Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019

 
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
Response to FCA Consultation CP 18-35
Rent-to-own and alternatives to high-cost
credit

January 2019
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
Introduction
The Centre for Responsible Credit (‘CfRC’) welcomes the opportunity to respond to the FCA’s
consultation on its proposals to control prices in the Rent to Own market. We welcome the
work of the FCA in this sector, which has identified that firms are currently ‘charging over the
odds’1 for ‘essential everyday items like cookers or washing machines.’

We agree with the FCA’s analysis of customer vulnerability in this market and note that people
on very low incomes – with median incomes between just £12,000 and £18,000 per year –
are paying extremely high prices for goods: often as much as four or five times the
‘mainstream’ retail price.

We also agree with the FCA that the high total prices charged by firms over the lifetime of
their agreements can cause significant harm to low income customers. In our own previous
research with Rent to Own customers2 we have found that many struggle to maintain the
payments over what can be very lengthy (156 weeks) agreements:

          “It was very, very stressful for us as there were some weeks when there was
          very little money - we had to choose whether to eat, pay BrightHouse, or
          pay the electricity.”
The FCA is also correct to identify the need for direct intervention on prices in this market.
Other potential remedies, including disclosing comparative retail prices and including risk
warnings about the total high costs of Rent to Own are not likely to prove effective because,
as the FCA notes, borrowers are much more focused on the level of weekly repayments, and
– particularly where essential appliances have broken down or are needed to start a home –
often need to obtain goods at short notice.

In addition, most Rent to Own customers have a lack of alternative credit options available to
them to fund the purchase of goods.                This is because they are already highly indebted

1
    https://www.fca.org.uk/news/press-releases/fca-proposes-introduction-price-cap-rent-own-firms-protect-
vulnerable-consumers-high-costs
2
 See, for example, our series of reports looking at the social impact of Fair for You: a much more affordable and
ethical provider of credit than Rent to Own firms.

                                                       2
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
(relative to income levels). In this respect we note from the FCA’s earlier work conducted for
the High Cost Credit Review3 that:

    •   The typical (median) level of total indebtedness amongst Rent to Own customers is
        £4,300;
    •   Around one third of this amount is held in the form of Rent to Own agreements; but
    •   The remaining two-thirds is owed on a wide range of other credit agreements
        including to door to door moneylenders, catalogue companies, on motor finance,
        credit cards, as well as in the form of arrears on household bills.

Given this high level of existing debt, and the spread of this across so many different forms of
credit (the median customer having eight outstanding debts at any one time), we consider
that many have simply ‘maxed out’ their credit limits; have already defaulted on other types
of commercial credit previously available to them, or are currently trapped in patterns of
repeat borrowing (including the constant ‘rolling over’ or refinancing of their high cost credit
commitments). This raises questions about whether or not many customers using Rent to
Own can really afford the agreements into which they are entering.

It is recognised by the FCA (para 3.25) that the credit scores of people using Rent to Own are
very low, “even when compared with other high cost credit users”. Although the FCA has not
published the full distribution of credit scores amongst Rent to Own customers or commented
on the reasons why scores are so low, we consider that very low scores imply recent defaults,
and possibly ongoing debt problems. In our view, this supports the case for robust consumer
protection measures to be put in place as Rent to Own is, for many, their final commercial
credit option. This makes them less price sensitive, and vulnerable to exploitation.

Although the FCA states (para 3.56) that its authorisations process and supervision of firms
has “already driven improvements in firms’ conduct around affordability assessments, price
transparency and treatment of customers in arrears” and that this has led to “a reduction in
the number of consumers accepted for unaffordable RTO agreements” there has been a lack

3
 High Cost Credit Review Technical Annex 1: Credit Reference Agency (CRA) data analysis of UK personal debt,
July 2017

                                                     3
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
of transparency from the FCA concerning the distribution of indebtedness amongst this
customer group, and no proposal put forward to measure progress in this respect.

This is extremely disappointing. Whilst we support the FCA’s overall objective to (para 1.18)
“…bring down prices on RTO agreements where the overall costs to consumers are high
relative to other retailers’ prices” there is also a need to ensure that overall levels of
indebtedness for customers using this market are reduced and credit scores improved over
the longer term. Giving people a chance to reschedule existing debts and access less
expensive credit options would be the most sustainable solution for customers trapped in this
sector of the consumer credit market.

Imposing price controls in the Rent to Own market should (if properly designed and enforced)
go some way to reducing overall debt levels, but they are unlikely to make a significant
difference to overall indebtedness on their own (as seen above, debts on rent to own
agreements constitute only around one third of their overall indebtedness and price controls
in the Rent to Own market will only partially reduce this portion of the total).

Measures are therefore also needed to control prices in other sectors of the consumer credit
market which are used by Rent to Own customers. Indeed, it makes no sense for Rent to Own
customers to be protected from paying more than 100% of the cost of goods in this market,
if they are also, simultaneously in many cases, trapped in a pattern of repeat borrowing from
door to door moneylenders or sub-prime credit card providers where the costs of borrowing
can easily exceed that level. Whilst supporting the proposed cap on credit costs for Rent to
Own (subject to our further comments on the specifics of the FCA’s proposals in this
document) we also urge the FCA to extend a 100% total cost cap across the entire consumer
credit market.

Importantly, we support the imposition of caps on the cost of credit not only because they
bring the prices paid by low income customers down, but because they can be an effective
measure to control the level of risk being taken by lenders. This is particularly the case where
default charges are included in the cost of credit cap and the level of that cap is low enough
to impact significantly on lender business models.

Evidence from the total cost cap on payday lending indicates that this has successfully driven
an improvement in lending practice. There is now much less irresponsible lending taking

                                               4
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
place in that sector, and default rates have fallen significantly as a result. However,
irresponsible practices – which for example, encourage repeat lending for people in financial
difficulties – have not been completely eradicated. In October, the FCA’s Chief Executive,
Andrew Bailey, wrote to the Chief Executives of payday lenders alerting them to evidence that
they were, in some cases, still failing to properly assess affordability in line with the FCA’s
rules.

As we have pointed out in previous responses to the FCA, its current creditworthiness and
affordability assessment rules provide far too much discretion to lenders to determine what
constitutes the “basic quality of life”4 that they are advised to ensure borrowers can afford
after taking account of their loan repayments and household bills. Because the payday
lending cap is (at 100% of amount loaned) very high and because there is so much discretion
given to lenders when calculating affordability, lenders have a financial incentive to ‘game’
the FCA rules: to lend to people who they know will struggle to repay and trap them in repeat,
profitable, borrowing patterns.

For the above reasons, we argue in this response in support of:

      •   Effective price control within the Rent to Own market, including not only base prices
          and the cost of credit but also delivery and installation costs, default charges, and the
          Theft and Accidental Insurance products sold by Rent to Own firms5;

      •   Adequate resources to be devoted to the supervision and enforcement of any final
          rules;

      •   A transparent review and monitoring process of the impact of the FCA’s rules,
          including the publication of the full distribution of total indebtedness held by Rent to
          Own customers on an annual basis; and

      •   Much improved FCA activity to support the development of more affordable, and
          appropriate, alternatives to Rent to Own, and Theft and Accidental Damage Insurance.

4
    Consumer Credit Sourcebook (CONC) 5.2A.18
5
 We consider the FCA’s final rules on the elimination of point of sale advantage for extended warranties a
welcome one, although we think the ‘gap’ of two days to be very short.

                                                    5
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
The remainder of this submission now provides further detail in respect of these issues in
turn.

Effective price control
Whilst we welcome the fact that the FCA has put forward proposals to regulate both the base,
cash, or ‘purchase’ price of goods and cap the cost of credit that can be charged on those price
elements at 100%, we consider that the specifics of its proposals in these respects are
currently inadequate to protect consumers from the potential harm that the FCA has
identified.

We are concerned that, unless significant changes are made to the detail of the proposals,
many Rent to Own customers will see very marginal reductions in total cost. Indeed, the
proposals as they currently stand run the risk of creating a price cap in ‘name only’: one which
simply legitimises the extremely high prices that customers are currently being charged.

This is borne out not only by our modelling of the FCA’s proposed rules in respect of individual
items (see the following section and Appendix) but also by the FCA’s estimate of total benefits
for customers arising from its proposals. In this respect:

    •   The FCA estimates that its proposals will, by directly reducing the cost of goods from
        Rent to Own firms, save customers a total of £17.9 million per year (para 4.37); and

    •   We estimate that there are approximately 108,000 new customers per year6;

    •   This results in an estimated saving per new customer per year of £165, or £3.18 per
        week. On an average payment per customer of £28 per week (para 3.12), this
        represents a saving of just eleven percent.

6
 Based on FCA statement (para 3.13) that there are approximately 300,000 customers with outstanding Rent to
Own debts; that BrightHouse holds approximately two-thirds of this total (BrightHouse Annual Report to 31 st
March 2018) and that BrightHouse had 36,100 new customer acquisitions in the first half of 2018 Q2
(BrightHouse Half-Year Report, September 2018). Therefore, we estimate BrightHouse’s expected number of
new customers to be 72,000 for the year and for this to constitute two thirds of the market total = 108,000.

                                                     6
Response to FCA Consultation CP 18-35 Rent-to-own and alternatives to high-cost credit - January 2019
•   It should, however, be noted that customers have, on average, 2.4 agreements
       outstanding at any one time (para 3.12). If all agreements are taken out in the same
       year then the average saving per agreement will be just £68.75, or £1.32 per week.

The precise level of savings to be made by customers will depend on both the number and
type of goods (e.g. appliances, TVs, or furniture) that they obtain from firms. Nevertheless,
as we now proceed to point out, the savings that are likely to be delivered by the FCA
proposals could be extremely small in comparison with the current cost of many items.

The problem with the FCA’s base price benchmarking proposal

The stated ambition of the FCA to stop firms “charging over the odds” is welcome. However,
the current proposal regarding the benchmarking of base prices to other retailers is unlikely
to achieve this. This is because the proposals make it possible for firms to establish their own
comparison set of other retailers for each item. As a result, they are always able to set their
price at the highest level they can find in the non-catalogue retail market.

The specific proposal (para 4.6; Appendix 1, 5B.2.2) put forward for consultation by the FCA
allows firms to choose to benchmark against either:

   •   The median of three other retailers, where one of these is a catalogue credit retailer,
       or
   •   The highest of three other non-catalogue credit retailers.

In practice this means firms will always be able to charge at least the highest price of three
non-catalogue retailers.

This could have the effect of limiting the savings for customers under the new rules to just a
few pence per week in some cases. For example, the Samsung Washing Machine in the
screengrab (figure 1) shown below has a product price of £965.51 with BrightHouse.

                                               7
Figure 1: Samsung Washing Machine, BrightHouse website screengrab, January 2019

If BrightHouse were required to benchmark against the highest of three major mainstream
retailers in this market then this would significantly reduce the base price (figure 2, below)

                                               8
Figure 2: BrightHouse base price v three major mainstream retailers

In this scenario, BrightHouse would be required to lower the base price on the washing
machine by £317: a considerable saving and one which would deliver on the FCA’s promise to
stop Rent to Own customers from being “charged over the odds”.

However, apart from the restriction that no more than one of the three retailers can be a
catalogue credit retailer, and none of the comparison set can be other Rent to Own firms or
an associate of a Rent to Own firm, the current FCA proposal places no restrictions on who
the three retailers used in the comparison set should be.

There is therefore nothing to stop Rent to Own firms deliberately finding the highest possible
prices in the market, including those charged by one catalogue lender (see figure 3, below).

                                                 9
Figure 3: How the FCA’s current proposal allows much higher base prices to be set

As can be seen, the FCA’s current proposal would leave BrightHouse free to set their base
price up to £930, which is clearly way outside the mainstream range of between £600 and
£700 and only £36 less than they currently charge.

It should be noted that since undertaking this analysis in the earlier part of January, the cost
of this specific item at Littlewoods (a catalogue credit retailer7) has fallen to £759.998.
However, under the FCA’s proposal this would make no difference to the base price
calculation. Because Littlewoods is a catalogue lender and the others are not, Rent to Own
firms could eliminate Littlewoods from the comparison set and take the highest of the prices
advertised by RGB, Co-op Electricals and Argos. The result is still £930. Indeed, the result will
always be the highest price charged by non-catalogue retailers in the market9.

7
  The FCA defines catalogue credit retailers in the proposed rules as those firms selling goods under “retail
revolving credit agreements”. Although Argos offers credit options for the purchase of its goods, it does so
under Buy Now Pay Later agreements which do not meet this definition.
8
    Accurate as at 16th January 2019.
9
 This is because this price is always the median of the three highest prices when a catalogue company is included
and always the highest of prices when catalogue companies are excluded. If it is the intention of the FCA to
allow Rent to Own firms to charge the highest price they can find from non-catalogue retail firms then it should
have said so directly and presented a much simpler proposal for consultation.

                                                      10
Further problems arise with the FCA’s proposals, as demonstrated through the following
example of the benchmarking of a Sony television.

Figure 4: Sony Television, BrightHouse website screengrab, January 2019

The product price for the above TV at BrightHouse is £955.51. Searching for three mainstream
alternative retailers for this product, gives the results in figure 5, below.

                                                11
Figure 5: BrightHouse base price v three major mainstream retailers

However, if we expand the comparison set to include the catalogue retailer, Littlewoods, and a very
high outlier, Simply Electricals, we can justify a median price of £1,180. This is £224 higher than is
currently charged by BrightHouse (figure 6, below).

Figure 6: BrightHouse base price v broad comparison set

                                                 12
It is not entirely clear from the guidance whether firms are required to include catalogue
retailers in their comparison sets in these cases. If Littlewoods is included the median of
£1,180 becomes the benchmarked price, but if excluded then the price of £1,599 charged by
Simply Electricals could become the benchmarked price .

This highlights a fundamental problem with the approach that the FCA is proposing, as it
allows Rent to Own firms to scan the market for the highest available price for products that
they sell (or ones which are comparable) regardless of the cost basis on which they and other
retailers are operating: for example, in respect of their wholesale and distribution costs. In
the above example Simply Electricals is a small retailer trading on-line and from a store based
in Bolton. It is unlikely to have comparable supplier terms to BrightHouse.

And retail pricing practice is also complex. Retailers sometimes inflate the prices of some
stock to make other models, which they wish to sell in greater volumes, appear a more
attractive prospect to customers. So, it is always going to be possible for Rent to Own firms
to find ‘outliers’ against which they can benchmark their prices. In other words, the current
FCA proposal virtually guarantees that Rent to Own customers will be offered the very worst
deal on the market.

The proposed FCA rule to address the problem of very high ‘outliers’ being used in the
benchmarking process is contained in Appendix 1, 5B.2.2(8):

         “Where a RTO firm reasonably considers that a particular cash price is so
         far outside the range of cash prices it has found that no reasonably-informed
         UK consumer is likely to pay that cash price, the RTO firm must not use that
         cash price as a benchmarking price.”
However, this leaves it to the Rent to Own firm itself to determine whether a cash price
charged by another retailer meets this criterion. Leaving this decision to the discretion of
Rent to Own firms would, in our view, be nothing short of a dereliction of its consumer
protection responsibilities by the FCA.

What should the FCA be trying to achieve?

In our view, the FCA should be trying to ensure that Rent to Own firms arrive at their cash
prices for goods through the process of fair comparison with other retailers: one which
ensures that they are benchmarking against other retailers with similar cost structures to their
own. We recognise that the scale of Rent to Own firms does not provide for comparison with
                                              13
the very largest mainstream retailers, but neither should it mean that Rent to Own customers
should always have to pay the very highest prices.

Fair comparison could be achieved in two ways:

       •   By increasing the number and/or specifying in greater detail the non-catalogue
           retailers with whom Rent to Own firms should obtain benchmarked information on
           price, and taking an average10 of these; or

       •   By pegging Rent to Own firm cash prices to their actual wholesale and distribution
           costs.

We now look at each of these options.

Increasing the number of non-catalogue retailers to benchmark against

If the FCA continues with its current proposal to require Rent to Own firms to benchmark
against retail prices in the wider market, then we urge it to delete the option for a catalogue
credit provider to form part of the comparison set, and to increase the number of non-
catalogue retailers to five. Catalogue retailer cash prices are higher than mainstream retailer
prices in order to reduce the nominal interest rate charged to customers11. In the above
worked example of a Samsung washing machine, the median price calculated on this basis is
£699. Based on the costs of the item charged by the biggest retailers (figure 2, above) this
appears to us to constitute a fair price. It would reduce the cost of this item for customers by
about 27 percent.

Specifying the comparison set in greater detail

We recognise that Rent to Own firms may object to an increase in the number of comparator
retailers on the grounds that this would require them to benchmark against some firms which
have very different operating costs to themselves (i.e. very large retailers with significantly
lower wholesale costs). They may also argue that a requirement to gather information from
five different retailers increases the administrative burden on them to comply with the rules.

10
     Whether mean or median – as specified by the FCA
11
  Indeed, we believe that the base prices of catalogue retail companies need to be controlled and will return to
this in our submission to the consultation on proposals to regulate that sector in March.

                                                        14
If the FCA is sympathetic to these arguments, then it could seek to address them by reducing
the number of comparator retailers but, in this case, we consider it would be incumbent on
the FCA to specify precisely who that smaller number of comparator firms should be. This
exercise would require the FCA to identify comparator retailers taking into account factors
such as volume of sales and supplier agreements, store and distribution costs etc. If the FCA
takes this route, we ask for further consultation on the detail of this approach. This should
involve the FCA in publishing the precise factors it would take into account when setting the
comparator group, together with detailed examples of the savings it expects this to generate
across a wide product range.

Problem of ‘Comparable’ Products

The FCA has correctly identified that some products will not be available from many other
retailers and there may not therefore be a sufficiently large comparison set available for the
benchmarking process to be completed. The risk of this occurring is greater if the number of
retailers required for benchmarking purposes is increased to five, although we consider that
for appliances, technology, audio and entertainment, there is usually a broad enough
distribution of models across other retailers that Rent to Own firms should be able to find five
comparator retailers for most models.

We do, however, acknowledge that it will be a bigger problem in respect of furniture.

Where there is a lack of comparator retailers with the same product the FCA has proposed
that a benchmark price can include those of ‘comparable’ products (para 4.9):

             “Where the same product is not sold by other mainstream retailers, the firm
             would need to benchmark by finding a ‘comparable product’, based on, for
             example, quality, size, performance, and functions.”12
In our view, much more detail is needed in respect of each of these factors. Guidance is
particularly needed in respect of ‘quality’ considerations. It is not clear, for example, how two
very different quality sofas would be distinguished by such under the guidance, although they
would have very different prices.

12
     The draft rules and guidance in Appendix 1 5B.2.3 add brand and colour to this list.

                                                         15
We would therefore welcome the FCA establishing a working group, with consumer and
industry representatives, to further develop the guidance in this respect. That group could
also be used on an ongoing basis to review actual pricing policies for ‘comparable products’
to help ensure compliance.

Pegging base price to wholesale costs

In its consultation document the FCA states that it has considered approaches to Rent to Own
regulation taken by other countries, including in the United States. It specifically references
(Annex 5, para 9) that “a small number of states” peg Rent to Own base prices to wholesale
costs, but there is no evidence that the FCA has assessed the pros and cons of this possible
alternative approach vis a vis its current retail price benchmarking proposal. We ask the FCA
to undertake and publish the results of such an assessment.

Our research finds that the specific states referenced by the FCA are New York, California,
Maine, Vermont, West Virginia, and Hawaii.

In California, which has a population roughly 60 percent that of the UK, the state legislature
passed the California Rental Purchase Act (also known as the ‘Karnette Act’) in 2010. This
defines the cash price of goods as “the documented actual cost, including actual freight
charges, of the rental property” to the Rent to Own firm “from a wholesaler, distributor,
supplier, or manufacturer and net of any discounts, rebates, and incentives.”

The Act was initiated due to the failure of previous legislation which was very similar to that
currently being proposed by the Financial Conduct Authority. Indeed, the prior legislation in
California required Rent to Own firms to establish a base price based on “the price at which
willing buyers are paying willing sellers for the item” and to evidence this by maintaining
records of “published prices or advertisements by retailers of similar products selling in the
same trade area” in which the Rent to Own firm was located.

However, reviewing the effectiveness of this approach in 2005, the California Senate’s Bill
Committee noted that this approach placed a high administrative burden on firms, and also
made it impossible for consumer groups and enforcement agencies to know whether or not

                                              16
a cash price for goods had, in any individual instance, been set in accordance with the law
without first making a complaint and seeking evidence of fair price setting from the firm13:

          “Under current law, a rental company has to disclose the cash price of the
          rented item in the contract. The "cash price" is defined as the price at which
          willing buyers are paying willing sellers for the item in the relevant trade
          area. This calculation has not worked well because the determination of
          cash price requires a regular survey of the market which imposes an
          administrative burden on rental companies and a burden on law
          enforcement to determine what the real cash price is.”
As a result, the case for a change in legislation to peg prices to wholesale and distribution
costs was supported by the Rent to Own industry itself (the Bill to amend the legislation was
sponsored by Rent-A-Center), and debates indicate that there was broad support for the
principles of “…ensuring that consumers are not taken advantage of by unconscionable
pricing” whilst also providing “sufficient margin for RTO companies to function profitably.” In
addition, the pegging of base price to wholesale costs would reduce administrative burdens
on firms and make it easier for consumer agencies and regulatory bodies “…to obtain
documentation supporting the cash price and payments disclosed in the contract.”

The pegging of base prices to wholesale and distribution costs in the UK may therefore be a
more appropriate approach to take than the benchmarking of retail prices, particularly given
the problems identified previously in this paper concerning the FCA’s proposed rules.

However, it should be noted that the mark-ups on wholesale costs in the six US states referred
to are very high and further multiples of those base or cash prices are also allowed in the
legislation in respect of credit costs (see table 1, below14).

13
  The full Senate Committee discussion is available at http://www.leginfo.ca.gov/pub/05-06/bill/asm/ab_0551-
0600/ab_594_cfa_20060621_122037_sen_comm.html
14
  Table copied in its entirety from ‘Rent to Own: rules and regulations’, Association of Progressive Rental
Organzations (‘APRO’). Available from www.rtohq.org

                                                    17
Table 1: US states price controls

It is not clear to us what processes the relevant US state legislatures went through to
determine these multiples, although it is notable that when signing the New York law into
effect in January 2010, the then New York Governor, David Paterson, added a memorandum
stating15:

            “While these steps represent a positive improvement, I am concerned that
            the pricing provisions in the bill will not provide an adequate shield against
            the predatory practices that they purportedly seek to address. Unlike the
            law that had existed prior to this bill's enactment, this legislation establishes
            a formula for determining the maximum cash price for new goods based on
            the merchant's actual cost of acquiring the merchandise. While this tethers
            the price ceiling to an objective number, it too is woefully inadequate, as the
            legislation allows for sizeable mark-ups above the cost of acquisition and
            will permit merchants to demand payments many times the value of the
            item rented before equity passes to the consumer. To state it bluntly, this
            bill is no panacea, and will permit unscrupulous merchants to take
            advantage of low-income consumers”
For this reason, the change in legislation in New York was opposed by a number of consumer
groups and trade unions.

We also have some reservations about the use of multiples of wholesale costs (even if set at
lower levels than those in force in the six States), as this could incentivise Rent to Own firms
to enter into agreements with their suppliers at higher wholesale prices than for other

15
     Downloaded from State archives, 9th January 2018. Copy available on request.

                                                      18
retailers of similar sizes16. Nevertheless, it may be possible to prevent this by requiring firms
demonstrate fair practice in this regard to the Financial Conduct Authority on an annual basis.
The compliance costs of this approach, would, we believe, be significantly lower for firms than
for the FCA’s current proposals.

In view of the above, it would have been preferable if the FCA had undertaken and
published a detailed comparison of different base price setting approaches, including in
respect of stipulating the comparison set for retail price benchmarking, extending the
comparison set to five, and pegging prices to wholesale costs as part of the consultation on
its price capping proposals. It’s failure to do so, has left us in a position of supporting a price
cap to come into force in April this year, but unsure of the most effective structure for that
cap.

As an interim measure we therefore request that the FCA proceed with a retail benchmark
cap based on five comparators and commit itself to a thorough review of alternative options
within one year, when the impact of the retail benchmark cap should be reviewed to inform
a final decision.

Delivery and installation costs

We note that the existing proposal requires Rent to Own firms to benchmark delivery and
installation costs for each product category against competitor retailers. Based on the
delivery and installation costs described by the major providers of similar products, we expect
that delivery charges will be required to fall if RTO providers benchmark against equivalent
services. See comparison table 2 on the following page.

16
   The use of multiples leads to a perverse incentive to obtain a sub-optimal deal from suppliers. For example,
an appliance with a wholesale cost of $300 can be multiplied by 1.75 to create a base price of $525 in New York,
providing a margin (before credit costs) of $225. If the Rent to Own firm agreed to pay a higher price of $400 to
its supplier for the same item, the base price would rise to $700 and the margin (before credit costs) to $300.

                                                      19
Table 2; Comparison of delivery and installation costs

 Category        BrightHouse        Argos           Currys                  Appliances Online       Habitat

 Large           £55 installation   £45 delivery,   £25 installation        £25 connection          Not

 Appliance       and    delivery.   installation    From free delivery      From free delivery      applicable

 (washing        Within 7 days      and recycling   (within two days –      (>2 days, no
                                                    most similar to         customer selected
 machine)
                                                    BrightHouse offer)      window) to £40
                                                    to £40 delivery (next   delivery (next day
                                                    day with customer       with customer
                                                    selected time slot)     selected time slot)

 TV & Audio      £65                £4.95           From free delivery      From free (>2 days,     Not

 (large          installation       Standard        (within 2 days –        no customer selected    applicable

 screen          and delivery.      Delivery        most similar to         window – most
                 Within 7 days      (next day if    BrightHouse offer)      similar to
 television)
                                    ordered by      to £40 delivery (next   BrightHouse offer) to
                                    8pm) – does     day with customer       £40 (next day,
                                    not include     selected time slot)     customer selected
                                    installation                            window)
                                                    £45 set up /
                                                    installation (but not   £3 service to unpack
                                                    forced to buy as        TV and take
                                                    with BrightHouse)       packaging away

                                                                            £40-55 set up /
                                                                            installation (but not
                                                                            forced to buy as with
                                                                            BrightHouse)

 Large           £60                £6.95           Not applicable          Not applicable          £15 for

 Furniture       installation       standard                                                        orders

 (sofa)          and delivery.      delivery; 2-                                                    under
                 Within 7 days      hour timeslot                                                   £500
                                    advised day
                                                                                                    £25 for
                                    before
                                                                                                    orders
                                    (retailer
                                                                                                    over £500
                                    chooses)

                                    £24.95 next
                                    day with
                                    customer
                                    chosen 4-
                                    hour window

                                                      20
We note that PerfectHome does not currently charge for delivery and installation. If it
introduces charges for delivery and installation in response to this new action from the FCA,
we hope that it will be required to benchmark its prices for delivery and installation to broadly
comparable services. RTO providers should not, for example, be allowed to consider a same
day delivery service with a narrow, customer selected time window comparable to a service
where delivery takes several days. We hope that the FCA will monitor the benchmarking of
delivery and installation prices carefully, and also require providers to give evidence that they
are benchmarking against equivalent / comparable services.

Controlling Default Charges

We are concerned that the FCA has proposed to leave late payment and default charges
outside the 100% cost cap. Whilst the FCA has proposed a rule to prevent default costs from
being increased to offset any loss of revenue from the cost cap, its failure to include default
costs within the 100% cost cap will undermine its potential to positively impact on lending
practice.

One of the main impacts of the cap on the total cost of credit (which includes default charges)
in the payday lending sector has been an improvement in lending practice. Total cost caps,
which include default charges, limit the extent of the risk that lenders can take and reduce
the financial incentive for these to target people who they know will struggle to repay with
products which seek to profit from their financial problems: either because borrowers are
encouraged to refinance or because they face high default charges. In this way, price caps
can also have a positive impact on default costs for firms. By encouraging more responsible
lending the number of defaults should reduce.

Although there has been a considerable improvement in lending practice within the payday
lending sector since the introduction of the total cost cap, the level of that cap is still
sufficiently high for lenders to ‘game’ the FCA’s rules concerning creditworthiness and
affordability assessments, and there is still too much lending taking place to people for whom
loans are unaffordable from the outset, creating problems of repeat borrowing and ‘credit
dependency’. The fact that affordability assessment rules are still not being followed was
expressly confirmed in Andrew Bailey’s letter to payday firm Chief Executives in October 2018.

                                               21
We are therefore concerned that excluding default fees from the 100% cost cap will lead to a
similar problem within the Rent to Own sector.

We are also concerned that the FCA has not proposed an adequate rule to prevent firms from
levying default fees more frequently than currently as a means of offsetting lost revenue from
the cost cap.

Within the Rent to Own sector, the FCA notes (para 4.28) that arrears charges are typically
between £10 and £12 and that one large firm has voluntarily limited charges to £48 within a
13 month period. Over a 156 weeks long agreement it is therefore possible, and the FCA
accedes this, for customers to be charged “hundreds of pounds”. Although the FCA states
that “in practice” this is not being seen, it provides no detailed breakdown of the distribution
of arrears charges that are actually being levied from customers.

We are concerned that, even if current firm practice is to restrict the number of times that
arrears charges are imposed on customers, this could change following the introduction of
the cap, and there is nothing in the current proposed rules which would prevent this.

In the consultation paper, the FCA refers to the existence of the general rule (CONC 7.7.5R)
that requires all consumer credit firms to limit the level of their default charges to those which
are “no higher than necessary to cover the reasonable costs to the firm.” But this does not
restrict firms in respect of their propensity to levy default charges (i.e. when they will exercise
forbearance and when they will not). The current general rules for consumer credit lenders
provide significant levels of discretion for lenders in this respect.

Neither does the specific draft rule which the FCA proposes to ensure firms are not able to
offset the loss of revenue from the cost cap. This states:

         “RTO firms must not attempt to recover revenue that may be lost due to
         compliance with the total cost of credit cap rules through the price for other
         goods or services provided by the RTO firm in connection with a RTO
         agreement.”
This draft rule is, in our view, defective because it only prevents firms from increasing the
level of their default charges not the number of occasions that they are prepared to levy
charges on customers over the course of an agreement. It also does not prevent firms from
levying multiple charges on customers who have more than one agreement outstanding at

                                                22
the time of the default. In our view these potential actions of firms in response to the cap
need to be anticipated and addressed.

There are two ways of dealing with this issue. The first is to consider what further detailed
rules are required to address the potential problem of increased propensity to levy default
fees; and how customers with multiple agreements should be treated. The second, and our
preference, is simply to include default charges within the overall cost cap of 100% of base
price.

At para 4.32 of the consultation paper, the FCA notes:

         “In the range around 100% – caps at 90% or 110% – the effect of the cap on
         firm revenues does not jump dramatically. For caps between 90% and 110%,
         combined with the effects of benchmarking, we estimate that firms would
         stop offering less than 5% of agreements. This relatively low figure is
         because firms expect individual agreements to make up much of a firms’ net
         revenue. This is because consumers generally pay much more, in total, than
         the cost of the goods sold. We estimate that most agreements will remain
         profitable for RTO firms, and so, as long as firms continue to trade, we do
         not expect a price cap of between 90% – 110% to have a significant impact
         on consumers being able to access RTO.”
Given that the FCA expects firms to provide help and forbearance to people in financial
difficulty, it cannot be expecting default charges to make up a significant proportion of firm
revenues. And, given that a cap of 90% would not significantly affect firm viability, we see no
reason why default charges could not therefore be accommodated in a cap of 100%. This
would limit the ability of firms to alter their recovery behaviours to maximise revenues, and
achieve the stated aim of the FCA to avoid default charges being used to offset lost revenue
from the cap.

Theft and Accidental Damage Insurance

The existing FCA proposal is for theft and accidental damage cover to be excluded from its
price controls. However, it states that it intends to prevent firms from raising the cost of
cover as a means of offsetting lost revenue from the price cap. We believe that the FCA should
go further for two reasons:

Firstly, it appears to us that theft and accidental insurance cover is currently priced as a
percentage of the base price of goods sold. For example, theft and accidental damage from
BrightHouse in respect of appliances costs about 10% of the base price of the items per year.
                                              23
This rises for laptops (logically as they are more likely to be stolen) and is slightly lower for
items of furniture. Theft and accidental damage seems to be higher than these rates at
PerfectHome but the cost again has a clear link to the base prices of the items. If the FCA
implements effective base price controls, then the cost of theft and accidental damage per
item could feasibly fall in line with those base prices. However, if this is the sector’s current
pricing practice, a rule preventing its nominal rise is therefore inadequate. Simply keeping
nominal insurance prices at the same level would generate additional revenue to offset the
impacts of the price controls on goods and credit costs. If this is the case, and we invite the
FCA to investigate further and publish its findings, then a rule must be put in place to ensure
that the reductions in the level of insurance cover needed by customers are passed onto
them.

Secondly, the current arrangements for customers to insure items against theft and
accidental damage provide Rent to Own firms with significant point of sale advantages and
prevent customers from seeking out cheaper cover. This is particularly the case for customers
who take out multiple agreements, where a general home contents policy (including
accidental damage cover and without any excess) would be much cheaper.

For example, Thistle is a provider of home contents insurance through social landlords. They
price home insurance including accidental damage for goods which are not designed to leave
the house (e.g. furniture, desktop computers, small and large appliances) with no excess at
£54 per year if paid directly to Thistle or £60 per year if paid through the social landlord in
combination with rent. For comparison purposes the amount is £5 per month.

For appliances from BrightHouse the theft and accidental cover is approximately 10 percent
of the base price of the item per year. Therefore, for any customer entering into an
agreement, or agreements, to obtain one or more appliances with a combined base price
value of more than £600 the Thistle insurance product is likely to be cheaper.

We know from the FCA’s data provided in 2017 that roughly two-thirds of RTO customers
have more than one active rent to own agreement, and more than 40% have three or more
agreements and it is highly likely that a significant proportion of these customers would
benefit from obtaining the type of insurance cover provided by Thistle.

                                               24
The FCA has accepted that RTO providers have a substantial point of sale advantage in the
market for extended warranties and has introduced final rules, involving a two day break
between the entering of a credit contract and the purchase of an extended warranty, to
address this. However, it is not possible for such a sales break to be provided in respect of
theft and accidental damage cover, because the goods need to be insured from the moment
that the customer takes possession of them.

As a result, we believe that the FCA should bring forwards a draft rule for consultation to
require all Rent to Own firms to inform any customers entering into agreements for goods
with a base value of £600 or more (or in the case of customers with multiple agreements,
when these exceed a combined base price value of £600) that cheaper insurance may be
available from other providers. And, seven days after these customers have taken possession
of the goods to write to them with further information about how to obtain alternative cover.
This letter should stress that the customer can, at any time, over the lifetime of the agreement
cancel their cover with the Rent to Own firm provided they submit evidence of alternative
cover having been obtained.

Adequate Resourcing of Supervision and Enforcement
We are concerned that the FCA has estimated its additional costs of supervising and enforcing
a complex retail benchmarking requirement in this market to be less than £50,000 per year.
The FCA calculates this as a 0.5 full-time equivalent post.

Whilst recognising that the market is highly concentrated, the product range offered by Rent
to Own firms is broad, and there are considerable complexities involved to ensure that
customers are offered fair prices, particularly where there is a need for firms to benchmark
against ‘comparable’ products. The complexity of retail benchmarking increases the potential
for Rent to Own firms to abuse the system, and they have a track record (as evidenced by
recent redress schemes) of failing to ‘play by the rules’.

It is also apparent to us, that the FCA’s proposal put forward for consultation – which have
not included a full analysis of the pros and cons of different possible benchmarking
approaches – indicate that it has inadequately resourced its work on this sector to date.

                                               25
We therefore propose that the FCA convene a working group involving consumer agencies
(who should be paid for their time) to review the FCA’s proposals to supervise any final rules
and advise the FCA’s Chief Executive, independently, on the adequacy of these and the
resources that he will need to ensure are made available to support them.

Review and Monitoring Processes
Currently, the FCA has suggested that Rent to Own firms must provide an overview of the
processes through which they will go when benchmarking prices and be able to provide
evidence on request from the FCA. We believe that this is inadequate. Rent to Own firms
should be required to provide the evidence for each of their benchmarked prices to the FCA
on at least a quarterly basis to help the FCA monitor whether the benchmarking process is
being adhered to correctly, and to what extent the process is being gamed. As referred to
above, this will have resourcing implications for the FCA. We recommend that the working
group referred to previously be involved in the design of the reporting requirement.

Improved FCA Support to develop Affordable Alternatives
Whilst recognising that the FCA has moved to clarify how social landlords can help promote
affordable alternatives to Rent to Own, we consider that much more could be done to help
the development of these.

In particular, we would like to see the FCA publish much more detailed information
(potentially obtained from credit reference agencies) on the distribution of debt amongst rent
to own customers together with their geographical concentration. This would assist local
authorities and their partners, including providers of more affordable alternatives, to gauge
the extent of Rent to Own use within their local communities and develop plans to scale-up
alternative provision.

We also consider that the FCA could stimulate more activity in the development of
alternatives by running a Project Innovate Challenge, with the involvement of local
authorities, public and voluntary sector debt advice and financial support agencies, current
affordable alternative providers, and FinTechs. We recommend that the parameters of the
challenge be set following detailed consultation with these organisations, which could
perhaps be facilitated by groups such as the End High Cost Credit Alliance. Working with

                                             26
Government and social investors the FCA should ensure that development funding for
conceptual design, research with target audiences, and submission of proposals is made
available and the FCA should enable the most promising of these with access to its Regulatory
Sandbox for trials to take place.

                                             27
APPENDIX: Benchmarking TV prices
We gathered prices for the televisions offered online by Perfect Home from as many retailers
offering online prices and delivery to the UK as possible, based on simple web searching.

 Name                           Manufacture   Comparison   Median       FCA    Max   FCA Max /
                                r Code        Count        Cash Price   Cash Price   Median
                                                           (excl.                    Cash Price
                                                           catalogue)

 LG 49" UHD SMART TV            49UK6400P     9            £399         £599         1.50
                                LF

 LG 43" UHD HDR SMART TV        43UK6750P     7            £369         £499         1.35
                                LD

 LG 55" UHD SMART TV            55UK6400P     6            £449         £599         1.33
                                LF

 PANASONIC    55"   UHD   HDR   TX55FX650     11           £679         £900         1.33
 SMART TV                       B

 TOSHIBA 49" UHD HDR SMART      49U5863DB     9            £349         £450         1.29
 TV

 TOSHIBA 43" UHD HDR SMART      43U5863DB     6            £299         £304         1.02
 TV

 TOSHIBA 55" UHD HDR SMART      55U5863DB     9            £399         £399         1.00
 TV

 TOSHIBA 65" UHD HDR SMART      65U5863DB     7            £599         £599         1.00
 TV

 LG 43" UHD HDR SMART TV        43UK6950P     0            na           na           na
                                LB

 LG 70" SMART UHD HDR TV        70UK6500P     2            na           na           na
                                LB

 LG 75" UHD HDR SMART TV        75UK6200P     1            na           na           na
                                LB

 Average                        na            6.1          £443         £544         1.23

                                              28
Where there were at least three retailers offering products with the same manufacturer code,
we found that the maximum price allowed on the current benchmarking varied from between
1 and 1.5x the median non-catalogue retailer price, and that it would reach 1.23x on average.

Given the median prices and the 100% credit cap, this could mean customers being charged
over £300 than they would be if the cap were set at, for example, 1.1 times the median (LG
49” UHD SMART TV), or an average of £113 in total (>£1 week on a two year agreement)
which is where the FCA expects cash benchmark prices to land.

 Name                Manufacturer      FCA Max 1.1x             FCA      Max Impact       on
                     Code              Cash         Median      Cash   Price total paid (at
                                       Price        Price       vs       1.1x 100% cap)
                                                                Median

 LG     49"   UHD 49UK6400PLF          £599         £439        £160          £320
 SMART TV

 LG 43" UHD HDR 43UK6750PLD            £499         £406        £93           £186
 SMART TV

 LG     55"   UHD 55UK6400PLF          £599         £494        £105          £210
 SMART TV

 PANASONIC 55" TX55FX650B              £900         £747        £153          £306
 UHD HDR SMART
 TV

 TOSHIBA       49" 49U5863DB           £450         £384        £66           £132
 UHD HDR SMART
 TV

 TOSHIBA       43" 43U5863DB           £304         £329        -£25          -£50
 UHD HDR SMART
 TV

                                               29
TOSHIBA       55" 55U5863DB           £399        £439         -£40           -£80
 UHD HDR SMART
 TV

 TOSHIBA       65" 65U5863DB           £599        £659         -£60           -£120
 UHD HDR SMART
 TV

 LG 43" UHD HDR 43UK6950PLB            na          na           na             na
 SMART TV

 LG 70" SMART 70UK6500PLB              na          na           na             na
 UHD HDR TV

 LG 75" UHD HDR 75UK6200PLB            na          na           na             na
 SMART TV

 Average             Na                £544        £487         £57            £113

We accept that the FCA has conducted more price checking than we have.

However, we believe that the FCA’s described approach, where Currys, Argos, AO.com, and
Appliance Direct are checked first (Annex 8) and others only checked if fewer than three of
these retailers offer the product may not make the prices gathered by the FCA a full guide to
how RTO providers will attempt to conduct the benchmarking process, where they will be
incentivised to find unusually high prices (as illustrated in the examples of Samsung Washing
Machine and Sony TV given in the main response).

Additionally we found that three items had very limited distribution such that simple web
searching was not sufficient to find three retailers selling the same product (excluding third
party marketplaces on Amazon and eBacy), meaning that PerfectHome would be able to
choose which products it considered ‘comparable’ when finding cash prices against which to
benchmark, unless this process is more tightly defined as discussed in our main response. As
a very basic illustration of the problem, we note the following products are all 43” UHD HDR
TVs, yet have wildly different cash prices even from the same retailer:

                                              30
31
There are differences between these products, but our concern is that without careful
specification of how a product can be understood to be comparable for the purposes of price
benchmarking, Rent to Own providers will be incentivised to test the limits of comparability
in order to reduce the constraints of the price cap on their own pricing.

                                              32
You can also read
NEXT SLIDES ... Cancel