What can happen to you if your pre-payment is lost is demonstrated by the recent administration of budget tour operator Lowcostholidays. The company’s administration left customers already abroad at risk of being asked by hotel owners to settle their bills before leaving and meant that other customers lost deposits paid for holidays which will now, sadly, not take place.

These holiday makers could have protected their deposit by booking their holiday through a member of the ATOL protection scheme, but the many people who lost deposits paid for furniture when, for example, furniture makers MFI and Land of Leather went into administration had no such choice.

You may have found in the recent administration of BHS that the store would only honour your gift voucher if you agreed to spend an equivalent amount in cash. In fact, you were lucky to be able to use your gift voucher at all, as whether or not to honour a voucher, is entirely up to the administrators.

In 2006 Christmas hamper company, Farepak, went into liquidation just before Christmas, leaving many, mainly low income families, without a happy Christmas. Some 114,000 savers lost a total of £37m and although the liquidators eventually repaid the Christmas savers 50% of their savings, 70% of the money returned came from compensation funds and it took 6 years before the repayment was made.

The Law Commission Report on Consumer Prepayments on Retailer Insolvency

The fact that the Law Commission has been tasked with examining how protection may be provided to consumer pre-payments is therefore to be welcomed. Its report was published on 14 July 2016 and can be found at http://www.lawcom.gov.uk/protecting-consumers-when-retailers-go-under.

In relation to deposits the Commission recommends statutory pre-payment protection in sectors posing a particular risk to consumers. Statutory regulation should ensure that bonding, such as the ATOL scheme, insurance or trust arrangements are put in place. With regard to gift vouchers it concludes that regulation would be disproportionate, but that everyone must be made aware that gift vouchers are not money and should be spent quickly.

Protection already out there for card payments

Protection already exists for those who have paid by debit or credit card. Under the Consumer Credit Act 1974, a credit card issuer has an obligation to refund pre-payments for undelivered goods which have cost more than £100 and less than £30,000. In relation to all card payments, irrespective of value and whether made by debit or credit card, card schemes such as VISA and MasterCard, voluntarily provide a “chargeback” system.

Under the system, the card issuer can ask the merchant acquirer (which processes payments on behalf of retailers) to reverse a payment made by card. This has the effect of the merchant acquirers constantly assessing retailers’ insolvency risks and holding back funds to pay for refunds, where they consider that there is a real insolvency risk. The Commission’s analysis showed that that the “chargeback” system represents a very important protection for consumers and that it has resulted in considerable sums being refunded to consumers on retail insolvency.

The existence of the “chargeback” system is not well known and the Commission is of the view that banks must tell their customers about the existing protection for card payments and how to make claims.


The report sets out five recommendations to improve consumer protection:-

  • Regulating Christmas and similar saving schemes which pose a particular risk to vulnerable consumers.
  • Introducing a general power for government to require pre-payment protection for sectors that 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 way in which creditors are ranked, to give preference given to the most vulnerable category of pre-paying consumers.
  • Making changes to the rules on when consumers acquire ownership of goods.

The government is now to consider the report and to decide whether it follows up the Commission’s recommendation to introduce legislation. It will also be interesting to find out what the consumer groups will make of the report and what pressures they can apply to ensure its implementation.