James Daley comments on the reforming of the Consumer Credit Act 1974

“The review of the Consumer Credit Act provides a perfect opportunity to tear up the current regulations and start again to greatly improve disclosure in the credit market. We need new rules which ensure customers are given the right information at the right time, to help them properly understand the benefits and risks of credit products.

“The Act contains a number of prescriptive rules around what firms must tell their customers – but these are often inhibitors to customer understanding, rather than enablers. The rules around disclosure should be entirely governed by the FCA – but as the FCA takes on that responsibility, it should take a fresh approach in developing a new, effective and proportionate disclosure regime – which empowers consumers to make the best decisions.

“To test the effectiveness of the current rules and how much information consumers typically understand when applying for a credit card, we commissioned a study1 and asked a nationally representative group of 30 people who either owned or were considering taking out a credit card to complete a mock online credit card application, which fully complied with current regulations. It found the majority of Brits are baffled by the most basic terms of their credit agreements, like how much interest they’ll be charged.

“Only 43% were able to identify the correct APR. This is an especially important number to keep track of, since if a borrower had a £1,000 balance and paid off £100 each month, on a card with 22.9% APR, they would pay £108 interest, while on a card with 34.9% APR (charged by many credit builder cards) they would pay £167 - a £59 difference.

“A worrying number of participants failed to identify various fees; one in three (37%) either weren’t aware of the 2.9% balance transfer fee or thought there was no fee. A further 60% either weren’t aware of the 3% cash transaction fee or thought there was no fee. With a £1,000 balance transfer and £20 cash withdrawal, these fees would add up to £32. On average, just 2 in 5 participants could correctly answer the basic understanding questions. Not a single participant was able to answer the most difficult question (‘what is the fee for withdrawing cash overseas?’), while even the easiest question (‘does this credit card charge an annual fee?’) was answered correctly by just two-thirds of respondents.”

Fairer Finance responded to the consultation, making six recommendations (below) and it believes that if its recommendations are enacted, the market will be understood by a great many more people - whilst improving the customer experience for everyone.

1. All disclosure rules should be removed from the Consumer Credit Act – with powers delegated to the FCA to set and amend regulations going forward. In the last review of the Consumer Credit Act in 2019, the FCA indicated a preference for taking over most of the provisions in the Consumer Credit Act. There are a handful of provisions - specifically those that relate to unenforceability of credit agreements and Section 75 protection - which will need to be retained in law. But rules around information requirements can and should be transferred entirely into FCA hands.

2. The FCA should remove the requirement for lenders to publish a pre-contract credit disclosure document. Summary boxes are now established in credit markets as well as other markets such as savings. An additional pre-contract credit document provides duplication and the requirement to provide one should be removed. The rules around disclosure should be entirely governed by the FCA – but as the FCA takes on that responsibility, it should take a fresh approach in developing a new, effective and proportionate disclosure regime – which empowers consumers to make the best decisions.

3. All lending products should have to produce a summary box, which must be made available before the start of the application process, and throughout the journey. Our research showed that many consumers do want a short summary of the product which is more accessible and digestible than the full Ts&Cs. The FCA should prescribe what information should be disclosed in these - and the requirements should be adapted to each sector. The language and format of the summaries should not be prescribed, though, allowing firms to innovate in the way they communicate and improve customer understanding.

4. The FCA should introduce a new prominence requirement across all financial services communications, requiring firms to prominently draw any onerous or misunderstood product features to the customer’s attention during the application process. In the credit market, guidance should make it clear that this needs to include details around the consequences of missing payments, early repayment charges – and how interest, fees and charges are applied.

5. The FCA should issue new guidance on acceptable font sizes for web journeys and printed literature. This should include a recommendation that firms use a minimum of 12px for online text and 10pt for printed text. Firms should be reminded that they will be in breach of the Consumer Duty If key information is printed in a size that is hard for customers to read.

6. The calculation of APR should be standardised, and greater flexibility should be provided to short-term lenders in terms of how they show the cost of credit. APR is not always a useful way to compare the cost of credit. By adding annual fees, it can distort the number, while displaying an annual cost can be misleading in the context of shorter-term forms of credit.