Close protection

The abuse of prepayments and deposits continues with many millions of pounds lost every year. The legal protection remains inadequate despite the Consumer Rights Act 2015.

The consumer has little chance of recovering their money as the trader is usually insolvent, the consumer has a low creditor priority and the sum involved is usually comparatively modest (though it can amount to thousands of pounds).

Also, despite the theoretical existence of a remedy, in practice a claim for restitution or compensation is unlikely to be worth the trouble and expense of pursuing in court.

Protection for the consumer lies principally with the Competition and Markets Authority (CMA) and Trading Standards.

Unfair

The requirement for payment of a proportionate deposit may be seen as reasonable, an indication of the consumer’s commitment to enter into a contract and the sharing of the risk.

The requirement for a 100 per cent (or close to) prepayment in advance indicates potential unfairness. The consumer is deprived of the opportunity of justified set-off and is required to accept all the risk (though if the money was held under secure arrangements then fairness would be restored).

There may be a case for regulation by sector, depending upon need, demand and effectiveness. For example, the protection of savings built up over time for a family Christmas has attracted attention because of abuse of the system suffered by poor families.

Package holidays, which have been especially popular, are governed by the Package Travel and Linked Travel Arrangements Regulations 2018. Air package holidays sold by UK businesses are covered by the Air Travel Organiser’s Licence (ATOL) run by the Civil Aviation Authority.

Too many travel companies and airlines have gone bust. And as this usually happens suddenly and unexpectedly, the resulting chaos can be considerable with foreign hotels unpaid and flights home cancelled.

Though ATOL provides full protection, its scope has reduced in recent years with the advent of independent online booking by consumers. Package holidays have been diminishing and separate flight bookings have been increasing, and these are not covered by ATOL.

Ordinary consumers usually rank low in priority on insolvency. There’s a case for improving the priority of consumers (and employees) and reducing the priority of commercial creditors, but this would involve a significant review of insolvency laws.

Consumers who paid by credit card are entitled to be indemnified by the credit card company (between £100 and £30,000) under the Consumer Credit Act 1975 (as amended).

In the case of a block booking, for example, for families or a dozen friends, the credit card company might argue it is responsible only for the individual’s holiday but not the others.

A trader may run into financial difficulties for many reasons such as fraud, expanding too rapidly, unfavourable market conditions or new advances in consumer trends.

It can then find itself using ‘Peter’s money to pay Paul’. I suggest that where the consumer pays at least £100 to pay for future goods and services, eg by way of prepayment or deposit, there should be a legal requirement that this money should be placed in a trust fund. It should not then be withdrawn until the goods or services are delivered to the consumer or to an appropriate third party, such as the holiday hotel.

Such a system should be capable of being administered efficiently and effectively in this electronic age, subject to simple confidential supervision by the regulator.

Other protections would also be possible. The trader could, for example, provide an appropriate bond; they could be required to hold a minimum sum of money in reserve; or required to carry appropriate insurance to cover the risk of insolvency.

However, protection costs money and the traders will pass this on to the consumer, and the regulator should have appropriate powers.

Consumers should be warned about the risks of losing their money and advised to investigate what protection is available for their money. Abuses should be reported to local trading standards, the CMA – and the police.

Alec Samuels is a barrister