Buyer better beware when it comes to paying a deposit
Firms routinely use customer's deposits. David Prosser explains why Farepak may not be a one-off scandal
Saturday 09 December 2006
The collapse of Christmas hamper company Farepak, whose customers this week began receiving charitable payments worth just 15p for every pound they have made of festive savings, could be just the tip of the iceberg. While the scandal has caused understandable outrage, consumer groups warn that hundreds of thousands of people are losing out in very similar fashion each year, usually in much smaller - and less widely publicised business failures.
"I'm one of around 1,000 insolvency practitioners in the UK and I personally deal with 10 of these cases a year," says Keith Stevens, a partner at accountancy firm Wilkins Kennedy. "There are thousands of companies going bust every year and taking customers' money with them - while I wouldn't want to sound heartless, the sad truth is that Farepak is a fairly everyday type of occurrence."
In fact, although they may not realise it, consumers are exposed to a potential Farepak-style loss every time they pay for goods or a service and don't receive it immediately.
Buy something over the internet, for example, and there's a chance the supplier could go bust before the products are despatched. Put down a deposit on, say, a kitchen, double glazing, a new car or home furnishings, and you could lose your money if the supplier goes under before the delivery date.
Even an annual magazine subscription is risky - if the publisher goes out of business after three issues, you may not get a refund.
The risk may sometimes be even less obvious. Many products come with extended guarantees and warranties - 10 years on new housing, for example. But if the company providing the guarantee goes bust in the meantime, the promise becomes worthless. The problem is that there are few legal obstacles to prevent companies using customers' deposits and advance payments for their own purposes.
At Farepak, the losses have been especially large because the company had more than 100,000 customers paying in over an extended period. Since it wasn't required to ring-fence this cash, it used the money to shore up the business and then lost it. However, exactly the same thing routinely happens elsewhere, warns Stevens. "Very few companies that consumers pay substantial deposits to are legally obliged to ring-fence customers' money," he says. "When we get called in to deal with corporate insolvencies, we invariably find customers' deposits are used as working capital."
Joanne Barker, a legal adviser at Which?, the consumer group, warns that as Farepak customers have discovered, customers caught out in this way have very few rights. "We hear about these cases very regularly," Barker says. "Unfortunately, as unsecured creditors, customers are at the bottom of what can be a very long queue when it comes to repayments."
As the story below explains, there are some limited ways in which consumers can protect themselves. But consumer groups believe the law needs to be strengthened in order to give customers' more chance of getting their money back.
"There needs to be more protection for customers in this area," says a spokeswoman for Citizens' Advice.
Barker points out that consumers are at risk of becoming victims of rogue operators, as well as legitimate businesses that cease trading. "The lack of consumer protection is pretty surprising," she says. "Especially when you consider how easy it is for companies and their directors to close down and then begin trading again under a different name."
Which? believes schemes of a similar nature to Farepak, which operate almost identically to regulated financial services companies, need to be regulated, particularly where people are handing over money so far in advance of the goods actually being delivered.
However, such regulation would leave customers of many other businesses unprotected and with no way of knowing whether it is safe to hand over money in advance.
How to protect yourself from a future Farepak
* The safest option, if you're paying in advance, is to do so on a credit card. Under Section 75 of the Consumer Credit Act, any purchase made on a credit card for goods or services worth more than £100 (even if you pay less than this on plastic) is protected. If you don't receive what you've paid for, or it is unsatisfactory, you can reclaim the money from your credit card provider if you can't get redress anywhere else.
* An alternative is Visa's "charge back" system, which applies to payments made on debit or credit cards carrying the Visa logo. "Our operating rules allow your bank to reclaim money from the other party's bank," explains a spokesman. "But it is up to your bank to decide whether or not to try and do so - there is no statutory protection for customers."
* Which?'s Joanne Barker also advises people to be very wary about making large upfront payments for goods and services that have yet to be delivered. "With most consumer contracts, you will normally be able to opt to pay on completion, rather than in advance," she says.
* If you're paying a builder or some other kind of company providing work on an ongoing basis, don't pay the full bill in advance. "It's understandable that a builder, say, may want you to pay in instalments, but there is room for negotiation and, in order to protect yourself, try to pay in a way that reflects work that has actually been done."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Sales of the tablet are set to fall again, say analysts
Met Police confirm there was a 'minor disturbance' and that no-one was arrested
George Lucas criticises the major Hollywood film studios
Does Chris Grayling realise what a vague concept he is dealing with?
Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets
Parties threaten resort's image as a family destination
I Am Bread could actually be a challenging and nuanced title
Mark Dampier: Woodford’s young companies could be the stars of the future
Money Insider: Help to Buy must be boosted by building
Weekly Money: Round-up of the personal finance stories you may have missed 13-17 October
The opera singer, the broadband delay and why customers aren’t divas if they expect a good service
How to start your own internet business
- 1 Indian footballer Peter Biaksangzuala dies after injuring spine doing somersault celebration
- 3 Banksy arrest hoax: Internet duped by fake report claiming that the street artist's identity has been revealed
- 4 Drink alcohol and eat meat to improve male fertility - but cut down on coffee, studies suggest
- 5 Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Sorry Judy Finnigan – Ched Evans is no less sickening than an alleyway rapist
Residents should throw a street party and mix with immigrant neighbours, councils told
Workers 'could be forced to pay £5 a week' to get benefits
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver allegedly kicks gay couple off for kissing
iJobs Money & Business
£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...
£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....
£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...
£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village