Information Paper for
the Bills Committee on the Banking (Amendment) Bill 1996
Prepayment for Goods or Services

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Introduction
Background
Present Position
Consideration
The Way Forward

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Introduction

This paper briefs Members on the present position regarding protection of consumers who opted to pre-pay for goods or services to be provided later.

Background

2. At present, some businesses, mainly in the retail sector, offer the option for consumers to pre-pay for goods or services. Normally, consumers receive coupons/cards/stored value tickets for the goods or services purchased in return for their advance payments. The goods or services will be provided to consumers at a later time upon production of such coupons/cards/stored value tickets. Prepayments for goods or services is chosen by some consumers because a discount may be involved and/or because of convenience.

3. Some examples of businesses which offer the option of prepayment are listed below :

1. common stored value tickets issued by the Mass Transit Railway Corporation and accepted by Kowloon-Canton Railway Corporation and some bus companies;
2. monthly tickets issued by public transport companies and car parking operators;
3. coupons issued by cake shops, video/laser disc rental shops, laundry shops and gift vouchers issued by department stores etc;
4. membership cards issued by/subscriptions made to beauty salons, private clubs, health clubs, hotels or restaurants, moon-cake clubs, gold savings clubs and magazine publishers etc; and
5. package tours organised by travel agents.

Present Position

4. Except for the regulation and control of licensed travel agents, there is no specific legislation for the regulation of business practices involving prepayment for goods or services by consumers. However, there are various pieces of consumer protection legislation in place to protect consumer interests in the course of general trade transactions. They include :

1. Sale of Goods Ordinance. This Ordinance governs the contractual relationship between sellers and buyers as regards sale of goods and their respective rights and obligations. The Ordinance specifically requires that the goods supplied under a contract of sale should be of merchantable quality;
2. Control of Exemption Clauses Ordinance. This Ordinance seeks to limit the extent to which civil liability for breach of contract, or for negligence or other breach of duty, can be avoided by means of contract terms;
3. Supply of Services (Implied Terms) Ordinance. This Ordinance codifies the common law principles governing supply of services to enhance clarity and overall consistency;
4. Unconscionable Contracts Ordinance. This Ordinance empowers the court to rewrite or strike down unconscionable terms found in consumer contracts; and
5. Trade Descriptions Ordinance. This Ordinace prohibits anyone from applying false trade descriptions during trade transactions or in advertisements, false trade marks and mis-statements in respect of goods provided in the course of trade.

5. In addition, consumers may take civil action against businesses which have failed to honour terms of contracts, including prepayment for goods or services, under the common law to claim compensation for damages. A Consumer Legal Action Fund has been established since November 1994 and is managed by the Consumer Council to assist consumers to take legal action against unscrupulous traders under consumer legislation.

6. The Secretary for Financial Services advises that at present, there is no specific statutory protection under the Bankruptcy Ordinance, insolvency provisions of the Companies Ordinance or the Protection of Investors Ordinance applicable to consumers who make advance payments for goods or services to a business which goes into liquidation or bankruptcy before supplying such goods or services. He does not see any justification to do so.

Consideration

7. Apart from the issue of multi-purpose stored value cards, which the Secretary for Financial Services proposes to regulate under the Banking Ordinance, we do not see the need at the moment to adopt across-the-board measures to regulate businesses which offer the option of prepayment for goods or services, having regard to the following considerations -

1. the option of prepayment for goods or services is commonly practised in Hong Kong and such practice has generally been working well;
2. from the consumer complaint statistics collated by the Consumer Council at the Annex, there is no sign of a widespread problem;
3. any attempt to apply across-the-board regulatory measures on prepayment for goods and services might stifle innovative business practices, which is essential to the development of a vibrant economy and would reduce the flexibility in the financial management of these businesses. It would also reduce the option available to consumers. In this regard, we consider it important to strike a proper balance between the need for more regulatory measures to protect consumers on the one hand and the need to avoid imposing undue burden on the business sector and reducing consumer choice on the other; and
4. regulation involves costs which need to be weighed against the benefits. Given that the problem arising from prepayment for goods and services is not widespread, that the amounts of money involved are usually relatively limited, and that any across-the-board regulatory measures imposed are likely to incur significant administration costs which would be wholly or partially passed onto the consumers, the cost-effectiveness of such regulatory measures should be carefully examined. For example, the protection scheme that has been put in place to protect outbound package tour travellers requires contributions from the businesses and consumers.

The Way Forward

8. We consider that the best way to address the issue for the time being is through consumer education. Consumers should be reminded of the potential risk they take in opting to make advance payments for goods or services. Eventually it is a matter of consumer choice and consumers should not be exempted from the normal business risk in such transactions. The Consumer Council has agreed to step up its consumer education programme to increase the awareness of consumers on the potential risk they take in making advance payments for goods or services.

9. We will also monitor closely with the Consumer Council complaints against failure to obtain the rightful goods or services after prepayments, in order to ascertain whether there is a widespread problem. Where appropriate, the Consumer Council will approach the relevant trade associations to see if any measures could be taken to enhance protection to consumers. We will consider what administrative or legislative measures may be required should there be indication of a growing problem in particular business sectors.

Trade and Industry Branch
>October 1996

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Annex

Source : Consumer Council

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