The Financial Conduct Authority (FCA) has confirmed it will introduce a price cap in the rent-to-own (RTO) sector with effect from April 1 2019.
The final rules are essentially the same as those outlined in the consultation paper in 2018. The FCA is taking action because it believes that many customers of RTO firms are vulnerable – only one-third of them are in employment – and because it is concerned that many customers are paying up to four times the retail prices of the goods.
The new rules that RTO firms need to follow include:
- Total credit charges cannot be more than the cost of the product
- The cost of products must be ‘benchmarked’ against the prices charged by three other retailers. Only one of the three can be a catalogue credit retailer, and the other two must be mainstream retailers. Firms will be unable to charge more than the median average of the prices offered by these retailers (if one of the three was a catalogue credit firm), or the highest of the three prices (if none of the three was a catalogue credit firm)
- Customers cannot be charged higher prices for insurance premiums, or for going into arrears, purely with the aim of recouping reductions in revenue caused by the price cap. If a firm wants to raise its charges, it would need to be able to prove that this is a legitimate business need
These rules must be applied from April 1 for all products introduced to the market for the first time. For existing products, they will apply from the earlier of the date on which prices are raised, and July 1. Micro-enterprises (firms which employ fewer than 10 people and have a turnover or annual balance sheet that does not exceed €2 million) will be given special permission to delay introduction of the rules until the earliest of the date prices are raised, and October 1.
The level of the cap, and its effectiveness, will be reviewed after 12 months.
The market is dominated by a handful of major players, and three of the largest market participants have been forced to pay almost £16 million in compensation to 340,000 consumers. Ways in which the FCA believed the firms were failing their customers included:
- Not carrying out adequate affordability checks
- Some customers were charged late fees for arrears on their insurance contracts, even though this was contrary to the firm’s own policy
- Some customers were required to pay for insurance before receiving any goods
- Other customers did not receive a refund of their first payment where their agreement with the firm was cancelled before the goods were delivered
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.”
While there is no direct mention of any other forms of credit in the official FCA press release, Mr Woolard has been speaking on the record to the national press. He told The Times that he was not sure why guarantor loans had such high interest rates when guarantors were meant to have strong credit records. His comments may mean that guarantor loans are next in line for price capping.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article