The Financial Conduct Authority (FCA) is reviewing whether annual percentage rates (APRs) effectively help consumers understand the true cost of borrowing, as evidence suggests they may not always provide clear insight into credit costs. APRs indicate the yearly cost of borrowing, including interest and fees, and are currently required in most credit advertising as representative rates, meaning at least half of consumers receive that rate or better.
Research Findings on APR Effectiveness
The FCA's research indicates that while APRs are useful for comparing products, additional information such as total repayment figures can enhance consumer understanding. However, providing different information tailored to different products can sometimes complicate comparisons and cause confusion. The regulator found that among people shown the APR alone, 80% correctly identified the cheapest product when a lower APR corresponded to lower repayments.
Proposed Simplification of Credit Advertising Rules
The FCA is also proposing to simplify parts of the consumer credit rulebook on credit advertising, aiming to remove duplication and outdated requirements where the consumer duty already sets clear expectations. The consumer duty, which came into force in July 2023, requires firms to consider how their communications deliver good outcomes for consumers, including supporting customer understanding.
According to the FCA's Financial Lives Survey 2024, 79% of UK adults (42.5 million people) held at least one regulated credit or loan product in the previous 12 months. The regulator noted that technology is transforming the sector, with firms developing innovative products and offering an increasing array of digital communication channels.
Industry Reactions and Expert Opinions
Alison Walters, director of consumer finance at the FCA, stated: “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, commented: “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, added: “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.”
