High-interest borrowing has been the subject of a Financial Conduct Authority (FCA) investigation that has taken nearly two years to complete. One of the major targets of this has been the rent to own sector, which includes stores such as BrightHouse that offer payment plans on items, such as ovens or furniture, available on very high-cost credit terms [in 2016 we showed how you could end up paying 2-3x the cash price!].
The FCA has now concluded its investigation and the result is a potential crackdown on rent to buy – but not much impact on other forms of high-cost credit, such as overdraft fees or doorstep loans.
What is “rent to own” or “rent to buy”?
Rent to buy acted as a trigger for the FCA investigation, which was designed to look further into the high-cost credit market. More than three million people in the UK use high-cost credit and around 400,000 people currently have an outstanding debt to a business like BrightHouse. This type of credit makes it possible for anyone who is unable to pay the upfront cost of an item, such as a washing machine, to make the purchase using credit instead. Rather than paying for the entire item upfront, regular payments are made until the debt is cleared, at which point the item is owned. In principle, this sounds like a good idea for cash-poor individuals who need a little more time to cover the cost of essentials. However, the FCA investigation has found that customers ended up paying a lot more for an item than would have been the case with a single upfront purchase thanks to the high cost of the credit. For example, BrightHouse customers were paying £1,500 for ovens that sell in other high street shops for under £300.
How is the FCA taking action?
A new cap is likely to be introduced that is designed to prevent the cost credit in the rent to own sector from spiralling so disproportionately. The FCA is about to undergo a period of consultation with the industry before potentially introducing the price cap into the market in April 2019.
What about other forms of high-cost credit?
Campaigners against high-cost credit (including actor Michael Sheen) were looking for more from the FCA review. In particular, many were hoping that the FCA would impose a cap on bank overdraft charges too. According to Gareth Shaw of Which? the charges that banks apply to those going over their overdraft limits can be seven times more expensive than the cost of a payday loan! In 2015 the FCA intervened in the payday loans market to cap the cost of credit. The intervention has been deemed a great success and so many debt charities and campaigners were hoping that step would provide a blueprint for every type of high-cost credit, including overdraft fees.
Why has the FCA not tackled high overdraft fees?
Andrew Bailey, the Chief Executive of the FCA has not ruled out a cap on high overdraft fees, saying,
“Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place…However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.”
So, it’s entirely possible that – at some point in the near future – the FCA will introduce a cap on overdraft charges. However, the FCA hesitation is anchored in a fear of getting a price cap wrong when it comes to overdrafts, particularly as the British banking industry is a formidable opponent with no qualms about challenging change in the courts. In particular, the FCA is wary of a 2009 case that ended up in a supreme court challenge that went in favour of the banks on the issue of price caps.
So, what is the FCA doing with overdrafts right now?
Instead of introducing a price cap, the FCA has made a number of recommendations to the industry that are designed to save consumers money. These include requiring banks to send mobile alerts with respect to imminent overdraft charges, no longer including an overdraft in the definition of “available funds” and making credit and borrowing costs clearer.
Is the FCA doing enough?
The cap on high-interest credit, such as rent to own, is a great first step and is likely to benefit around 400,000 people who currently owe money to companies like BrightHouse. However, the £2.3bn in overdraft fees that are generated by customers who go over their limits and into the red remains untouched by the FCA recommendations. Banks will still be able to collect these, no matter how disproportionate they are. For campaigners, the hope is that the FCA won’t take too long to work out how to engineer a price cap for these fees too.
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam