FCA launches review into credit advertising and APRs

The FCA is seeking views on two distinct areas: firstly, simplifying provisions on financial promotions and communications with customers (CONC 3) contained within the FCA Handbook; and secondly, whether the use of APRs in consumer credit advertising supports consumer choice and decision making. Both the discussion paper and consultation close on 17 June. The FCA will update on the outcome later this year.

The consultation follows recent FCA work which identified areas of overlap of certain consumer credit advertising requirements in CONC 3 with the consumer duty and areas of unnecessary prescription. The consultation paper follows a commitment by the FCA to remove unnecessary burdens on firms.

The FCA said the consultation would help clarify whether simplifying many of the “overly prescriptive or outdated” rules – including removing the requirement to publish APR and replacing it with a general 'consumer duty compliance' – would benefit consumers.

The consultation is not considering all parts of CONC 3. For example, the rules in CONC 3.4 on high-cost short-term credit risk warnings; CONC 3.7 on credit brokers; CONC 3.7A on peer-to-peer lending agreements; and most of CONC 3.9 on debt counsellors and debt adjusters are all expressly out of scope of the current review.

The FCA is also proposing that the ‘clear, fair and not misleading’ rule in CONC 3.3.1R is retained because it provides a private right of action that is not available for breaches of the consumer duty.  The new rules are proposed to take effect three months after they are made, with no further transitional provisions considered necessary.

Jo Owens, who leads Pinsent Masons’ consumer credit practice, said the consultation provided a real opportunity to update advertising rules for consumer credit to allow for greater flexibility across digital channels. “By stripping back certain prescriptive CONC 3 rules and aligning financial promotion disclosures more closely with the consumer duty, the proposals give firms greater flexibility, but also place a much sharper onus on judgement, testing and evidencing what genuinely supports consumer understanding,” she said. “For many firms, the real impact may be operational rather than technical, requiring a potential rethink of how promotions are governed and signed off across channels in the absence of prescriptive rules.”

The regulator has also published an accompanying discussion paper which focuses on cost disclosure and whether borrowers could make more informed choices if loan costs could be presented more flexibly. The FCA is seeking views on three key areas: the extent to which disclosure of the Representative APR and its triggers supports consumer understanding and what alternatives might be considered; whether the mandatory inclusion of a representative example supports consumer understanding; and whether the current 51% threshold for determining a Representative APR remains appropriate.

Research undertaken by PwC on behalf of the regulator (46-page / 796KB PDF) indicated that consumers’ understanding was significantly enhanced when they were presented with information in addition to the APR, such as total repayment figures, helping them make more informed decisions about their credit options.  In particular, the research showed that 80% of those surveyed correctly identified the cheapest product when the lower APR meant a lower repayment. However, fewer than one in five of these consumers did so when the lower APR did not equate to cheaper borrowing.

Alexandra Byard, a retail financial services expert at Pinsent Masons, urged firms to engage with the discussion paper carefully ahead of the deadline. “The FCA has commissioned its own consumer research and is genuinely open to reform, but the research also shows that simply removing APR can make consumer outcomes worse,” she warned. “Firms, particularly those using rate-for-risk pricing or operating in the short-term credit space, should be contributing evidence-based responses before the June deadline."

Separately, the FCA stated that the government is undertaking a review of the retained provisions of the Consumer Credit Act 1974 (CCA). Any changes to the CCA will require primary legislation and the scope and timing of this will be confirmed at a later dated. The FCA said its review of financial promotion rules would not require legislation and it saw considerable “merit” in firms and consumers benefiting from its proposals “as soon as possible”.

Owens said the consultation and discussion papers come at an important juncture in the CCA reform timeline. “The FCA is moving on financial promotions now without seeing how the regulated credit regime will develop in light of HM Treasury proposals,” she said. “It will be important to consider how today's proposals interact with the wider reform horizon – particularly for firms that have built compliance architectures around CCA-derived disclosure rules that may look very different in two to three years' time."