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When a business fails, deposits or prepayments made by the public rank only as unsecured claims. Consumers have no greater protection or priority than suppliers or other trade creditors. The most high profile recent example of this was the collapse of Farepak, the Christmas hamper company, in 2006, when some £38 million of consumers’ money was largely lost.

It’s estimated, however, that 1.8 million people who have made prepayments in the last two years did not receive the goods they ordered, with insolvency stated as the reason in about 1 in 5 of these cases.
With the growth in online sales, more and more transactions involve paying for goods in advance, and so the issue is likely to gain an ever-increasing profile. Now Consumer Focus, a consumer rights pressure group, has published a report entitled Pay Now, Pay Later which argues for greater rights for consumers in insolvency situations.

Their recommendations include:

• Promoting consumers to the rank of preferential creditors in cases of insolvency;
• Harmonising the redress afforded by section 75 of the Consumer Credit Act 1974 to those paying by credit card (credit card issuers are jointly liable with suppliers where the price of the purchase is over £100) to all types of payment card;
• Enhance duties on directors to ensure that consumer prepayments should not be used for purposes unrelated to those for which it was originally paid;
• Introducing powers for the Secretary of State to require businesses carrying on specified activities to establish payment protection schemes, with targeted interventions in the furniture, electrical goods and travel sectors.

The Government has committed itself to reviewing the regulatory framework for consumer prepayments in its recent white paper A Better Deal for Consumers, Delivering Real Help Now and Change for the Future. There is no doubt in our view that consumers need greater protection, and whilst we have reservations about some of the proposals in the Consumer Focus report, particularly those that would place a greater regulatory and bureaucratic burden on small or medium- sized enterprises, it is a valuable contribution to debate.

IMPORTANT NOTE: This article is intended for general information only. It is not a substitute for specific advice which should be sought for specific cases. We cannot accept responsibility for any action (or decision not to take action) made in reliance on the content of this publication.