Section 75: credit card loophole means shoppers might not be protected

Section 75 of the Consumer Credit Act is meant to provide vital cover if something goes wrong with a purchase, but a loophole could leave you out of pocket. Now, the Financial Ombudsman Service has called for reform.

The Financial Ombudsman Service (FOS), which settles disputes between customers and UK financial institutions, is taking action to get a little-known loophole in the Consumer Credit Act closed down.

Under Section 75 of the act, you're entitled to valuable consumer protection if there's a problem with your credit card purchase – for example if it doesn’t arrive or is faulty.

In a nutshell, as long as the item you buy using your credit card costs between £100 and £30,000, you're supposed to be covered by Section 75.

Many people shop with credit cards specifically for this protection – it’s something we frequently recommend to readers.

However, some are finding that credit card providers are rejecting their refund claim because a third party firm like PayPal has processed the payment.

For a claim to be successful, there needs to be a direct link between the shopper, retailer and credit card company. If the relationship is deemed to be broken by the involvement of a third party firm, Section 75 protection is invalidated.

The FOS, which deals with Section 75 complaints, has called for the flaw to be looked at in the annual Law Commission’s review later this year.

A spokesperson told loveMONEY: “An important part of our role is to share our insight from the cases we see. Back in October the Law Commission announced its 13^th programme of law reform. We suggested Section 75 is  one area the Law Commission may wish to consider in its future work as we frequently see cases where there has been a break in the debtor-creditor-supplier relationship and the consumer making the payment will not realise the protections do not apply”.

But until the rules are changed you could still be caught out. Here’s what you need to know about Section 75 protection and when it might go wrong.

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When does Section 75 apply?

Section 75 protection kicks in when the contract you have with the supplier has been breached, or the goods or services you have bought have been misrepresented in some way.

You can claim it on purchases you make in the UK and abroad.

There are many circumstances where you may be entitled to a refund. Here are a few typical examples:

• The goods you buy turn out to be faulty or damaged;
• The supplier you buy the item from goes bust and your order never arrives;
• The quality of the item is unsatisfactory.

In all these cases – and many others – you'll have the right to redress under Section 75.

You may also be able to claim for any further financial loss suffered as a result of the problems you have experienced with your purchase.

So for example, if you booked a new, more expensive flight to get you home because the original airline you booked with went bust, you could claim the full cost of the more expensive flight.

Why are you allowed to make a claim through your credit card? Under Section 75, the supplier of your goods and your credit card issuer share liability jointly and severally.

So, you can pursue either or both parties.

Neither claim carries more weight than the other, so it's a good idea to pursue your credit card company first if the supplier has gone out of business.

It may also be better to claim against the card issuer for overseas transactions.

When does Section 75 go wrong?

There are a number of payment firms, such as PayPal or SagePay, which allow shops to take online orders or provide card terminals to shop keepers.

The problem is, claims under section 75 can be rejected if there is no direct relationship between the debtor (the shopper) and the supplier.

Here's an example: Let's say you use your credit card to pay money into your PayPal account. You then buy an item and pay for it using PayPal.

If the item later turns out to be faulty, you won't be covered by Section 75 because there are too many links in the chain between you and the supplier.

Unfortunately, when your claim for a refund is rejected for this reason, the FOS is likely to side with your credit card company.

This loophole is particularly annoying as it’s often not clear when you’re buying through a third party payment firm.

LoeMONEY reader Davidmm said he fell foul of the loophole earlier this year.

“I made a purchase over the phone using my Santander MasterCard,” he explained.

“The retailer used SagePay to process the payment. I didn't know this until I received the invoice from SagePay.

“My Section 75 claim was rejected by Santander on the grounds that there wasn't a direct connection between them and the retailer.”

Until the regulator closes this loophole or makes it easier for shoppers to identify when a third party firm is used, the onus falls on you to make sure you're protected.

It's a hassle, but if you're making a big purchase you might want to ask the retailer how they process payments before paying.  

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Other potential issues

It is becoming more common for claims to be rejected by credit card companies because consumers haven't pursued the supplier for a refund first.

But this isn't a satisfactory reason since both the supplier and the credit card issuer share liability.

If your claim is rejected on these grounds, take your complaint to the FOS. There's a good chance the decision will be reversed.

As if all this wasn't complicated enough, there's some serious confusion over Visa's chargeback scheme and Section 75 because both provide broadly similar protection.

The chargeback scheme applies to Visa's credit and debit cards, and can be used to provide a refund by reversing the disputed transaction.

Just like Section 75, the scheme enables you to claim your money back if goods don't arrive, or they're faulty and so on.

But the trouble is credit card companies have started rejecting refunds under chargeback rules, rather than Section 75.

Card issuers will often argue they can't apply a chargeback because the card holder failed to query the transaction within the timescale stated in the card scheme rules. This is normally between 45 and 180 days.  

But the timescale under Section 75 is far longer. In some cases, you could wait up to six years before making a claim.

This is a useful part of the protection, since it may not be immediately apparent that a good is faulty.   

But still claims are frequently rejected because time has run out.

If this happens to you, the chances are your credit card company is using Visa chargeback rules, when it should give you far more time to ask for a refund under Section 75 rules.

So, don't allow yourself to be fobbed off.

It's good to know you can claim under Section 75 when things go wrong, but the law – and specifically how it's applied in practice –  is far from perfect.  

If you do make a claim under Section 75, but you feel it has been rejected unfairly by your credit card issuer, get onto the FOS straightaway and ask them to review your case.

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