Shoppers need more protection

One in ten consumers are not receiving goods or services they pay for in advance, with less than half (48 per cent) getting their money back, says Consumer Focus, who are today calling for tough new measures to protect consumer prepayments.

Nearly 1.8 million consumers have not received an order paid for in advance during the past two years, according to the first research on consumer prepayments for 25 years. Retailers and suppliers going bust is being cited as a main cause.

The average loss for those losing money was £242 each, with the worst performing sectors being: electrical goods (15 per cent); books, music or other small entertainment items (15 per cent); clothing and textiles (12 per cent); furniture (11 per cent) and holidays (11 per cent).

Debit cards were used in nearly half (45 per cent) of all prepayment transactions and Consumer Focus is recommending that all prepayment purchases offer the same statutory payment protection as credit cards. Visa already offers voluntary protection for its debit cards.

Consumers should also be moved up the list of creditors who receive a share of proceeds when the assets of an insolvent company are sold off. They currently lie near the bottom of this hierarchy receiving an average of only 3p for every pound spent - compared to 35p for secured creditors such as banks.

Steve Brooker, markets expert, Consumer Focus, said: ‘Consumers are losing out in the fight to reclaim money from bankrupt businesses. And the problem looks set to worsen given the dramatic rise in companies going under this year. As with many things during a recession, it's the poorest who will be hit hardest.

‘Better protection of prepayments is 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.'

The research shows that low-income consumers are hit hardest as companies targeting this group are more likely to fail. Low-income consumers were also less likely to use credit cards - the best source of payment protection.

The investigation follows the loss of £38 million of customers' Christmas club savings after the collapse of Farepak, the 100,000 guests at risk of losing their money after wedding firm Wrapit folded, and 30,000 customers who booked with XL Leisure Group who stand to lose their money.

The Government's Consumer White Paper promises a review of consumer protection following the launch of this research.