The Red Flags Rule requires financial institutions and creditors to have a program in place to prevent identity theft. The program must include identifying red flags, detecting them, taking action, and updating the plan regularly. The rule covers a wide range of creditors, including veterinarians and accountants.
The Red Flags Rule is an identity theft prevention scheme developed by the Federal Trade Commission (FTC) in the United States. Under this rule, financial institutions and individuals or companies that may be considered creditors must take a series of steps to identify and prevent identity theft. The purpose of the Red Flags Rule is to protect consumer security by requiring that people who have personally identifiable information and financial records have a system in place to deal with identity theft.
The red flags rule requires that those subject to the rule have a program written to deal with identity theft. The company could use a generic model or develop its own. The program needs four components. The first is identifying any red flags, activities or events that might indicate someone is trying to commit identity theft. This can vary by business and industry. The company should also have a plan for detecting these red flags.
Some examples of red flags might include suspicious documents, unusual account activity, inquiries to an account, or notices from credit bureaus. There may also be concerns specific to a particular company, such as evidence that someone is using false insurance information to obtain medical assistance or the inability to provide proof of ownership of a home or vehicle before requesting services.
A prevention and action plan should form part of the program under the Red Flags Rule to ensure the company takes immediate action in cases of suspected identity theft and works to close obvious loopholes. Finally, the company needs to commit to updating the plan. Updates must include new information and policies and must occur regularly. This shows that the company is on top of identity theft issues and has plans to address them.
Identifying financial institutions like banks and credit unions is easy, but determining what types of lenders are subject to the red flag rule is a bit more complicated. The rule covers people like veterinarians, who may provide services on credit or accept payment plans. Most companies that allow people to pay later for services can be classified as creditors, ranging from utilities that bill after the fact to accountants who send bills to their clients. The scope of the Red Flags Rule has led to several delays in enforcement, while industry lobbyists argued that compliance would be difficult for small businesses, particularly those run by self-employed workers.
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