57. In our first Report on financial inclusion, we
concluded that "savings, and the problems of making saving
worthwhile and beneficial for those on lower incomes, are integral
to any effective strategy on financial inclusion".
In that Report, we also indicated our intention to return in this
Report to the issue of savings clubs.
58. On 13 October 2006, Farepak, the Christmas hamper
company, was placed into administration. It is estimated that
over 100,000 people lost savings with a value of over £43
million when the company collapsed.
In a debate in Westminster Hall on 7 November 2006, the Minister
for Trade, Mr Ian McCartney MP, said
The impact on so many family Christmases, in so many
parts of Britain, can only be imagined. I fully share the concern
that so many hon. Members have expressed about the effect on hard-working
people, many of them among the least well-off, who aimed to put
by something for Christmas, so that when that happy time of year
came round again, they could be sure of participating without
getting into debt.
59. He noted that the situation was under investigation
by the Administrator, BDO Stoy Hayward, and officers from the
DTI's Companies Investigation Branch.
He announced the establishment of the "Farepak response fund"
which will be operated by the "Family Fund", a registered
charity. This fund, which will grant vouchers to affected families,
will be independent and will accept donations from any organisation
willing to help.
A number of major companies have announced donations to this fund.
60. Whether a company accepting deposits is regulated
by the FSA will depend on whether the company meets the definition
set out in the Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001. Article 5 of this Order states that deposit
means "a sum of money
paid on terms
[the money] will be repaid, with or without interest or premium,
and either on demand or at a time or in circumstances agreed by
or on behalf of the person making the payment and the person receiving
it". This indicates that if the money is paid over on terms
that it won't be repaid, and that the purchaser will get goods
in return, then the money is not classified as a deposit under
the regulation and the company involved does not have to be regulated
by the FSA.
61. We raised the issue of the regulation of Farepak
and other savings clubs during our oral evidence on the FSA's
annual report for 2005-06. Sir Callum McCarthy expressed "huge
sympathy for the people who have lost money in this way"
but noted that "the FSA has no responsibility whatsoever
at the moment, as the law is drafted, for this sort of scheme.
It would require a change of law to give us responsibilities."
Sir Callum pledged to discuss the issue of possible changes to
the regulatory regime with the Trade Minister, Ian McCartney MP.
In reply to a letter from our Chairman, Sir Callum told us that
Had great sympathy for the people affected by this
failure. However, we can only discharge the responsibilities given
to us by Parliament. Farepak was not authorised by the FSA and,
as we understand the position, the way in which it conducted its
business did not require it to be. It follows that those affected
cannot benefit from the Financial Services Compensation Scheme.
Ian McCartney, the Minister of State for Trade, Investment and
Foreign Affairs, has written to MPs who took part in the Westminster
Hall debate on 7 November explaining the position. The Minister
also announced that he met the Chief Executive of the Office of
Fair Trading (OFT) on 8 November and asked that the OFT work with
the FSA and DTI officials to look at the regulatory framework
in which Farepak operated, and to consider options to address
any issues raised. A report will be made to him at the earliest
opportunity. We will contribute fully to this work.
62. As part of the Government's agenda to promote
savings it is vital that people are given confidence that their
money will be protected. We note that the Farepak scheme was not
regulated by the FSA and is outside the scope of the Financial
Services Compensation Scheme. We recommend that as a matter of
urgency the Government, in conjunction with the OFT and FSA, consider
whether appropriate safeguards are in place to protect those who
have entrusted their money to others. This should include examination
of whether an expansion of the FSA's regulatory responsibilities
is necessary, or whether the appropriate degree of regulation
could be accomplished through other mechanisms. The Farepak case
has highlighted a serious lack of consumer protection which could
have much wider implications for savings products of this kind.
Given the level of public concern, we want the Government to address
this issue with urgency and we want to see evidence of substantial
progress by the end of January 2007.