Gift Cards

Jessica Morden Excerpts

Tuesday 9th July 2013 Westminster Hall

[Penny Mordaunt (Portsmouth North) (Con)]

It is always a pleasure, Mr Bone, to see you in the Chair. I know that many in the House are exercised by the stories we have heard in the wake of companies going into administration of people not being able to cash in their gift vouchers or losing their savings in schemes such as Farepak. It is terribly unjust and it is time that we did something about it.

My experience with Portsmouth FC has taught me that the victims of a company’s administration are not always obvious. In that case, rules that were not widely known meant that football creditors were at the head of the queue for repayment, despite the fact that the credit of others had been just as vital to the running of the club. Those at the head of these queues might receive only a tiny fraction of their investment, and those at the back nothing at all. It is devastating to be told that, through the mismanagement of others, one will not receive back a penny of one’s loan. How much worse is it to be told that money one has paid over, not as a loan but in exchange for goods, will be taken without redress?

[Jessica Morden (Newport East) (Lab)]

The hon. Lady is quite right to highlight the issue of unsecured creditors losing money when companies go under. As she said, the situation is reminiscent of what happened with Farepak, when thousands of people lost their Christmas savings. It is only now, seven years later, that we have come to a very unsatisfactory conclusion. Does she agree that we should redouble our efforts, because what might seem like quite small amounts of money to some people are very significant to those whom she mentions?

[Penny Mordaunt]

I am grateful to the hon. Lady for her intervention. She is absolutely right to say that this matter disproportionately affects those people on the lowest incomes. As she rightly said, the Farepak incident, which happened before I was elected to this House, has been going on for a number of years, so it is really time that the Government acted to stop such poor practice continuing.

[Penny Mordaunt]

I agree with my hon. Friend and I am grateful to him for his expertise. As I share a corridor with him in Parliament, I know that he is a champion of consumers in Dover and Deal and I am grateful to him for his support on this issue.

It is a terribly unjust position in which the holders of gift cards find themselves when the shop that issued the card goes into administration. Such people should not be treated as ordinary creditors. A grandmother who buys her grandchildren the once-ubiquitous WHSmith voucher for Christmas does not regard herself as having lent Smith’s any money. On the contrary, she has made a purchase. Indeed, her circumstances are just the opposite of a creditor’s, who might expect to receive some interest on his loan, as her gift card is worth less and less as time passes, due to the effects of inflation. It is as illogical to deny gift card holders the right to redeem their vouchers as it would be to demand that people who had bought their goods return them to the shop to help pay off the creditors. It is from that essential point that we must proceed today. A gift card is not a bond certificate; the money has not been loaned to the company. Quite simply, the collection of the product has been deferred, which is, in any case, to the advantage of the company. That principle has already been recognised at an EU level in respect of e-money, which is money put on to pre-paid cards or gift cards bought through third parties. Those moneys must be kept in segregated accounts pending the use of the cards, so that the consumer is protected.

In Britain, that scheme is regulated by the Financial Conduct Authority, a successor to the Financial Services Authority. Individual retailers may opt in to the scheme, but, for perhaps obvious reasons, the temptation seems to have been uniformly resisted. Although there is no mandatory and regulated scheme for cards issued by companies independently for use in their own shops, there appears to be no impediment to its introduction. Already many retailers that issue their own unregulated cards accept the regulated cards issued by third parties, such as the One4all card, including Argos, Boots, B&Q, Currys, Debenhams, Topshop and the aforementioned WHSmith. In all, the Gift Voucher Shop, which is responsible for the One4all card, has more than 1,500 corporate clients. Surely that is a double standard that should not be allowed to continue. Two customers who intend to spend their vouchers at the same shop could thus be in the absurd situation that one can have a full refund and the other receives nothing. The matter is left entirely to the discretion of the administrator.

It is true that under the Consumer Credit Act 2006, those who bought vouchers with credit cards are protected, but only if they bought between £100 and £30,000 of vouchers. The problem here is twofold: people who buy vouchers as savings, perhaps against the expense of Christmas, are very unlikely to use credit cards; and those who buy vouchers as gifts to put towards say the purchase of white goods on a wedding list are unlikely to do so to the sum of £100. Chargeback offers some protection to consumers using certain debit cards, such as Visa, American Express and MasterCard. In all circumstances, there is a 120-day window in which to make a claim for a refund, and the claim must be made by the purchaser, not the holder of the voucher. Once again, that is contingent on a given card supplier operating the scheme, and, in all circumstances, those who bought vouchers with cash, which is a likely scenario when smaller sums are involved and if the people buying them are paid in cash, are entirely exposed.

What is hard to understand is why the administrator is allowed to appropriate the money held against vouchers for the purposes of winding up the business. As I said earlier, that is akin to telling anyone who has previously bought something from that shop to return it without a refund, or the practices of the most artless playground bully.

Some administrators are prepared to accept vouchers, such as those for Nicole Farhi and Blockbuster. Holders of Republic vouchers were not so fortunate, which meant that the administrator simply took £1.2 million in advance payments. That is £1.2 million with just one retailer. The evidence of total sales suggests that there is still a demand for gift vouchers. Last year, more than £4 billion was spent on their purchase and, as they are not exchangeable for cash, one can only assume that retailers like them, too. How many of the people who contributed to that £4 billion knew that they, or the vouchers’ intended recipients, were so vulnerable?

Currently, holders of gift cards are well down the order of priority for creditors. They are on a par with Her Majesty’s Revenue and Customs, suppliers and unsecured creditors, but behind secured creditors, the costs of insolvency, and debts due to preferential creditors and employees. I do not argue too much with the order of creditors other than to say that employees should never be an afterthought. My point is simply that gift card holders do not belong on a list of creditors at all. It is not possible to exchange gift vouchers for cash, which is further proof that they are not a form of credit as there is never any prospect of getting back one’s money. It would be bizarre if this were permitted when a company went into administration. Rather, it should be possible to redeem one’s vouchers. That would resolve some of the concerns of the Association of Business Recovery Professionals about the knock-on effects of promoting holders of vouchers up the list of preferred creditors. R3, as it is known, is anxious that were card holders prioritised, businesses and suppliers, which are currently with card holders in the fifth tranche of those to be paid by administrators, would be even worse off.

I mentioned my experience with Portsmouth FC’s administration, and I understand only too well the hardship that is borne by small businesses that must extend credit in order to get the trade they need to survive when they are left hanging on administrators’ decisions. The same goes for employees, who are placed in the invidious position of waiting in limbo to know whether they will have a job in the future or be paid for the work they have already done.

There is also a concern that preferred creditors—those who issue secured loans—would be more wary of extending cheap or reasonable credit in the future if the list of preferred creditors were to be expanded to include gift card holders. At a time when small businesses and retailers are still concerned that lending is not getting through to the degree that is needed, that concern must not be dismissed.

R3 has put forward three possible solutions—a requirement to purchase bonds against the value of issued gift cards; the ring-fencing of the money used to buy cards until they are redeemed; and the extension of the 2006 Act to include purchases under £100. However, each of these solutions has problems. In the case of the first two, they would handicap solvent businesses by restricting cash flow and they could make administration more likely. Equally, extending the 2006 Act would come into effect only if administration procedures began, but cash buyers would still be out in the cold.

If one takes all of these factors into account—the need to protect the viability of going concerns and to treat gift card holders equitably, without undermining lending or supplier confidence, or disadvantaging employees —the solution seems clear. If vouchers are allowed to be redeemed, the administrator does not need to surrender the money that it has on deposit through the sale of gift cards. Instead stock, which would be very likely to be sold off at a generous discount to raise money quickly, would be exchanged for the vouchers.

[Jessica Morden]

The hon. Member has made some really important points. Does she agree that, at the very least, some kind of warning should be put on gift cards or vouchers? That would be a start—telling people what risk they face if things go wrong. It would also be a good way forward.

[Penny Mordaunt]

I agree absolutely with the hon. Lady. I have already said that there are products out there that would do the same thing as some of these gift vouchers and that could be exchanged for goods at an enormous number of retailers. Clearly, if people were aware of those particular e-money products and of how exposed they make themselves by not buying them, they would go and buy them. So she is absolutely right to point out that raising awareness is half the solution to this problem.

If the gift voucher holders were allowed to redeem those vouchers in exchange for goods, that would be done at pre-insolvency prices, which is after all the basis on which the cards were bought. Therefore, the impact on the administrator would be more modest than otherwise. Furthermore, the goodwill of the card holders would be sustained. The fact that they hold vouchers for a specific shop suggests that they would like to buy its goods, and they are the very people on whom the administrator would rely during a post-insolvency sale. Indeed, treating gift card holders better could make the administrator’s life much easier.

I do not pretend that this problem is easily solved, but it would be helpful if the Department for Business, Innovation and Skills recognised that there was a problem and that a solution was required. I have raised this matter in the House and I have written a number of times to the Minister who is here in Westminster Hall today. In one of the replies that I received, it was even acknowledged that gift cards are considered to be pre-payments for specific goods and services, rather than cash or an extension of credit—quite. However, the Department is content to continue to allow gift card holders to be treated as creditors.

I appreciate what the Minister has said to me in the past, namely, that in administration proceedings there is only so much money to go round and that administrators have to act in the best interests of creditors as a whole. However, it is apparently accepted that voucher holders are not creditors, so setting aside stock for them would not be to prefer one creditor over another. Indeed, the process might even lead to the sale of other stock for ready money. Her Majesty’s Treasury has shown a willingness to engage on this matter, and I hope that BIS will now be prepared to do so too.