The Centre for Responsible Credit (‘CfRC’) has welcomed today’s announcement from the Financial Conduct Authority (‘FCA’) that it intends to cap the cost of credit in the rent-to-own sector.
However, we warn that the FCA’s proposals as they currently stand – although a small step in the right direction – will fail to deliver a fair deal for low income borrowers, and must be strengthened between now and the expected implementation of a price cap in April 2019.
In its press statement today, the FCA announced that it was designing a “a bespoke price cap to fit the RTO market, limiting both the cost of the product and the charge for credit.” The main proposal is to limit the cost of goods (the ‘base price’) by requiring firms to benchmark their prices with other retailers, and then also limit the total cost of credit to 100% of the ‘base price’.
Whilst we welcome FCA proposals to control the base prices of goods, the ‘bespoke’ cap proposed by the FCA will still leave many rent-to-own borrowers worse off than those taking out credit from a payday lender. This is because, the FCA’s proposals for the cap do not include default charges and the very high cost insurance products which firms require rent-to-own customers to take out with their credit agreements. By excluding these elements from its proposed cap, the FCA is allowing firms to continue charging rent-to-own customers much more than double the cost of the goods.
We are also concerned that the FCA continues to demonstrate a timid, slow and ‘piecemeal’ approach to regulation when wider ‘system change’ is required.
Eight million people are currently caught in a debt trap, paying out an average of one quarter of their incomes on debt repayments, and frequently forced to borrow simply to make ends meet. A consistent total cost cap is needed across the entire consumer credit market: not just within the payday and rent-to-own sectors. According to the FCA’s own research, rent-to-own customers typically hold £4,300 of consumer credit debt. Only one third of this is owed to rent-to-own firms with the remainder borrowed from a wide range of other sources, including on credit cards, overdrafts, and from door to door moneylenders. It makes no sense for the credit costs on only one third of a borrower’s overall debt to be capped.
As part of the End the Debt Trap Campaign, we have therefore today called on politicians to intervene to force the FCA to extend the total cost cap on payday lenders, which prevents people from ever paying back more than double the amount that they borrowed, across the entire consumer credit market. A full briefing is available here.
Responding to the announcement, CfRC Director, Damon Gibbons said:
“When it says it has designed a ‘bespoke’ cap for rent-to-own firms, the FCA really means it has designed one which is much less effective than that which already exists for payday lenders. The FCA is taking a piecemeal approach to regulation, and moving at snail’s pace, when what is needed is bold action to provide a consistent level of protection for low income households right across the consumer credit market. It is now time for politicians to act.”