Reform needed for consumer protection in retailer insolvencies

david-menzies By David Menzies, Director of Insolvency

18 September 2015

ICAS calls for any proposed amendments to consumer prepayment protection on retailer insolvency to be balanced against the increased costs and burden for business.

ICAS has supported a number of proposals and challenged others in its response to a consultation issued by the Law Commission in England and Wales on consumer prepayments on retailer insolvency.

The consultation considers whether greater protection is needed for consumers who lose deposits or gift vouchers when retailers or other service providers become insolvent.

A study by Consumer Focus in 2009 found that approximately 24.5m prepayment transactions are made each year in the UK by around 20m consumers. However, recent high-profile retailer insolvencies have highlighted the lack of protection for consumers making these kinds of payments.

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The collapse of the Farepak Christmas savings club in 2006 left many consumers out of pocket. More recently, unused gift vouchers worth £4.7m 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.

David Menzies, ICAS Director of Insolvency, said:  "We recognise the concern and need for more to be done for consumers when high street retailers become insolvent. However, any measures introduced should be proportionate and balanced against the likely increased cost and burden placed on retailers in what is already a challenging environment for the high street."

The response from ICAS supports the view that clear information should be provided to consumers when a retailer becomes insolvent. That responsibility should be jointly shared by the insolvency profession, retailers and card issuers.

The ICAS response also highlights some of the practical difficulties in achieving some of the proposals within the consultation, noting the difficulties that multiple legal jurisdictions and devolved responsibility for some insolvency processes within the UK bring when retailers will often operate across the UK.

Proposals for consumer prepayment to be held in trusts or for a new 'consumer charge' to be created which would give consumers a higher priority in insolvency than at present have particular challenges and the costs and burden on business and any insolvency process are likely to be significant.

ICAS also rejected the proposal that consumer creditors should be given preferential status in retailer insolvencies. The response said that providing preferential status is no guarantee that consumers will receive their money back and that amending the ranking order will likely have an adverse impact on availability and cost of finance to the retail sector.

A proposal to provide mandatory protection for consumers who contribute to schemes marketed as savings schemes is supported. The ICAS response said that such schemes are often used by the most vulnerable in society and therefore mandatory intervention is warranted.


  • Insolvency

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