FCA: Rent to own market remedies

The Financial Conduct Authority (FCA) has published a consultation paper on redressing the failures of the rent-to-own market which includes providers such as BrightHouse, PerfectHome, and Buy As You View.

FCA found that the total cost of a typical rent-to-own agreement is around three times the median mainstream retail price. For example a rent-to-own customer might may over £800 for a fridge that would cost £260 on the high street. The FCA also found that rent-to-own customers were highly likely to be vulnerable, with only one third of customers in work and most on low incomes. In comparison to other users of high-cost credit, rent-to-own customers are the least creditworthy individuals.

FCA’s consumer research shows that rent-to-own customers tend to focus on the weekly repayments over the total cost of credit, have low-levels of financial literacy, and gave more weight to simply being accepted for credit compared to other customers. In addition, rent-to-own providers tend to mark-up the price of the original goods and insurance on top of charging an interest rate.

Rent-to-own customers give less weight to, and are less able to make decisions based on, the total price of goods in order to restrain the prices charged by rent-to-own companies. As a consequence FCA has decided to introduce the following measures.

FCA proposals

As a response to the rent-to-own market failures the FCA proposes to:

• Introduce a 100% total credit cap (customers cannot pay more than the price of the goods in credit)
• Require firms to benchmark base prices (i.e. prices before any added products like warranties etc.) against retail prices.
• Require firms to benchmark price of delivery and installation.
• Prevent firms from increasing their insurance premiums in order to recoup the lost income from the price cap
• Ban the sale of extended warranties alongside the sale of the rent-to-own agreement. Firms will be required to allow two clear days before consumers can opt-in to buy these.
• Require firms to provide information to help customers decide whether or not to buy the extended warranty such as the pricing over the contract and what is already covered by the manufacturer’s warranty.

The point of sale ban on extended warranties will come into effect on 22 February 2019 whilst the price cap and benchmarking requirements will come into effect on 1 April 2019 for new products and prices and 1 July 2019 for all products. FCA plans to begin to evaluate the impact of the price cap in April 2021.

FCA’s Approach to alternatives

FCA estimates that three million use high-cost credit in the UK many of which are vulnerable and cannot access mainstream credit. FCA has received feedback that as well as regulating high cost lenders it should promote also alternatives such as credit unions which provide lower-cost borrowing. FCA wants to support alternative credit as well as non-credit alternatives such as budgeting help, debt advice, and sources of essential household goods.

The FCA recognises that lower cost credit providers often have smaller advertising and marketing budgets than commercial lenders.

Current measures

The FCA has summarised its approach and support for alternatives in its infographic below.

In detail

Reducing fees

As reported in ABCUL’s policy briefing on the regulatory fees policy consultation 2019/20, the FCA proposes to exempt credit unions and community finance organisations from all consumer credit fees. Currently most credit unions do not contribute to these fees as the vast majority of their lending (borrower-lender agreements) is unregulated. Where credit unions do engage in consumer credit activity they are exempted from paying fees on the first £250,000 of consumer credit related income. Above that threshold credit unions are expected to pay the £1,095 minimum fee plus the variable rate.

Guidance for social housing landlords

FCA proposes to publish guidance for social landlords to clarify the regulatory boundaries around credit broking. Government announced in the 2018 budget that it would simplify the regulations for social landlords which has led the regulator to consider whether it should still publish its guidance. As the date and scope of the Government intervention is not yet known the FCA is still going to proceed to finalise its guidance. The draft guidance can be found in FCA Consultation Paper 18-12 here.

Engagement with government and other bodies 

FCA also highlights its engagement activity to promote alternatives to high-cost credit with government and other bodies namely through:

• Financial inclusion policy forum
• Dormant Assets Fund
• No-Interest Loans Scheme
• Affordable Credit Challenge Fund
• Green paper on social housing
• Scottish Government
• Money Advice Service and Financial Guidance Body
• End High Cost Credit Alliance

For more details of FCA’s engagement with these parties see page 54 of the consultation paper here.

Potential measures

The FCA considers several examples of how awareness of alternative credit could be raised which are:

• Finding ways to make lower cost credit providers more visible on price comparison websites.
• Increase the public awareness of online portals devoted to searches for lower cost credit.
• Further use of referrals to lower cost credit providers from organisations like social landlords.

FCA also highlights some of the ideas raised in response to their previous consultations such as:

• Improving credit unions awareness and engagement of the ‘regulatory sandbox’ where they can develop and test innovative products with the FCA
• Hold events such as Technology challenges which are focussed on alternatives to high-cost credit.[1]
• An FCA-led information campaign
• Public list of providers of lower cost credit
• Regulatory intervention to require firms to signpost consumers to lower cost credit as well as other forms of support.

FCA has stated that they will consider the feasibility and appropriateness of all of the above approaches.

Conclusion

ABCUL welcomes the regulatory intervention in the rent-to-own sector which addresses poverty premium imposed on the most financially vulnerable. ABCUL is also actively engaging with the FCA to improve awareness and access to the sector.