Rent-to-own firm BrightHouse has agreed to pay out £14.8 million in redress to 249,000 customers after the financial watchdog found that it did not act as a "responsible lender".
The compensation is linked to 384,000 customer lending agreements which "may not have been affordable" and payments "which should have been refunded", the Financial Conduct Authority (FCA) said.
BrightHouse, which provides household goods to customers on hire purchase agreements, has been working with the FCA since 2014 after the watchdog identified the firm's lending assessment and collections processes fell short of its expectations.
The FCA said that the group "did not always deliver good outcomes for customers, particularly those who were at a higher risk of falling into financial difficulty".
BrightHouse has "identified customers that may have been treated unfairly where its processes fell short of FCA expectations" and has committed to "putting things right" for these customers.
Where it is determined that customers were not assessed properly at the outset of the loan and may have had difficulty making payments, and providing they handed back the goods, BrightHouse will be paid back the interest and fees charged under the agreement, plus compensatory interest of 8%.
Charity Citizens Advice has welcomed the move, which will affect almost a quarter of a million customers.
It claims that one in five rent-to-own customers spent 20% or more of their income on payments, and more than half had to take on other debts to cover the costs.
In addition to action to help people when they are in debt, the charity is asking for more protection for people against unaffordable lending.
Gillian Guy, chief executive of Citizens Advice, said: "Citizens Advice has long called for the Financial Conduct Authority to take action on poor affordability checks on rent-to-own deals, which can trap people in debt.
"In the last 12 months, Citizens Advice helped people with more than 13,000 rent-to-own issues where people were struggling to make repayments for essential goods like fridges and washing machines.
"We’re pleased to see that the FCA are taking action against BrightHouse, whose loose lending practices have pushed the very people who can least afford it further into financial difficulty.
"Citizens Advice is calling on the FCA to tighten up credit checks across the rent-to-own sector to prevent people getting caught in a debt spiral.”
Customers who retained the goods will have their balances written off. This part of the redress totals around £10.1 million for 114,000 agreements entered into between April 1 2014 and September 30 2016, covering 81,000 customers.
Those customers who made the first payment due under an agreement with the firm which was cancelled prior to the delivery of the goods will be refunded by BrightHouse plus receive compensatory interest of 8%.
This redress totals around £4.7 million for 270,000 agreements entered into after April 1 2010, covering 181,000 customers.
BrightHouse will write to all affected customers, some of whom are affected by both sets of circumstances, to explain the refund or balance adjustment that they will receive.
The FCA added that BrightHouse has worked to improve its lending application assessment to ensure that loans are affordable and customers are treated fairly during the collections process, including revising its late payment fee structure.
Jonathan Davidson, executive director of supervision at the FCA, said: "During the time in question, BrightHouse was not a responsible lender and failed to meet our expectations of firms in this sector.
"I am pleased that it has agreed to provide redress to those customers affected by these historic practices.
"This scheme continues our work with the rent-to-own sector to resolve the concerns we have previously identified.
"Responsible lending and the fair treatment of consumers, especially those in financial difficulties or who are vulnerable, are key priorities for us."
There are Brighthouse stores in Fulham, Hounslow, Uxbridge and Wembley.
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