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Price cap plan for rent-to-own sector Price cap plan for rent-to-own sector
(about 1 hour later)
The most "financially vulnerable people" could soon see a cap on the charges they pay if they buy domestic goods on a rent-to-own (RTO) basis. Plans to cap the costs of buying domestic goods such as TVs and fridges through rent-to-own shops have been welcomed by the stores' customers.
The Financial Conduct Authority (FCA) has proposed a cap to make sure that credit charges could not be more than the cost of the product. Michele Jacques, from Droylsden in Manchester, ended up spending £700 on a cooker as a result of interest rates that can reach 99% a year.
Had she gone to a High Street shop, it could have cost her as little as £250.
The proposals from the Financial Conduct Authority (FCA) mean rent-to-own customers would pay much less.
Rent-to-own customers make monthly payments, in effect renting goods until they have paid in full.
"Interest rates should be capped. They shouldn't be allowed to make so much profit from vulnerable people," said Ms Jacques.
"It does make you frustrated. It makes you angry."
She said the cap proposed by the FCA was "the correct thing to do".
How will the proposed cap work?
First, the FCA will limit the amount of interest that customers pay.
From April 2019, they will pay no more in interest than the cost of the product itself. So if a cooker costs £300, they will pay no more than £600 in total, including the cost of credit.
However, rent-to-own shops will still be able to charge for insurance and warranties on top of that.
Second, the cost of the goods themselves will be limited.
Shops will be able to charge no more than the median - i.e the middle price - of three mainstream retailers.
Andrew Bailey, chief executive of the FCA 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."
How much will consumers save?
The FCA says the cap could save about 400,000 consumers up to £22.7m a year.The FCA says the cap could save about 400,000 consumers up to £22.7m a year.
RTO customers make monthly payments, in effect renting goods until they have paid in full. In a series of examples, someone who buys a Hotpoint cooker on a rent-to-own basis could save as much as £606 over a three-year period, or £3.88 a week.
Under the proposals, RTO firms will also need to limit the cost of products themselves. They will be able to charge no more than the median price at three mainstream retailers. Someone buying an Indesit fridge freezer through rent-to-own could save £360 a year, or £2.31 a week.
In one example given by the FCA, a consumer who buys a Hotpoint cooker could save £606 over a three-year period, or £3.88 a week. How have rent-to-own shops reacted?
The cap is due to come into force in April 2019. The main providers of rent-to-own goods are Brighthouse and PerfectHome.
High credit rates A BrightHouse spokesman said: "BrightHouse has been working closely and constructively with the FCA over a number of years. This comprehensive process has led to many changes in the way we operate as a business and serve our customers.
News of the cap was welcomed by consumer groups. "We're going to carefully consider today's announcement, while continuing to offer those excluded from mainstream credit ways to get the household goods they need."
"This cap is a victory for people who struggle with the runaway costs of rent-to-own agreements," said Gillian Guy, the chief executive of Citizens Advice. What do consumer groups say?
The proposed cap was welcomed by Citizens Advice.
"This cap is a victory for people who struggle with the runaway costs of rent-to-own agreements," said Gillian Guy, chief executive of Citizens Advice.
"A cap gets to the heart of the problem by stopping costs from spiralling out of control and pushing people into further debt."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.""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 FCA estimates that RTO customers can pay up to four times the average retail price for items such as cookers, fridges and televisions than if they bought them outright on the High Street.
Currently annual rates for credit can be as high as 99.9%.
Many customers have ended up in a cycle of debt as a result of the high charges.
'Comprehensive process'
The main providers of rent-to-own goods are Brighthouse and PerfectHome, which earlier this year had to pay compensation to 37,000 customers for failing to carry out proper affordability checks.
Reacting to the FCA proposals a BrightHouse spokesman said: "This comprehensive process has led to many changes in the way we operate as a business and serve our customers.
We're going to carefully consider today's announcement, while continuing to offer those excluded from mainstream credit ways to get the household goods they need."
Andrew Bailey, chief executive of the FCA 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."