What could the FCA approach to the rent to own sector mean for motor finance?

The regulator is moving for a price cap in the rent to own sector – could this indicate the type of approach from the regulator?

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The Financial Conduct Authority has proposed to introduce a price cap on the rent-to-own (RTO) sector, a move that could be an indication of the direction of travel for attitudes to consumer credit from the regulator.

The FCA said it has designed a bespoke price cap to fit the RTO market, limiting both the cost of the product and the charge for credit. Under the proposed cap, credit charges cannot be more than the cost of the product. In addition, RTO firms will need to benchmark the cost of products against the prices charged by 3 other retailers.

It is estimated that the cap will cost the RTO industry £22.7m per year.

It’s unclear yet as to what APR will be suggested, and the consultation on the price cap and benchmarking proposals are open until 17 January 2019.  If agreed the new rules will be implemented from 1 April 2019.

However it seems an indication that the regulator is prepared to act in advance of its commitment to affordability and vulnerability.

“RTO customers are some of the most financially vulnerable in our society,” wrote the regulator.

“Only one third are in work, most are on low incomes (between £12,000 and £18,000) and are likely to have missed a bill payment in the last 6 months. Despite this, firms often charge these customers more than other retailers for essential household goods such as a washing machine or a cooker, and with add-on insurance and warranties in some cases RTO customers can pay up to 4 times the average retail price.”

It is unknown if there will be any transferral of the approach into the motor finance review, which is more likely to look at commissions and information provided at the point of sale, but if there is a focus on low incomes and vulnerability it could be that the regulator might consider sub-prime motor finance more closely in its review.

In addition, the FCA is introducing a 2-day cooling off period for the sale of extended warranties. This will effectively ban firms from selling these warranties at the point of purchase. This will come into force on 22 February 2019.

In recognition of the challenges some people may find in accessing alternative sources of credit, the FCA is publishing further information about its approach to promoting alternatives to high-cost credit. These include not only lower cost credit options but also alternatives that meet the consumer’s underlying need, without taking out credit, for example other sources of essential household goods. The FCA has set out what actions it is taking including working closely with the Government and other relevant organisations to support a number of initiatives.