The Farepak Victims Committee have been campaigning for the reform of pre payments legislation since the collapse of the Farepak Christmas savings club in 2006. Last month the Law Commission announced it would be holding a consultation on Consumer Prepayments on Retailer Insolvency. The consultation contains proposals that, if implemented, would mean that nine years after the collapse of Farepak, we may finally be making moves towards ensuring such a situation never happens again.
Farepak was a Christmas savings club in which savers made monthly payments which could be used to buy hampers of food ahead of Christmas each year. In October 2006 the company went bankrupt leaving about 116,000 people with total losses of £38m. The average amount lost was £400 and some families lost up to £2,000. As these payments were unregulated those who lost out were defined as "unsecured creditors" and placed at the bottom of the pile when it came to claiming the assets of the liquidated company. Average repayments have been around £120 and an estimated 11,000 people have yet to reclaim their entitlement. Louise McDaid and Deborah Harvey, two women who lost money as a result of the collapse, formed the Farepak Victims' Committee and since this time have been campaigning for justice and for the law to be changed so that no-one again loses out in this way. Their tenacious campaigning has lead them to direct discussions with Government Ministers, senior civil servants and sections of the industry.
It is not only saving clubs which are unregulated. Almost all consumer prepayments offer little or no protection to those making the payments. Anyone purchasing a product in advance be it a magazine subscription, sofa or fridge freezer can be left out of pocket and without receiving what they paid for should a company they purchase from go into administration before their goods have been received. The situation is the same for people in receipt of gift vouchers as shoppers at Borders, Woolworths, Republic and many others have discovered as these stores have gone into administration and liquidation. It is estimated that £250 million worth of gift cards are wasted each year in the UK as these become worthless once the card date expires or if a company ceases to trade.
The law does provide some protection for payments made on credit or debit cards through chargeback. Chargeback can only happen however if an individual contacts their bank and makes a request and this facility is often not well known or publicised. In the case of debit cards this protection is very limited and non-statutory. Unfortunately many customers who make purchases by cash are often those on the lowest incomes and therefore it is they who will disproportionately lose out should a company cease to trade.
Following the collapse of Farepak the Government asked the Office of Fair Trading (OFT) to look into the regulatory framework surrounding the pre-payment sector. It made a series of modest recommendations for the Government to consider and identified a small number of sectors where it felt there was a problem with existing legislation. A much more comprehensive set of recommendations were made in 2009 by Consumer Focus which included making prepayment customers preferential creditors, harmonising upwards payment card redress and giving the Secretary of State a reserve power to compel companies in specific sectors protect pre-payments that have been made. Sadly neither the current or previous Government have made these changes to date. Debbie and Louise have had success persuading some retailers, such as the Co-op, to protect their Christmas savings schemes, but the vast majority of prepayments to this day remain unregulated.
The recommendations of the Law Commission are limited in scope. They give only some prepayment customers preferential creditor status and stop short of recommending legislation to make chargeback mandatory or to regulate vouchers. In relation to saving schemes however they propose that "it should be unlawful to market a scheme in a way which suggests that it can be used as a savings vehicle without putting some form of protection in place to protect the funds". This should ensure that nine years on the chances of another Farepak will be at least be substantially reduced. We should welcome this proposal, but only as a starting point in a broader discussion about how we can best protect customers in an uncertain economic climate.
Anyone who wishes to help shape this debate can do so in the first instance by responding to the Law Commission's consultation here.