By Huw Jones
LONDON (Reuters) – Britain’s financial watchdog is considering capping “rent-to-own” prices and fundamentally reforming how banks charge for unarranged overdrafts to crack down on high cost credit, it said on Thursday
The Financial Conduct Authority (FCA) published findings from its review into high cost credit, which includes unarranged bank overdrafts, home-collected credit, and a form of hire purchase known as rent-to-own.
“High cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society,” FCA Chief Executive Andrew Bailey said in a statement.
“Today we have proposed a significant package of reforms to ensure they are better protected, including the possibility of a cap on rent-to-own lending.”
The package of proposals could save consumers a combined 200 million pounds a year, the watchdog said.
The FCA has come under pressure from Britain’s lawmakers to cap the cost of rent-to-own credit, as it already has done for interest charged on payday loans.
The watchdog said costs for the 400,000 customers that use rent-to-own, a form of hire purchase for obtaining goods like fridges and washing machines, can be exceptionally high.
In some cases, customers have paid over 1,500 pounds for an electric cooker that can be bought in the shops for less than 300 pounds, it said.
The FCA said it would now carry out a detailed assessment of the impact that a cap could have on the sector and how it might be structured – and that it was also open to other options.
Any changes to the sector would be introduced by April 2019.
The FCA said it was also consulting on banning the sale of extended warranties when a rent-to-own contract is signed, which could save consumers up to 7.7 million pounds per year.
In addition, it said it was consulting on mandatory rules to make it easier for customers to manage their bank accounts and avoid punitive charges for unarranged overdrafts.
The way banks operate and charge for overdrafts needs fundamental reform, the FCA said.
Banks earned 2.3 billion pounds from overdrafts in 2016, with nearly a third from unarranged overdrafts, most of which are paid by just 1.5 percent of customers who pay about 450 pounds a year in fees and charges.
“The FCA is putting forward some immediate proposals today for overdrafts that it believes will save customers up to 140 million pounds a year,” the watchdog said.
“Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.”
If appropriate, these options will be consulted on later this year as part of the watchdog’s separate ongoing review of retail banking.
The FCA proposed stronger protections for customers who take out credit from firms who collect repayments in the home, with the aim of saving customers 34 million pounds a year.
Catalogue and store card firms will also have to do more to help customers avoid persistent debt, with changes proposed by the FCA saving an estimated 27.5 million pounds a year.
(Reporting by Huw Jones; Editing by Mark Potter)