When Christmas company Farepak went into administration last week (for reasons that remain unclear) its customers were completely shocked: 170,000 of them had been saving for their Christmas presents and meals through the firm and had put in an average of £200 each some a great deal more. Administrators have made it pretty clear they aren't getting their money back. I was shocked, too, but for rather a different reason. I had no idea companies like this still existed. I thought Christmas saving schemes had gone out with Green Shield stamps and coin-operated ovens.
Why there is no value in savings schemes
I was wrong. Instead, there are apparently hundreds of them still around. Farepak called itself a hamper company rather than a savings company but the principle was the same. People paid their money in 45 weekly instalments from the beginning of the year and then used the accumulated cash to buy goods from the Farepak catalogue in time for Christmas. No interest was paid on the money, you had to choose your goods at the start of the payment period and there was, as far as I can see, no value in it whatsoever.
Not only did the firm keep your money all year without offering you any return on it, but the goods were generally worth significantly less than what you had paid for them. One investigation of a £90 Farepak Christmas hamper a few years ago showed that you could have bought all its constituent parts in the supermarket for less than £50.
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Even worse, when I looked up reviews of the catalogue on the internet I found one posting that explained how if you paid 22p a week for 45 weeks you would get a £5 voucher at the end (22p times 45 adds up to £9.90).
Given that the whole thing appears to have added up to little more than legalised theft, why on earth would anyone hand their money over to Farepak rather than just put it into a savings account then use it to buy whatever they wanted at Christmas? The answer is a dismal one: most Farepak customers don't appear to have had anywhere near the level of financial understanding required to know that it was offering a rubbish deal.
How Farepak exploits the financially ignorant
I asked one woman who had lost £1,500 why she had done it. Because, she said, her mother had always done it and she hadn't had any trouble. Other victims have said they used Farepak because it was convenient the money collectors came right to your door and so did the goods.
Farepak is not alone in its attempts to exploit Britain's financially ignorant. Even worse is Homebuy, provider of what it called "our coin meter technology system", which went into administration last month.
It worked like this: you chose something, usually a TV, from the Homebuy catalogue, and agreed to pay for it over three years. It delivered the TV with an old-fashioned coin box attached into which you paid your money. If you didn't keep filling it up, the TV went off. The collector came round once a month and emptied the box so you could fill it up again.
You might think this sounds a reasonably sensible way for those the industry insists on calling "the credit challenged" to pay for goods, and but for a few flaws it might be.
Those flaws? The outrageous interest rates for one thing, starting at 29.9 per cent but going up a great deal higher. When combined with the cost of "maintenance vouchers", they brought the cost of a £470 TV up to a minimum of £1,050. I found one complaint on the internet from a woman who had ended up paying £900 for a £150 washing machine.
I mention these two companies first to make a point that I have made many times before: that lack of education is what keeps people poor. If Farepak's and Homebuy's customers had just put their money into a good savings account paying 5 per cent they'd all be a lot better off.
The government needs to get serious about providing personal finance lessons in schools. And to point out that sometimes just sometimes investors do get what they deserve.
Next time something like this comes to market hopefully both potential investors and customers will look a little more carefully and then all put their money elsewhere.
First published in the Sunday Times 22/10/06
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