Price cap proposed for rent-to-own firms to protect vulnerable consumers
The financial regulator has proposed a new price cap on rent-to-own firms to come into place next spring, meaning consumers can't be charged more in interest than they paid for the product.
Today's proposals unveiled by the Financial Conduct Authority (FCA) would affect both the base price charged for rent-to-own goods and the interest charged.
The FCA proposes that after 1 April 2019, rent-to-own firms will need to set their prices in line with other retailers, and make sure that any interest charged is capped at 100% of the price of the product (including delivery and installation charges). The cap will, however, exclude charges for warranties or arrears.
It says the changes could save consumers up to £22.7 million per year.
If you're struggling with debt, our Debt Problems guide has full help.
Martin: 'We need to change the system so no-one needs to touch these firms'
Martin Lewis, founder of MoneySavingExpert.com, said: "The rent-to-own sector is perhaps the most visceral example of the poverty premium in the UK. The fact that the most vulnerable with the least pay four times as much for their electrical and white goods as everyone else is simply unjust and it's rightfully about time that the FCA cracked down on it.
"There has been a real inconsistency across the board that payday loans – one form of high-cost lending – have had a total cost cap on them, so that you cannot pay more than double what you originally borrowed, but many other forms of high-cost credit are free to charge what they like. I hope that this is only the first sector that the FCA cracks down on – we also need to see similar changes to unauthorised overdraft costs, logbook loans and others.
"With rent-to-own, it must be remembered the rip-off is not only are you sometimes charged nearly double for the product, they then lend it at up to 100% APR, which means the costs aren't gradually exploding out of control, they've been out of control from the start.
"The move to capped costs at, we would hope, a very maximum of the same as the payday loan cap, is important. As is the cooling-off period for extended warranties, where, on top of the already really expensive prices, people are charged for warranties that can cost more than the product would itself if it were bought the normal way. Quite simply, we need to change the system so no-one needs to touch these firms."
What is rent-to-own?
Rent-to-own firms allow consumers to buy goods using smaller regular payments over a period of one to three years, rather than a lump sum. The average weekly payment is £28.
But the firms charge high levels of interest, which means the overall cost of the product ends up being far more than the retail price.
The FCA says that rent-to-own consumers are often financially vulnerable and are likely to be on low incomes of between £12,000 to £18,000, to have recently missed a bill payment, and just a third are in work – yet they can end up paying up to four times the retail price for essential household goods.
Two firms, BrightHouse and PerfectHome, account for just over 90% of outstanding rent-to-own agreements, and as of November 2017 there were about 300,000 rent-to-own customers with outstanding debt across the market.
What changes has the FCA proposed?
The FCA's proposal follows a review of high-cost credit which started in May, and includes consultations on overdraft fees, catalogue credit and store cards.
The suggested changes for the rent-to-own market are as follows:
- Rent-to-own firms will need to benchmark their prices against other retailers. To combat high base prices, rent-to-own firms would need to calculate the median price of the same product at three other 'mainstream retailers' (including no more than one catalogue credit retailer) and make sure they were not charging more.
- Rent-to-own firms won't be able to charge more than the cost of the item in interest. Credit charges on rent-to-own items will be capped at 100% of the base price of the product, including delivery and installation, so the total a consumer would pay for a £100 item is £200.
If the price cap is introduced, it would take effect from 1 April 2019 for new products and 1 July 2019 for existing products – although if a firm changes the price of an existing product after 1 April, it'll need to apply the price cap straight away. The cap won't apply to any agreements taken out before 1 April.
- Rent-to-own firms won't be allowed to raise insurance premiums or arrears charges in response to the cap. There will be a ban on increasing premiums and charges to regain revenue which is lost as a result of the price cap.
There will be new rules for extended warranties
The FCA has already consulted on extended warranties, where consumers buy extra protection for the product on top of the standard warranty.
It says that 70% of rent-to-own consumers take out extended warranties, accounting for up to 20% of their weekly payments – but their value can be limited if the product is still protected by a manufacturer's warranty.
The following rules will be put in place from 22 February 2019 to help customers decide whether to take out an extended warranty:
- Selling extended warranties alongside rent-to-own products will be banned. Firms must now give consumers a two-day cooling-off period after buying rent-to-own products before they can opt into taking out an extended warranty.
- Firms must give extra information about extended warranties. Firms must tell consumers the weekly, annual and length-of-contract price of the extended warranty, and give them information about how it works alongside the manufacturer's warranty and any other insurance.
What does the FCA say?
FCA chief executive Andrew Bailey 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 £22.7 million 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."
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