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

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

PROMOTED VIDEO
Extras
indybest
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
Arts and Entertainment
tv
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
News
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Life and Style
Pick of the bunch: Sudi Pigott puts together roasted tomatoes with peppers, aubergines and Labneh cheese for a tomato-inspired vegetarian main dish
food + drink
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Quant Analyst - C++, Boost, Data Mining

    £25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

    Service Desk Analyst- (Desktop Support, Help desk)

    £25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

    Junior Quant Analyst (Machine Learning, SQL, Brokerage)

    £30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

    UNIX Application Support Analyst- Support, UNIX, London

    £45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

    Day In a Page

    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born
    From slow-roasted to sugar-cured: how to make the most of the British tomato season

    Make the most of British tomatoes

    The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
    10 best men's skincare products

    Face it: 10 best men's skincare products

    Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
    Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

    Mackay, Moody and another grim day for English football

    The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
    La Liga analysis: Will Barcelona's hopes go out of the window?

    Will Barcelona's hopes go out of the window?

    Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape