A price cap which aims to protect vulnerable customers in the rent-to-own sector has been announced by the Financial Conduct Authority.
It has introduced a 100 per cent total credit cap meaning customers of firms such as BrightHouse, EasyBuy and PerfectHome will no longer pay more interest than the original cost of an item.
Some rent-to-own customers can end up paying in total more than four times the retail price of goods – and this cap will prevent this.
For example, instead of a £400 washing machine costing a potential £1,600 or beyond, the maximum a firm can charge from April will be capped at £800.
Expensive: Many low income families turn to rent-to-own as they cannot afford items outright
Most of the respondents to the consultation agreed with the FCA’s assessment and the need for intervention in the market.
Consumer groups, in particular, showed particularly strong support for a price cap which they said would address the harm caused by the high prices.
The FCA will take out a further review to assess the impact of the price cap in April 2020.
Peter Tutton, head of policy at StepChange debt charity, said: ‘Thanks to the new rules, a cap on the cost of rent-to-own credit will come into force in April.
‘We welcome the fact that the price cap will apply both to the cost of credit and to the underlying cost of goods that can make these agreements expensive, even compared to other types of high cost credit.
‘The Financial Conduct Authority will review how the rules are working in a year’s time – an important activity, as the regulator will need to keep close tabs on how the cap works in practice to avoid high prices continuing to harm consumers.
‘However, rent-to-own and other high cost credit will continue to put a strain on low income households who have little choice but using credit to pay for essential goods.
‘This important intervention by the FCA still needs to be accompanied by better affordable alternatives to rent to own’.
Citizen’s Advice welcomed the news of the cap and said it helps approximately 5,000 people a year with rent-to-own issues.
Research from the charity found that people who were, at the time, signed up to a rent-to-own agreement could save £62million over the payment period on 245,000 products if a cap was enforced.
Gillian Guy, Chief Executive of Citizens Advice, said: ‘This cap, which we’ve campaigned for, is a win for those struggling with the runaway costs of rent-to-own agreements. We’re delighted it will now be introduced.
‘The FCA has recognised the massive harm caused by the crippling interest rates on rent-to-own deals.
‘This cap will stop people from paying over the odds compared to similar products on the high street and falling into further debt when costs spiral out of control.
‘Our evidence has repeatedly shown well-designed caps can reduce the harm high-cost credit can cause. Where these credit products cause more harm than good, for example doorstep loans, the FCA should move to introduce similar protections.’
Brighthouse, one of the most well known rent-to-own companies, has previously been in trouble over its payments and in October 2017, it was ordered to pay 249,000 customers £14.8million by the FCA after it said it didn’t act as a ‘responsible lender’ and had treated its customers unfairly.
It also announced last month that it is due to close 30 of its stores and cut 350 jobs, shrinking its size by around a tenth.