A total cost cap on the rent-to-own market
Response to the FCA’s consultation 411 KB on a cost cap on the rent-to-own market
The Financial Conduct Authority’s (FCA) decision to consult on a cap on the cost of rent-to-own goods is a positive step towards addressing the problems associated with this market.
In 2017, Citizens Advice helped 5,127 people with rent-to-own debts. These rent-to-own consumers tended to be heavily indebted or showed signs of being vulnerable. They are often single parents, almost never have a mortgage or own their home, and a large number are out of work due to poor health. Commonly, they hold more than £8,000 of debt.
Rent-to-own products are useful for consumers - they allow people on low incomes to purchase goods that they cannot afford to pay for upfront. Clients who use rent-to-own stores value the convenience and feel that there are a lack of alternatives.
However, action is necessary to prevent people paying over the odds for rent-to-own goods. At present, rent-to-own goods are excessively expensive. Interest rates can be as high as 99.9%, and missed payments are subject to fees of £10-12 per occasion. More generally, rent-to-own goods are a bad deal - with high markups on prices, costly delivery charges, and expensive add ons, such as aftercare and insurance.
A total cost cap would be the most effective way to prevent these costs spiralling. A total cost cap would limit the damage that rent-to-own goods can do to people’s financial situation in two ways. A limit on the total cost cap would:
Make rent-to-own products more affordable - by limiting the upfront cost of the good, installation and delivery fees, and the level of interest charged, a total cost cap would reduce the outstanding levels of debt held by rent-to-own clients.
Reduce the cost of late payment fees - nearly 60% of rent-to-own clients are charged late payment fees. These charges commonly amount to £72 over the course of a loan.
Competition and information remedies are unlikely to work. Rent-to-own customers tend to urgently need the good they purchase. This sense of necessity means these customers are unlikely to shop around or compare prices - circumstances which would limit the effectiveness of information or competition based solutions. The likelihood that such measures would work is further reduced by the high levels of vulnerability common to customers, with nearly half (46%) experiencing a long term health condition or disability.
The cap on rent-to-own to own goods must be clear to consumers and robust to gaming. It should include a 100% total cost cap on the following components:
A cap on the upfront price of the good - tied to RRP or a ‘reasonable’ price benchmarked to high street providers which sell the good upfront.
Benchmarked delivery, installation and recycling costs.
A £15 cap on default charges per agreement per year.
A cap on rent-to-own goods should be implemented as quickly as possible. The FCA has proposed that rules on the cap be ‘in force’ by April 2019. We think the FCA must meet this timeline in order to limit the massive harm caused by this high cost product.