By Huw Jones

LONDON, May 31 (Reuters) – Britain’s financial watchdog is considering capping “rent-to-own”, a form of hire purchase for household goods, and reforming overdraft and other bank charges as it seeks to protect consumers from high credit costs.

In a review of high cost credit published on Thursday, the Financial Conduct Authority (FCA) said that costs for the 400,000 customers that use rent-to-own, a practice often used to buy goods like fridges and washing machines, can be exceptionally high.

In some cases, customers had paid more than 1,500 pounds ($2,000) for an electric cooker that can be bought in the shops for less than 300 pounds, it said.

“High cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society,” FCA Chief Executive Andrew Bailey said in a statement.

“Today we have proposed a significant package of reforms to ensure they are better protected, including the possibility of a cap on rent-to-own lending.”

High cost credit also covers unarranged bank overdrafts and the watchdog said it was consulting publicly on mandatory rules to make it easier for customers to manage their bank accounts and avoid punitive charges for unarranged overdrafts.

The total package of proposals could save consumers a combined 200 million pounds ($266 million) a year, the watchdog said.

The FCA has come under pressure from Britain’s lawmakers to cap the cost of rent-to-own credit, as it already has done for interest charged on payday loans, triggering a big contraction in the sector.

“It’s often the most vulnerable who get stung by these dodgy deals,” Britain’s financial services minister, John Glen, said.

The FCA said it would now carry out a detailed assessment of the impact that a cap could have on the sector and how it might be structured – and that it was also open to other options.

Any changes to the sector would be introduced by April 2019.

The FCA said it was also consulting on banning the sale of extended warranties when a rent-to-own contract is signed, which could save consumers up to 7.7 million pounds per year.

“The FCA must now deliver to put the cap on rent-to-own by April 2019. There will inevitably be push-back from the industry but it cannot fail the customers who desperately need to be protected by this cap,” said Citizens Advice, a charity that helps people tackle money problems.

Greg Stevens, chief executive of the Consumer Credit Trade Association, said caps would be counterproductive as they force borrowers to find alternatives that may not be regulated.

“We´ll have to see where the review gets to, but we´re pleased the FCA will be undertaking a proper cost-benefit analysis,” Stevens said.

FUNDAMENTAL REFORM

The way banks operate and charge for overdrafts also needs fundamental reform, the FCA said.

Banks earned 2.3 billion pounds from overdrafts in 2016, with nearly a third from unarranged overdrafts, most of which are paid by just 1.5 percent of customers who pay about 450 pounds a year in fees and charges.

“The FCA is putting forward some immediate proposals today for overdrafts that it believes will save customers up to 140 million pounds a year,” the watchdog said.

“Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.”

If appropriate, these options will be consulted on later this year as part of the watchdog’s separate ongoing review of retail banking.

The FCA proposed stronger protections for customers who take out credit from firms who collect repayments in the home, known as doorstep lending, with the aim of saving customers 34 million pounds a year, but stopped short of considering caps.

Consultants PwC said the FCA’s overall package posed various challenges for firms.

“As they factor in the additional processes required and restrictions on borrowing and costs, they will need to consider whether certain business models are sustainable in the long term,” said John Coley, PwC’s financial services risk and regulatory director.

($1 = 0.7509 pounds) (Reporting by Huw Jones; Editing by Mark Potter and Susan Fenton)