New laws are due to be announced this week to protect the hundreds of thousands of Britons who use savings clubs to set aside money for Christmas or pay for other items in advance.
The government said it would also consider whether there are other sectors that pose risks to people who pay in advance for goods or services, and whether such protections are needed. Home and wedding improvements are two examples of items with large tickets, in which people often hand over significant sums in advance.
The move comes 16 years after the collapse of the Farepak Christmas Savings Club, which left about 100,000 customers without access to the money they set aside and led to calls for better protection for users of these schemes.
The government said that as households face rising costs, “now more than ever, hard-earned family savings need to be protected.”
Savings clubs allow shoppers to pay for goods and services in installments throughout the year instead of all at once, and are often used by low-income people.
With many clubs, people save for Christmas. Consumers often receive vouchers, which can be spent at certain retailers or through the club’s catalog.
However, unlike money in current and savings accounts, the money people pay in commercial savings clubs is not protected by the UK’s financial services compensation scheme, the official rescue scheme for bankrupt financial clients.
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 Ministry of Business, Energy and Industrial Strategy said the proposed new laws, to be outlined this week, would mean that savings clubs must protect people’s money through insurance or trust, so even if the company goes bankrupt, the money will still be protected.
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The law will apply to Christmas savings clubs and other prepayment schemes, which are forms of savings clubs.
“This will prevent scandals like Farepak,” the department said. When Farepak collapsed in 2006, it owed about £ 37 million to about 100,000 users. They had saved an average of £ 400, although some had bet four figures. Customers waited six years for payment and eventually recovered about 50 pence a pound, which came mainly from compensation funds set up to help those in difficulty.
A number of companies run Christmas savings clubs in the UK, with Park Christmas Savings claiming to be the largest. It says there are about 350,000 customers who register each year, and that all prepayments are held in an independent trust.
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