Bill 47, Protecting Rewards Points Act— ASSESSMENT & POSITION

Bill 47, Protecting Rewards Points Act— ASSESSMENT & POSITION REPORT – Bill 47, Protecting Rewards Points Act (Consumer Protection Amendment) 2016 Ontario, Canada

WHITE PAPER INTRODUCTION The Ontario Government’s Bill 47, Protecting Rewards Points Act (Consumer Protection Amendment) 2016 is aimed at providing consumers who participate in loyalty programs with protection over rewards points earned from loyalty programs. As one of the foremost thought leaders in the brand loyalty industry, Bond Brand Loyalty has developed this report in order to help loyalty owners, operators and their partners better understand the implications of the amendment to the Act. In our opinion, there are several challenges with the way the amendment to the Act was written, which will create new and unwanted consequences for both businesses and consumers if left unchanged. This report will describe the key issues that we have unearthed, and we advocate that businesses closely examine the amendment to the Act with their legal, financial and strategy teams to draw their own conclusions. In our view, it is incumbent upon businesses to immediately engage in consultation with the Ontario Government to ensure that these issues and any others are adequately addressed.

BACKGROUND

Points expiry in the Canadian marketplace has existed ever since loyalty programs began issuing points to Members as a currency. Points are generally expired by loyalty program owners/ operators under several circumstances including Members who are inactive for a defined period, the passage of time alone, and/or in the event that a program owner decides to close down their loyalty program. Such points expiry polices are contained in the terms and conditions of loyalty programs. Members are party to these terms and conditions either upon enrolment in a program or by activating their account, which is deemed as acceptance of the terms and conditions.

In 2007, Aeroplan announced that it would expire Aeroplan Miles by “date stamping” miles issued with a future expiry date. However, in 2013, Aeroplan decided to cancel their plan to retire miles. In 2011, the Air Miles Reward Program, owned and operated by LoyaltyOne, announced that it would begin date stamping Air Miles, thus requiring Air Miles Collectors to redeem their Air Miles within five years of the date of issuance, otherwise those Air Miles would expire. As the five-year expiry was about to come into effect in 2017, many Air Miles Collectors began to redeem their Air Miles in order to avoid forfeiture of their earned Air Miles. Simultaneously, there was a significant public outcry by Air Miles Collectors over this expiry policy and over Collectors’ inability to redeem their Air Miles for certain rewards. This situation drew substantial media attention, which inevitably received the attention of the Ontario Provincial Government. As a result, Arthur Potts, Ontario Liberal MPP, tabled a Private Members’ Bill proposing that the expiry of points in loyalty programs be prohibited in the Province of Ontario. Today, Bill 47, Protecting Rewards Points Act, is an amendment to the Consumer Protection Act in Ontario. The Government of Ontario has been consulting with businesses who own and/or operate consumer loyalty programs as well as business associations to ensure that there is a smooth implementation of this Bill for consumers and businesses.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 2 SUMMARY OF THE AMENDMENT

According to the Ontario Government’s website, The Protecting Rewards Points Act eliminates expiry dates on reward points programs based on time alone in Ontario. This means that consumers do not have to worry if they were told that they have points that are about to expire. The legislation is retroactive, so any points (earned at any time) that expired on or after October 1, 2016 will go back into the consumer’s account.

The new law was approved by the legislature on December 5, 2016 and will come into effect in 2017 after the Ontario Government consults with consumers and businesses about how best to implement the change. After this assessment, the law will come into effect and consumers’ points that expired on or after October 1, 2016 will be reinstated. In the meantime, the government recommends that consumers keep statements that show their points balance.

The only time reward points can still expire because of their age is if there is also a secondary reason. For example, if a loyalty program points agreement states that a consumer must use their account (earn or redeem points) within two years and the consumer does not do so, then the points could expire because of the combination of time passing and inactivity as depicted on the Ontario Governments website at: https://www.ontario.ca/page/reward-points. The full details of Bill 47 are available at the following location: http://www.ontla.on.ca/web/bills/bills_detail.do?locale=en&BillID=4254&isCurrent=false&BillStagePrintId=7387&btnSubmit=go.

BOND BRAND LOYALTY’S Perspective ON POINTS EXPIRY

Bond Brand Loyalty is not in favour of Bill 47 as it currently exists. We fervently believe that there are several key clarifications and modifications that are necessary in order to make this Bill clearer and more practical for businesses, and to mitigate the probability of confusion and complexity for consumers. To better understand the impact and implications of points expiry, it is important to examine the relationship expectations between program Members and businesses as well as the financial implications for businesses.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 3 Value Exchange Between Loyalty Program Members and Businesses

Businesses that offer loyalty programs do so to influence consumers to resist competitive brands and remain loyal to their brand(s). While loyalty programs in Canada manifest in many different forms, they all have a common ingredient, that being a “value exchange” between the business and its program Members. This is better known in the loyalty industry as the “do this, get that” equation. A business makes an offer to provide future rewards to a consumer if the consumer lives up to the conditions stipulated by the business, most commonly, making a defined sum of purchases from the business. The means by which a business keeps track and monitors whether its Members are living up to these conditions is by issuing points, miles, stars, etc. as an equity counter of sorts. This equity counter allows the business to keep track of all transactional and non-transactional activity of Members by issuing the equity when a Member meets the required conditions. This equity is used to determine if a Member is in a position to redeem a reward based on pre-qualified thresholds.

Consumers often voice the opinion that if a business commits to furnishing its program Members with a reward based on a (value exchange) promise, shouldn’t the business be obligated to live up to their commitment regardless of the passage of time? Bill 47 makes the Ontario Government’s position on this matter very clear. Businesses cannot abandon their commitment to reward their program Members due to the passage of time alone. In other words, points, miles, stars or any equity counter cannot expire due to the passage of time alone. The only way the commitment can be eliminated is if the Member is deemed inactive for a defined period of time, based on the program’s terms and conditions.

"DO THIS" "GET THAT" REWARD-ELIGIBLE LOYALTY VALUE BEHAVIOURS PROPOSITION

i. Purchase Activity ($) i. Monetary Benefits ($) ii. Non-Purchase ii. Non-Monetary Engagement Signals Benefits

The Importance of Points Redemption

Qualitative and quantitative studies combined with transactional analyses conducted by Bond strongly indicate that points redemption is a key driver of Member satisfaction, and keeps Members more engaged and more loyal to the brand. According to The Loyalty Report 2016 by Bond, Members who have recently redeemed for rewards are 2.5X more likely to be highly satisfied when compared to Members who have never redeemed. Redemption of rewards is a good thing for a brand and its program Members. We also learn from this study that more than one-fifth of Members of loyalty programs have never made a redemption, and non-redeemers are 2.3X more likely to defect from a brand than those who have redeemed in the past 12 months. While this makes a strong case for businesses to encourage points redemption, it can be expensive and can build a liability on the books that can increase financial risks. Having said that, removing a Member’s ability to redeem points due to the expiration of points through the passage of time will restrict many Member cohorts’ ability to derive maximum benefit from their loyalty programs. This will lead to diminished Member satisfaction with the business, a lower likelihood of continuing to engage with the business, and fewer referrals of new consumers to the business. On the flip side, the Bill in its current embodiment will restrict businesses’ ability to leverage expiry as a “call to action” lever, often used to stimulate Member activity.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 4 Financial Implications of Points Expiry and Liability Management

Operating a loyalty program is a significant financial undertaking for most businesses, but when designed and executed intelligently, the loyalty program can have substantial strategic and financial gains for businesses. Since loyalty program rewards costs are generally incurred as soon as the currency is issued to a Member, a reserve liability must immediately be set up on the business's balance sheet to remunerate the Member when they redeem their currency for rewards. So essentially, what happens is that there is an accounting entry that impacts the expense of the loyalty program. Upon redemption, a percentage of the liability reserve is converted into cash to account for the redemption reward. We can understand why a business might wish to diminish the size of their liability by expiring points. Most large loyalty programs in Canada have tens if not hundreds of millions of dollars in points liability sitting on their books. Many loyalty program managers often deploy point or mile redemption campaigns to stimulate Member transactional activity and remove points from the books. These can take many forms, such as discounts on the number of points needed to redeem, issuance of bonus points to achieve a reward threshold quicker, and many other such promotions. Points expiry through the passage of time (prior to Bill 47) would take points off the books with no further financial obligation by the business to the program Member; however, the business loses the ability to stimulate Member purchase activity through the encouragement of points redemption.

When a business wants to reduce their liability, and now cannot do so through the passage of time, they will need to lean on other strategies. Specifically, managing the “accrual rate” and “cost per point.” Reducing the accrual rate, which is effectively the proportion of points a business can expect to see redeemed during the life of a point, can only be achieved by increasing the expected breakage rate; however, marketers are generally not in favour of increasing the breakage rate as that means that a smaller proportion of the Member base will experience a reward redemption, and redemption is a catalyst for Member satisfaction and engagement with the business. So, businesses are really left with only two other options.

1. Reduce the cost per point. A reduction of the cost per point can be achieved by shifting redemptions to lower cost per point rewards, reducing the points liability reserve for a period of time. To sustain a lower reserve, the loyalty program needs to be structured to drive redemption behaviour change towards lower cost redemption options, or a realignment of the rewards value.

2. Structural program design changes. This requires the loyalty program owner to rethink program features on the earn and burn side of the loyalty program design. There are loyalty program mechanics and reward options that are widely used that do not necessarily impact financial liability. In such instances, the cost of rewards is funded through a marketing budget. For instance, providing exclusive access to special, coveted experiences such as Member-only events, early access to merchandise or services, and entry into contests will not build a liability as they are funded through a fixed marketing budget. Points could act as an unlock (e.g., eligibility) determining which Members can take advantage of these benefits, reducing expense exposure in some instances. Points are not being redeemed, but instead act as an indicator to the business as to which Members are eligible for a suite of benefits. Usually this is achieved by program tiers, which are generally calculated on spend or on the number of points earned in a defined time frame.

Structural changes to a loyalty program for financial purposes need to be assessed holistically as they can have significant implications on program efficacy and resulting Member engagement. Points liability management is more important than ever as brands face increasing competition from non-traditional channels and need to find unique ways to attract and retain their program Members.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 5 REQUIREMENT FOR CLARIFICATION OF THE AMENDMENT

Portions of amendment to the Consumer Protection Act require greater clarification for consumers and businesses, as well as modifications as denoted below:

1 "Rewards Points" means, subject to the regulations, points provided to a consumer under a consumer agreement, that can be exchanged for money, goods or services: (“points de recompense”)—This clause makes reference to “points” only. For greater clarity, “rewards points” should include all kinds of equity counters, not just “rewards points.” Many consumer loyalty programs operating in Ontario instead offer miles, credits, stars or other known forms of equity to their program Members. The amendment should explicitly make mention and include all forms of equity beyond just “rewards points” that are awarded by businesses to consumers so as to ensure that there is equal treatment and no ambiguity under the Act.

2 “The supplier agrees to provide rewards points to the consumer, on the supplier’s own behalf or on behalf of another supplier, when the consumer purchases goods or services or otherwise acts in a manner specified in the agreement.”—For greater clarity, it is recommended that the amendment to the Act refer also to the awarding of rewards points for non-transactional activities conducted by consumers. The issuance of rewards points for non-transactional consumer activities such as, but not limited to, completing a survey, linking a personal social handle with a business, or referring a fellow consumer to a loyalty program, is becoming much more commonplace and is often not referenced in program “agreements” as presumed in the language of the amendment to the Act.

3 The amendment to the Act does not comprehensively address the transferring of rewards points from one consumer to another consumer (where permitted under a loyalty program’s terms and conditions). We suggest that this be brought forward to the Ontario Government for clarification. In the absence of a concise reference to this matter in the amendment to the Act, we would like to see this issue treated as follows: If consumer A transfers points to consumer B, those points cannot expire as the result of the passage of time alone. The only way those rewards points could expire for consumer B would be in the instance whereby consumer B is inactive for the specified period described in the program’s terms and conditions. The act of receiving the transference of rewards points would not cause a consumer account to become active based on the definitions in the amendment to the Act.

4 The amendment to the Act does not address points that are earned using a bank instrument such as a bank credit card. The question becomes, which governing rules take precedence? Federal or provincial regulations? We suggest that credit card issuers seek legal counsel and consult with the Ontario Government on this matter. There is likely some precedent on this matter in the Province of Ontario. Back in 2004, the Ontario College of Pharmacists prohibited the issuance of points or any other reward currency on the purchase of prescription drugs. However, bank credit cards, which are federally regulated, were excluded from this prohibition. Additionally, the amendment to the Act does not address credit card issuers’ ability to expire or reclaim points issued to consumers who are not in “good standing” (i.e., have defaulted on credit card payment terms). Again, the question which must be answered is, which legislation takes precedence? We suggest that credit card issuers seek legal counsel and consult with the Ontario Government on this matter. From a business perspective, credit card delinquency seems like reasonable grounds on which to expire or reclaim points, as most cardholder agreements state that the credit card account must be in good standing to earn points.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 6 REQUIREMENT FOR CLARIFICATION OF THE AMENDMENT 5 The amendment to the Act does not address fee-based loyalty programs, whether tender-neutral or credit card-based; however, the presumption is that rewards points earned through such programs would have to be treated in accordance with the amendment to the Act. Specifically, rewards points can only be expired due to inactivity. Bond believes that if a consumer pays a fee for the right to earn and redeem rewards points, then rewards points should not expire under any condition so long as the consumer continues to pay a fee to participate in this type of loyalty program. We recommend a further amendment to the Act to reflect this position.

6 “This Act applies in respect of all consumer transactions if the consumer or the person engaging in the transaction with the consumer is located in Ontario when the transaction takes place.”—This implies that rewards points will have to have different treatment depending on the province. As such, there are several operational, technical and financial implications for businesses who will be required to segregate points for varied treatment. Should a business decide to apply the rules of the amendment of the Act to their own activities in other provinces, it may reduce complexity but will negatively impact its program’s financial position. To further complicate the matter, should other provinces adopt different rules on expiry, program owners and operators will need to make the necessary changes, which will differ by province. Should the winds of change on points expiry spread to other provinces, we would highly recommend that all provincial governments harmonize their regulations.

7 There is no mention in the Act about any further safeguards for consumers for the expiry of points due to inactivity. The amendment to the Act states that “consumer agreements under which rewards points are provided for expiry due to reasons other than the passage of time alone, subject to any limits that may be prescribed.” In other words, businesses may expire points if an account is deemed to be inactive (i.e., no earning or redemption of rewards points in a predetermined time frame). The Act does not stipulate a minimum or reasonable inactivity time frame. The Act has left that up to each business. Bond advocates that there be a generous minimum inactivity period (ideally 12–36 months) depending on the natural cadence of interaction between a consumer and the specific business. While not stipulated in the Act, many businesses house this requirement deep in the terms and conditions of their Member program agreements. While businesses might benefit from expiring such rewards points when a Member account is deemed inactive, businesses should be more upfront in their disclosure of these terms with their program Members. In fact, loyalty programs could benefit from advising program Members ahead of such expiry to entice them to reconnect and transact with their businesses.

8 The amendment to the Act does not cover situations in which a “reward” may expire. For instance, in some loyalty program designs, Members may redeem their rewards points for a “reward,” which may carry an expiration date. We advocate that businesses have the right to expire rewards to create a consumer “call to action,” as well as to minimize their liability. We would want to ensure that there is no potential confusion on this matter for businesses and consumers.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 7 CONCLUSION

We believe that an effective consumer loyalty program is one that is simple to understand, transparent in design and communications, and easy for the consumer to participate in. The introduction of Bill 47 stems from the Ontario Government’s desire to ensure that consumers’ rights are protected when participating in loyalty programs. While we agree with the principle of fairness for consumers, in our view, the execution of Bill 47 in its current incarnation raises several legitimate issues which need to be challenged by businesses. Loyalty designs are varied and can be complex, and the current Bill does not appear to have taken these variations and complexities into consideration. There are multiple areas of the amendment to the Act that are silent on the aforementioned issues. As such, we feel that is imperative that the Government of Ontario seriously consider these issues further, and amend the Act accordingly. If the amendment to the Act is executed as is, we anticipate a whole new set of challenges for consumers and businesses.

In the meantime, program owners, operators and partners should: n read the amendment to the Act; n seek assistance in understanding the implications; n ensure that they consult with the Ontario Government to share their concerns; and n stay updated on any further changes.

DISCLAIMER

The points of view expressed in this document are the opinions of Bond Brand Loyalty Inc. (“Bond”). Bond makes no warranty as to the completeness, accuracy, reliability or fitness for any purpose of the contents. Bond recommends that you consult legal counsel to ensure that you have a complete understanding of how any changes in legislation would apply to you or your organization.

Protecting Rewards Points Act—ASSESSMENT & POSITION REPORT WHITE PAPER | 8 ABOUT BOND BRAND LOYALTY —

Bond Brand Loyalty is a management-owned agency that specializes in building brand loyalty for the world’s most influential and valuable brands. Our mission is to make marketing more rewarding for customers, richer and more resilient for brands, and more profitable for our clients. We build measurable, authentic and long-lasting relationships through a combination of services that includes loyalty solutions, customer experience, marketing research, customer analytics, live brand experiences, and proprietary loyalty technology platforms.

Download the 2016 Loyalty Report The Loyalty Report is based on a comprehensive survey of nearly 6,000 consumers that captured ratings for over 200 loyalty programs. CLICK HERE to download.

Visit our website, follow us on Twitter or contact us at 1-844-277-2663.

[email protected] bondbrandloyalty.com bond-brand-loyalty @createabond

ABOUT THE AUTHOR — Richard Schenker Senior Loyalty Consulting Director, Bond Brand Loyalty Richard is a highly accomplished and visionary loyalty and CRM professional who has enriched the relationships between some of North America’s most iconic brands and their customers for over two decades. He possesses a unique breadth and depth of experience that includes client-side and agency roles, building award-winning customer loyalty and CRM programs, and leading strategic marketing and promotional campaigns. He has a passion for retail and customer management, with a proven track record of harnessing customer and transactional data to deliver enterprise-wide solutions that drive company sales and profitability.