Case warns more firms may go bust in tough economy, leaving customers who make prepayments stranded

SINGAPORE — Consumers who made hefty advance payments to firms that then went bust reported losses of S$81,000 in the first quarter, prompting a consumer watchdog to warn that such "prepayment losses" could surge in the tough economic times ahead.

The watchdog's warning comes two weeks after TODAY reported that enrichment chain Genius League suddenly shut down, leaving customers claiming thousands of dollars of losses of money paid upfront for lessons that were never given.

In response to TODAY's queries, Case president Melvin Yong noted that also warned that “our current laws do not sufficiently protect the interests of consumers who might have paid thousands of dollars in prepayments to the business”.

He reiterated the watchdog's earlier call for the Government to mandate prepayment protection in industries where purchases tend to be big-ticket items and where there is a trend of large prepayment losses.

One such form of prepayment protection cited by Case is an escrow service.

This is where a trusted and neutral third party holds a customer’s funds until both parties are satisfied with the contractual terms and conditions have been fulfilled.

In the example of Genius League, the parents' upfront payments would still have been held in the escrow account since all the lessons had not been provided yet. The parents could then have sought to recover their money when the chain closed.

In its response to TODAY, Case said that prepayment losses reported by consumers totalled S$645,000 in 2022 and S$520,000 in 2021.

Even though the S$81,000 of losses in the first quarter of this year indicates that the trend could be on the decline, Mr Yong noted that data from the Ministry of Law shows there has been a rise in the number of companies winding up recently — 54 did so in the first quarter of this year, up from 40 in the last quarter of 2022.

The watchdog pointed out that it has operated a service known as CaseTrust to help protect consumers in areas such as renovations and the spa and wellness industry since 2011.

Over that period, some S$380 million of consumer prepayments have been protected in relation to accredited businesses.

BUSINESS OWNERS COOL ON USING ESCROW SERVICES

Still, the idea of introducing escrow services met with a lukewarm response when TODAY spoke to eight small businesses, including beauty salons, gyms, automobile companies, and tuition and enrichment centres.

Five of the businesses said that they did not know what escrow services are, while the others said that they chose not to use such services because they are too expensive and onerous.

Mr Russell Chin, 46, founder and director of renovation firm Inspire ID Group, said that most firms in the industry do not use escrow services.

Mr Chin, who is also secretary of the Renovation Contractors and Material Suppliers Association, said that it is expensive to hire lawyers to set up such a service. The costs of offering the service would add to the costs charged to customers as well.

His understanding is that legal fees for escrow services for real estate are between S$2,000 and S$5,000.

“With high labour costs, workmanship, rising interests rates, rental and legal costs, implementing escrow services would result in these costs (being) borne by owners.

"Newly established businesses will not be keen to go on board with this,” he said.

It is his belief that lump-sum escrow will not work in the renovation industry.

“It would be a long way to fully enforce escrow services with tonnes of red tape, making escrow a tedious process because of the need to engage lawyers," he added.

"There is no standardised template to determine milestone payments and ambiguous conditions between contractors and customers.”

Mr Benjamin Loo, chief operating officer of car firm CarTimes Group, said that “currently, escrow services are cumbersome and expensive for our customers”.

He added that he was “unaware of the full process of setting it up”.

Moreover, there are simpler methods of collecting deposits from customers upon the confirmation of their orders, which would be fully refunded if the customer’s transaction does not proceed.

Mr Loo described this as “the standard market practice in Singapore”.

TODAY also spoke to Dr Lu and Mr Lee, co-owners of Everyday Tuition. They declined to give their full names.

“I have faith regarding Everyday Tuition’s strong business financials, having sufficient back-up funds should the company go into liquidation,” Dr Lu said.

When customers sign up for year-long tuition programmes, Dr Lu said that Everyday Tuition encourages customers to use “credit card services that already offer protection to customers who can also opt for interest-free instalments”.

In response to TODAY's queries, Ms Stefanie Yuen-Thio, joint managing partner at TSMP Law Corporation, also raised some possible problems with escrow services.

She pointed to the hassle of frequent small payments, "lots of documents to check" and possible disputes over when a sum is payable, adding that "building in an escrow arrangement would increase costs to the parents”.

Ms Yuen-Thio suggested that firms should “avoid taking so much money upfront”.

“A company can offer one-year course packages, but stage the payments in quarter-yearly intervals.” 

Mr Kenneth Szeto, banking and finance partner at law firm Withers KhattarWong, said that escrow services can be used across foreign jurisdictions, for example, and "where the transaction stakes and risks are high".

They do this "by providing the party anticipating receipt of payment with certainty that it receive ready funds once relevant conditions are fulfilled with the monies paid”, he added.

However, some challenges would include needing to conduct “anti-money-laundering checks and client due diligence, particularly if any payments come from third parties and parties need to consider who bears the escrow agent’s cost”.