Who Will Be The Next Farepak Victims?

The high-profile collapse of Wrapit and Farepak made one Fool wonder just how often our money is at risk.

Last month, brides stormed the offices of HSBC in Canary Wharf, just across the street from my office. Wedding list company Wrapit had gone bust, taking more than 40,000 undelivered wedding presents with it. Wrapit blamed HSBC. The brides blamed Wrapit. And they were angry. Think of a street full of furious, chanting meringues, and you'll start to get the picture.

I headed down to Canada Square to escape work and watch the show. While I admired the PR genius of demonstrating in full wedding togs - the brides themselves were outnumbered by the journalists and photographers on the scene - I began to have troubling thoughts.

Wrapit isn't the first wedding list company to collapse, leaving couples in the lurch. Gift Registry went bust in 2004, leaving more than 350 couples present-less. In both cases, there was no official compensation. Unhappy couples were told to appeal to their guests' credit card companies.

Even sadder was the collapse of Christmas savings scheme Farepak in 2006. Around 150,000 low-income savers were deprived of the hampers and gifts they had saved for all year, with no rights to compensation and nothing under the tree.

Less widely reported, but just as devastating for those involved, was the collapse of wire transfer company First Solution Money Transfer late in 2007. £1.7 million of its customers' cash was wired into non-existence - because, like Farepak, money transfer companies aren't covered by the Financial Services Compensation Scheme (FSCS).

So I began to wonder. Essentially, we are risk whenever there is a delay between paying our money and goods being delivered, or cash being transferred elsewhere. Just how many different companies do we hand our money to on trust - and how many of them are covered at all, if the worst happened?

Travel trouble-free

In my case, holidays are the largest payments I make upfront, and it can be a little nerve-racking handing over huge sums of money months in advance. The good news is that travel companies are among the safest around.

The tale of tourism company Travelscope is a happy contrast to Farepak. It suddenly ceased trading late last year. But its 40,000 customers didn't face a Christmas nightmare - instead, they all got a full refund on their holidays.

Why are travel companies safer? The key is to make sure that your tour operator is registered with ABTA (the Association of British Travel Agents). This industry regulator will protect you if the operator goes bust.

For example, if I were to jet off to the Seychelles with an ABTA-registered operator who went under while I was abroad, they would fly me back at no extra cost, probably at the end of the holiday. And if I had paid for my holiday but not yet travelled when the operator went bust, they would hand me my cash back in full. Now there's a relaxing thought.

Insuring the insurers

Car insurers may have annoying adverts, but they also have the safest insurance. That's because compulsory insurance, such as covering your car for third-party protection, is 100% covered by the FSCS.

Other types of insurance (such as home insurance or pension protection) are fully covered up to the first £2,000, and then up to 90% of the remaining amount. In any case, it's pretty unusual for an insurer to go bust - which makes those dancing telephones and hyperactive Australians a bit more tolerable.

Fantastic plastic

Travel and insurance are big business, which is why they have well-defined compensation schemes. Sadly, we have much less protection elsewhere, such as when it comes to buying presents for our friends.

Despite the collapse of Wrapit, wedding list companies are not covered by any compensation scheme, and the government has not committed itself to introducing any.

The same is true of a range of other well-meaning companies, such as sites where you sponsor your friends for charity - or simply ordinary shops that go bust before delivering goods we've paid for in advance.

The best advice when no other protection is available is to pay by credit card. Under the Consumer Credit Act 1974, your credit card company is equally responsible if a company becomes insolvent, as long as you've lost between £100 and £30,000. (If you lose less than £100, there's usually little you can do, so generosity could be its own reward.)

So paying by credit card can be a good move whenever you're making a big transaction, including holidays. That's as long as you find a good deal and pay the balance in full each month.

Christmas cheer

Finally, since Farepak, wise Fools know that putting our cash into a hamper scheme is about as appealing as Christmas dinner in an Aberdeen Angus steak house. But is there a better, safer way to save for the festive season?

In fact, now that the government has introduced a new watchdog for Christmas savings clubs - the Christmas Pre-Payments Authority - these companies are much safer places to save. The downside though is that these schemes often offer poor value and pay no interest.

Instead, Fools might think that a simple high-interest account would the best place to save for Christmas. Indeed, that's true. But many people prefer to `lock up' their savings so they can't touch them until nearer the big day.

And very few places offer specialist, interest-paying Christmas accounts with early withdrawal penalties. (If you're lucky enough to live near Scarborough or Skipton building societies, then you're the exception.)

Instead, the Post Office's over-the-counter Christmas Club was introduced specifically in response to Farepak. It has lock-up penalties and your money is guaranteed - though it doesn't pay interest.

Supermarkets including Asda and Tesco offer convenient Christmas reward card schemes, with special savings come November. While these aren't guaranteed, if huge supermarkets like these start to go bust, we'll have bigger problems than Christmas presents.

So in short - make sure you book with a reputable travel agent, pay by credit card where you can, and stick with the high street for Christmas savings.

And if the worst happens and you do lose out, make sure that you protest naked, or at the very least in a giant lion costume. Wedding dresses? So last year.

More: Xmas Savings Clubs A Year On From Farepak