On 18 June 2015 the Law Commission published a consultation paper on Consumer Prepayments on Retailer Insolvency. The purpose of the consultation is to consider whether greater protection is needed for consumers who lose deposits or gift vouchers when retailers or other service providers become insolvent.
The issue of consumer pre-payments and insolvency has been considered many times before: The Cork Report in 1982 acknowledged the issue but did not distinguish between consumers and trade customers who pay in advance for goods or services to be supplied later, rejecting the need for any specific protections.
Having previously published several reports that drew attention to this issue the (now disbanded) Office of Fair Trading (OFT) considered it again in 2006, following the collapse of Farepak. This extensive report on the topic examined the regulatory framework surrounding consumer prepayments in general, and the Christmas hamper market in particular. The OFT’s preferred approach was to give consumer creditors preferential status, as they were less able to assess insolvency risk than trade creditors or institutional lenders. The OFT did not believe that there was a case for the regulation of all prepayments. It noted that many businesses depended on prepayments to provide working capital. Regulation would impose compliance costs which would probably be passed to consumers. Instead, the OFT looked to encourage voluntary protections through codes of practice.
In 2009, Consumer Focus (whose functions are now discharged by Citizens Advice) examined the issue. The study found that approximately 24.5 million prepayment transactions are made each year in the UK. It recommended a combination of measures to protect prepayments including granting consumers (and particularly those deemed vulnerable) preferential status on insolvency and reforming wrongful trading provisions in insolvency law to make them easier for consumer to use as well as sector specific protection. Consumer Focus also recommended enacting a reserve power allowing the Secretary of State to require businesses carrying on specified activities to establish means to protect prepayments if the need arose. Finally, Consumer Focus recommended that debit card payments should be protected in the same way as credit card payments. Although the 2009 Consumer White Paper proposed a government review of the regulatory framework for prepayments, no formal consultation of the issue was conducted.
A number of high profile retailer insolvencies have again highlighted the apparent lack of protection for consumers. In September 2014, the Department for Business, Innovation and Skills asked the Law Commission to re-examine the protections given to consumer pre-payments. The Law Commission points to the fact that unused gift vouchers worth £4.7 million remained in circulation when Comet folded and similarly, that home furnishings retailer Paul Simon held £2.4m in customer deposits when it went into administration last year. The consultation paper also cites the collapse of MFI, HMV, Borders and Zavvi as examples of cases where consumers lost out or risked losing out. The Commission points out that this project is not in response to any one particular insolvency but is intended as a long term look at the issue.
The Law Commission’s research into retail insolvency has revealed two problem sectors: gift cards and vouchers; and deposits made for furniture and other home improvements (which represent the largest consumer losses). The consultation paper considers options for reform in five areas:
- the chargeback scheme;
- facilitating possible means of protection;
- possible regulation in high-risk sectors;
- a limited preferential status for consumers who make large payments in the months leading up to insolvency and are not protected by other means; and
- changes to the legal rules about when ownership passes to consumers.
The consultation runs until 17 September 2015, following which the Law Commission will publish recommendations in the form of a final report (scheduled for summer 2016) and present this to the government who will decide whether to change the law.
The chargeback scheme
From a payments perspective, it is the first of these potential areas of reform that is most relevant. For certain credit card payments the consumer has a statutory right to claim against the card provider. For other claims (i.e. purchases made by debit card or for less than £100) the protection is non-statutory. Consumers may request a “chargeback” where the card issuers reverse the transaction and recover the money from the merchant acquirer (according to procedures set out in the MasterCard and Visa scheme rules).
The paper explains that as chargeback arrangements have become institutionalised they are not as voluntary as they might appear (for example, consumers have the right to complain to the Financial Ombudsman Service). However, consumers often lack information about chargebacks. The Law Commission suggests that card issuers take different approaches when responding to chargeback claims and propose three changes to improve the transparency of chargeback arrangements:
- first, in the event of insolvency, insolvency practitioners should provide information to consumer creditors about chargeback options;
- secondly, all card issuers should give consumers a brief explanation of how to raise a chargeback (including certain key pieces of information) – the consultation wonders whether this would require action from the FCA; and
- thirdly, card schemes such as MasterCard and Visa should provide a publicly available authoritative guide on the situations in which a chargeback may be available, something that could be taken forward by the Payment Systems Regulator.
Lastly, with regard to chargebacks, the consultation paper considers the more fundamental question of whether chargeback should remain a purely voluntary arrangement in cases that fall outside of the statutory right to claim. The alternative posed would be to impose a legal duty on banks to refund consumer prepayments made by credit and debit card whenever goods and services are not delivered. The Law Commission is currently of the view that, provided chargeback is made more transparent, the case for legislative intervention has not been made out. The consultation acknowledges that this issue has implications which are much wider than just retailer insolvency and welcomes respondents’ views on the topic.