Regulator asks whether loan cost disclosures can be made clearer for borrowers
The Financial Conduct Authority (FCA) is examining whether annual percentage rates (APR) remain the best way to explain the cost of borrowing in credit advertising.
The regulator has opened a discussion on whether the current approach should be changed, after research found that APRs can help borrowers compare products but may not always show the true cost of credit.
APRs show the yearly cost of borrowing, including interest and charges. A representative APR means at least half of customers who take up the product receive that rate or a lower one. Under existing rules, most credit adverts must include a representative APR.
The FCA said its research found that 80% of people shown only an APR could identify the cheapest product when the lower APR also meant a lower repayment. However, fewer than one in five chose correctly when the lower APR did not result in cheaper borrowing.
The regulator said additional information, such as the total amount repayable, could improve understanding. It also warned that using different forms of information for different products could make comparisons more difficult.
The review will be relevant to lenders and intermediaries operating in credit markets, including firms subject to the Consumer Duty. The FCA has also published proposals to simplify parts of its Consumer Credit rule book on credit advertising, with the aim of removing duplication and requirements it considers outdated.
“Clear information advertising credit helps people shop around,” said Alison Walters (pictured right), director of consumer finance at the Financial Conduct Authority.
“But there’s evidence that APRs do not always allow people to understand the true cost of credit. To help people navigate their financial lives, we’re asking for views on whether there’s a better way.”
Industry reaction focused on the need for clearer but consistent disclosure.
“APRs have long been the cornerstone of credit advertising, but the regulator’s research reinforces a well-known challenge – they are not always a reliable proxy for the true cost of borrowing, particularly where product structures differ,” said Paul Matthews, senior risk director at banking and credit advisory firm Broadstone.
“The FCA’s willingness to revisit how borrowing costs are communicated is therefore welcome, especially at a time when affordability will be critical to a well-functioning credit market. There is a strong case for complementing APRs with clearer, more tangible measures such as total repayment or pounds-and-pence cost, provided this is done in a consistent way that preserves comparability.”
Matthews pointed out that consumers tend to focus on monthly repayments and overall cost, so aligning disclosures with these behaviours would be key to improving outcomes.
“Under the Consumer Duty, firms are already expected to ensure communications are understandable and support good outcomes, so any simplification of the rulebook should focus on reducing duplication while maintaining robust standards,” he said.
“The priority should be a balanced approach that improves consumer understanding without introducing unnecessary complexity. Any move towards more flexible disclosures will need careful calibration to avoid inconsistent approaches across the market, which could ultimately undermine comparability.”
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