Hong Kong watchdog calls for law to protect people who have paid upfront to firms that go bust
Consumer Council’s suggestion follows closure of gym chain that left thousands of members unable to recover their fees
Hong Kong’s consumer watchdog has called for stronger legal protection for people who have made upfront payments to insolvent merchants.
It urged the government to introduce legislation to hold both credit card issuers and troubled companies accountable.
The suggestion came after 64,000 members of the California Fitness gym chain were left in limbo last July by its sudden closure. Most were unable to recover prepaid membership fees, with up to HK$1 million involved in one case.
Consumers are now often asked to file refund claims to insolvent retailers, which offers a slim chance of recovering their money. But a “connected lender liability” clause would allow buyers to demand refunds from their banks regardless of the merchant’s situation, the council said.
“The council recommends the government to make reference to the UK’s Consumer Credit Act and introduce connected lender liability through legislation, so that the connected lender [card issuer] is jointly liable for retailer’s breach of contract,” council chairman Professor Wong Yuk-shan said.
Such legislation would shift the risk from consumers to credit card issuers, who would bear legal liability to ensure traders were able to deliver services and goods to consumers, he added.
A consumer who made a purchase through a credit card instalment payment plan (IPP) – which is not covered by the existing chargeback protection scheme – would also enjoy better legal protection.
In the case of California Fitness, more than half of the 1,199 complaints made to the Consumer Council involved instalment payments. Among 68 complaints who asked for a chargeback, only one succeeded in recovering the money.
According to the Hong Kong Monetary Authority, only consumers using credit cards to make lump-sum payments upfront are eligible for a refund for goods and services that they have not received because the merchant has gone out of business.
But Wong said IPP was more like a bank loan agreement than a typical credit card transaction and people have to pay their debts to banks no matter what happens to the traders.
There is no specific legislation or regulatory guidance in the city to protect such customers despite the increasing popularity of IPP among consumers.
“Some people think they have not paid their bills in full [by using IPP], but in reality they have already done so,” Wong said, adding such payment methods were subject to bigger risks.
Democratic Party lawmaker Andrew Wan Siu-kin welcomed the idea of a connected liability mechanism as he said banks should not be exempt from responsibility in making refunds on the basis of “business ethics”.
He said banks encouraged prepayment by jointly launching instalment plans with merchants, while receiving a percentage of the sum as service fees.
“It is unfair that banks are allowed to stay aloof from the affairs,” he said.
While the watchdog did not give a timetable for such legislation to be introduced in Hong Kong, its chief executive Gilly Wong Fung-han said it would be a “long-term advocate” of the idea to the government.
It took nine years for the legislature to approve the United Kingdom Consumer Credit Act, which was implemented in 1974.
The council also urged credit card issuers to improve transparency and streamline procedures when handling refund requests from customers, which was welcomed by the Monetary Authority.
Seven of 15 agencies polled in a survey admitted that chargeback applications were only accepted after customers had tried to settle the dispute with the merchants, which was often a lengthy and exhausting process.