Consumer deposits need greater protection in retail insolvencies

CONSUMERS who lose deposits or gift vouchers when retailers or other service providers become insolvent should be provided with greater protection in the event of retail insolvencies, a Law Commission review has found.

The BIS commissioned report suggested that consumers paying a cash deposit of £250 or more within six months of a retailer entering insolvency should be given limited preferential protection, below claims from employees but above floating charge holders.

The recommendation is one of five proposals from the Law Commission aimed at providing more protection for consumers in the wake of a series of high-profile retailer insolvencies which highlighted the lack of protection for consumers making prepayments.

  • Regulating Christmas and similar savings schemes, which pose a particular risk to vulnerable consumers.
  • Introducing a general power for Government to require prepayment protection in sectors which pose a particular risk to consumers.
  • Giving consumers more information about obtaining a refund through their debit or credit card issuer.
  • Making a limited change to the insolvency hierarchy, to give a preference to the most vulnerable category of prepaying consumers.
  • Making changes to the rules on when consumers acquire ownership of goods.

The collapse of the Farepak Christmas savings club in 2006 left many consumers out of pocket. More recently, unused gift vouchers worth £4.7 million remained in circulation when Comet collapsed and home furnishings retailer Paul Simon held £2.4m in customer deposits when it went into administration in April 2014.

Insolvency table

“Getting a refund on your deposit depends very much on how you paid, and on commercial decisions made by the accountants dealing with the bankrupt business,” said Stephen Lewis, Law Commissioner for commercial and common law. “It can be a hit-and-miss affair, and it’s often the most vulnerable consumers who lose out. We believe that consumers should have better protection in the more serious cases where larger sums are involved.”

As well as protections for larger cash deposits, the Law Commission also recommends that banks should do more to tell their customers about existing protections for card transactions. “Banks must make it clear to customers what protections are being offered and how to make a claim under the ‘chargeback’ scheme. Consumers should be encouraged to use credit and debit cards whenever they can and to contact their bank quickly if things go wrong,” said Lewis.

The report also considers Christmas clubs and other “savings schemes” that deliver goods or services at the end of the savings period rather than returning your money with interest, and we recommend that schemes marketed as being suitable for savings must make sure their savers’ funds are protected.

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