BrightHouse was recently ordered to pay almost £15 million in redress to customers after discussions with the Financial Conduct Authority (FCA), after the Rent-to-Own (RTO) firm was deemed to be falling short of responsible lending standards and failing to treat its financially vulnerable clients fairly. BrightHouse provides a range of household goods on Hire Purchase (HP) agreements, at relatively high rates of interest. It has also been reported that many of its customers are on state benefits.
The decision underlines the need for careful legal and regulatory advice to ensure compliance with the FCA’s stringent requirements in this area.
Consumer credit businesses such as BrightHouse had to reapply for authorisation to carry on their business after the FCA took over as regulator from the Office of Fair Trading (OFT) in 2014. The financial watchdog reported in 2016 that this process was still ongoing for the three major RTO lenders, including BrightHouse. The FCA stated that it had particular concerns with business practices in relation to assessing whether borrowers were able to repay, arrears handling and price transparency.
Each of the three firms was required to appoint a ‘Skilled Person’ (an independent expert) to examine their businesses and to compensate customers who had suffered detriment. Before the announcement on BrightHouse, another RTO lender (Buy-as-You-View) had agreed to compensate customers £939,000. Brighthouse agreed to compensate two categories of customers:
- Those where they had not sufficiently assessed affordability i.e. whether the customers could pay. In this category, those who handed back the goods are being compensated for any fees or charges they paid +8% interest. Those who kept the goods are having their balances written off.
- Those who cancelled after making one payment – they are having payments refunded +8% interest.
The business is also required to review its collections processes including revising its late payment fee structure to make sure that customers are treated fairly throughout the process.
With real value wages stagnating and pressure on both those who are struggling as well as the ‘just about managing’ (and a mortgage rate just implemented) BrightHouse, as a high cost lender (69.9% APR) is just the place that customers in financial difficulties will turn to meet their needs for household goods.
When the FCA took over consumer credit, real concerns where voiced that if their complex and stringent requirements were enforced by firms, customers would no longer be able to access credit. 81,000 customers have been affected by BrightHouse failure to apply the FCA’s requirements properly, from the first date that they applied to them (April 2014) will have cost them dearly with cash payments, a write off for part paid goods, or a refund of all fees and interest where the customer no longer has the goods.
The firms also fell foul of the FCA’s expectations in relation to collections, where they were expected to be proactive in identifying customers at risk of falling into financial difficulties. Failure to do this puts RTO businesses at risk of not treating customers fairly. When it comes to interest rates like those of BrightHouse, customers are at a higher risk of falling into arrears than those of other lenders.
Rent-to-Own consumer credit is not always inherently more risky but for household items such as those provided by BrightHouse, this type of finance can be a rather expensive way to buy household items. A new wave of companies has recently emerged with the aim to eradicate any irresponsible lending by pay-weekly retailers. This movement is being spearheaded by Fair for You which describes itself as the UK’s only national not-for-profit organisation that provides an alternative to the traditional RTO and recently emerged as leader at the Consumer Credit Awards.
The FCA’s scrutiny of this controversial sector is unlikely to wane in the current economic environment, and the regulator may yet show an appetite for intervention in relation to caps on charges or rates. The rules are strict and difficult to apply. FCA authorisation, Skilled Persons reports, consumer redress schemes and FCA enforcement actions can be costly, lengthy and arduous – with potentially very serious consequences both for firms and individuals.