Our response to CONC 3: Reviewing financial promotion rules for consumer credit
Summary of our view on CP26/15
We have eagerly awaited the review of CONC 3 financial promotion rules, in particular the review of the usefulness of APR. Our experience has shown that communications rules around consumer credit can restrict the progress firms are able to make in their efforts to optimise customer understanding and are conflicting with the aims of Consumer Duty.
This has led us to a broad view that the prescriptive nature of existing rules, including those set out in CONC 3, often stand in the way of improvements to customer understanding. In many cases, this prescription is not necessary and isn’t supporting the best customer outcomes. We therefore support efforts to rely on the Consumer Duty as much as is possible, so many of the changes outlined in the consultation paper are welcomed.
On APR specifically
Our research with Fair4All Finance, ClearScore and Thinks Insights, found that APR was poorly understood. A Randomised Controlled Trial (RCT) used comprehension questions to test three ways to communicate the cost of credit on a short-term loan:
1. The original ClearScore interface, presented in the traditional way of using APR and a representative example.
2. A version which was optimised for customer understanding using the Plain Numbers Method but within the existing rules – so keeping APR and the representative example.
3. A pure Plain Numbers optimised version without the APR or representative example.
Findings from the RCTs
The Randomised Control Trials showed:
- Version 1, the original interface, had the lowest customer understanding (13% of customers getting four or five out of the five comprehension questions right)
- Version 2, using the Plain Numbers Method, but keeping APR and the representative example, doubled the proportion of people understanding (26%)
- Version 3, was the best performing, by following the Plain Numbers Method and being able to remove the APR and representative example. The proportion of people who demonstrated good understanding (35%) was almost triple that of the original interface.
What this shows is that firms can present information in a way that more people understand by using pounds and pence cost disclosures, but that the prescription of APR disclosure limits them significantly in achieving maximum understanding. Even with a pounds and pence disclosure alongside APR, people find it easier to understand the information if APR and representative examples are not present. It also demonstrates just how low understanding of APR is, making a continued reliance on it a significant risk to efforts to drive good customer outcomes.
The full research can be found here.
Where the problem actually lies
The issue is not about whether people conceptually understand APR or how its calculated, the issue that matters most to customers is how easy it is to get the information they need about the cost of credit from APR and representative examples. The research demonstrates that customers are too often unable to do that.
Despite the flaws of APR, we recognise the need for comparability. Therefore, we are not arguing for firms to be given complete freedom to communicate the costs in any way that they judge consumers are likely to understand.
Our recommendation
We recommend that further robust testing is carried out to assess the variety of options for alternatives to APR. Our experience suggests a pounds and pence cost disclosure which is prescribed to be consistent across all providers of similar products would be best understood and maintain comparability. However, there are many possible alternatives and with the cost of borrowing being so important for customers, different options should be tested across different markets to ensure confidence in the chosen approach – or approaches.
Trying to use the same measure for a whole range of products – from retail store credit to mortgages and long-term high value personal loans to specialist lending – creates confusion for the customer in pursuit of comparability which doesn’t support any useful decision making for customers. We would therefore argue that a consistent, comparable approach is only necessary for products of the same type.
Our research focussed on short term, low value lending, where APR is a particularly problematic measure. We have significant concerns that APR overstates the cost of some of these deals or confuses customers to the point of disengagement – causing damage to the attempts set out in the government’s Financial Inclusion Strategy to increase access to affordable credit.