Why we should be wary of regulator's rent-to-own cap

The idea of restricting rent-to-own credit sounds great - a safety blanket for some of the most vulnerable people in society. The reality could be very different.

This is a sector that serves a chunk of our economy that often gets ignored.

Low-income households, or people with a poor credit history, often find it hard to buy expensive items on credit.

Banks, for instance, generally don't want to lend money to people who live on a financial breadline.

:: Rent-to-own cap will limit product and credit costs

After the financial crisis, the rules were - rightly - tightened to avoid reckless lending, and the poor in our society fell victim to those enhanced restrictions.

Similarly, those who've previously defaulted on a loan find it very hard to get another one, even if their circumstances change. Our big high-street department stores don't really want to sell televisions to people who have a track record of not paying for things.

And that is where the likes of BrightHouse and Perfect Home come in.

They exist precisely to serve these sort of people, by accepting the higher possibility that customers might default and charging them more to cover that risk.

From their perspective it's a bit like buying home insurance - if you live on a flood plain or by an eroding cliff, your insurance costs more than if you live in a more benign place, because the chance of something going wrong is much higher.

That's not to say that rent-to-own companies are some kind of proxy for charities, or customs unions. They are not. They are commercial companies that want to make a profit out of their customers.

But a quick look at the financial records of BrightHouse, the biggest player in this market, suggests that any charge of profiteering is rather wide of the mark.

The company made a pre-tax loss of £23m in the year to March 2017, the last figures that are publicly available.

They had to write off £25m on items that were either obsolete, or which had been stolen by customers who stopped paying their bill.

So right now, this is not a profitable business and it is hard to imagine that the FCA's proposed regulations will help to change that situation.

Perfect Home went into administration earlier this year and closed all but one of its high street stores as a cost-cutting measure. Other companies have fallen by the wayside.

Sources close to BrightHouse tell me that they are determined to carry on, but fear that the political demand for greater regulation could end up destroying the basis of their business model.

They query how the FCA's price benchmarking will actually work, and also whether, in an effort to evade the rules but stay in business, they will end up simply renting products to people, rather than selling them.

The FCA says it does not want to destroy the rent-to-own sector, but it does look precarious.

Some will welcome that as the demise of what they see as predatory lenders. Others will worry about where low-income families will get credit from, and the lurking fear that they will be driven to more unscrupulous lenders.

That, surely, it not the outcome anyone wants.