24/09/2013 07:14 BST | Updated 23/11/2013 05:12 GMT

The Gift Cards Wild West: Or, How to Protect Your Presents

On the face of it, gift cards present a brilliant solution to an age-old question - what to buy for the impossible relative/friend when birthdays and holidays loom. That little slab of plastic worth a lump sum in a trusted store has the benefit of offering your loved one something more than a new pair of socks, or an overpriced set of shower gels.

What many people aren't aware of is the hidden threat posed to your cash when you purchase a gift card. A survey by Which? earlier this year found that that one in three people believed they'd have a legal right to a refund for their gift card if a retailer went bust. But with High Street retailers closing all the time, the funds you spend on gift cards are more at risk than ever.

This is because the majority of funds held by retailers in bought gift cards are not held in a separate account to the store brand's own funds - meaning that when a company like HMV goes bust and calls in the administrators, the latter can refuse to refund you.

For the customer, this means wasted funds and much frustration. Just ask the 78,000 gift card holders at failed fashion chain Republic, who found themselves out of pocket earlier this year when the company folded.

There is apparently little political will for tough action to protect consumers. MPs debated the issue in Parliament some months ago, but came to no conclusion. Meanwhile, the Government's response to the debacle has been to call for the industry to step in and mend the mess by volunteering to protect consumer funds.

The ministers have a point; at a time when consumer trust in high street brands is at an all-time low, the best-known stores need to go out of their way to show their support for their customers - rather than signalling a distinct lack of respect for consumers' cash.

Sadly, the retail industry is seemingly deaf to the cries of consumers on the gift card issue. This spells a potential disaster, both for cash-strapped consumers and retailers alike.

However, it needn't be all doom and gloom. There is, in fact, a simple way to protect customers' cash - a European Union agreement currently not being used to its potential.

The EU's Electronic Money Directive aims to encourage Europe's nascent electronic money market. In the UK, the Directive requires electronic money issuers to be either authorised or registered by the Financial Conduct Authority (FCA), and to comply with certain rules about issuing and redeeming e-money - such as the funds held in your typical gift card.

There are now 30 of these E-Money License Institutes (EMLIs) regulated in the UK, including - full disclosure - my own company, Prepaid Financial Services.

So what difference could this make to the gift card buyer?

Crucially, EMLIs have the ability to separate consumer and retailer funds by converting the former into e-money, and retaining them in separate holding accounts valid under EU law.

If a high street store arranged to provide its gift cards through one of the UK's 30 EMLIs, the customer's funds held in the gift card would automatically be held in a different account to the store's other funds. This would mean guaranteed protection for the funds represented by the gift card - even if the store encountered financial difficulties.

The FCA has the power to demand that retailers in the UK to issue their gift cards through this protective EMLI system - thus solving the problem of gift card security and protecting up to £5 billion in consumer cash in one fell swoop.

So far, we have seen no action from the regulator, suggesting that the status quo will remain; a form of monetary Wild West in which billions of pounds in public funds are at the mercy of administrators with no protection whatsoever.

In a time of increasing consumer woes, there is a pressing need to invigorate trust in the retail sector. The last thing UK plc needs are more negative headlines encouraging shoppers to put their wallets away. Let's embrace a simple solution to a maddening problem, and give customers reason to trust in the high street again.