issue further and determine whether changes should be made.
And in addition to gleaning tips such as these from consent orders, it is helpful to consult guidance from the FTC and Consumer Financial Protection Bureau (CFPB) on legal requirements and expectations for providing products to consumers. For instance, the FTC offers numerous issuances on its website targeted to businesses, including with specific regard to advertising and marketing.
These steps are important for any consumer financial services provider to consider, because liability for deceptive conduct can be significant. Both the FTC and CFPB have certain authority to take enforcement actions to address deceptive acts by nonbank providers of prepaid cards and other consumer financial services (the agencies manage their shared authority pursuant to a memorandum of understanding (MOU)). As we previously blogged, while the future of the CFPB’s prepaid rule remains unclear, the FTC and CFPB already can take actions against prepaid card providers for alleged UDAP (as well as for “abusive” conduct in the case of actions by the CFPB). Potential liability under such actions can include orders calling for civil money penalties, restitution, various corrective actions, and regulatory monitoring and reporting for extended periods of time (of note, while the FTC is somewhat limited in its authority to assess civil penalties, it tends toward imposing very long periods of reporting and oversight in its consent orders, as with the 20-year period involved in the NetSpend matter). All of these can be costly and time-consuming to address, not to mention damaging to a company’s reputation with consumers as well as with third-party service providers and marketing partners.