Credit Regulations Update: A Representative Example

In August 2010 the Department for Business, Innovation and Skills (BIS) published its ‘Guidance on the regulations implementing the consumer Credit Directive’.  There is also, helpfully, a ‘Quick Start Guide’, in plain English, to the key changes that have been made to the Consumer Credit Act of 1974. Plain English or not, some further comments on one aspect of the new rules may be helpful.  The changes, known as the Consumer Credit Directive, have already been adopted by the EU and will come into effect in the UK on February 1, 2011.

They affect mainly creditors, but will also have an impact on credit brokers and intermediaries. All those involved in lending and making credit available to consumers will need to ensure that they are familiar with the new rules.   The regulations set out what information must be provided to consumers before entering into a credit agreement, and how the information must be provided. They will apply to the vast majority of advertisements for any product covered under the Consumer Credit Act for credit under £60,260, including loans and credit cards.

One of the key changes highlighted in the Guidance concerns the way in which lenders advertise their APRs.  Whenever an advertisement for credit includes an interest rate there is a new requirement is to provide a ‘representative example’.  What does this mean exactly?  According to the Guide, the example must contain very specific information, including a representative APR.  The example must be clear and concise and ‘more prominent than the information that triggered the inclusion of the example’. The representative APR must reflect at least 51% of business expected to result from the advertisement.

The aim of the ‘Representative Example’ is to ensure consumers are well-informed about the cost of any credit agreement they enter into, and to protect them from advertisers’ hype.  As the BIS Guidance says, it will ‘ensure that important information concerning the cost of the credit can be viewed together as a whole, so that the borrower can assess suitability and affordability in the round’.

The new rules should improve clarity and increase awareness of the cost of a loan, reducing the emphasis on APR alone. This will make it easier for borrowers to work out the real cost of financial services and to make comparisons between different providers.