Price cap plan to clamp down on high rent-to-own fees
The City watchdog has proposed a price cap on rent-to-own companies in a clampdown on “excessive charges” expected to save 300,000 vulnerable customers up to £22.7m a year.
High interest charges levied by firms such as BrightHouse, which sell household appliances and electrical goods on credit, mean items can cost four times above the average retail price, when insurance and warranties are included, the Financial Conduct Authority said.
The financial regulator said rent-to-own customers are some of the most financially vulnerable in the UK: only a 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 six months.
How do poverty levels in the UK compare with other countries?
The main poverty indicator used in the Joseph Rowntree Foundation’s study is the number of households that have income levels of less than 60% of median income. Using the same measure, the UK was ranked 22nd out of 35 in an international league table of child poverty rates in rich nations put together by Unicef in 2012.
In a 2016 league table of all measures of poverty, the UK did rather better compared with other nations. The study, also by Unicef, ranked the UK joint-14th out of 35 rich nations. This was just above the US, but well below many European countries, notably Denmark, Finland and Norway. On some specific measures the UK did less well, notably education, where it ranked 25th out of 39 countries, and health, where it was 19th out of 35.
In the latest official comparison of poverty across the 28 countries in the European Union, the UK ranked 15th. This was some way behind the Czech Republic, Sweden and the Netherlands but ahead of Ireland, Spain and Italy. The European figures confirmed the JRF’s observation that the number of people at risk of poverty in the UK has risen since 2008.
Under the proposed price cap, credit charges (including interest and delivery and installation costs) cannot total more than the original cost of the product. In addition, rent-to-own firms will need to benchmark the cost of products against the prices charged by three other retailers.
Andrew Bailey, the FCA’s chief executive, 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.”
Citizens Advice hailed the cap as a “victory for people who struggle with the runaway costs of rent-to-own agreements”.
Its chief executive, Gillian Guy, said: “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 cap will come into force on 1 April 2019 following a consultation. The FCA is also introducing a two-day cooling off period for the sale of extended warranties, to stop firms selling them at the point of purchase. This will come into force on 22 February.
The crackdown follows the introduction of a price cap on payday lenders in 2014, which means borrowers never have to repay more than twice the cost of their original loan.
Around 300,000 households use rent-to-own firms. Alternatives include Fair For You, a not-for-profit credit provider that funds household goods and credit unions.
The regulator has also imposed customer compensation packages totalling nearly £16m on the main rent-to-own companies, BrightHouse, PerfectHome and Buy As You View. BrightHouse was ordered to pay more than £14.8m in compensation to 249,000 customers in October 2017.
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