The Financial Conduct Authority (FCA) is capping the cost of buying from BrightHouse, PerfectHome and other pay weekly shops from April 2019.
This is very good news.
It is not just a cap on the interest, where the FCA has imposed the same 100% cap that currently applies to payday lending.
The FCA is also proposing controls over the prices of the goods the shops are allowed to charge. Current prices are often much higher than for similar goods elsewhere. Controlling these is essential otherwise the shops can get around any interest rate cap by just upping their prices.
300,000 people have these sorts of debts
Pay weekly shop customers are often very vulnerable and pay a large amount of their income for these goods. The FCA found that:
- only 1 in 3 is in work;
- 1 in 3 is unable to work because of health reasons
- 1 in 4 are single parents;
- 1 in 4 have not paid an essential bill in the last 6 months;
- on average they have 2.4 pay weekly items with a weekly repayment of £28;
- as a group they are less creditworthy than people borrowing from doorstep lenders or payday loans.
The 300,000 people with pay weekly debts are some of the poorest in our society. It will always be more expensive for them to buy items on credit but the total cost they are paying in pay weekly shops is simply exorbitant.
There are some good examples in this article which looked at a range of “Black Friday bargains” on offer at BrightHouse and PerfectHome (who between them have over 90% of this market) and compares them to other retailers.
What the FCA is proposing
1) A 100% cap on the cost of credit
The FCA is proposing a cap of 100% on the amount a customer can pay for credit in pay weekly shops. It makes various arguments why this is an appropriate level but doesn’t mention the two strongest ones:
- 100% is the same as the cap on payday lending. It would be confusing for customers if different levels were set for different sorts of high cost credit;
- people understand that borrowing will not be cheap if you have a poor credit record, but paying more for credit than the amount borrowed is felt by many to be fundamentally unfair.
This is a very good approach.
2) Prices must be benchmarked against similar goods
The FCA is proposing that pay weekly shops have to compare all their prices with the prices for comparable goods in three other retailers. The FCA doesn’t expect pay weekly shops to be the cheapest, but says they cannot set a price which is:
- higher than the middle price if the three other retailers include a catalogue retailer; or
- higher than the highest price where there is no catalogue retailer in the comparison.
The FCA recognises the problems of finding an exact product match – for example where manufacturers give similar products different serial numbers as “exclusives” or where there are bundles of games or software included. It says that a comparable product must be found based on quality, size, performance and functions. And that unreasonably high prices should not be included in the comparisons.
Prices have to be checked at least once a year or when the price of an item is changed. And the company needs to keep detailed records of each check – against which retailers with evidence of the prices found at that time.
The FCA also wants delivery and installation charges to be controlled by benchmarking against what other retailers charge for similar services by product type, eg washing machines or fridges.
3) Anti-avoidance rules
The FCA is proposing new rules that will stop a pay weekly company increasing their insurance charges or default charges as a way of getting around the price benchmarking.
4) Delay on selling extended warranties
The new rules say that an extended warranty cannot be sold with the item, there has to be a delay of at least 2 days.
Any delay is good, because it gives a chance for someone to think if they really need this. But these warranties are expensive and much of their “protection” just duplicates what someone already has automatically from the manufacturer. I think the delay should have been longer.
Timescale and consultation
The FCA is proposing that the new rules come into force in April 2019. The price comparisons will apply to all newly listed goods from that point and to all existing goods on sale within three months.
The FCA is consulting on their proposals – any responses should be in by January 17 2019.
Will this actually reduce BrightHouse prices?
I think the FCA has set out a reasonable approach but it will need to be monitored closely to see how it works in practice. The problems around finding suitable comparisons are not small.
The FCA expects that there will be c. £18million a year of savings to consumers from buying lower priced and interest-capped items. If benchmarking does not have the effect the FCA expects on reducing prices, it will need to be reconsidered. The FCA will review it after two years – I think it should be sooner.
There is no mechanism for customers, or their debt advisers, to be able to challenge a price and to ask how the benchmarking was done. And there is no specific redress proposed for a problem in this area – although a complaint to FOS on the general basis of treating customers unfairly could be used. The FCA says in its review it will act on feedback and intelligence from its consumer contact centre, but that is not a proper complaints mechanism.
What if you already have BrightHouse goods at a high cost?
If you find after April that you are paying more for something that has dropped in price, you could consider returning it and buying a new one:
At BrightHouse, it’s OK if you change your mind, anytime. We accept returns at any point during your agreement with no further payment to be made.
But this could cost you more unless you have only recently bought the item. Even though the new cost and interest may be less, you are losing all the payments you have made so far and starting again with a new debt from scratch.
You could also think about whether your repayment were “affordable”. Many people that have bought a lot from BrightHouse may be able to make an affordability complaint and ask for a refund of the interest they have paid.