A poor way of banking

Observations on Farepak scandal which has left 150,000 families facing a miserable Christmas

"A firm must pay due regard to the interests of its customers and treat them fairly." This laudable statement is enshrined in the "Principles for Businesses" of the Financial Services Authority.

Given that, how has Farepak happened? How have an estimated 150,000 families who regularly saved with the Swindon-based company lost their shirts - and been left facing a miserable Christmas?

These cheated families put money aside every week to spread the cost of the festive season. It goes without saying that this is a strategy that would be taken only by those who need to be careful with their cash. But after Farepak went into administration last month, these savings - around £40m - disappeared.

The money was supposed to be available now - to buy food hampers and vouchers for non-food goods - ready for families to plan their Christmas celebrations. But Farepak is offering neither hampers nor compensation. And perhaps the most galling and unacceptable aspect of this sorry saga is that, by all appearances, no law has been broken.

It seems barely credible that in 21st-century Britain, thousands of individuals could have paid money to a long-established company, their money could vaporise, and all they are left with is a succession of corporate executives shrugging their shoulders.

That is because Farepak, while it took deposits from its customers, is not a "deposit-taking institution". In other words, it is not, strictly speaking, a bank. This entire episode, therefore, lies outside the FSA's remit. Its code of conduct simply does not apply.

If such legalese makes your eyes roll, think how it sounds to the mother and father on the council estate who saved diligently all year with Farepak.

They, like tens of thousands of others, now face the choice between using a door-to-door loan shark - some of whom, also legally, charge 1,000 per cent interest - or telling the children that Santa has been mugged this year.

Unsurprisingly, the media have been fascinated by this story. Watching Sir Clive Thompson, chairman of European Home Retail, Farepak's parent company, trade blows with his bankers, HBOS, makes good television pictures and newspaper copy.

Nor should we be too surprised that HBOS, while initially remaining aloof, has now put £2m towards the Farepak relief fund. HBOS maintains that it has done nothing wrong. It denies Thompson's claim that it "hung Farepak out to dry" by withdrawing a lending facility. But it also knows the importance of public relations and - without doubt - feels this £2m is money well spent.

I will not be surprised if, at the end of the various official inquiries into Farepak, there is no legal case to answer. For, even if it were found that the company was taking customers' money while aware that it was going bust, the likeliest outcome would be that no one would accept responsibility.

Yes - thousands of low-income savers who made laudably prudent efforts to plan their finances have been treated disgracefully. That is utterly wrong. But we should not be too surprised. After all, there are millions of British people who cannot open a bank account.

The lowest 30 per cent of households by income operate almost entirely in the cash economy - with no access to the financial services most of us take for granted.

Organisations such as Farepak - unregulated, propped up by debt finance, not banks at all - are the only realistic option for many who want to put money away.

What we should be surprised about is that America's financial services industry manages to do a much better job for low-income folk than Britain's.

In the United States, "lifeline" banking services are making huge inroads into the scourge of financial exclusion. American banks also face a universal service obligation - forcing them to provide access to financial services for the low-paid.

British banks may well be legally in the clear over Farepak. But they have a responsibility to do their bit to tackle a very broad social problem. And, if they will not do so voluntarily, then the government should, quite simply, force them to.

Liam Halligan is economics editor of the Sunday Telegraph