Shop gift cards need watchdog protection

The city watchdog should take regulatory control of the retail gift card market in the UK to stop people losing millions when stores go bust.

Store gift cards can seem like ideal gifts as they allow the recipients to choose their own present. But problems arise when stores get into financial trouble and then refuse to accept the previously issued cards.

In recent times customers of Comet and HMV have seen their cards turned down by under-pressure store staff, although both chains relented after public pressure. This year fashion chain Republic went under, leaving some 78,000 people holding the company's gift cards with worthless bits of plastic.

The vast majority of consumer funds held on gift cards – estimated to be around £5bn – are not held in a separate account to the retailer's own funds, meaning a company's administrators can refuse to refund customers, as has often been the case with recent collapses.

But there could be a simple solution, according to payment firm Prepaid Financial Services. Chief executive Noel Moran said the Financial Conduct Authority should force retailers to place consumer funds with regulated E-Money License Institutes. That would mean the gift cards would be treated as financial products under an EU e-money directive.

E-money firms separate consumer and retailer funds by converting the former into 'e-money' and retaining them in separate holding accounts valid under EU law. The regulation could also cover e-wallets – virtual wallets that allow people to make prepaid transactions with e-money.

"The regulator needs to speak up on behalf of consumers and protect their hard-earned money,"said Mr Moran. "Otherwise billions of pounds are at the mercy of an administrator, with no protection whatsoever."