Gift Cards

Jo Swinson Excerpts

Tuesday 9th July 2013 Westminster Hall

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson)]

As always, it is a pleasure to serve under your chairmanship, Mr Bone.

I thank my hon. Friend, the hon. Member for Portsmouth North (Penny Mordaunt), for securing this debate, because she raises an important issue. She has been a long-standing advocate for moving the holders of gift cards and vouchers up the order in which creditors are paid when there is an administration or an insolvency procedure. She has been that advocate for very sound reasons. We all understand the distress that is caused when a business—whether it is a major high street chain or a smaller local company—goes into administration. People are very disappointed if they are holding gift cards, which often have been actual gifts to them, but those cards end up being worthless. Clearly, that situation causes upset and I understand the need and the desire to address it.

Indeed, the Government are keen to try to ensure that those types of problems do not continue. A huge amount of work has been done with the hon. Member for Newport East (Jessica Morden) and others on the particular issue of Farepak, to try to get the best deal for those people who faced those appalling circumstances just before Christmas a few years ago. We have seen some positive moves by parts of industry that perhaps show the way for us to find some solutions to this issue; I will discuss them later. The specific solution of moving gift-card holders up the hierarchy is not necessarily the best solution; there may be other solutions and I hope to explore some of them in my remarks.

Let me address the particular issue of whether we should change the order in which creditors are paid. Both my right hon. Friend the Business Secretary and I have listened very carefully to a range of views on whether consumers with pre-payment cards and vouchers should be made preferential creditors. However, the problems of doing so—some of which my hon. Friend touched on in her speech—prove that this is not a solution that is especially desirable for vulnerable groups, such as employees or small and medium-sized enterprises that had supplied goods to the business in question. Much as I sympathise with all of the people in that situation, there are individuals for whom there is a real responsibility to try to get as much money back as possible. Just looking at one group in particular is perhaps not helpful; we need to look at all the individuals who are affected by an insolvency.

Unfortunately, as my hon. Friend said, after an insolvency, an administration or a company not doing as well as it would have wanted to, a limited amount of money is available. Ultimately, that business has not been successful, and that money must be spread out among the creditors. The question is how that pot of money should be divided up.

Among those seeking to be reimbursed from that limited pot of money are employees who may have worked but not been paid their full wages; business suppliers, many of which may be the SMEs that we all want to support in order to help the economy, particularly in our own constituencies, and we are well aware of the challenges that small businesses face; financial institutions; and Her Majesty’s Revenue and Customs. The difficulty is that, with that limited pot of money, if we were to change the preferential creditor status to improve the position of holders of gift cards, that would necessarily make the position of those other creditors worse. Therefore, it is a win-lose situation, not a win-win situation.

I am particularly concerned about two of those groups—employees and SMEs. Just like gift-card holders, business suppliers fall within the category of unsecured creditors. Therefore, they often receive only a fraction of what they are owed in these cases. That can have a particularly disproportionate impact on their finances, and we need to ensure that that is uppermost in our minds when we consider this issue. Making gift-card holders preferential creditors could, especially if large numbers of gift cards were issued, reduce the already scarce funds available to those supplier businesses, which are arguably in as much need—if not more so—of those funds to continue operating and continue employing people. We do not want to end up with a system where more businesses are suffering financial distress. So, the suggestion that we do something that could have a negative impact on the financial viability of small businesses must be treated with a great deal of caution.

With employees, there is a slightly different situation, because they are already in the pool of preferential creditors. However, if we add more people to that pool, of course the money that is available must go further. Employees could be in an even worse situation, in already difficult circumstances. Of course, we feel for gift-card holders when a high street chain goes bust, but we also feel for the employees, many of whom have huge uncertainty and do not know whether they are going to keep their job, whether the company will be bought out or whether some branches will remain open. If they do not even get paid for the work that they have already done—although some schemes enable them to reclaim some amount towards the payment they would have received—they end up out of pocket. That is a particular concern when considering such a change.

My hon. Friend also mentioned secured creditors, such as banks, which do not necessarily always elicit the most sympathy in this House or in the wider public. However, if lenders cannot rely with confidence on the security given by borrowers, they might become less inclined to lend in the first place or might factor that risk into increased costs of borrowing. As my hon. Friend said, there are already challenges in respect of bank lending to small businesses. Putting further hurdles in the way and burdens in place could limit access to working capital for a business that might already be under financial pressure and, ironically, could perhaps hasten the failure of such a business and even its insolvency. These issues and impacts mean that that solution is not necessarily the right way to address the matter. My hon. Friend will not necessarily be happy with that answer, but I hope that she understands why the Government take that view.

[Penny Mordaunt]

I think that I am on the same page as my hon. Friend the Minister. My argument is that we should not be treating these people as creditors at all. A number of solutions have been discussed this morning. For example, the hon. Member for Newport East mentioned awareness; we have e-money products; and I have suggested that such consumers should not be treated as creditors and that they could receive preferential treatment in exchanging the vouchers for goods, which is what they originally wanted to do. I am keen that the Minister does something. There is considerable evidence that companies are continuing to sell vouchers even though they know that they are going to go into administration and cannot honour them.

--- Later in debate ---

[Jo Swinson]

My hon. Friend raises a good point. I will come to the potential solutions that we think could alleviate some of the pressure for consumers. It is quite right to say that that is where we need focus.

Some issues that my hon. Friend raised are worth pursuing, particularly those relating to the 2006 Act. I am happy to take up some of the suggestions raised by R3 and get back to her. That would help in some cases, but where payments are made in cash, which is often the case for the small amounts on gift vouchers, that protection would not necessarily be extended. Various solutions may assist.

We have been trying to work with the industry, challenging it to do more to deal with these issues and support these consumers. On whether goods will be able to be bought in exchange for gift cards, of course, it is not always the case that they cannot be. As my hon. Friend mentioned, in many cases administrators allow vouchers to be redeemed, although there is often an initial period of uncertainty, as in the example of Nicole Farhi last week, as she said. This is done for sound business reasons, where the administrator wants to preserve the goodwill of a business if their objective is to sell it on as a going concern for the benefit of all creditors. That can have real business benefits.

One challenge for businesses that know they are going into administration is that they are trying to ensure that they are as viable as possible and are maximising their business assets, which can be one reason why gift cards and gift vouchers continue to be sold. But if some other solutions could be put in place by industry, that may not need to be a problem.

There are four ways in which industry could be encouraged to think about how it can further protect consumers. First, as has been mentioned, the Electronic Money Regulations 2011 provide protection for prepayments when made in card form. My hon. Friend mentioned the One4all card and there is also a system operated by O2, where a card loaded up with money is then usable at a wide range of outlets, through the card issuer systems. It is not restricted to a single retailer or a group of retailers. Such cards are treated differently; effectively, much more like currency—like cash. If more gift cards were delivered through those open loop systems, that would be one way that the industry could help to protect consumers.

Secondly, there is the good example of the Co-op, where payments made by consumers can be held in a separate trust-protected account. The Co-op Christmas savings has now moved to this model, which is an excellent initiative. It deserves huge credit for doing this and recognising that this gives their consumers extra benefit, and it is another reason for consumers who want to save for Christmas in that way, with an organisation or a shop such as the Co-op, to do so. It is also important that the Co-op managed to do this quickly, without incurring significant additional expense and within the existing constraints of its operating systems. I encourage others to follow such a model.

Thirdly—we need to challenge the industry on this—gift card and voucher issuers should consider adopting an industry code of practice, with specific commitments on the protection of customers’ prepayments. The Trading Standards Institute has a consumer codes approval scheme, with core principles on the protection of prepayments and deposits. The widespread adoption of those principles by the industry would be a clear message to administrators about the industry view on how consumers should expect their prepayments to be treated.

Fourthly, it is also worth exploring whether industry could introduce insurance-backed protection of prepayments. This already works well within the package travel sector. Such options may be part of the solution more widely within the retail sector and may be able to protect consumers.

The hon. Member for Newport East mentioned having a warning system on gift vouchers. This has merit, because one challenge is the lack of information. People assume sometimes that buying a gift voucher is like having cash, rather than, as the hon. Lady highlighted, making them a creditor to a business. Making it clearer to consumers up front that there is a risk, although generally that risk will be small, might mean that consumers would think twice about buying a gift card from a certain company, or set of companies, and might not leave it sitting in a drawer, gathering dust for months, instead deciding to spend their gift because there is no guarantee—it is not like having cash sitting in their purse—and there is a level of risk with this product. Given that there is currently a level of risk with this product, it is appropriate that consumers should be aware of that. Informed, empowered consumers are an important part of having a stronger economy, because we need them to have confidence to go out there and buy products and gifts. Any measures that can enhance that would help.

We hope that the consumer bill of rights will be introduced later this year. Hon. Members will be aware that the draft was published a few weeks ago. It is, rightly, going through pre-legislative scrutiny in this House. A range of protections is built into the Consumer Rights Bill and the associated consumer rights directive, which has come from Europe and will be introduced in the UK through secondary legislation. Those protections relate to how prominent, transparent and up-front the information that consumers need before making decisions needs to be. Hon. Members have mentioned warning labels, or similar information—a key point—which should perhaps be included for consumers.

I hope that legislation is not the answer and that the industry is able to get its act together and recognise the concerns expressed by hon. Members from all parties about this issue. I am sure that, if the industry does not act, hon. Members will wish to mention that during the progress of the Consumer Rights Bill. I hope that, by the time we get to debates on that Bill we will have some positive news to report on what industry has been able to do.

I thank my hon. Friend sincerely for raising these issues and for her campaigning and tireless work. I hope that our pursuit of a range of options, which we hope that industry will also take up, shows that there can be a positive way forward. I also hope that my hon. Friend and other hon. Members interested in this issue will continue to work with me and the Government to encourage the gift card and voucher industry to move swiftly to develop practical and reliable ways to restore consumer confidence and protect consumers’ money.