The Financial Conduct Authority (FCA) recently announced a proposed introduction of a price cap on Rent to Own (RTO) firms to protect vulnerable consumers from high overall costs created by high credit charges.
The cap, subject to consultation, will come into force on 1st April 2019. It is intended to provide protection and support to a vulnerable segment of people in the UK, expecting to save UK consumers up to £22.7m per year.
What is the Rent to Own cap?
The RTO cap is a proposed price cap on products (usually household goods) sold with financing, often to consumers who are financially stretched and are unable to purchase outright; With only one third of these customers in work, mainly on low incomes (between £12,000 and £18,000), many are likely to have missed a bill payment in the last 6 months. The cap is intended to serve as a limit to the cost of credit and cost of ownership for what are often needed household goods. The proposal is to cap this cost at 100% the cost of the product being purchased.
What impact will it have for consumers?
The paper produced by the FCA is extensive and detailed. At 131 pages, it explains the overall approach and findings, the cap proposal, and an additional consultation on extended warranties and valid alternatives to high-cost credit. Some of the highlights are:
- The cap has been two years in the making, the FCA set out to prioritise the high-cost credit sector back in 2014 when they took over the regulation of consumer credit; this included RTO, home-collected credit, catalogue credit, store cards and overdrafts.
- The current cost of some RTO products is causing some consumers to pay four to five times the retail cost of the item; this is due to higher than retail product cost, high interest charges and additional add-ons.
- Benchmarking must now be completed by RTO retailers against retail prices to ensure product cost is fair and accurate against the RRP.
- A consumer survey conducted by the FCA as part of the consultation period has shown a need for these household goods, coupled with disbelief of being ‘accepted’ anywhere else for finance. In some cases, it was felt a low level of financial literacy also clouded the consumer’s judgement on the long-term costs of the product i.e. focusing on the weekly cost.
- Alongside the introduction of the cap, there has also been an announcement of the termination of the sale of additional extended warranty at the point of purchase. This is intended to give the consumer some further additional control around its sale and comes into force in February 2019.
- It’s understood that fewer than 5% of consumers will be negatively impacted by this cap; in part due to RTO providers ceasing trading.
- The FCA have further outlined a list of nine actions they have committed to, to help increase the alterative options to the consumer; credit unions and community development finance institutions (CDFIs).
How to respond in collections?
A standard response to any new regulation within a financial organisation is to ensure you are well prepared, have a smooth-running operation and have plans that can resolve any issues that may arise; the RTO sector will be no different.
Rent to Own may see a downturn in revenue if current interest charges and/or products are higher than the new proposed rules. This may in turn require process changes, including greater automation and efficiency to ensure continued profitability (not to mentioned control and compliance).
Within Collections and Recoveries, it is also worth reviewing strategy, after all small changes in strategy can be highly beneficial in preventing losses. In turn this helps to reduce the cost of credit, address and prevent issues for customers before they can become too challenging.
Arum is a leading provider of expertise in Collections and Recoveries, including strategy, technology and implementation. We work across industry to help clients improve process, automation, strategy and technology. If you think we could help, please contact us.