Any price cap introduced in the rent-to-own sector would need to be carefully structured if it is to function, executives from BrightHouse have told Credit Strategy exclusively.
Last week, the Financial Conduct Authority (FCA) warned it could introduce reforms across the high-cost credit sector by April 2019, including in the rent-to-own sector, where it says it has identified “harm”.
The regulator is now carrying out a detailed assessment of the impact that a cap could have on the sector and how it might be structured. A previous cap imposed on payday loans has had a significant effect on the sector, with several players in the market disappearing. Rent-to-own is a significantly smaller market, with only two major players currently operating: BrightHouse and PerfectHome.
While legal due diligence is necessary, FCA director of strategy Christopher Woolard said, he noted that should the FCA decide to pursue the price cap following consultation, it could be in place as early as April 2019.
On the prospect of a price cap in that timeframe, BrightHouse chief executive Hamish Paton told Credit Strategy that his company would “prefer more time, given the choice”.
“Working through all the ramifications of what a price cap might mean will take some time. Not only around product design but product governance. What we need to understand is what’s involved and get a much clearer picture as early as possible of where we are heading, and that will be much easier to assess.”
“Our pricing structure is more complicated (than payday lending), we’ve got a retail price, we’ve got the cost of the credit itself, a different dimension around term,” he added. “We typically offer our customers flexibility on term – a one-, two- or three-year product – but to be able to put a price cap on something that’s one-year, versus two or three, how do you price for risk? How do you price for time? What’s a fair comparison?”
BrightHouse chief risk officer David Poole added that “running a three-year loan is very different to running a three-week loan”.
“There are significantly more costs associated with it,” he said. “Our customers by their nature have more unpredictable incomes, some of which have been affected by shifting to Universal Credit from traditional benefits, more customers being impacted by benefits sanctions,” he said.
“We’ll give them breathing space if they are transferring to Universal Credit, they can trade down to a cheaper product. Over a three-year period, that creates a very different picture and the account takes a lot more maintenance and a lot more cost than shorter-term lending.”
A full-length interview with Hamish Paton and David Poole will appear in the next edition of Credit Strategy.