Memorandum submitted by the Office of
1. This memorandum is submitted in advance
of OFT's appearance on 6 June 2007 before the Treasury Select
Committee's enquiry: Financial inclusion follow-upsaving
for all and shorter term savings products.
2. The memorandum describes the role of
the OFT, the advice it provided to the DTI in December 2006 following
the collapse of Farepak, and the work it is now engaged in following
the recommendations made by Brian Pomeroy in his "Review
of Christmas savings schemes".
3. The OFT's mission is to make markets
work well for consumers. Our goal is for competitive, efficient,
innovative markets where standards of consumer care are high,
consumers have choice and are empowered and confident about making
choices, and where businesses comply with consumer and competition
laws but are not disproportionately burdened by Government regulations,
or restricted and harmed by market abuse. We achieve this goal
by using tools within the consumer and competition law regimes
which enable us to look at all aspects of markets to ensure that
they are working well for consumers.
4. Our role following the collapse of Farepak
has been to advise DTI on the policy options available for protecting
vulnerable consumers who are most at risk of losing their money
when a company fails in the way that Farepak did. We have no role
in regulating savings schemes but have a direct role in helping
to ensure consumers are well informed and able to make informed
and rational selections of products and services. Empowered and
well informed consumers will then act as a positive stimulus to
competition. OFT undertakes powerful awareness and education programmes
and coordinates an alliance of consumer education partners. This
is the key part of our work going forward on the follow up to
5. In November 2006, following the collapse
of Farepak, the Minister of State for Trade, Investment and Foreign
Affairs asked that OFT work with the DTI and the FSA to look at
the regulatory framework and consider options to address the issues
raised. OFT provided advice including a contribution from the
FSA on 14 December 2006. No single recommendation was made given
the short timescale within which the advice was provided but it
was suggested that the best options for consumers appeared to
relate to reform of company law by moving consumers up the list
of creditors and improving consumers' rights to take representative
actions. We did not favour regulation of the hamper industry or
of prepayments generally.
Company law reform
6. Consumers are not as well placed as others
to judge the risks involved when making prepayments to a business
and often receive relatively little from the distribution of assets
by the administrators in the event of company failure. Moving
consumers up the list of creditors would transfer the risk from
consumers to other existing creditors such as institutional lenders
who are more likely to be able to make judgements on the viability
of a business. We acknowledged that changing the order could affect
the terms under which they provide finance. However, this would
represent a market based substitute for regulation.
7. Enhanced duties on directors in respect
of using consumers' prepayments could potentially lead to directors
being found personally liable if they have misused consumers'
money and lead ultimately to more money being made available to
the administrators for distribution. We also suggested strengthening
the position of consumers in terms of their right and ability
to take representative actions where potentially money is available,
possibly through directors' personal liability.
Regulation of all prepayments made by consumers
8. We did not consider this to be a viable
option. Many businesses depend on prepayments to provide working
capital and some might not be able to start up if the compliance
costs were too great. It is extremely likely that the costs of
any regulation would ultimately be passed onto consumers in the
form of higher prices. We therefore considered the costs would
Specific regulation of the hamper industry
9. We were not satisfied that there was
a clear case for regulating the hamper scheme business model specifically,
whether by bringing these products within the FSA's regime, or
otherwise. This is partly because of difficulties in targeting
regulation at the specific products (hampers, vouchers, and other
goods) but also because such a response to the Farepak collapse
would ignore the risks to consumers of business failure in other
sectors where significant prepayments are taken.
10. The business model used by the hamper
scheme industry carries significant risks for consumers. However,
based on what we found in our brief analysis, we felt it would
be extremely difficult to put protection in place. The need for
working capital was a significant problem and insurance or bonding
would be costly given the risks now associated with the market.
Prescriptive regulation would be unattractive to the agents and
costly to consumers. Defining exactly what was to be covered in
order to prevent either evasion or unintended consequences could
be problematic. We also considered whether businesses (other than
regulated savings schemes providers) should be prohibited from
holding consumers' money for longer than a certain period. However,
any legislation would need to ensure that the everyday use of
prepayments in other sectors of the economy remain untouched.
11. If any of these options were to be explored
further, we recommend a detailed cost benefit analysis be carried
out. Any regulatory option would impose costs on business and
therefore on consumers.
12. On 23 March 2007 HMT and DTI asked us
to run a £1 million consumer education campaign and we agreed.
We intend to get the most effective outcomes for consumers for
this spend by combining targeted consumer education initiatives
with national PR and advertising. This approach will be more effective
in terms of sustained consumer benefits.
13. Our strategy has two main strands:
a. to inform and educate people who lost
money from the collapse of Farepak to help them understand what
options are available to them to save for this Christmas; and
b. to carry out a consumer education programme
that will help consumers to choose the most appropriate short
term saving vehicle for their needs.
14. We have examined the target audience
by talking to the individuals and organisations that have a good
knowledge of the drivers that inform consumer behaviour in this
area. This will ensure our campaign will have credibility with
our audience and will be absorbed.
15. As the Pomeroy Report described, people
who use hamper schemes are making sensible decisions from their
perspective. The apparent benefits can outweigh the disadvantages
such as loss of interest on the money saved. Our aim is to encourage
those wishing to save for Christmas to look at the features of
hamper schemes and alternative options and to empower them to
make decisions that are better for their particular circumstances.
16. Our campaign and consumer education
programme is called "Save Christmas" and will begin
with a national launch on 1 June. The launch will disseminate
information showing the options for short term savings for Christmas
this year. We will use printed materials, PR, a press event and
the networks described below to push the information out to our
17. We are working closely with others to
disseminate messages and later to develop and deliver consumer
education materials with them. These include the DWP "Now
let's talk money" campaign, Citizens' Advice, the Trading
Standards Service, Advice UK, ABCUL and LACORS amongst others,
as well as specifically local groups.
18. The programme will also involve in-depth
consumer education work delivered locally by organisations that
have face-to-face contact with our audience supported by local
and national PR and advertising. This will roll out sequentially
to regions and nations across the UK focusing where there were
major concentrations of Fairpak victims. We are building links
with community groups, media and the voluntary sector in each
area andcombined with our national partners' linkswe
will work with them to deliver in each separate region/nation.
This will begin with Scotland in the summer, and be followed by
other regions between July and December. This phased roll out
of tailored education materials
will be preceded by a campaign launch in each area.
19. These materials will continue to do
their job within communities after our campaign has finished and
will be fully evaluated.
20. The campaign will end in late November/early
December with a national PR and advertising push. This will reiterate
and reinforce the messages at a time when consumers are deciding
how they will save for Christmas 2008.
21. We examined the competition position
briefly in the advice we provided to the Minister in December
2006. We did not have time to collect detailed information but
noted certain features of the market. Consumers value the convenience
and informality of the home collection system through agents who
are usually family members or friends. Social and cultural factors
are very important to them together with the idea that the money
has been put out of reach. We noted that supermarkets offered
Christmas savings schemes and might possibly be able to attract
customers through the use of agents. We also recognised that supermarkets
would not necessarily offer the convenience of hamper schemes
particularly in rural areas. At the time of providing the advice
the information we received suggested that consumers were unlikely
to turn to bank savings schemes if hamper schemes were unavailable
and would be attracted to local schemes run through pubs and clubs.
22. In considering competition issues further
we are considering primarily the effects of the merger between
Park Group and Home Farm Hampers. We have received some preliminary
information from Park Group and have issued an Invitation to Comment
notice, distributed by Reuters Regulatory News Service and the
OFT's web site, inviting interested third parties to comment on
the merger. We will, in addition, be carrying out targeted third
party enquiries. The consideration of the merger will, inevitably,
require an investigation into the "hamper market", how
it operates, what (if any) alternatives are available to consumers
and the effect of the merger upon competition. The investigation
of this merger should help inform how we would then take forward
any further consideration that might be required.
23. The OFT's administrative target is to
process a merger to a decision within 40 working days. This suggests
an outcome towards the second half of June although the administrative
clock can be "stopped" if the parties delay in providing
17 These materials could include short films to show
at community meetings, self-help leaflets, speaking notes, PowerPoint
presentations, web links and so on. They will be customized for
each specific region/nation. Back