The Government has just published its consultation paper on radical reforms to the UK’s consumer credit laws. The proposals include scrapping the much-criticised credit ad regulations, but will the suggested changes make much difference?
Topic: Consumer credit
Any advertising or marketing material in the UK offering credit must comply with detailed regulations. First, there is an over-arching requirement under the Consumer Credit Act 1974 that consumer credit advertising must not be misleading. Secondly, there are detailed rules contained in the Consumer Credit (Advertisements) Regulations 1989 ("the 1989 Regulations"). In essence, these require that to be legal, a consumer credit advertisement must be "simple", "intermediate" or "full".
For each of these three categories, there are rules as to what information must, can and cannot feature in the ad. There are also rules applicable to the quoting of the Annualised Percentage Rate of Interest ("APR") which applies to the credit on offer, the prominence with which the APR must be quoted and other rules such as a requirement that no comparative claim can be made except in a full credit advertisement and in circumstances where the competitor being compared with is named and the competitor's alternative, less advantageous deal set out in detail.
The 1989 Regulations have been consistently criticised as over-restrictive and complex. They also do not seem to have had the desired effect. Research conducted recently by MORI for the DTI indicated that 76% of people found the language used in consumer credit advertisements confusing. More than half did not even know what APR stood for and 80% wanted more information on their rights when using consumer credit.
Proposed new law
As part of the UK government's radical overhaul of the country's consumer credit legislation, a white paper has been published with detailed proposals for reform. Amongst the suggested changes are the scrapping of the 1989 Regulations. These, we are told, will be replaced by a simpler regime, putting consumer credit advertising under stricter guidelines and providing robust redress for victims of misleading and unfair selling practices.
The white paper proposes to introduce measures designed to ensure greater consistency and transparency so that consumers can compare financial products more easily and make informed purchasing decisions with confidence. The new regime will simplify the advertising rules, it says, and focus on the essential information that lenders want to get across and that consumers need.
Two credit ad categories instead of three
In the place of the "simple", "intermediate" and "full" designations will come just two categories, advertisements which include no financial information and all other advertising for consumer credit.
If the ad contains no financial information, in other words nothing more than name, contact details and general information about the products on offer, (including general statements as to the type of loans available) there will only be a requirement that the name of the lender is given and that the advertisement is clear, fair and not misleading.
However, as soon as any subjective claim is made about the nature of the products being offered, for instance "low interest" or "cheap loans", the advertising will fall into the second category.
In this category, the APR will always have to be shown and it will always have to be located with, more prominent than and twice the size of any other financial information in the advertisement. In addition, where an advertisement advertises more than one product with different APRs, all APRs will have to be given exactly the same prominence.
Key financial indicators
Another fundamental new rule will relate to "key financial indicators". These are:
· the amount of credit;
· the deposit, if one is required;
· any advance payment, if required;
· the frequency, amount and number of payments;
· the total amount payable;
· notification of other charges and fees associated with obtaining the credit;
· where appropriate, the cash price of the goods or services purchased; and
· where the advertisement is for a mortgage or loan secured on property and the repayments are to be made in a foreign currency – a warning that changes in the exchange rates may increase the sterling equivalent of the debt.
Whenever any of these key indicators are given, all of the others will also have to be shown, together and with equal prominence. The APR will also have to be displayed in the same place as the other information and double the size and more prominent.
Two other significant changes include a new approach to the calculation of APR, to be set out in new "Total Charge for Credit" regulations.
Secondly, there will be a new approach to the quoting of "typical" APRs. The overall requirement will be that any APR quoted in an ad must be representative of the business that it is expected to generate.
To that end, the advertisement will have to quote the highest APR that at least 66% of the eventual number of consumers formally accepting a credit agreement in response to the advertisement are expected to be given.
In addition to simply quoting this 66% rate, it is also proposed that advertisers be allowed to retain the option of quoting a "from APR" figure. Where they do so, it is intended the draft regulations will require this to be based on 10% of the business written and to be accompanied in the advertisement by the corresponding "to APR" – based on 90% of the business written.
Furthermore, where "from" and "to" APRs appear, the 66% typical APR would always have to be shown at twice the size and greater prominence of the upper and lower figures.
Detailed draft regulations currently named the "Consumer Credit (Advertisements) Regulations 2004", are included in the white paper. Responses to the proposals and to the draft regulations are requested by 15 March 2004 and it is hoped that new legislation across the board can be introduced before the end of 2004.
Responses to the consultations proposals by 15 March 2004.