Protecting consumers from lost prepayments

High-profile insolvencies such as Farepak and Comet have highlighted the risks of prepayments, with consumers losing £4.7 million on un-used vouchers when the electrical chain collapsed. The Law Commission, independent law reform adviser to the government, announced today that it is conducting a project to review how insolvency law balances the interests of businesses, suppliers and customers.

Paying in advance through savings schemes, deposits and gift vouchers can leave consumers at risk, because existing insolvency law favours larger creditors. The problem is likely to continue to grow, as prepayments remain popular and high-street retailers continue to go out of business.

Around 24.5 million prepayment transactions are made each year in the UK by 20 million consumers, according to a 2009 study by Consumer Focus. Prepayments are popular with consumers 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 make easy presents. Businesses benefit because prepayments provide a cheap source of working capital and can lock in consumers to a particular brand. But the complications for consumers can be significant if the companies goes bust.

David Hertzell, Law Commissioner for commercial and common law, said:

“The problem of consumers losing money when retailers go out of business is likely to increase. It is vital that the law provides protection for consumers, not only because of the sums of money involved, but also to maintain consumer confidence in retailers and their products. But we must also bear in mind that greater protection for consumers will necessarily lead to less protection for others. The aim of our review is to seek the right balance.”

The project is one of nine projects the Law Commission is launching for its new 12th Programme of Law Reform.

Notes for editors
1. The Law Commission is a non-political independent body, set up by Parliament in 1965 to keep all the law of England and Wales under review, and to recommend reform where it is needed.
2. Consumer Focus, Waiting to be heard: Giving consumers the right of redress over Unfair Commercial Practices (August 2009).
3. For more details on this project and other projects in the new 12th Programme, visit www.lawcom.gov.uk
4. For all press queries please contact:
Phil Hodgson, Head of External Relations:  020 3334 3305
Jackie Samuel:  020 3334 3648
Email:  communications@lawcommission.gsi.gov.uk