Last Updated Aug 11, 2009 5:55 AM EDT
Every pre-payment is an act of faith -- and too many consumers are being betrayed, according to consumer champions Consumer Focus.
It is calling for customers to be 'promoted' to preferential creditor status -- and for company directors who misuse pre-paid funds to pay customers back from their own funds.
Its report, "Pay now, pay later", claims that one in 10 consumers never receive the goods for which they've prepaid and less than half of those get their money back -- with the average loss amounting to Â£242.17.
Twenty million customers make some 24.5 million pre-payment transactions each year, and nearly 1.8 million people who pre-paid in the last two years don't receive their orders -- with 48 per cent not getting a refund either. Nearly half of prepayments are done with a debit card, which offers no protection to the buyer.
Insolvencies account for some losses -- savings club Farepak, which folded just before Christmas 2006, swallowed up Â£38m of customers' savings and left consumers bitter at its banker, HBOS. Last year, when tour operator XL folded, some 85,000 passengers were left stranded because they'd pre-paid without protection.
But the worst culprits are in electrical goods, computers, domestic appliances, books, music and personal entertainment sales -- but bigger ticket buys in travel or furniture are costly and need "targeted intervention". Not surprisingly, online purchases were the most likely to go astray, accounting for 61 per cent of goods not received.
In contrast to investors or banks, it says, "consumers are involuntary creditors who cannot cannot conceivably assess the risk of business collapse" and couldn't insure against loss even if they could predict it.
The problem is that consumer protection measures are "confusing, inconsistent and have failed to keep pace with the changing economy."
Consumer Focus reckons self-regulation will allow some sectors to slip through the net and is calling for changes to the law that will put consumers in a less vulnerable position. It has suggested that payment card redress be standardised to allow the same protection to debit and credit card holders alike.
It also targets the company directors and suggested the insolvency laws be extended to ensure they be forced to dip into their own savings if they've been found to misuse pre-paid floats.
Despite sounding antagonistic to corporates, the organisation claims it's suggested changes will be in everyone's interest. "Consumers will be reassured that their money is safe, which will encourage spending and help keep a valuable source of credit open to struggling businesses," argues Consumer Focus's Steve Brooker.
Makes sense. But is legislation that compels directors to use personal money to pay off customer-creditors the answer?