The proposed rules consulted on were designed to protect vulnerable users of RTO products by controlling prices. In outline, the measures proposed were:
- to introduce a requirement for firms to benchmark base prices against retail prices;
- to set a total cost of credit cap of 100% of the credit amount; and
- to prevent firms increasing their prices for insurance premiums or arrears charges to recoup lost revenue from the price cap.
The finalised rules published this week confirm that these measures will be introduced largely as originally proposed in the consultation paper, but the FCA has introduced some relatively minor changes and clarifications in response to the feedback it received.
The rules come into force on 1 April 2019. They will apply from that date to any new products RTO firms introduce to the market for the first time. For products that RTO firms are already offering, the rules will apply either at the point the RTO firm raises the price of a product or from 1 July 2019 (whichever is sooner). Micro-enterprises will have until 1 October 2019 to comply.
The FCA's full Policy Statement can be accessed here.
The key requirement of the benchmarking rule remains as originally proposed, i.e. the benchmarked base price can be:
- no higher than the median of 3 mainstream retailers’ prices (this cannot include more than 1 catalogue credit retailer); and
- if a catalogue credit retailer does not sell the product, no higher than the highest mainstream retail price of the other 3 retailers.
On top of this, the consultation had also proposed a rule preventing a firm from benchmarking prices against prices so far outside the range of prices it has found that no reasonably-informed UK consumer is likely to pay that price. This rule has been retained and the FCA has additionally included a non-exhaustive list of factors to be considered when assessing whether a price falls into this category, including any evidence that that price is out-of-date (e.g. the product is no longer in stock) and how the price compares with the other two benchmarking prices found.
Under the draft rules, firms would have been required to re-benchmark a product whenever they changed its price. Feedback from firms highlighted that the requirement to re-benchmarking and the associated costs of compliance even in the event of a firm lowering the price of a product as well as when the a price is raised could discourage firms from lowering prices, which would not be in the interest of consumers. The final rules have been amended so that lowering a product's price does not require re-benchmarking.
In response to firms' concerns on how the benchmarking rules would work for products that are new to the market and so are not yet sold by other retailers (meaning the requisite 3 mainstream retailers' prices cannot be found), the final rules introduce a separate regime for new-to-the-market products. When a product is (a) not own-brand, (b) new to the UK market and (c) so technologically different from products currently on sale that there is no genuinely comparable product to benchmark against, firms must set their benchmark taking into account the advertised price of the new product, any recommended retail price of the new product or other recommended price from the supplier and the pricing of previous versions of the product at launch, but 3 months after the product is launched firms will have to re-benchmark in the usual way.
In the final rules firms must therefore benchmark prices:
- when they first start selling a product;
- if they increase a product’s price;
- (for new-to-the-market products) 3 months after the product is launched; and
- within 12 months of the previous benchmarking.
Under the draft rules, where a bundle of products was to be supplied for one price, firms would have had to always benchmark against mainstream retailers' prices for comparable bundles. This was to prevent firms "artificially" bundling products which may have had a high value when sold individually but a low value when sold in bundles thereby distorting the resulting benchmarked price of the bundle. The feedback from some firms argued that there may be difficulties in finding appropriate benchmarking comparisons in relation to bundled goods – so the final rules adopt what the FCA view as a compromise whilst still retaining stringent limitations on bundled prices.
Under the revised rules a bundle may be only be sold for a single bundled price where:
- the firm is able to find three benchmarking cash prices based on the same bundle of goods;
- each comparable bundle of goods that the firm is relying on to establish the benchmarked price does not contain any goods of significantly different value from those in the firm’s bundle; and
- the bundle price is benchmarked against other goods supplied as bundles in accordance with the normal benchmarking rules.
If the firm cannot satisfy all of the above criteria in respect of a bundle, then it must separately benchmark each item in the bundle in the normal manner and set separate cash prices for each of those items. This is likely to present a significant difficulty for firms seeking to offer bundled products – given the commercial rationale behind bundles, it is likely this will see a significant reduction in the existence of such products due to a lack of available comparisons.
The price cap and the anti-avoidance rules
The draft rules that set the total cost of credit cap at 100% of the credit amount and prohibited firms from attempting to recoup lost revenue by increasing insurance premiums or arrears charges remain unchanged in the final rules, save for some minor clarifying amendments.
Review and measuring success
Acknowledging that pricing in the retail market changes constantly, the FCA has brought forward the start of its proposed review of the price cap level from April 2021 to April 2020.
The FCA estimates that the proposed cap would bring about a net consumer benefit of between £19.6m and £22.7m a year. The regulator will be closely monitoring the effect of the price cap on the RTO market and its consumers and any changes to RTO business models or approaches to RTO that can be identified as a result.
The finalisation of the rules comes just one day after the FCA's announcement that it is acting to address pricing practises it considers excessive in the motor finance sector, further highlighting the regulator's ongoing focus on mitigating harm and improving outcomes for vulnerable consumers in the consumer credit sector.
Interestingly, the FCA explicitly acknowledges that it is aware that its changes to the RTO sector may deprive some customers of access to RTO finance, but it appears willing to accept this outcome due to its perception of the RTO market currently causing significant detriment to a more significant proportion of customers. Given the FCA has focused in other sectors on ensuring access to financial products, their acceptance of limiting access in this context indicates the seriousness of the FCA’s concerns around the pricing practices in the consumer credit industry. RTO firms and other players in the consumer credit sector will need to ensure compliance in this changing regulatory landscape which puts the customer at the centre of pricing.