A Farepak-style disaster will be avoided by new measures. Sophie Freemanreports
TO THOSE of us who keep our money in interest-paying bank accounts, it seems truly bizarre that anyone would choose to put their money in a previously unreg- ulated, non-interest-accumulating Christmas savings club.
Yet the fact that hundreds of thousands of people do – or did, at least until the Farepak fiasco put an end to thousands of customers’ savings – shows that the banks do not have the ability to entice a sizeable sector of the population. Or maybe they just don’t want their custom.
Now, the Government is locking the stable door – albeit after the Farepak horse has bolted – by introducing a level of regulation into the industry.
The Department of Trade & Industry has announced measures to prevent another Farepak-style crisis, in which £40m was lost by 150,000 families after the company went into administration in October last year. Victims will get just 4p-5p back for every £1 they lost.
The DTI said that money deposited with Christmas hamper schemes would now be ring-fenced in trust accounts and the system monitored by an industry trade association.
It’s not rocket science and is something that happens in many other sectors already. Which begs the question, why was this not the case before?
Unlike banks and building societies, hamper clubs and other schemes that take monthly contributions in return for Christmas vouchers and goods do not fall under the regulatory remit of the Financial Services Authority. This is simply because they are not a financial service – they are retailers who collect money in advance for goods.
Abi Jones, a spokeswoman for the FSA said: “We only regulate deposit-taking schemes, where you can only get your money back and it’s not for payment of goods or services.
“With Farepak and Park Group, you can only get vouchers, or say, a turkey. You don’t get your money back. Whereas with a savings account, which would be regulated, you can’t get a roast turkey, you can only get your money back.” Peter Johnson, founder-owner of Birkenhead-based Park Group, said: “The company is working hard with the Department of Trade & Industry to embrace regulation.”
After the collapse of Farepak, Mr Johnson – the former chairman of Everton Football Club – announced that Park had created three subsidiaries outside the group’s own bank accounts to ensure customer funds are only used for their goods and services.
Last week, Argos became the latest company to try its luck in the Christmas club industry, which is currently hugely dominated by Birkenhead-based firm, Park Group.
And ironically, HBOS, which effectively forced the collapse of Farepak by pulling the plug on its extended overdraft facility, is now also in on the act.
Through its Halifax banking arm, HBOS is launching a version of a Christmas savings scheme which will actually pay interest and, at the end of the six month period, will allow savers to either take out their money or redeem savings for vouchers exchangeable on the high street.
But is there any shelf-life in Christmas savings clubs?
Mr Johnson said the clubs can reach a sector of the community that would struggle to save regularly if left to their own devices – something that Brian Pomeroy, chair of the government’s financial inclusion taskforce, wants to see addressed.
Mr Johnson said: “We knock on your door and ask for money,” he said. “It’s a cultural thing.”
He increased revenue on the Christmas savings division by 31% last year, but he admits that the adverse publicity following Farepak’s collapse has so far driven down orders for Christmas 2007 by 27%.
Mr Johnson, who set up the Christmas hamper group in 1967 as part of the family chain of butcher's shops, said the damage to the industry was very much evident but not irreparable. “It’s affected this year but we feel that (orders) will return,” he said.
Despite the fall in orders, the group’s cash position remains strong with cash balances £12m above that at the same date last year. For the year ended March 31, 2008, the board still expects the company to make a satisfactory profit at slightly below market expectations. Mr Pomeroy’s review echoed Mr Johnson’s comments. It suggested that despite the "lack of security" demonstrated by Farepak's collapse the popularity of hamper schemes would continue because of a desire from low-income families to pay for Christmas in advance rather than going into debt.
Mr Johnson said: “There is so much criticism over credit card debt. These people (who use Christmas savings clubs) are to be applauded when they save.”
The review recommends that the Government should launch a publicity campaign to educate consumers about their options in the market and stated that groups such as the Post Office and credit unions should be encouraged to enter the Christmas savings market and find ways of attract-ing "hard-to-reach customers".
The Government has allocated £1m funding for the Office of Fair Trading to conduct a consumer awareness campaign in the coming months on Christmas saving schemes and mainstream alternatives.
The report also said there should be a look at competition issues in the sector. It found that Park Group now has more than a 90% share of the market.
Commenting on the OFT probe, Mr Johnson said: “We are not concerned. We are quite transparent.”
He added: “The establishment of trust accounts for Christmas savings clubs will provide the security for customers’ monies in the future. Park will now move forward and create trust accounts in accordance with the proposals announced.”
But Mr Johnson would not be drawn on the future of the industry and the possibility of finding a buyer for Park Group.
The 67-year-old has tried and failed, on two occasions in the last few years to find a buyer.
Three years ago, he appointed AIB Corporate Finance to handle the disposal, telling the Daily Post: “I now have a young team in place and maybe now’s the time to stand down and let some younger people have a go.”
It was Mr Johnson’s second attempt at retirement. Until 2001, he was living in tax exile in Jersey, but returned when things started to go wrong at the business.
Frank Field is Labour MP for Birkenhead, where Park Group is based. He put down an Early Day Motion in Parliament last October to draw attention to the role HBOS – Farepak’s bank – played in the loss of Christmas savings.
He called for HBOS to make good the promises made by Farepak to these customers by compensating them for their savings. The motion pointed out that HBOS continued to allow Farepak to trade and take more money from customers in order to offset the company’s overdraft and recorded gross profits of more than £4.8bn in 2005.
He told the Daily Post he was pleased with the fact that agreement with the industry had been reached voluntarily. “I welcome the Government's announcement that there has been a voluntary agreement with the savings club industry and that in future all customers’ savings will be properly ring fenced. I hope this will ensure that the Farepak fiasco can never be repeated and the trust of hard working families in these types of schemes will be restored.”
There is still a large percentage of the population without access to a bank account, although the numbers who have one are increasing. According to the Department of Trade & Industry, the number of adults living without a bank account fell in 2005-06 to 2m, down from 2.8m in 2002-03.
Ed Balls, economic secretary, said: “We have made real progress on financial inclusion but there is still a lot more to do. Tackling financial exclusion is essential for both our economic prosperity and for social justice. It is good for individuals, for society and the economy as a whole. I look forward to working with everyone to drive this agenda forward in the coming months.”
sophiefreeman
