Evidence submitted by End Child Poverty Coalition (HHF0008)

Written evidence submitted by the End Child Poverty coalition to the Treasury Select Committee’s inquiry into household finances

1.              Executive summary

• Poorer households pay a poverty premium for a range of essential goods and services such as energy, insurance and goods. In 2016 End Child Poverty estimated that lower income households can pay almost £1700 a year more than those on a higher income. Higher costs of credit are a key form of this premium.
• Families living in poverty are often unable to buy essential goods like fridges and washing machines up front, and cannot access cheap credit. They are therefore left with no option but to turn to high cost credit products offered through rent-to-own companies.
• The total cost of a product can be up to 5 times the equivalent of buying a comparable product up front from the high street.
• Families can feel forced to cut back on food, heating and other essentials in order to meet debt repayments for basic household goods purchased through rent-to-own agreements.
• End Child Poverty is recommending the creation of an expanded government interest free credit scheme to halt the dramatic decline in Government provision of interest free credit through the social fund and through local authority schemes.

• End Child Poverty is calling for tighter regulation of the rent-to-own sector including a cap on the total cost (initial price and interest) of rent-to-own goods.

2.               Introduction

2.1              End Child Poverty is a coalition of nearly 100 UK organisations from across UK civil society formed to hold the Government of the day to account for the impact of their policies on the levels of child poverty in the UK.

2.2              We are making this submission to the Committee’s inquiry into household debt because of our concerns that as benefits remain frozen at a time of rising prices, more families are facing financial hardship and are vulnerable to the practices of high cost credit providers, like the rent-to-own sector.

2.3              We would urge the Committee to make recommendations to the government to help end the poverty premium that lower income households face for essential goods and services. In order to achieve this we are calling for greater provision of interest free credit from the State and for tighter regulation of the rent-to-own sector.

3.               2017 survey of rent-to-own customers

3.1              StepChange the debt charity, a member of End Child Poverty, conducted a survey of its clients’ experiences of using rent-to-own to buy essential household goods. Their findings formed the basis of our report and will be referenced in this submission. A copy of our report can be found at http://www.endchildpoverty.org.uk/furnishing-your-home-with-rent-to-own-report/

4.              The rent-to-own sector

4.1              In 2017 the Financial Conduct Authority reported, in their feedback statement of a review into high cost credit, that at the end of 2016 400,000 people had outstanding rent-to-own debts with a value of £0.5 billion, with approximately 45,000 new rent-to-own loans taken out per month on average.

4.2              The FCA found rent-to-own borrowers had the lowest incomes of all high-cost credit borrowers (median income of £16,000), were more likely to be in household bill arrears and have other high-cost credit products.

4.3              StepChange’s survey of its clients found that 73% turned to high cost credit because they could not afford to buy the product outright and that spreading payment through weekly repayments was the only viable alternative.

4.4              The StepChange survey of its clients found that 51% had missed one or more repayments and a further 28% had struggled with repayments.

5.               The high cost of rent-to-own goods

5.1              Whilst a weekly repayment plan can be attractive for many people unable to purchase goods upfront, it is a very expensive way of buying basic household goods.

5.2              In our report (referenced above), a comparison of purchasing ten household goods (white goods and furniture) through a rent-to-own company and buying comparable products outright from a high street retailer showed a rent-to-own customer could pay up to three times more. (£9,132 over 3 years to £3,127 upfront cost. See a breakdown of prices in the appendix at the end of the submission.)

5.3              The advertised price of a rent-to-own product before interest and added costs is often significantly more expensive than a comparable product from a high street retailer, penalising low income consumers before any interest is paid. Interest rates of up to 70% and installation and delivery costs means the customer can pay up to 5 times the price of an equivalent product from the high street.

5.4              Rent-to-own companies no longer include insurance and warranties automatically into the price of goods being bought but do often make insurance a requirement of the rental agreement. The APPG on Debt and Personal Finance’s report on the rent-to-own industry in 2015 expressed concerns that customers can be unaware that their existing household insurance would be sufficient and a cheaper option, than the insurance offered by the rent-to-own company.

6.              Concerns about the treatment of rent-to-own customers

6.1              In order to help protect financially vulnerable households from unsustainable levels of debt it is imperative that rent-to-own companies undertake extensive affordability checks for the life of the loan. There are concerns that these checks are inadequate in light of the Citizens Advice Bureau reporting in 2015 that one fifth of rent-to-own customers spend more than 20% of their annual income on repayments.

6.2              In November 2017, the Financial Conduct Authority required one rent-to-own company to compensate customers for unaffordable lending practices (£14.8m to 250,000 customers).

6.3              Many rent-to-own customers who struggle to meet their repayments have reported aggressive tactics by companies’ debt collectors and an unsympathetic response to requests to restructure their repayment plans. In 2015, a Citizen’s Advice Bureau survey of rent-to-own borrowers, found that of those who had missed payments: over 90% were not given a payment holiday; more than a third (34%) were not able to agree an affordable repayment plan; and two in five (41%) said that the company was not understanding of their situation.

6.4              Many customers are in vulnerable situations, not aware of the protection the 1974 Consumer Credit Act gives them, and allow debt collectors from the rent-to-own companies enter homes and take away goods, leaving households without essential items such as fridges and washing machines. The APPG on Debt found that over 10% on rent to customers had goods taken away after falling behind on repayments.

7.               Access to interest free credit from the State

7.1              The State has a role in providing interest free credit to households in financial crisis through the Discretionary Social Fund”. For example, those in receipt of out-of-work benefits for at least 6 months have access to “Budgeting Loans”, until 2013 families facing a financial crisis could also ask for a “Crisis Loan”.

7.2              Interest free credit is excellent value for money as loans are primarily reclaimed through benefit repayments. Therefore, additional investment by the Government is limited as the scheme is recapitalised by repayments.

7.3              Repayment rates are good since deductions can be made from people’s ongoing benefit entitlement - around 80% of the value of loans made in 2010 was recouped through repayments of loans from the same and previous years.

7.4              Real term spending on budgeting loans through the discretionary social fund has fallen from £790m in 2009/10 to £410m in 2016/17. Crisis Loans were abolished in 2013 in favour of local provision but very few Local Authorities have found the means to introduce any credit provision.

8.               Recommendations

8.1              We would ask the Committee to consider the following recommendations to protect low income households from incurring unsustainable levels of debt just to buy essential household items such as fridges, cookers and washing machines. In order to meet their repayments families can feel forced to cut back on heating, food and meeting other essential bills. It is not only children’s day to day needs that are affected but there is the damaging long-term impact of growing up in a home where unmanageable levels of debt are causing stress and anxiety.

8.2              Regulation of the rent-to-own sector

8.2.1              The FCA should improve safeguards for customers in financial difficulty: for example, by introducing a ‘time to pay’ guarantee that would provide some payment relief; and introduce a requirement for rent-to-own companies to restructure repayment plans before repossession.

8.2.2              The FCA should investigate the pricing of goods and services in the rent-to-own sector.

8.2.3              The FCA should consider introducing a price cap that encompasses the full cost charged for goods as part of rent-to-own agreements. This would require ongoing monitoring of average retail prices for equivalent goods, to prevent prices being significantly more than the market price.  A full cost price cap would be required in order to respond to the risk that, if a cap was placed on interest charges alone, the price of the goods themselves could be pushed up as a result.

8.3              Improved access to interest free credit form the State

8.3.1              The Government should create a single fund that combines and extends current provision of interest-free credit.

8.3.2              This fund should be available to anyone eligible to receive Universal Credit (or equivalent legacy benefits) – with no benefit criteria applying to families requiring access to help in a crisis.

8.3.3              The fund should be capitalised with a one-off payment of £1.5bn. This, with current loan schemes would create a new scheme of £2bn. It would be recapitalised through repayments with an additional annual cost of £400m              plus an annual uplift to take account of inflation.             

9.               Appendix

9.1              Comparison of the cost of furnishing a home with rent-to-own products with buying goods outright from an alternative high street retailer. (Prices correct as of 1st Nov 2017)

December 2017