Government plans new laws to protect Britons who use savings clubs
New laws are to be announced this week aimed at protecting the hundreds of thousands of Britons who use savings clubs to put money aside for Christmas or pay for other items in advance.
The government said it would also look at whether there were other sectors posing risks to people who prepay for goods or services, and whether similar protections were needed. Home improvements and weddings are two examples of big-ticket items where people frequently hand over substantial sums in advance.
The move comes 16 years after the collapse of the Christmas savings club Farepak, which left about 100,000 customers unable to access the cash they had put aside, and led to calls for better protection for users of these schemes.
The government said that with households facing rising costs, “now more than ever, families’ hard-earned savings need to be protected”.
Savings clubs allow shoppers to pay for goods and services in instalments throughout the year instead of in one go, and they are often used by people on low incomes.
With many of the clubs, people are saving up for Christmas. Users often receive vouchers that can be spent at specific retailers or via the club’s catalogue.
However, unlike money in current and savings accounts, the cash that people pay into commercial savings clubs is not protected by the UK’s Financial Services Compensation Scheme, the official rescue scheme for customers of financial firms that go bust.
This means that if a savings club goes out of business or customers’ money is lost, they may not be able to get it back.
The Department for Business, Energy and Industrial Strategy said the proposed new laws to be outlined this week would mean that savings clubs must safeguard people’s cash by using insurance or a trust, so that even if the company went bust the money would still be protected.
The law will apply to Christmas savings clubs and other prepayment schemes that are forms of savings clubs.
“This will prevent scandals like Farepak,” the department said. When Farepak collapsed in 2006 it owed about £37m to about 100,000 consumers. They had saved an average of £400, though some had put away four-figure sums. The customers waited six years for payment and eventually got back about 50p in the pound, which mostly came from compensation funds set up to help those facing hardship.
A number of companies run Christmas savings clubs in the UK, with Park Christmas Savings claiming to be the largest. It said it had about 350,000 customers who signed up annually, and that all prepayments were held in an independent trust.