First things first. If I ask a cobbler to repair my shoes, and he goes bankrupt while my shoes are in the shop, the bailiffs have no right to take my shoes away. They are still my shoes, and I can l get them back. If I give money to a lawyer to pay for a house, it does not become the lawyer’s money; it will sit in a separate account. If I give money to a bank to safeguard, the bank does not become the owner of my money. I am their customer for the service I am receiving, and may be liable for charges or a charge against the interest, but it is still my money.
The Farepak scandal happened when a saving club went bankrupt. About £40m in savings were lost. Farepak’s bank, HBOS (Halifax Bank of Scotland), was able to recover about £35m of debts owed to it by Farepak. The “customers” have lost everything.
Something is seriously wrong here. The people who saved money with Farepak might be regarded either as depositors, or as customers. If they are depositors, the money recovered by HBOS still belongs to them. Irrespective of how Farepak ordered its accounts, the bank has actually recovered its losses from their money, and the bank is liable to restore it. If, by contrast, they are customers, and their “saving” was in fact payment by instalment for a service to be rendered, the situation is legally different – they become creditors, like others including the bank. The bank has acted legitimately, even if it might be thought to have taken advantage of the situation to recover assets before others could act.
This situation is still questionable, however. One has to ask whether the position of the unfortunate customer is morally equivalent to that of a lender or an investor, both of whom offer capital on the basis that there will be a return on their risk. Lenders and investors knowingly take a chance, and gauge the rate of return in that light. The customer, by contrast, is not engaged in risk-taking. That seems to me to imply, in the settlement of debts, an order of priority. The restoration of bailed goods and money should have priority over the repayment of loans. The “customers” should receive the £35m recovered by the bank. If the law does not say so, the law should be changed.
Additional note, July 2013. In 2013, the decision was taken to pay Farepak’s customers 50p in the pound. This followed a legal case where Mr Justice Smith commented: “This is not a court of morality but I would suggest that HBOS really ought to seriously consider whether or not they ought to make a further substantial payment to the compensation fund.”