Requirement for Prepayments Collected by Businesses in Sale of Goods and Services to be Deposited into Escrow Account

Mr Gan Thiam Poh asked the Minister for Trade and Industry whether the Ministry will introduce a law to require all pre-payments collected by businesses in the sales of goods and services to be deposited into an escrow account that is free from encumbrances and creditors' claims and which account is strictly for use by the affected consumers for goods and services that have yet to be rendered or consumed.

Today, it is not unusual for businesses to collect monies from consumers before they provide their goods and services to consumers. Consumers bear the risk of not being able to recover their monies in the event that a business suddenly ceases operations. This has resulted in public concerns on how companies should handle the monies they receive from consumers and the Member’s suggestion to require all businesses to deposit advance monies collected from consumers in an escrow account.

Let me first set out a few broad scenarios under which businesses may collect monies from consumers before they provide their goods and services to consumers. These are not exhaustive.

First, a business which is acting as an agent for its clients may need to hold monies in trust for its clients. We have rules that specify how such agents should handle monies that are held in trust. An example of this is for conveyancing transactions. Under the law, lawyers are not permitted to receive and hold conveyancing monies unless such monies are deposited in special conveyancing accounts opened with appointed banks, the Singapore Academy of Law or in an escrow account.

Second, businesses may, as part of their loyalty programmes and promotions, come up with their own stored value facilities and offer consumers a better deal when they purchase using these facilities. For example, a business may give consumers a discount off their purchases if they choose to pay using their stored value cards. There are also businesses which offer stored value facilities for payment of goods and services offered by various merchants. These are commonly known as multi-purpose stored value facilities.

Third, businesses may also decide to offer consumers a variety of payment options for their services, such as prepaid packages and coupons. Businesses usually offer a lower unit price for these options. For example, an operator may charge consumers $100 for each session of their service but may offer consumers a better price of $90 per session if they choose to prepay for 10 sessions.

Fourth, businesses may also require consumers to make full or partial payment before they deliver the goods and services to consumers in full. Businesses may do this to ensure that the consumers are committed to the purchase before they put in time and resources to engage their own suppliers.

Fifth, businesses may also collect security deposits from consumers. The purpose of collecting such deposits is usually to cover the cost to businesses in the event of consumers' damage of rented goods or consumer default in payment for post-paid services.

As illustrated, there are many different scenarios under which businesses may collect monies from consumers before they provide their goods and services. Different scenarios carry different risks and require different controls to manage those risks. A mandatory requirement for businesses to ringfence all prepayments in an escrow account would stifle growth and innovation of legitimate businesses and affect the operations of small and medium enterprises in particular. Broad-based regulatory measures would inevitably raise the cost of doing business which would be passed on to consumers. In some cases, this may even undermine the commercial viability of an industry.

Instead of imposing broad-based regulatory measures, the Government has taken the approach of assessing the need and scope for specific regulatory measures for each sector. For instance, the Committee for Private Education (CPE) has imposed requirements on private education institutions to protect students’ course fees through fee collection caps and insurance schemes. The Singapore Tourism Board (STB) requires travel agents to offer consumers the option to purchase travel insurance that includes protection of their prepayments in the event of the travel agent’s insolvency. The Monetary Authority of Singapore has oversight of stored value facilities under the Payment Systems (Oversight) Act. The Act requires large multi-purpose stored value facilities holders that hold stored value exceeding S$30 million to seek approval from the Monetary Authority of Singapore to operate and appoint a bank to guarantee the outstanding stored value.

Besides regulatory measures, the industry also plays a role in uplifting standards. The Consumers Association of Singapore (CASE) has worked with industry associations to develop CaseTrust accreditation schemes for specific industries. A number of these schemes, including those for spa and wellness, renovation, motor vehicles and school bus services have prepayment protection requirements. We encourage consumers to patronise CaseTrust-accredited businesses.

Consumers can also manage potential risks by making informed decisions. In this regard, CASE has issued several consumer tips on prepayment protection to help consumers. There are some questions that consumers can ask a business before committing to a prepayment. For example, "Can I choose to pay for the cost of goods or services in parts over a period of time rather than pay for the full cost upfront?"; "What is your refund policy?"; and "Does your business provide any protection on consumer prepayments?" By asking such questions and also comparing what different businesses offer, consumers will be empowered to make informed decisions.

In conclusion, we need to strike a balance between safeguarding consumers and enabling business innovation and growth. The risks and controls would be different for different scenarios and while the Government has put in place regulatory measures to safeguard consumers' interests, the industry and consumers also have a role to play. The Government will continue to monitor developments and consider additional sector-specific prepayment protection requirements as necessary, taking into consideration the cost impact on businesses and consumers.