Following a period of sustained focus on payday lenders, it seems the time has come for rent-to-own firms to face the music. Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), made clear that price caps would not be the first measures he’d be likely to take, but were a possibility: “The price cap is very much the thing we do when all other price measures don’t look very promising. So we would start elsewhere, and work our way through the possible remedies.”
Precisely how the FCA will approach these remedies remains to be seen, but at the crux of the argument is an issue of credit-worthiness and affordability. High cost rent-to-own homeware is, for rent-to-own companies, the answer to a specific type of customer. This customer — for reasons such as a thin credit file or tainted borrowing history — falls outside the reach of mainstream financial services.
For this customer, alternative finance providers can offer a valuable service that enables them to get hold of key products — refrigerators and washing machines, for example. Alternative finance providers should be prepared to conduct slightly more “custom” due diligence that enables them to better understand the risks associated with these borrowers, and make decisions based on that information.
However, and what rent-to-own companies should not be doing is granting credit freely, and simply accepting that some people will never repay. Based on a small sample of Credit Kudos data, 86% of those with rent-to-own transactions had more money leave their accounts than enter them across the period for which their data was provided. This picture may not be complete, but there are certainly grounds to explore further whether the initial decision to provide rent-to-own services to those customers was in line with the fair treatment of customers, given the nature of cashflows through their accounts.
Default happens — it is unavoidable. But lenders should not provide finance if it is clear at the outset that a consumer will be unable to repay. If customer circumstances change and they can’t repay — that is the nature of lending. If a customer is provided with a high-cost rent-to-own service that, from the outset, it’s clear they can’t afford — that is deplorable, and is at the heart of the FCA’s investigation.
As the regulator moves forwards with its remedies for this sector, we’ll be interested to see what measures they put in place to ensure that rent-to-own companies really are implementing a TCF culture, and conducting the necessary checks to ensure the appropriate provision of products to consumers.