Information Paper for
LegCo Panel on Trade and Industry

Prepayment for Goods and Services

Introduction

1 This paper sets out the present position regarding prepayment for goods and services.

Background

2 Some businesses, mainly in the retail sector, offer an option for consumers to prepay for goods and services. In return for the advanced payment, consumers will normally obtain coupons/cards/stored value tickets which they can redeem at a later time to receive the goods and services. Advanced payment arrangements often offer price discounts to consumers and cashflow benefits to the coupon-issuers.

3 Some common forms of prepayment for goods and services include -

  1. common stored value tickets/cards which the Mass Transit Railway Corporation, the Kowloon-Canton Railway Corporation and some bus companies accept;

  2. monthly tickets for use on some modes of public transport and in some public car parks;

  3. coupons and gift vouchers from cake shops, video/laser disc rental shops, laundry shops and department stores, etc.;

  4. membership subscription and other service deals in respect of beauty salons, private clubs, health clubs, hotels or restaurants, moon-cake clubs, gold savings clubs and magazine publishers, etc.; and

  5. cinema tickets, concert tickets, package tours, air tickets, etc.

Present Position

4 At present, there is no across-the-board legislation to regulate business practices involving prepayment for goods and services. However, we have adopted various pieces of consumer protection legislation 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;

  2. Control of Exemption Clauses Ordinance. This Ordinance limits 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 provides for the terms to be implied in contracts for supply of services and disallows exclusion of liability for implied terms in consumer contracts;

  4. Unconscionable Contracts Ordinance. This Ordinance empowers the court to refuse to enforce or revise unconscionable terms found in consumer contracts; and

  5. Trade Descriptions Ordinance. This Ordinance prohibits the application of false trade descriptions or false trade marks to goods, or misstatements in respect of goods provided in the course of trade.

5 Certain types of prepayment are subject to additional controls. For the travel industry where prepayment is almost a must, the amount involved is generally substantial, and the consequences of being stranded overseas could be severe, the Travel Agents Ordinance provides for a levy scheme for a compensation fund to protect travellers of outbound package tours against default. The issue of multi-purpose stored value cards is regulated through the Banking Ordinance. These cards represent a new payment system and the default of an issuer could disrupt financial stability if the cards are very widely used.

6 Consumers may take civil action under the common law against businesses which have failed to honour terms of contracts and claim compensation for damages. Should a business go into liquidation or bankruptcy before supplying prepaid goods and services, consumers may claim as ordinary creditors.

Consumer Council

7 The functions of the Consumer Council are to protect and promote the interests of consumers. In the context of prepayment, therefore, it performs the following roles -

  1. consumer education - advising consumers the need to balance the benefit and possible risk when purchasing prepaid goods and services;

  2. complaints handling - advising consumers of their rights and obligations in the case of default and offering assistance as appropriate; and

  3. information collation - collecting and collating relevant information and making suggestions to the Government as appropriate.

The Council also manages the Consumer Legal Action Fund, to which consumers may have recourse should they require financial assistance to take legal action against unscrupulous traders.

Consideration

8 The Administration has kept the need to introduce more regulatory controls on prepayment under regular review. Some relevant considerations include -

  1. whether consumers have a choice to use another mode of payment in securing the goods or services in question. If so, why they should be afforded extra protection in choosing to use prepayment would need to be fully justified;

  2. the average amount involved per transaction vis-a-vis the cost of the regulatory regime to the business operator and the consumer. Regulation is likely to generate administration costs which the private sector will inevitably pass onto consumers. The higher the relative cost of regulation, the more caution with which to pursue the proposal is required; and

  3. the costs and benefits of allowing prepayment as an option of transaction, not only to the business operator but also to the consumer. The increased administrative cost and procedure will likely act as a disincentive to business operators for offering prepayment as an option, thus reducing consumer choice.

9 The Administration considers that a better way to protect consumers' interest in making advanced payment for goods and services is to increase their awareness of the need to balance the benefits against potential risks that such advanced payment involves. At present, the need for and pacticability of across-the-board legislation to regulate prepayment have not been established. We will nonetheless continue to keep the situation under review to take into account possible changed circumstances.


Trade and Industry Bureau
July 1998
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