As has been widely predicted in recent months, the Financial Conduct Authority (FCA) has announced that the costs rent-to-own firms can charge will be capped from April 1 2019. The regulator says that by taking this action they are “providing protection for some of the most financially vulnerable people in the UK.”
The FCA estimates that the cap will save UK consumers as much as £22.7 million per year. It notes that the typical rent-to-own borrower is on a low income and has often missed one or more bill payments within the previous six months. Furthermore, only around one-third of customers of these firms are in work. Despite these adverse financial circumstances, rent-to-own customers face such high charges that they sometimes end up paying four times the average retail price of the goods.
The new measures will require firms to:
- Limit credit charges so they cannot be more than the cost of the product
- Benchmark the cost of products against the prices charged by three other retailers – firms will be unable to charge more than the median average of the prices offered by these retailers. Only one of the three can be a catalogue credit retailer
- Refrain from charging customers higher prices for insurance premiums, or for going into arrears, purely with the aim of recouping lost revenue once the price cap comes into effect. If a firm wants to raise its charges, it would need to be able to prove that this is a legitimate business need
Before the cap and the benchmarking rules are introduced on April 1, February 22 will see the introduction of a compulsory two-day cooling off period for the sale of extended warranties, which will effectively ban firms from selling these warranties at the point-of-sale.
The cap and the benchmarking requirements will apply with effect from April 1 to all products introduced on or after that date, and also where prices are changed on or after April 1 on an existing product. In all other cases the requirements will apply from July 1 2019.
The consultation on these proposals closes on January 17 2019.
Andrew Bailey, Chief Executive of the FCA, 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.”
The FCA has previously expressed its concerns about the way rent-to-own firms treat their customers. 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
With high cost short-term lending having been subject to a price cap for some time now, it remains to be seen which area of consumer credit will be next. Organisations such as Citizens Advice are sure to lobby the FCA hard to introduce price controls on other forms of credit. Having campaigned vigorously for a rent-to-own price cap, Citizens Advice chief executive Gillian Guy welcomed the proposals by saying:
“This cap is a victory for people who struggle with the runaway costs of rent-to-own agreements.
“These products are aimed at people who have little choice but to resort to this type of credit, yet they come with crippling interest rates on prices that are far higher than anywhere else on the high street.
“A cap gets to the heart of the problem by stopping costs from spiralling out of control and pushing people into further debt.
“Our evidence has repeatedly shown that well-designed caps can reduce the harm high-cost credit can cause, as they have done in the payday loan market.”
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