The City watchdog has proposed a 100% 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 the average retail price, when insurance and warranties are included, the Financial Conduct Authority said.
The financial regulator noted that only a third of rent-to-own customers 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.
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.
Greg Stevens, chief executive of the Consumer Credit Trade Association, said: “We know that Andrew Bailey is uncomfortable with this but the politics of credit necessitates a political response – the clamour from campaigners for caps only gets louder and there will be calls for more caps on other sectors.”
He said credit unions and social lenders would not be able to fill the gap if rent-to-own firms like BrightHouse went out of business, and added that consumers would “lose access and choice”.
Andrew Bailey chief executive of the Financial Conduct Authority told the Guardian: “I am absolutely convinced that this is the right way to deal with this issue. This is based on extensive and rigorous analysis that we have done of the evidence and the data.”
The FCA 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.