Reform of Section 75 credit card protection mooted as more caught out by loophole

The Law Commission has included an overhaul of the rules around Section 75 credit card protection in a shortlist of proposed legal reforms, to address a little-known exemption which has left some shoppers £1,000s out of pocket if something goes wrong, MoneySavingExpert.com can reveal.

The rules around the protection you get if you buy from a retailer using a third-party payment processor are being looked at after the Financial Ombudsman Service (FOS), the independent body which arbitrates Section 75 disputes, said it "frequently" sees cases where consumers lose out on protection without realising.

A proposal to change the rules could be included in a programme of law reform which the Law Commission is due to present to Parliament in the autumn.

The news follows MoneySavingExpert.com's investigation last month revealing the potential scale of the problem - an investigation which has prompted more than a dozen of MoneySavers to come forward and tell us how they have been caught out by the payment processing loophole.

If there's a third-party payment processor, Section 75 may NOT apply

Section 75 of the Consumer Credit Act 1974 is a vital UK law that means when you buy something costing between £100 and £30,000, and you pay for any of it on a credit card, your card firm's liable for the whole amount just as much as the retailer if things go wrong. If the worst happens, you can go to the card firm to get your money back. See our Section 75 guide for full info.

This strong legal protection leads many people to pay for major purchases on a credit card so they're covered if the worst happens. Yet some shoppers are finding credit card firms are rejecting Section 75 claims because the retailer they bought from used a third-party payment-processing firm to collect their payment.

For Section 75 consumer law to apply there must be a direct link between the customer buying an item, the credit card company whose card is being used and the retailer. If this relationship is broken by using a third party payment processor, Section 75 protection WON’T apply - though there's widespread confusion about exactly how these rules apply in practice.

Last month FOS told us that buying from a retailer using a third-party processing firm will void your usual Section 75 protection in some, but not all, cases, and it wasn't able to say which type of payment is or isn't protected, leaving shoppers in the dark.

Proposal to reform Section 75 law

It's now emerged that the financial ombudsman is so concerned about this issue that in October last year it suggested the Law Commission consider reform of the rules around Section 75 and third-party payment processors. The topic was one of several raised in a response to the Law Commission's consultation on its wide-ranging proposals for legal reform, which it submits to the Government once every three years.

A spokesperson for FOS told MSE: "We highlighted to the Law Commission that we frequently see cases where there has been a break in the debtor-creditor-supplier relationship and often the consumers making the payment will not realise the protections do not apply. We suggested this as one area the Commission may wish to consider in its future work."

The Law Commission confirmed the ombudsman's suggestion had made it through the first round of approval, though there will be at least one further whittling down of the list before the commission puts forward a final list of proposals.

A Law Commission spokesperson said: "75 [out of 221] project proposals made it through the first sift. Competition for places is fierce and we will only take forward projects where we have confirmation from the relevant department that it has a serious intention to take forward reform in the area."

The Treasury did not answer email requests to comment on whether it's planning to reform the Section 75 rules. The Law Commission said that it now expects to present its proposed legal reforms to the Government after Parliament's summer recess, in the autumn. There's no guarantee all the reforms on its list will be enacted though - the last time it submitted a list in 2014, just nine proposals were taken forward.

'I was over £3,500 out of pocket' - MoneySavers' Section 75 stories

Since we first highlighted the issue last month we've been sent details of at least 15 cases where MoneySavers have been caught out by the Section 75 payment processing loophole. Here are a few examples.

• Matthew Cooper was left over £3,500 out of pocket - he applied for refund from M&S Mastercard after buying a new shower from A E Bathrooms (which is no longer trading). His card issuer declined his claim because the payment went through PayPal. Matthew said: “It cost me around £2970 on top of the original £689.00. If the product worked I would have been happy but instead I had to pay the extra £2,970 to get back in the same situation I would have been in if the product had worked.”
• Sue, who didn’t want to give her full name, spent £3,040 on internet advertising from Banners Broker on two occasions using different credit cards (Banners Broker is no longer trading). Her claim for a refund of £640 was accepted by Sainsbury’s Bank, but a claim for £2,400 was rejected by M&S Bank on the grounds the payment was processed by ‘EW’, the digital e-wallet of Banners Broker. Sue appealed to FOS which upheld M&S Bank’s decision.
• Martyn Bate paid £1,413 on his Barclaycard for a holiday booked via Cottages4you. His Section 75 claim was rejected as the payment was processed by third party Wyndham Vacation Rentals UK. (Cottages4you declined to comment - the site still uses Wyndham Vacation Rentals for payments).
• Andre Holder was left £358 out of pocket after paying upfront for help with a PPI claim from claims firm Scarlet Reclaim, which is no longer trading. Andre's Section 75 claim was rejected by MBNA because the payment had been processed by 'payment gateway' AWscarlet.

We've also heard some stories from MoneySavers who've initially had their Section 75 claims turned down by their card company, yet have ended up getting their money back:

• Andy Cook successfully appealed after reading our investigation last month. His Section 75 claim for a £100 robotic vacuum cleaner bought online was originally rejected by Santander, because the payment was processed by Paypal. After reading our article he complained to FOS who took the matter direct to Santander. Santander refunded the payment days later.
• Frank, who didn’t want to give his full name, successfully appealed to FOS after his initial Section 75 claim for a £330 lithium battery was twice rejected by Halifax Bank. Within 48 hours the ombudsman helped him get a full refund plus £201 to cover his costs and inconvenience.
• Graham Grafel bought £120 of rechargeable batteries from an Amazon Marketplace seller. After finding they didn't work, he submitted a Section 75 claim to Natwest who turned him down because the payment he'd made was processed by Amazon. However Graham was then able to get a refund direct from Amazon, which offers a separate guarantee for Marketplace purchases.

A spokesperson for FOS was unable to give clear guidance about which third party processors could nullify shoppers' Section 75 protection, but encouraged anyone who believed they'd had a claim wrongly turned down to appeal.

"It’s not possible to say which third party processors might prevent Section 75 from applying because we’ll need to check on a case by case basis what role the processor was performing in each transaction," she said.

What the card firms say

We contacted more than a dozen credit card firms who were named by MoneySavers as having rejected Section 75 claims - none gave us an individual response, but we instead received the following blanket response from the UK Cards Association, which represents card providers.

It said: "Card issuers have to follow the instructions as set out in the legislation. Within the act there are different criteria for a payment to meet to be eligible for Section 75 protection. There cannot be a break in the debtor-creditor-supplier relationship.

"To find out when a breakdown occurs which makes a claim invalid, you need to find out how the third party process works and this can vary. It’s not by simply using a third party payment processor that a breakdown occurs. Crucially it’s whether a break in the chain occurs and this varies in individual circumstances."

What the third-party payment processors say

Here's what some of the big payment processing firms told us:

• Rob Skinner, Director of Public Relations from Paypal, said: "Although Section 75 protection doesn’t apply when you use PayPal to pay a separate entity there are ways you can use PayPal and retain Section 75 protection. If you sign up for PayPal Credit the relationship between debtor, creditor and supplier is not broken because PayPal becomes the creditor." Paypal has its own buyer protection programme which can be found here.
• If you buy from an online seller on Amazon Marketplace you’ll be using a third party payment processor. Amazon declined to give any further details on how these payments work. Amazon Marketplace customers do have separate protection under its A-Z guarantee.
• A Worldpay spokesperson said: “In light of the FCA and FOS being unable to provide clear guidance, Worldpay believes that Section 75 should apply when the transaction is acquired directly by Worldpay. Whether the protection is afforded to a particular transaction or not would depend on the facts of the actual transaction."

What to do if you're affected

Unfortunately because this is such a grey area, many shoppers have been left in the dark as to whether they've actually got Section 75 protection. However, here's what you can try:

• Ask the retailer BEFORE you buy whether a third-party payment processor is involved. There's a good chance they may not know, and even if they say yes, this doesn't automatically mean your protection is invalidated.
• If you buy, something goes wrong and your Section 75 claim's turned down, appeal to FOS. It will look at the facts of your individual case and come to a judgement on whether Section 75 applies. Check out its How to Complain guide for online and downloadable complaints forms.
• If all else fails, try claiming via chargeback instead. Chargeback doesn't require the debtor-creditor-supplier link - however it ISN'T legally binding like Section 75 and has its own set of rules, such as a time limit. See our Chargeback guide for info and downloadable template letters.