High Cost Credit: Rent-to-own - Citizens Advice response to CP18/35
In 2017-18, Citizens Advice saw nearly 5,000 clients with hire purchase debts. Commonly, these consumers are vulnerable, single parents, on a low income, heavily indebted, and have a disability or long term health condition.
The rent-to-own (RTO) market is currently a bad deal, with consumers paying 3, 4 or more times the cost of the same good purchased upfront, and the total cost cap will be a beneficial remedy. We think the cap will bring two key benefits by:
- Preventing low-income rent-to-own consumers overpaying for household goods.
- Bringing greater clarity to the price of rent-to-own goods.
However, the details of the cap need to be significantly strengthened if this measure is to mitigate the majority of detriment experienced by rent-to-own consumers. The process of introducing the cap will need to:
Include arrears charges. Allowing rent-to-own firms to charge late payment fees undermines the clarity of the cap, and does not address the harm this causes. Roughly 3 in 5 customers who purchase rent-to-own products miss payments, and the resulting late payment fees pose an additional financial burden. Not only would a total cost cap reduce the burden of these fees, reducing the weekly cost of the good would also decrease the likelihood that customers miss payments.
Expand the proposed approach to benchmarking, which only requires benchmarking against 3 retailers. Within the FCA’s proposal there is little restriction on how these retailers are chosen. We recommend the FCA raise the size of the comparison set to 5 retailers and including more guidance on how these may be chosen.
The FCA should ask firms to benchmark warranties and TAD cover with at least 3 other single item product insurance products to control the costs of add-ons on RTO products. Add-ons to RTO products increase the average cost of a rent-to-own product from 2.7 to 3.7 times an off-the-shelf item. It’s therefore vital that these costs are controlled.
Align the implementation period across existing and new products to prevent consumers being disadvantaged. As with late payment fees, the implementation of this cap across a staggered 3 month period reduces the clarity of the cap for the consumers it aims to help.
Alongside improvements to the structure of the cap, we think the FCA should introduce two further measures to protect consumers in the rent-to-own market:
All consumers should be given a 14 day cooling off period after purchase to shop around for aftercare and insurance. A two week cool off period is standard practice across insurance and consumer credit products, and would prevent rent-to-own customers being canvassed for insurance during the delivery of the item.
Strengthening the rules around the affordability of rent-to-own products would be a welcome measure in addition to a rent-to-own cap. The FCA’s insistence on a light touch approach to affordability means checks continue to fall short, as they fail to take full account of client expenditure as well as income. This leads to worse long-term outcomes for those who are financially vulnerable.