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In Brief - substitution of credit and debit cards

In a decision likely to be of great interest to card issuers in Australia, the Federal Court on Tuesday found for Westpac, in a case brought by ASIC, on the substitution of cards under section 12DL of the ASIC Act. We expect that this decision will have important consequences across all issuers of both credit and debit cards that have considered substituting existing cards with cards with new features, such as a card that is linked to the Visa or MasterCard networks.

In August this year, ASIC released Regulatory Guide 201, setting out its view as to the circumstances in which debit and credit cards may be renewed, replaced or substituted under that section. The Regulatory Guide indicated that ASIC did not regard the replacement of a debit card using a single payment system with a card using an additional payment system as permitted under the section.

We have been of the opinion that ASIC's interpretation of a "card of the same kind" under section 12DL is wrong - that the proper construction is to look at whether the card is a debit card or a credit card (or a hybrid) and, if the card is being replaced with a card that is of that same kind, there is no breach of the section. ASIC's view was that in judging whether a card is of the same kind, other characteristics should be considered such as the payment systems the card uses, the likelihood of fraud and the manner and places in which the card can be used.

We assisted Westpac in seeking a declaration that in fact, the substitution of its Handycard with a Debit MasterCard was not a breach of the ASIC Act as the cards were cards of the same kind. It was argued that it did not matter that the card could be used in more places or that it used the MasterCard network as these were irrelevant to the analysis. Justice Rares of the Federal Court granted Westpac its declaration.

Importantly Rares J:

  • Rejected ASIC's argument that the presence of a new security feature or functionality with a new payment system would mean that the cards were not "of the same kind".
  • Rejected the argument that the history of amendments to the section colour the interpretation to be given to the section.
  • Stated that the section does not mean that the cards must be absolutely identical.
  • Stated that the defining characteristics of the card was the use of it either to obtain credit or to obtain access to the customer's funds (ie either a debit card or a credit card).
  • Did not agree that extra functionality of permitting use by mail, telephone, on the internet and a wider range of places (whether considered individually or together) would change the nature of the card.

Rares J stated:

"The Parliament sought to guard against them [consumers] being sent a credit card or a debit [sic] that they had never sought. But, it was not the intention of the Act to constrain the relationship between an issuer of a card and its customer by preventing the issuer updating the particular kind of card (i.e. a credit or debit card) with the latest version of that kind of card. The more is this likely given the context in which s 12DL has taken its present form of a period of rapid technological growth and the continuing evolution of financial systems."

Link here if you are interested in reading the decision.

We would be happy to discuss how this decision may affect your business and how it is likely to be interpreted.

 

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