Two years ago last month the Christmas savings club Farepak went bust. Its 150,00 customers – predominantly low-income and female – have still not received a penny of compensation for the £40 millions which they lost.
Farepak customers deposited money with the savings club from January to October each year. In November they would be issued with the equivalent value in the forms of vouchers, provided by Choice Gift Vouchers (CGV).
The retailers in whose shops the vouchers were used would return the vouchers to CGV. The latter, in turn, would send the vouchers on to Farepak and reclaim their value in cash from Farepak. Once received by CGV, the money would then be paid to the retailers.
Farepak, in other words, accumulated substantial amounts of money from its customers in the period January to October – and with no legal restrictions on what it could do with that money.
The company also enjoyed generous credit facilities from retailers, given that retailers who accepted the vouchers were not paid for the goods purchased until around February of the following year.
In February of 2006 Family Hampers, another Christmas club, went bankrupt, leaving unpaid debts of £7 millions to CGV. The latter then went bankrupt itself. As a result, retailers lost £55 millions in unpaid debts for vouchers which had been used the preceding Christmas.
Retailers responded by cutting the credit line to Farepak. They demanded up-front payments for the vouchers used by Farepak customers. This demand hit Farepak at a particularly vulnerable time.
Its parent company, European Home Retail (EHR), was heavily in debt to Halifax-Bank of Scotland (HBOS).
EHR had bought another company in 2000 for £35 millions. In 2003 it had sold the same company for just £4 millions. In order to subsidise the massive overdraft charges it was incurring as a result of this major loss, EHR had already used around £20 millions of the money deposited by savers with Farepak.
By July of 2006 EHR was in trouble. It announced that it needed to “substantially” increase its borrowing requirements. At the same time, Farepak continued to accept deposits from customers, and also encouraged its agents to sign up new customers for the company.
The following month EHR’s shares were suspended on the Stock Exchange. But even then Farepak continued to accept deposits from customers and assure them that there was no reason for alarm. And EHR likewise continued to use money deposited with Farepak to pay off its overdraft with HBOS.
But despite the fact that EHR was gradually paying off its overdraft with HBOS – albeit at the expense of Farepak’s customers – HBOS was not satisfied that EHR was a viable concern.
When EHR presented a new borrowing and business plan for Farepak to HBOS, the bank rejected it.
When EHR asked HBOS for an extension of its credit facilities, the bank refused to grant one.
And when EHR informed HBOS of a possible takeover of Farepak by Park Foods, another Christmas club, HBOS dismissed such a takeover as “unrealistic”.
In October Farepak, along with EHR, went bankrupt. By that time an estimated £28 millions of Farepak customers’ money had been used by EHR to pay off the bulk of its £31 millions debt to HBOS.
In the final weeks of the existence of Farepak and EHR HBOS had been clawing back around £1 million a week from EHR – with the bulk of that money coming from unwitting Farepak customers.
At the time Farepak and EHR went bust, the average deposit with Farepak was £400. Some savers had around £2,000 deposited with the savings club. Measured against the incomes of the average Farepak customer, this was a lot of money.
The non-Farepak rump of EHR was quickly sold off to Findel, the catalogue retailer, for £34 millions. Not a penny of that money was used to reimburse the Faepak customers who had lost their Christmas savings.
A year after Farepak had gone bankrupt, in October of 2007, the Joint Liquidators published their first report. It stated that it was still “early days” as far as the possibility of Farepak customers receiving compensation for their losses was concerned. And if or when they did receive compensation, it would be no more than 5p for every pound lost.
The same month a report by the UNISON trade union – a number of whose low-paid members had been Farepak customers – found that many of the saving club’s customers had been forced into a cycle of debt after Farepak’s collapse, by taking out loans at high interest rates in order to cover the expense of the 2006 Christmas.
Last month the Joint Liquidators published their second report. It confirmed that 121,800 Farepak customers had lodged claims for compensation for losses amounting to £37.6 millions. It likewise confirmed that it was still “not yet possible” to say when compensation would be paid to Farepak customers.
And it confirmed, again, that any compensation paid would be “in the region of 5p in the pound.”
In the two years since EHR and Farepak went bankrupt a lot of things have happened.
The government has poured billion after billion after billion into the banking system to avoid banks from collapsing. It has guaranteed that any savings of up to £30,000, and then any savings of up to £50,000, would be guaranted by the government in the event of a bank going bankrupt.
And HBOS itself, having run up massive losses from its involvement in sub-prime mortgage deals, has had to go cap-in-hand to the government to be bailed out, as well as accepting a shotgun marriage with Lloyds TSB.
But all of this only confirms the only adage that it’s one rule for the poor, and another for the rich.
Despite the fact that only £40 millions was deposited with Farepak – the equivalent of loose change when compared with the amounts pumped by the government into the banking system in recent months – the government refused point blank to compensate Farepak customers.
Most of them were not looking for £50,000, or even £30,00. Most of them were looking for just £400.
And HBOS, in contrast to its recent behaviour of going round with a begging bowl and putting the best face possible of its ‘merger’ with Lloyds, refused to extend EHR’s credit facilities, and likewise refused to allow a takeover of Farepak by Park Foods.
EHR pumped as much money as it could out of Farepak customers, and passed that money onto HBOS. When retailers suddenly demanded up-front payments from Farepak – which Farepak could have paid if it had not passed on its customers savings to HBOS – HBOS simply pulled the plug on the company, while the government stood back and did nothing.
