Annual percentage rates (APRs), which indicate yearly borrowing costs to consumers, are being reviewed by the City regulator amid evidence that they do not always allow people to understand the true cost of credit.
The Financial Conduct Authority (FCA) is looking into whether APRs help people to understand borrowing costs and is seeking views on whether it should change the way these are communicated in credit advertising.
APRs indicate the yearly cost of borrowing, including interest and fees.
Current rules require representative APRs in most credit advertising.
A representative APR means at least half of consumers receive that rate or better.
The FCA said research indicates APRs are useful for comparing products, but additional information such as total repayment figures can also help consumer understanding.
However, it said providing different information tailored to different products can sometimes make comparisons harder and confusing.
The FCA said research showed that, among people shown the APR alone, 80% of people correctly identified the cheapest product when the lower APR meant a lower repayment.
The regulator is also proposing to simplify parts of the consumer credit rule book on credit advertising, aiming to remove duplication and outdated requirements where the consumer duty already sets clear expectations.
The consumer duty came into force in July 2023 and, where it applies, firms must consider how their communications deliver good outcomes for consumers, including by supporting customer understanding.
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The FCA’s Financial Lives Survey 2024 found that 79% of UK adults, equating to 42.5 million people, held at least one or more regulated credit or loan products in the previous 12 months.
The regulator said that technology is also transforming the sector, with firms developing innovative products and offering an increasing array of digital communications channels.
Alison Walters, director of consumer finance at the FCA, said: “Clear information advertising credit helps people shop around.
“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.”
The closing date for the discussion and consultation paper is June 17.
James McCaffrey, a spokesperson for TotallyMoney, said: “APRs can provide a benchmark for comparing products, but the truth is it’s often much more complicated than that – especially when you add 0% introductory periods, fees, flexible borrowing, and varying offer lengths to the mix.
“On top of that, loans, cards, buy now pay later and other credit agreements all work differently to one another, which means comparing all your options is even harder.”
Paul Matthews, senior risk director at banking and credit advisory firm Broadstone, said: “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.
“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.
“Consumers tend to focus on monthly repayments and overall cost, so aligning disclosures with these behaviours will be key to improving outcomes.”
