Consumer Prepayments on Retailer Insolvency

Current project status

  • Initiation: Could include discussing scope and terms of reference with lead Government Department
  • Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
  • Consultation: Likely to include consultation events and paper, making provisional proposals for comment
  • Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
  • Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

This project is complete. We laid our report before Parliament on 13 July 2016 and await the Government’s response.

This project, which was commissioned by the Department for Business, Innovation and Skills (BIS), considered whether greater protection is needed for consumers who lose deposits or gift vouchers when retailers or other service providers become insolvent.

Prepayments are popular because they can be used to budget for big spends, such as Christmas, or as a deposit for major purchases like cars or new kitchens. On a smaller scale, gift vouchers and cards solve the dilemma of choosing the “right” gift.

However, recent high-profile retailer insolvencies have highlighted the lack of protection for consumers making these kinds of payments. 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.

When a retailer becomes insolvent, the law imposes a strict hierarchy of creditors to be paid out of any remaining assets. Consumers, who are classed as unsecured creditors, are very near the bottom of the list and frequently receive nothing. In some cases, the administrator may decide to honour consumer prepayments and gift vouchers, though they are under no obligation to do so. Consumers are often unaware of the legal situation, and in some cases, conflicting information from administrators further confuses the situation.

The issues are complex and go to the heart of the insolvency regime. In 1982, the Cork report rejected greater protection for consumers, noting that consumers typically lose small and affordable amounts while the effect on suppliers can be catastrophic. But following the Farepak collapse, the Treasury Select Committee described the existing safety net as “inadequate and incomplete”. The OFT carried out a review, and ministers asked BIS to consider providing more protection for consumers.

Our project

After receiving the referral from BIS, we gathered empirical evidence about the scale of the problem and the current law. In summer 2015, we set out our findings and consulted on possible solutions. We received 41 responses to our consultation, a summary of which is available below.

We analysed the consultation responses and developed final recommendations, set out in our July 2016 report. The report, and a shorter summary of it, are available below.

The report sets out five recommendations which would improve consumers’ position on insolvency:

  • 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 team involved in the preparation of the report included Tamara Goriely (team manager), Laura Burgoyne (team lawyer), Conor McLaughlin (research assistant 2014-15) and Paul Smylie (research assistant 2015-16).

Documents and downloads

Project details

Area of law

Commercial and common law

Commissioner

Stephen Lewis