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