The Financial Conduct Authority (FCA) has proposed to introduce a price cap on the rent-to-own (RTO) sector. The cap, subject to consultation, will come into force on 1 April 2019 providing protection for some of the most financially vulnerable people in the UK. Once in force, the changes are expected to save consumers up to £22.7m per year.
Rent-to-own customers are some of the most financially vulnerable in our society. Only one third are in work, most are on low incomes (between £12,000 and £18,000) and are likely to have missed a bill payment in the last 6 months. Despite this, firms often charge these customers more than other retailers for essential household goods such as a washing machine or a cooker, and with add-on insurance and warranties in some cases RTO customers can pay up to 4 times the average retail price.
To protect consumers, the FCA has designed a bespoke price cap to fit the RTO market, limiting both the cost of the product and the charge for credit. Under the proposed cap, credit charges cannot be more than the cost of the product. In addition, RTO firms will need to benchmark the cost of products against the prices charged by 3 other retailers.
Andrew Bailey, Chief Executive of the Financial Conduct Authority said “Today’s measures are designed to bring down very high prices in the rent-to-own sector, which is used by some of the most financially vulnerable in our society. A cap will prevent firms charging over the odds for essential everyday items like cookers or washing machines. We believe a cap is the only intervention that will effectively tackle the highest prices. If implemented it will save consumers up to £22.7m a year from excessive charges.”
“We want to stop consumers having to pay many multiples more than the price of a product on the high street. These changes build on the measures we have already taken across the high-cost credit sector.”
In addition, the FCA is introducing a 2-day cooling off period for the sale of extended warranties. This will effectively ban firms from selling these warranties at the point of purchase. This will come into force on 22 February 2019.
In recognition of the challenges some people may find in accessing alternative sources of credit, the FCA is publishing further information about its approach to promoting alternatives to high-cost credit. These include not only lower cost credit options but also alternatives that meet the consumer’s underlying need, without taking out credit, for example other sources of essential household goods. The FCA has set out what actions it is taking including working closely with the Government and other relevant organisations to support a number of initiatives.
The consultation on the price cap and benchmarking proposals will be open until 17 January 2019. If agreed the new rules will be implemented from 1 April 2019.
Joanna Elson OBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline, said “This price cap for rent-to-own-firms is very welcome news, and I am pleased the FCA has listened to the advice sector’s concerns on this form of borrowing. Following its successful intervention in the payday loan market, this is another sign the regulator is taking problems with high-cost-credit seriously. While a 100 percent price cap will offer greater protection to people who use this market – who are often vulnerable and usually on low incomes – the FCA should consider going further by also capping late payment fees, which can escalate quickly.”
“We also hope to see further action from the FCA in other areas of high-cost credit, including on logbook loans following the government’s disappointing decision to shelve the Goods Mortgages Bill. Tackling problems with high-cost-credit is of course only one part of the solution – so it is good to see that the FCA are also looking at affordable credit. Together with the Government’s decision to explore a possible No Interest Loan Scheme, we are beginning to see momentum build on this crucial issue.”
StepChange Head of Policy Peter Tutton said “We are pleased that the FCA is addressing rent to own, where the high cost of goods and add-on warranties can make agreements expensive even compared to other types of high cost credit. The most financially vulnerable households cannot be left with no choice but the highest price on the high street. Fundamentally, we also need better alternatives for households who struggle to afford household needs, such as the cost of mending or replacing necessary household appliances.”
Matt Bland Head of Policy and Communications from the Association of British Credit Unions Limited (ABCUL) said “Our members have long been incensed by the activities of Rent-to-Own retailers and the exorbitant costs they charge to some of the poorest members of society. While they offer affordable repayment schedules of a few pounds a week, the long-term cost of goods compared to what those with cash up front pay is eye-watering. So ABCUL and our members applaud this week’s announcement from the Financial Conduct Authority which will see the levels of unsustainable debt and the rip off practices of Rent-to-Own curtailed in some of the UK’s poorest communities. The similar measures taken in the payday lending market have been a huge success and it’s great to see this extended into the Rent-to-Own market.”
“Many credit unions offer affordable alternative schemes for the purchase of white goods and home furnishings providing a cheaper, more ethical way for people to access the things they need to make their house a home. Be that simply by offering small sum cash loans for borrowers to spend in the mainstream stores or, in an increasing number of cases, through formal partnerships with furniture and white goods retailers.”
“With that in mind, it was also great to see the FCA set out a range of areas in which it is taking steps to support credit unions and other affordable alternatives to expand and play an every greater role in disrupting high-cost credit. We look forward to exploring these with the FCA. We also believe that there is more that the FCA could do to support credit unions to expand in areas not covered in the consultation and we will be setting these out in our engagement with the FCA proposals.”