Farepak follies

OK, so how did you imagine that a "christmas savings club" worked? To the extent I ever thought about it, I guess I assumed that the club collected money from savers, then used the pooled funds (a) to get a decent rate of interest from a bank and (b) to negotiate good prices on the stuff that went into the hampers. The interest earned would provide the income to cover the costs of the operation, and maybe a bit besides. I think that's probably how most of them do work -- very close in nature to a co-op, and not a business with much get-rich-quick potential.

Farepak doesn't seem to have been run like that, at least not in recent years, when it has been part of a sort of conglomerate of marginal consumer businesses (door-to-door catalogue sales and such). It appears that the parent company treated the funds provided by the Farepak savers as part of their own funds, and earlier this year used them to buy another company. It's no exaggeration to say that the savers would have been better off investing in a private equity fund, because in effect, that's how the management treated their money. In any event, although the story is still not entirely clear, once the savers' money was gone, there was no way to fund the purchase of the hampers.

Farepak senior management reacted to the collapse of the company by (a) heading off on holiday to Argentina (as you do) and (b) blaming the banks (as you also do). There are claims that Farepak asked its main bank (HBOS) to "ring-fence" the savers' deposits to protect them from the problems elsewhere in the conglomerate, but it appears that by the time this request came, there was nothing left to ring-fence. It seems unfair to blame the bank for the fiasco, though I suspect that the HBOS account manager who allowed the savers' money and the company's own funds to be mixed in the first place has not done his/her career any good.

There have been entirely predictable calls for the government to "do something" -- bail out the depositors in the short term, regulate savings clubs in the long term. Both of these pose problems -- and may in fact be at cross-purposes. A bailout creates a precedent that reduces the incentive for people to take better care of their money in future. As for long term regulation: who are you going to regulate? There seems to be no feasible way of preventing people from concocting schemes of this kind, altering the structure gradually to stay ahead of the regulators. And a bailout in the present case only increases the incentive for nefarious operators to get into this business, secure in the knowledge that the Government won't let the savers suffer.

It's to be hoped that these savings schemes will just fade away, because they are an awful way to put money aside. The sad stories of the Farepak savers should ensure that fewer people get involved in the next year or two, while the lessons remain fresh. For the longer term, it's up to legitimate (and regulated) financial institutions to make sure that there is no demand for these clubs. It's well known that banks don't much care to deal with poor people, but there is surely money to be made by any bank or building society that can come up with a Christmas savings offering of its own. Or, if the Government really wants to get involved, how about NS&I? In Canada the government-run Canada Savings Bond programme used to be known as "the biggest damned Christmas club in the world". If the banks aren't interested, who better than NS&I to accommodate the small savers who have been skewered by Farepak?