SUMMARY OF THE PROPOSALS FROM THE FCA IN ITS HIGH COST CREDIT REVIEW Consultation Paper High Cost Credit Review Consultation on rent-to-own, home collected credit, catalogue credit and store cards, and alternatives to high cost credit Discussion on rent to own pricing CP 18/12*** 31 May 2018
Proposals from the FCA in relation to High Cost Credit Overview On 31 May 2018 the FCA published its consultation paper High Cost Credit Review Consultation on rent-toown, home collected credit, catalogue credit and store cards, and alternatives to high cost credit. Discussion on rent to own pricing. This paper was issued at the same time as CP18/13 High Cost Credit Review Overdrafts. There are 2 different closing dates for consultation responses set by the FCA. The 1 st is 13 July 2018 for what the FCA terms discussion elements in its paper. These are questions 1 and 2 in relation to the rent to own market. The 2 nd and main closing date is 31 August 2018 for the other 27 consultation questions in the paper. The FCA says that if it concludes that a price cap in the rent to own market (RTO) is warranted then it will issue new draft rules to include in CONC in the autumn of 2019. The FCA plan is for the new rules to be in force by April 2019. The main impacts for firms in these FCA proposals The FCA is proposing changes to CONC which will come into force by April 2019 with some rule changes taking effect immediately but with others having a 6 month grace period. A price cap on interest rates charged by rent to own providers A ban on RTO providers selling extended warranty insurance at the point of sale No price caps for home credit providers New verbal and written explanations from home credit providers on refinancing or further borrowing New CONC rule requiring a better explanation of interest charging where a customer fails to pay off credit under a buy now, pay later deal before the end of the promotional period Catalogue credit providers to follow the same rules as credit card providers on credit limit increases Catalogue credit and store card providers to monitor accounts for evidence of financial difficult y amongst their customers Catalogue credit or store card customers who are in persistent debt to have interest and charges cancelled at the 36 month point Some of these proposals already apply to credit card providers. They will require system changes for RTO, home credit, catalogue credit and store card providers. The account monitoring to identify problem or persistent debt issues with customers is new and will take time to implement fully and embed within firms. Rent to Own The FCA makes these comments: RTO is usually weekly collected credit instalments. The APRs are in the 69.9%-99.9% range. The cash price of goods provided in the RTO sector is 45% more expensive than retailers charge. The cost of RTO credit is nearly 3 times more expensive than an outright purchase. RTO credit can be 5 to 6 times more expensive when optional extended warranty or theft and accidental damage (TAD) policies are included. 10-21139533-1 1
Most consumers who buy a TAD policy also buy an extended warranty one. Only 4 is paid out in extended warranty claims for every 10 collected as premiums. RTO extended warranties last longer than manufacturers' 1 year warranties, can provide faster repairs, offer like-for-like replacements and do not charge call out fees where no fault is found. Half of customers using RTO also use home collected or catalogue credit too. The FCA proposes these measures for the RTO sector: A price cap on interest rates charged by RTO providers, New rule in CONC to ban the sale of extended warranties at the same time as the credit agreement is concluded, A deferral period of at least 2 clear days before extended warranty insurance can be sold, Additional information to be given to customers before a RTO warranty sale including its cost, features, exclusions and a warning that a customer is free to buy a warranty elsewhere, and Firms will have to explain to customers the differences between a manufacturer s warranty and the RTO provider s extended warranty. The FCA says that a 250 fridge freezer costs 1241.76 from a RTO supplied when insurance products are included. It says that the equivalent cost using credit from a catalogue provider is 521 or 468 from a home credit provider. The FCA is consulting on the structure of this proposed price cap. It does not want to set the cap at a level where the RTO sector will shrink so much that consumers who would otherwise not be able to access credit elsewhere are frozen out of the market. The FCA has ruled out a complete ban on RTO extended warranties where there is a manufacturer s warranty in place. Home Collected Credit The FCA makes these comments: Most loans are around 1000 in value with payments collected weekly. No charges are levied where a payment is missed. 30% of customers miss payments. The market has shrunk by 50% in the last 5 years with only 600,000 customers in 2017 compared to 900,000 in 2012. However remaining customers are borrowing more. 75% of customers in this segment have more than 1 home collected loan. Section 49 of the Consumer Credit Act 1974 prohibits canvassing off trade premises. Where a customer wants an additional 200 loan before an existing loan has been paid off, this will cost 56.16 more if it is rolled up in a new loan rather than if it is set up as a new concurrent loan. There is an incentive for providers to encourage early settlement and roll up existing credit into a new loan. Customers do not know they could have a concurrent loan more cheaply from the same provider. 10-21139533-1 2
Firms already have to comply with these rules in the Consumer Credit Sourcebook (CONC) of the FCA Handbook: CONC 5.2 and 6.2 assess creditworthiness including affordability every time a customer refinances, CONC 6.7.18 prohibition on encouraging refinancing where this makes a customer s credit commitments unsustainable, and CONC 6.7.19 prohibition on refinancing unless it is done at a customer s request or where a firm reasonably believes it is not against a customer s best interests to do so. The FCA stresses its work on home collected credit is complementary to its recent consultation on staff incentives. The FCA stresses that it is not planning to introduce a price cap for home collected credit based on current market conditions. The FCA proposes these measures for the home collected credit sector: Firms will have to give a verbal explanation of borrowing options when a customer either wants to refinance or to take out further borrowing, A written notice confirming this will have to be given setting out the difference in costs, and Where a firm provides the information initially on either an app or an electronic device, the follow up communication has to be provided in a durable medium for the customer to keep. The FCA also states that it does not consider multiple borrowing of itself to be harmful as long as a creditworthiness assessment is carried out effectively. The FCA says that it will issue guidance on canvassing to clarify the law qualifying this that only a court can give a definitive interpretation. The FCA also says it has decided against imposing either a limit on the amount of refinancing or the point in an existing loan where refinancing can be offered. Catalogues and Store Cards The FCA makes these comments: There are sufficient similarities between these 2 market segments to warrant treating them in the same manner. This includes the amount of debt and the median age of customers. Although there are differences between the 2 segments, the FCA says it sees similar risks to consumers. Where a customer on a buy now, pay later deal fails to pay off the balance within that BNPL period, then he is charged interest from the date of purchase. The FCA says it has fundamental concerns over this practice and that forms should be clearer about the consequences and provide consumers with prominent reminders. In quarter 1 of 2014 almost three-quarters of catalogue credit account holders had at least 1 credit limit increase and some had more than one. Existing CONC rules applying to credit and store cards (but not catalogue credit) mean that firms must not increase credit limits where a customer has advised that they do not want it, or where a customer declines it and that at least 30 days prior notice is given of a CLI increase. Catalogue credit and store card providers will need to have adequate processes to identify customers at risk of financial difficulty. 10-21139533-1 3
Customers can carry a large balance for a long time without significantly reducing their debt. Only 6% of customers are in persistent debt at the 18 month point and even then the average balance is less than 845. An 18 month period for persistent debt monitoring is chosen to allow for seasonal variations in income or spending. The FCA proposes these measures for the catalogue credit and store card sector: To extend CONC so that firms have to make it clear to BNPL customers how interest will be charged if a customer does not repay during the BNPL offer period, A new CONC rule requiring firms to provide a prominent and timely notice to a customer before the end of the BNPL offer period, This new notice is to be in an appropriate medium, in plain English and sufficiently prominent so it is seen and understood, These new information requirements will mean firms have to change both on-line and hard copy communications, Catalogue credit providers to follow the same rules that apply now to credit and store card providers on credit limit increases, A new rule for catalogue credit providers to prevent them giving a credit limit increase where a customer is in financial difficulty, The new rules on credit limit increases will come into force as soon as the new rules come into force, New rules for both catalogue credit and store card providers to: Monitor customer s repayment records and identify signs of actual or potential financial difficulties, Take appropriate action where these signs are identified, and Establish, implement and maintain an adequate policy for identify these customers even though no monthly payments have been missed. These new monitoring rules to come into force 6 months after the rules are made, To extend the existing CONC rules on persistent debt that applies only to credit cards to both catalogue credit and store cards as well, To define persistent debt as meaning that where over an 18 month period a customer pays more in interest, fees and charges than they have repaid principal. Balances of less than 200 are out of scope, Firms will have to prompt at the 18 month point customers in persistent debt to change their repayment behaviour if they can afford to. A further reminder will have to be sent at either month 27 or 28, At 36 months, for customers in persistent debt, a firm will need to help them by either showing forbearance by reducing, waiving or cancelling interest and/or charges, Guidance will set out that catalogue credit providers have a shorter period than the 3-4 years which the FCA considers a reasonable repayment period for credit card providers for its persistent debt customers, The new rules on persistent debt monitoring are to come into force 6 months after the rules are finalised, and A new definition of retail revolving credit to ensure that it covers all catalogue credit and store card providers. The definition will exclude credit cards. The FCA says that its new CONC rules will not specify the particular aspects of account activity that a firm should monitor believing instead that firms are better place to identify appropriate indicators. 10-21139533-1 4
Next steps from the FCA Once the consultation has closed, the FCA will digest the responses. We then expect to see a feedback statement in autumn 2018. The FCA is proposing that the new CONC rules to implement its policy changes will be made and come into force by April 2019 but it could be earlier. Some rule changes will come into effect immediately but for a minority there will be a 6 month grace period. Further information The documents below were issued on 31 May 2018. Consultation Paper on High Cost Credit CP18/12 Consultation Paper on overdrafts CP18/13 KEY CONTACT Rosanna Bryant Partner Financial Regulation Rosanna.Bryant@addleshawgoddard.com 0113 209 2048 07738 679349 10-21139533-1 5
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