On July 9, 2013, the Federal Trade Commission (FTC) published in the Federal Register a notice of proposed rulemaking that would ban the use of certain payment methods in telemarketing sales transactions.1 Specifically, the FTC is proposing to amend its Telemarketing Sales Rule (the Rule) in an effort to prevent the use of certain retail payment methods that it has found appear to perpetuate fraud.2 The FTC has invited public comment on the proposed amendments, including the amendments’ likely costs and benefits to industry members and to consumers, and has also posed a series of specific questions on which it would like input from the public, including questions about legitimate uses of payment methods the amendments would prohibit. Absent special exception from the FTC, comments on the proposed amendments must be received by July 29, 2013.3

I. PROPOSED AMENDMENTS

The proposed amendments would prohibit telemarketers and sellers from accepting certain methods of payment, expand the scope of the ban on accepting advance payment for services offering to recover lost funds, and clarify five existing Rule requirements. The amendments aim to deter fraud within the telemarketing system, as well as end unfair and abusive practices.

  1. Prohibited Payment Methods

The proposed amendments would prohibit telemarketers and sellers from creating or accepting four payment methods for goods, services, or charitable contributions: remotely created checks,4 remotely created payment orders,5 cash-to-cash money transfers,6 and cash reload mechanisms.7 If the Rule is amended as proposed, accepting these payment methods will be deemed an abusive act or practice.8

According to the FTC, these four payment methods are particularly susceptible to use in committing fraud.9 The FTC believes the current Rule, as well as Regulation E, Regulation Z, and the Uniform Commercial Code, is insufficient to provide consumer protection, error resolution, and consumer recourse for these particular types of payment transactions.10 Additionally, these transactions are not subject to a centralized clearinghouse like ACH or a systematic fraud monitoring system.11 The FTC believes that this combination of factors places consumers at risk of substantial injury and economic harm, and that such risks do not outweigh any countervailing benefits to consumers or competition when considering the proliferation of alternate payment methods.12

  1.  Advance Fee Ban on Recovery Services

The current Rule prohibits telemarketers and sellers from requesting or receiving payment for recovering money or items of value “paid for by, or promised to, that person in a previous telemarketing transaction.”13 The FTC seeks to expand this prohibition to protect not only victims of telemarketing fraud, but also individuals who have paid for but never received goods or services (such as a promised prize in a contest) due to fraudulent communications over the Internet and other communications channels.14 To effectuate this, FTC proposes to amend the Rule to ban advance fees for recovery services offered to persons of “a previous transaction” instead of just “a previous telemarketing transaction.”15

  1. Clarification of Existing Rule Requirements

 

The proposed amendments clarify five existing requirements of the Rule that the FTC believes have been previously overlooked or inadequately followed. The proposed amendments would:

  1.  Illustrate that it is impermissible for telemarketers to interfere with a person’s request to be placed on any do-not-call registry, including harassing the person, hanging up, failing to honor the request, requiring the person to listen to a sales pitch, charging a fee for the request, requiring the person to call a different number, and requiring the person to identify the seller;16
  2. Expressly state that telemarketers bear the burden of demonstrating they have an express written agreement, or existing business relationship with a customer on a do-not-call registry before contacting that person;17
  3.  Clarify that the exemption from the Rule allowing telemarketers to contact a business applies only to calls inducing a sale or contribution from the business and not from its employees;18
  4. Clarify that a person’s express oral authorization to submit billing information for payment must include an accurate description of the goods, services, or charitable contribution for which payment is sought;19
  5. Emphasize that the prohibition on sharing the cost of the annual fee to access the national do-not-call registry is absolute.20

As stated, the Rule currently contains these requirements. The FTC designed the amendments to clarify the Rule’s language so that the Rule more accurately reflects the FTC’s enforcement policy.21

II. IMPACT ON INDUSTRY

Although the Rule does not directly apply to the banking industry, it would be prudent for financial institutions to take note of the proposed amendments in light of the possibility that they may process the types of transactions the FTC is proposing to prohibit. In its notice of proposed rulemaking, the FTC suggested that individual banks have the responsibility to monitor transactions using the prohibited payment methods for fraudulent activity.22 Citing United States v. Wachovia,23 the FTC underscored that processing the types of transactions the proposed amendments would prohibit could result in violations of the Bank Secrecy Act, 31 U.S.C. § 1051 et seq., for failure to report suspicious activity.24 Therefore, financial institutions and others involved in such transactions should consider the deterrent effect of the proposed amendments, as well as wrongdoers’ ability and incentives to shift to new forms of payment that are amenable to fraud.

III. QUESTIONS FOR COMMENT

The FTC has invited comment on any “issues or concerns” the public believes are “relevant or appropriate.”25 In addition, the FTC has specifically sought input on the following questions:

Broad Issues

  • „„ What would be the benefits and costs to industry of the proposed amendments to the Rule, including those who may be affected by the proposed amendments but not obligated to comply with the Rule?
  • „„ What changes should be made to the proposed amendments in order to minimize any costs to industry?
  • „„ With respect to the proposed amendments, are there any potentially duplicative, overlapping, or conflicting federal statutes, rules, or polices?26

Specific Issues

  • „„ Do banks have any feasible way of distinguishing among traditional checks, remotely created checks, images of remotely created checks, and remotely created payment orders flowing through the check clearing system?
  • What systematic fraud monitoring exists for remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms?
  • „„ Do the proposed definitions of remotely created checks, remotely created payment orders, cash-tocash money transfers, and cash reload mechanisms adequately, precisely, and correctly describe the payment mechanism?
  • „„ What costs and burdens would the proposed prohibition on using remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms impose on industry? 27

Comments filed in response to these questions and the others posed in the FTC’s notice will assist the Commission in tailoring its final amendments to reflect realities and