On the 22nd November, the FCA proposed a price cap on rent-to-own (RTO) products that would see the cost of credit used to purchase such items limited to a maximum of 100% of the cost of the product itself. If the new rules are agreed upon after consultation, the price cap will be implemented from the 1st April 2019.
The FCA is particularly interested in RTO schemes and other forms of high-cost credit because it is a sector that was noted to impact on customers in vulnerable circumstances. According to the regulator, those customers who buy products through RTO schemes are typically “some of the most financially vulnerable in our society.” The FCA noted that only one third of RTO customers are in work, with most on low incomes of between £12,000 to £18,000 a year. They are also more likely to have missed a bill payment within the last six months.
The FCA has come to understand that some firms are charging more than other retailers for essential products like household appliances through RTO schemes. The combined cost of credit, add-on insurances and warranties sometimes means that customers end up paying four times more through RTO than they would if they purchased the product outright.
The price cap aims to address this by lowering the price of the products themselves, limiting the charge for credit to no more than the cost of the product itself (so a £200 product could only ever cost £400 through regular instalments, for example) and requiring firms to benchmark base prices against at least three other retail sources.
To accompany these measures, the FCA is also introducing a two-day ‘cooling off period’ for the sale of extended warranties, effectively banning firms from selling these at the point of purchase. This rule will come into force earlier than the proposed price cap – the 22nd February 2019.
Following consultation as part of CP18 / 12, the FCA will also require firms in this sector to provide detailed information to customers about extended warranties – breaking down the price of taking these out in terms of weekly, annual and length-of-contract costs, as well as any information on the manufacturer’s warranty and any insurance attached.
Andrew Bailey, Chief Executive of the Financial Conduct Authority had this to say on the topic:
'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 does, however, understand that vulnerable customers do sometimes find it difficult to find the sources of credit needed to purchase essential goods, and so are promoting alternatives to high-cost credit. The FCA wishes to inform consumers of various lower-cost credit options available to them and alternatives to meeting their needs without having to take out credit at all (for example, borrowing or buying second hand).
The consultation period will be open until the 17th January 2019. Firms should write to the FCA with their feedback.
If the rules are agreed as they are proposed, final guidance will be published in early March 2019 and rules implemented on the 1st April 2019.
Considerations for firms
The FCA estimates that consumers could save up to £22.7mil a year as a result of this price cap, a fact that will obviously require some firms to rethink their credit and RTO offering. Indeed, some firms may wish to consider leasing products as opposed to using an RTO model after reading the proposals outlined above. Looking across the general credit sector more broadly, catalogue credit firms, under which product pricing can vary depending on credit facilities provided to purchases the product, should not ignore the developments in this case.
It should be noted that the regulator does not intend to enforce any extra reporting requirements for the small number of firms in this sector, at least not at this stage, though they will be able to request data on an ad hoc basis and monitor overall pricing trends to understand how the price cap is driving down prices within the sector.
Finally, it is also worth noting that some respondents to CP 18 / 12 suggested a strengthening of rules around affordability assessments to ensure that consumers only take on RTO agreements that are affordable. However, the FCA’s supervisory work in this space has already been determined to have “made significant improvements in conduct around affordability assessments, price transparency and treatment of customers in arrears”, leading to a reduction in complaints. Firms are also currently paying redress to consumers for past inadequate checks at this time. The FCA will no doubt continue to monitor this and stand ready to act if further poor outcomes are identified from the perspective of responsible lending regulation.