On 29 February 2020, Sky News reported “Rent-to-own giant BrightHouse on brink of collapse“. This said:
- there has been a “surge” of complaints which are currently costing BrightHouse more than £1million a month;
- management is worried about getting increasing numbers of complaints from claims companies;
- they are talking to the FCA about a possible “Scheme of Arrangement” but discussions so far have proved “inconclusive”;
- accountancy firm Grant Thornton is said to be on standby if the company is forced to go into administration;
- “An insider close to one of BrightHouse’s shareholders said an insolvency was not inevitable but that it had become more likely in recent weeks.”
Here are my thoughts on the story and the implications for customers now.
Background – Brighthouse’s results are getting worse
The Sky story highlighted the complaints as the main problem. But the background is that BrightHouse is already in a difficult financial situation.
- in the second quarter, the total number of customers had dropped by 10% in a year to 179,500. In the latest results, this fall had continued down to 172,000.
- the average revenue per customer per month had fallen from £126 in the second quarter of 2018 to £116 a year later. This decline has also continued, down to £112 in the recent third-quarter results.
BrightHouse said the falling revenue per customer was due to “reduced BrightCare penetration, product price benchmarking and the reduction in the number of contracts per customer.”
“Product price benchmarking” refers to the new FCA regulations brought in from April-June 2019, see FCA confirms introduction of rent-to-own price cap when the FCA said:
Currently, in some cases, RTO consumers are paying in total more than 4 times the retail price of some goods. The cap is intended to tackle those very high prices. Under the new rules, consumers will save hundreds of pounds on household products.
Financial Ombudsman (FOS) complaints
The FCA says a lender has to check credit is affordable for the customer. The definition of ” affordable” is that the loan can be repaid without getting behind with bills or having to borrow more.
FOS published a summary of how it considers affordability complaints last summer: Unaffordable Lending. For Brighthouse loans, the amounts are often not large, but many customers often have a low income or are reliant on benefits. That doesn’t mean they are barred from getting credit but lenders have to be careful that any credit is affordable.
BrightHouse’s second-quarter results in November had warned about the cost of complaints. Since then, more complaints have been received and BrightHouse said last week:
“The level of redress claims from customers is putting increasing pressure on the available liquidity in the group…
We are in the process of disputing recent cases where the Financial Ombudsman Service has given initial adjudicator views against us in terms of our historical product prices and our affordability assessments. If these test cases were formally upheld by the Ombudsman there would be a material increase in the cost for settling such cases. It is not possible to quantify the aggregated increased cost of such a situation”
It seems from this that BrightHouse has two concerns about FOS decisions.
The first is around historic affordability. Many FOS complaints are limited to events in the last six years. But FOS is often accepting affordability complaints going back to 2007 for payday loans and other forms of high-cost credit such as home credit and guarantor loans. It was FOS’s decision to do this for payday loan complaints that forced Wonga into administration.
If, as seems likely, FOS applies this same approach to BrightHouse complaints then the claims Brighthouse could face would be much larger than if the six-year rule was applied.
The second issue, “product prices” is specific to rent-to-own credit. I haven’t seen a FOS decision about a complaint that a BrightHouse price was too high so I don’t know when FOS might be likely to uphold such a complaint or what the award might be.
Is the FCA likely to approve a Scheme?
A Scheme of Arrangement is a legal device allowing a company to put a cap on how much it has to pay out against certain liabilities.
In 2019 both Wageday Advance and QuickQuid approached the FCA asking for approval for a Scheme that would allow them to cap payments to customers with affordability complaints and to carry on trading. In both cases the FCA apparently would not say that it would not object and both firms then went into administration
A Scheme was set up by the Money Shop who were exiting the business and who had argued a Scheme would give a better return to customers than administration. It now appears that the Money Shop scheme may return less than 10%, despite original projects of returning 80%.
It is not clear to me why the FCA would approve any Scheme which allowed an authorised firm to pay its customers less compensation for mis-sold loans than they should receive and still allow that firm to continue in business.
How this matters to customers now
We don’t know what is going to happen to BrightHouse. But here are some general thoughts.
If your repayments are unmanageably high:
- don’t borrow more to let you keep up these high repayments, instead talk to BrightHouse who may agree to let you pay at a lower rate;
- if you have other problem debts as well, talk to StepChange about your whole situation;
- you can also put in an affordability complaint but they can take a long while to get settled, so try to get lower payments as well.
If you think you were sold BrightHouse goods where they should have realised you couldn’t afford the repayments:
If you have already put in a complaint:
- all you can do is let your complaint proceed. If you are made an offer to settle by BrightHouse (and QuickQuid settled thousands of complaints just before going into administration) then you should probably consider taking the offer.