Cooling-off period not the answer, expert says

Introducing a cooling-off period that requires gyms to refund customers who prepay but later change their minds will help to reduce some financial losses. However, the mechanism will not curb scams related to advance payments in the long run, a legal expert has said.

Chen Yinjiang, deputy secretary-general of the China Consumer Protection Law Society, said that to address the risks inherent with prepaid businesses, it is important to step up oversight of funds via third parties, such as banks, insurance companies or escrow agents.

On April 1, the Beijing Municipal Bureau of Sports and the Beijing Municipal Administration for Market Regulation jointly released a notice promoting a contract template for prepaid services in the sports and fitness industry.

The contract put in place "a seven-day cooling-off period "that enables customers to terminate services and request a full refund within seven days of signing up for fitness services and paying upfront.

Moreover, refunds should be issued within 15 working days of customers filing the request, according to the template.

At the end of last year, a mandatory cooling-off period was embraced by 15 major fitness companies in Shanghai that operate more than 400 outlets in the city, local authorities said.

"Only a small proportion of customers who sign expensive deals will benefit from the new regulation, most especially those who made impulse purchases and quickly realized their decision was irrational," Chen said.

However, the majority of complaints and disputes about advance payments are caused by abrupt business closures and owners absconding, leaving customers without any way of recovering their lost payments.

"The core issue boils down to the lack of supervision of capital accumulated via the prepaid model. If the capital were supervised, it would be easier for customers to get their money back," Chen said.

To tackle the issue at the root, he said operators should be required to make deposits at designated banks. The size of the deposits will be determined by how much they charge customers for prepaid services.

For instance, in the United States, one way to prevent unfair trading practices is to ask customers to buy prepaid cards directly from a bank that has set up a public account for service providers.

Each time a customer makes a purchase, payments are transferred from the account to the business owner.

Chen said another option is to seek third-party guarantees, such as those from a commercial insurance company, to ensure the safety of customer payments.

"Setting up a relief fund that targets prepaid businesses is also recommended in order to protect consumer rights and reduce the burden falling on merchants if they are forced out of business," he said.

He added that the prepaid business model provides stronger impetus for owners to focus on improving their products and services without fretting too much over market expansion.

"But we need to build a threshold and ramp up regulation to deter wrongdoing," he said.