image

Bonds

Coupon fad a risky ticket for regulator

PUBLISHED : Monday, 11 May, 1998, 12:00am
UPDATED : Monday, 11 May, 1998, 12:00am

As one lawyer has noted, there is a link between buying a flat still under construction and purchasing a cake coupon. In both cases, consumers pre-pay for goods, usually at a discount, to be delivered at a later date.


For the providers, the pre-payments amount to a cheap source of working capital. For consumers, the lure of a small discount is sufficient to entice many to part with their money before they get the goods.


There is a danger of the goods providers failing to deliver. The events at Maria's, which has issued coupons worth millions, is a case in point.


In the light of Maria's collapse, lawyer Fred Kan Ka-chong proposed that a law similar to the one governing pre-payment for unfinished apartments be applied to coupon-selling companies. The Consent Scheme, as it is known, guards against developers going broke or buyers' money being misappropriated.


Under the scheme, money paid by flat buyers in a pre-sale is held in trust by a solicitor and is released to the developer in stages in accordance with the progress of construction.


Mr Kan's suggestion brought to mind the scandals involving residential developments on the mainland which failed to be completed by developers who had collected tens of millions of dollars from buyers in Hong Kong.


Since then, the mainland authorities have learned from Hong Kong's Consent Scheme to regulate the pre-sale of uncompleted flats.


So far, the Government has said no to Mr Kan's proposal to introduce a similar scheme to protect coupon buyers. It has a point.


Buying a flat costs millions, whereas a Maria's cake coupon is worth about $44. Why introduce an elaborate scheme to protect people who purchase a cake coupon because of the lure of a small discount worth a few dollars? As one popular Chinese saying goes: 'A lesson which crooks like to pass on to their children is, 'Don't fall for a small favour'.' This is not to say that coupon issuers are crooks, although the possibility of abuse exists.


But consumers need to be aware that pre-paying for a service always carries a risk and they have a responsibility themselves to assess whether it is worthwhile to undertake that risk.


As all businessmen know, their partners, debtors and creditors can get into difficulties, sometimes for reasons beyond their control. Failing to get paid is a risk they have to constantly watch out for.


No one is suggesting that the Government should introduce a scheme to insure against business failures, although some insurance companies are willing to do so for a fee.


To take Maria's as an example again, coupon holders suffer much less than the bakery's other creditors, such as its staff, suppliers and the landlords of its rented shops.


Consumer protection is important, but any protection scheme must have a sense of proportion.


Even for coupons which are worth several thousand dollars each - mostly likely to be issued by gymnasiums or beauty parlours - the cost of administering a consumer protection scheme similar to the Consent Scheme for unfinished flats is out of proportion to consumers' potential losses.


According to a Consumer Council survey, 72 per cent of respondents had bought coupons for goods ranging from cured meat, to cakes, to videos. People had hoarded an estimated total $310 million worth of cake coupons and $170 million worth of video coupons - an average of eight coupons per household.


The council has since broadened its investigation into the use of coupons to cover Octopus cards, magazine and gym subscriptions, moon cakes and cured meat. The council's targets of investigation, which cover a wide spectrum, show that pre-payment is a widespread practice and takes many forms.


However, although the total worth of coupons is huge, each pre-payment scheme can hardly afford to operate a consumer protection scheme on its own without defeating the purpose of luring customers by offering a small discount. Also, the absolute value of each coupon is small.


It has been proposed that coupon issuing companies should join hands to form an indemnity fund to compensate consumers in case of default by member companies. This is a good idea, although the moral hazard is also obvious.


In essence, such a scheme asks customers of participating companies to chip in to protect those who may suffer as a result of the failure of individual companies. The greatest danger of such a scheme is that the sense of security it gives to consumers may be taken advantage of by one or more participating companies for unscrupulous ends. The losers will be the honest participants in the scheme, especially if the collapse of one participating company may spark off a run on the rest. Coupon issuing companies may still want to introduce such a scheme for a variety of reasons. After all, the consumers pay for the scheme, not them. But the Government should have no part in it.


Consumers need to be reminded that they have a basic duty to protect themselves to the best of their ability.


A consumer protection scheme should be introduced only when its benefits outweigh costs and a consumer, on his or her own, is incapable of underwriting the risk concerned.


The most that the Government should to is to limit the value of a coupon to, say, a few hundred dollars, and to require a warning to be printed on it to remind consumers they are actually advancing money to the issuing company at their own peril.