The Financial Conduct Authority (FCA) has confirmed the introduction of a price cap to protect some of the most vulnerable customers in the UK in the rent-to-own (RTO) sector will be introduced from 1st April 2019 in a move which will save consumers in the UK up to £22.7 million a year.
In the Policy Statement published today the FCA has confirmed the following measures will apply to the RTO sector:
- setting a total credit cap of 100%
- introducing a requirement on firms to benchmark base prices (including delivery and installation) against the prices charged by 3 mainstream retailers
- preventing firms increasing their prices for insurance premiums (eg theft and accidental damage cover), extended warranties, or arrears charges, to recoup lost revenue from the price cap
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said “The actions we are taking today build on our wider work on high-cost credit and will save some of the most vulnerable consumers in the UK millions of pounds. This price cap has been designed to target some of the most excessive prices in the rent-to-own market. The measures come into force from 1 April and we will be keeping a close watch on firms’ compliance. We will review the impact of the price cap in 2020 and if further work is needed to protect these customers we are prepared to intervene again.”
Currently, in some cases, RTO consumers are paying in total more than 4 times the retail price of some goods. The cap is intended to tackle those very high prices. Under the new rules, consumers will save hundreds of pounds on household products.
In November 2018, we published a Consultation Paper outlining our intention to introduce a price cap in the RTO market, to protect vulnerable consumers from the high prices being charged in this market.
The majority of respondents to the consultation agreed with the FCA’s assessment and the need to intervene in this market. Feedback from consumer groups, in particular, showed strong support for a price cap, which they believe would address the harm caused by high prices.
The FCA has committed to carry out a further review to assess the impact of the price cap, which will take place in April 2020.
The FCA is continuing to promote the availability and consumers’ awareness of alternatives to high-cost credit. As set out in the November 2018 Consultation Paper, this includes working with Government and other stakeholders to support their initiatives. The next update on the FCA’s alternatives work will be published in the second quarter of 2019.
Peter Tutton, Head of Policy at StepChange Debt Charity, said “Thanks to the new rules, a cap on the cost of rent-to-own credit will come into force in April. We welcome the fact that the price cap will apply both to the cost of credit and to the underlying cost of goods that can make these agreements expensive, even compared to other types of high cost credit.”
“The Financial Conduct Authority will review how the rules are working in a year’s time – an important activity, as the regulator will need to keep close tabs on how the cap works in practice to avoid high prices continuing to harm consumers.”
“However, rent to own and other high cost credit will continue to put a strain on low income households who have little choice but using credit to pay for essential goods. So we are pleased that the Government is looking at the feasibility of a no interest loans scheme for the most hard-pressed households. This important intervention by the FCA still needs to be accompanied by better affordable alternatives to rent to own”.
Jane Tully, Director of external affairs at the Money Advice Trust said “The introduction of a price cap in the rent-to-own sector is a welcome move and should go some way in reducing harm from the high prices associated with these products.”
“As we saw with the regulator’s intervention in the payday loan market, it is clear that the regulator is taking seriously problems with high-cost credit. As ever it is crucial that the FCA monitors the impact of these interventions – I am pleased to hear that they have brought forward a review of their effectiveness and are prepared to ‘intervene again’ if problems persist.”
“These interventions are however only one part of the solution. A continued focus on alternatives to high-cost is needed to help in particular those households who are often on low-incomes. Momentum is beginning to build in this area with the FCA’s work and the Government’s decision to explore a possible No Interest Loan Scheme. However, a concerted effort is needed to address the lack of affordable credit options.”
Gillian Guy, Chief Executive of Citizens Advice, said “This cap, which we’ve campaigned for, is a win for those struggling with the runaway costs of rent-to-own agreements. We’re delighted it will now be introduced.”
“The FCA has recognised the massive harm caused by the crippling interest rates on rent-to-own deals. This cap will stop people from paying over the odds compared to similar products on the high street and falling into further debt when costs spiral out of control.”
“Our evidence has repeatedly shown well-designed caps can reduce the harm high-cost credit can cause. Where these credit products cause more harm than good, for example, doorstep loans, the FCA should move to introduce similar protections.”
Last year, research from Citizens Advice found that people who were at the time signed up to a rent-to-own agreement could save £62 million over the payment period on 245,000 products if a cap was enforced.