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25.10.2017

BrightHouse: is the UK’s Rent to Own market now a problem?

The news that the Financial Conduct Authority (FCA) has branded BrightHouse an irresponsible lender is the latest in a series of signs indicating that the UK Rent to Own market is now posing a danger to UK consumers.

The Rent to Own market covers not only those that provide access to hire-purchase agreements for TVs and cookers, but also the personal contract purchase market (PCP) for vehicles. The Bank of England has in the last year repeatedly expressed its concerns that the growth in this market is a cause for concern; particularly in relation to the risk it poses to the wider economy.

It also raises the question, do consumers need to be conscious of the types of agreements they are entering, whether they are affordable and whether creditors are offering products that may not be suitable for them?

Is Rent to Own inherently more risky?

The UK Financial Regulator, the Financial Conduct Authority (FCA), found that between April 2010 and September 2016, nearly 250,000 BrightHouse customers were either denied refunds after they cancelled agreements during cooling off periods, or the affordability of their agreements were not checked before they entered them. Put simply, BrightHouse didn’t know how many of their customers could afford the agreements they were entering them into.

This would appear to make no sense and amount to reckless behaviour on behalf of the creditor, unless of course there were other aspects of the agreement that offered them additional protection.

It is pure speculation, but one of the reasons BrightHouse may not have been overly concerned with whether agreements were affordable was because the risk to them is minimised when they charge interest rates of 69% APR, and offer products on a hire purchase basis. This means in the worst-case scenario, not only are they partly protected from losses because of their high interest rates, but they have the option of repossessing goods if payments are not maintained.

Arguably this is a risk that many Rent to Own firms pose for consumers, even when interest rates are lower, as unlike those lenders who just lend money to buy items, the Rent to Own model is utilised to minimise the loss firms suffer when payments are missed. In essence, they retain the option of repossessing the goods, so the affordability of the agreement is probably less important to them.

Does that mean Rent to Own is never suitable?

It’s not true that Rent to Own, whether through a hire purchase agreement or a personal contract purchase, is never suitable. Sometimes not owning property like a car can be an advantage when the bailiffs or sheriff officers turn up to try and seize goods to pay other debts. If the possessions you have are subject to finance agreements already, they cannot normally be used to pay other debts.

You will also usually have the right to return the goods after you have made half the payments, and providing the property remains in reasonable condition, not have to make further payments.

However, where the goods are essential household items, the advantages of these goods being subject to hire purchase agreements evaporates quite quickly, meaning you will usually be better being an owner and, therefore, benefit from the greater protections that ownership give you  against the items being seized to pay debts.

It is, therefore, for individual consumers to decide what is best for them. There is no correct answer. However, when deciding what is important, consumers should do their own affordability test and not overly rely on creditors doing it for them.

How do you check affordability?

Checking the affordability of an agreement is not an exact science. Much of it will depend on how much risk you want to take. The first step is to draft an income and expenditure, showing what your current commitments are, then look at the difference between both. If you have more income than expenditure and the surplus is enough to pay your monthly payments, then you can afford it.

However, when assessing affordability, it is sensible to allow for contingencies. These can be things such as emergencies and regular one off big payments. You also need to ask, do you want to save?  Go on holiday? Then what happens if you lose your job? What happens if all your household expenditure was to increase by 3%? Could you still afford to maintain the payments?

Increasingly all the signs are that consumers should begin being more cautious when it comes to their debt obligations.  The horizons is filled with portents of worsening economic times, with pending interest rate increases, 3% inflation, stagnating earnings and even lenders increasingly wanting borrowers to take items on a Rent to Own basis.  When lenders begin being that cautious, it’s time for consumers to take heed.

Where does that now leave BrightHouse customers?

BrightHouse has said it will now contact all the customers who have suffered a detriment before the end of 2017 and offer redress in the form of financial compensation.

This will mean where people cancelled their agreements during the cooling off period and were denied a refund; they will now receive a refund with interest of 8% per annum. Where customers did not have the affordability of their agreement checked properly, and have since returned the items, they will have the interest they paid refunded, with 8% interest.  Where they still have the items, the balance will be cleared and ownership of the goods will be transferred to them.

It is anticipated the whole redress scheme being operated by BrightHouse will cost almost £15 million.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.