PREPAYMENT PROTECTION IN OTHER CODES

6.27 This can present consumers with a confusing array of different logos and schemes, each offering different levels of protection. CTSI has told us that one of the strategic aims for the Consumer Code Approval Scheme is to reduce confusion and it is working alongside the Department for Business, Innovation and Skills to achieve this.

PREPAYMENT PROTECTION IN OTHER CODES

6.28 Most of these codes do not provide any form of prepayment protection. Here we look at some codes in high-risk sectors which address (or try to address) the problem.

8 Several trade bodies in this sector are currently seeking CTSI approval for their code. A list of prospective code sponsors, whose codes have not yet been approved, can be found on CTSI’s website at

http://www.tradingstandards.gov.uk/advice/Prospectivecodesponsors.cfm.

SafeBuy

6.29 SafeBuy is an independent standards body for online retailers, set up in 2003 after Which? closed its WebTrader scheme. Subscribers to its code of practice undertake not to accept orders which are unlikely to be fulfilled within 30 days and not to process payment from consumers more than two working days before dispatch of the goods. If they do, such payments are to be regarded as prepayments:⁹

Deposits and prepayments must be protected against loss in the event of the retailer ceasing to trade or for any other reason. This protection must be provided by an insurance-backed scheme, a ring-fenced consumer account, independent third party holding of such funds or other secure deposit.

6.30 SafeBuy had obtained stage one approval from the OFT. It withdrew its application for full approval from CTSI in February 2014 for reasons unrelated to consumer prepayment protection.

TrustMark

6.31 TrustMark is a voluntary scheme endorsed by the Government which aims to provide consumers with additional protection across all types of building and home improvements work. It covers supply and fitting of kitchens and bathrooms but not items more usually regarded as “furniture”, such as sofas.

6.32 Businesses which sign up to TrustMark must, at a minimum, provide consumers with the option of a warranty covering prepayments and rectification of defects or major damage if the business ceases to trade.¹⁰ However, this does not necessarily have to come free of charge: consumers may be required to pay for it.

6.33 Trustmark is trying to improve protection, continuing consultation with stakeholders and Government about whether it is practical to require businesses to provide a mandatory two year guarantee. This would cover prepayments, deposits and work in progress for work valued in excess of £500, on the basis that it is to be free of charge and available for activation through an online process. This work is ongoing, taking into account developments in other Government-backed schemes and also in the insurance products that are becoming available in this market.

9 The SafeBuy Code of Practice, para 4.6, http://care.safebuy.org.uk/code-of-practice/.

10 TrustMark, Core Criteria Document, version 6 (2014) section 8,

http://www.trustmark.org.uk/media/74165/core-criteria-artworked-may-2014.pdf.

The Furniture Ombudsman

6.34 The Furniture Ombudsman (TFO), originally called Qualitas, was established in 1992 following OFT reports noting significant consumer detriment in the furniture industry.¹¹ After initial enthusiasm from the industry, Qualitas found itself struggling financially. In the late 1990s, the OFT asked the Furniture Industry Research Association (FIRA) if it could house the organisation. In 2007, the organisation changed its name to the Furniture Ombudsman. In 2014, it detached itself from FIRA to become an independent not-for-profit company.

6.35 TFO’s remit extends beyond furniture to the supply and installation of kitchens and bathrooms. Membership is voluntary. The scheme now has around 150 full members, covering 4,000 to 5,000 outlets plus their online sales. Members adhere to a code of practice which makes no reference to consumer prepayments.

A limited payment protection scheme to cover ombudsman awards

6.36 Alongside its code, TFO runs a limited payment protection scheme which covers six large firms among the 150 members.¹² The main aim of this scheme is to ensure that there are funds available where a dispute arises between a retailer and a customer. It responds to the criticism that consumers who provide full payment in advance have no ability to withhold funds from the retailer should there be a problem with their order. It is not therefore directed at protecting consumers in the event of retailer insolvency. However, it does aim to ensure that a consumer who is awarded compensation by TFO has that award paid, even if the firm becomes insolvent after a complaint has been lodged.

6.37 TFO administers a trust account for each of the participating retailers.¹³ Initially, it took 20% of the contractual value each time a dispute was raised. However, this proved to be administratively unworkable and TFO adjusts the amount it holds for each retailer on a monthly basis, depending on the value of lodged disputes.

6.38 Based on its current caseload, it currently holds between £30,000 and £40,000 for each scheme member. TFO has yet to make any payment from the money it holds, though it may do so soon to cover an adjudication award in a case involving an insolvent member.

Application for approved CTSI consumer code

6.39 TFO is keen to organise a CTSI approved code. It has now submitted its application and is awaiting stage one approval. The submitted code is based on the existing rules for TFO membership but now also includes full prepayment protection for the consumer between the date of payment and delivery.

11 See Office of Fair Trading, The Protection of Consumer Prepayments (March 1986) and Furniture and Carpets - A report by the Director General of Fair Trading (February 1990) pp 29 to 30.

12 The six firms (including B&Q and Homebase) account for almost 1,200 retail stores.

13 Holding the money on trust will protect consumers from TFO’s insolvency, but not from that of retailers.

6.40 TFO proposes to allow members to offer prepayment protection in a number of ways. All pose challenges. As we saw in chapter 3, the industry often relies on deposits for working capital, so segregating funds into a trust account may not be a popular option. Providing a bond may not suffice if the retailer becomes insolvent. The insurance market is still developing so some members may find it difficult to obtain coverage. TFO is undertaking more detailed research into the availability of insurance and hopes that, even if only a proportion of the industry is covered, consumers will be in a better position by being able to choose a retailer which offers prepayment protection.

6.41 Assuming that the submitted code is approved, TFO will run two codes: the current obligatory one which does not include prepayment protection, and the new optional CTSI-approved one which does. TFO refers to the proposed set-up as “tiered membership”. It is unclear how many members will be persuaded to sign up to the code with more stringent financial safeguards. Furthermore, the scheme will require careful marketing if consumers are not be confused by the fact that some retailers promoting their TFO membership may not have signed up to the more extensive code.¹⁴

Home improvements and the glazing sector

6.42 Developing codes has proved to be particularly problematic in the glazing and conservatory industry. It has a bewildering variety of trade associations, each with its own arrangements. A review of 21 different trade associations operating in the sector, commissioned by one of them, found that few provided adequate deposit protection.¹⁵

6.43 In some codes, prepayment protection is optional. In others, protection is subject to a cash limit. Furthermore, consumers may have to take steps to register for protection or the protection may be time limited. For example, the Consumer Protection Association provides payment of the lower of £7,500 or 25% of the contract price, but consumers must register for protection by recorded delivery within 7 days of paying the deposit.¹⁶ Cover lasts for 90 days. In the GGFi scheme (the insurance arm of the Glass and Glazing Federation), some forms of deposit protection are limited to the lower of £1,000 or 10% of the contract price.¹⁷

14 See, for example, Patchett v Swimming Pool and Allied Trades Association [2009] EWCA Civ 717 in which a trade association failed to make a clear distinction between full and associated members, with the result that a consumer wrongly thought that his contractor’s work was underpinned by warranty and insurance protection in the event of the

contractor’s insolvency.

15 The Consumer Protection Report: Double Glazing and Conservatories, commissioned by the Double Glazing and Conservatory Ombudsman Scheme (DGCOS) (3rd ed, April 2013) chapter 5,

https://www.dgcos.org.uk/assets/uploads/Datasheets/Consumer_Protection_Report_3rd_e dition.pdf.

16 Consumer Protection Association brochure, How to improve your home with complete confidence, version 2, pp 6 and 7, www.thecpa.co.uk/wp-content/themes/twentyeleven-cpa/downloads/cpa_brochure.pdf.

17 This is the “new company” scheme; the “main scheme” offers protection of the lesser or

£6,250 or 25% of the contract value. We are grateful to the GGFi for providing us with this information.

6.44 The glazing sector highlights the problems of relying on self-regulation. Although there are some good schemes on offer, consumers can be confused by the sheer number of competing organisations and codes. Some schemes do not provide prepayment protection. In others, protection schemes may look adequate but protection is diluted in their small print, with low limits and onerous registration requirements.

The Christmas Prepayment Association

6.45 After Farepak collapsed in 2006, attention turned to similar savings schemes and the risk they presented to consumers. While there is still no statutory requirement for protection, the Department for Business, Enterprise and Regulatory Reform (BERR)¹⁸ liaised extensively with the industry to come up with a voluntary code of practice. The result of these efforts was the establishment of the Christmas Prepayment Association (CPA), a self-regulatory trade association for the Christmas savings industry. It currently has six members who adhere to a voluntary code of practice,¹⁹ which requires them to hold consumers’ savings on trust overseen by trustees, half of whom must be independent of the member.

6.46 There are, however, several Christmas savings schemes which are not part of the CPA, particularly Christmas savings clubs run by large supermarkets and smaller retailers. We return to these in Chapter 11, making proposals and asking questions.

The Consumer Code for Home Builders

6.47 The Consumer Code for Home Builders was introduced in 2010 in response to an OFT market survey on home building.²⁰ It is an industry-led code of conduct for builders and aims to ensure the home buying process is fair and transparent for purchasers. It applies to home builders which are registered with the United Kingdom’s main new home warranty providers and contains 19 core criteria to which builders must adhere. Like many others, this code is not exclusively aimed at protecting consumer prepayments, but rather at providing a better experience for consumers by providing information requirements and a dispute resolution mechanism.

6.48 The code requires builders to explain clearly “how home buyers’ contract deposits are protected and how any other prepayments are dealt with”. This requirement is supplemented by guidance to builders:²¹

You should have arrangements to protect contract deposits paid by Home Buyers. The Home Warranty Body’s insurance cover may include this protection.

18 This department was superseded by the Department for Business, Innovation and Skills (BIS) in June 2009.

19 The members are: Country Christmas Savings Ltd, Family Christmas Savings Ltd, Park Christmas Savings Ltd, Variety Christmas Savings Club Ltd, Post Office Ltd and Flexesaver Ltd. See http://www.cpa-advice.co.uk/members.htm.

20 Office of Fair Trading, Homebuilding in the UK: a market study (September 2008).

21 Consumer Code for Home Builders, (3rd ed, April 2013) para 3.4,

http://consumercodeforhomebuilders.com/wp-content/uploads/2015/04/Builder-Guidance-Note-Third-Edition.pdf.

DIFFICULTIES WITH PREPAYMENT PROTECTION THROUGH VOLUNTARY