The Financial Conduct Authority (FCA) has launched a review into annual percentage rates (APRs) to determine if they help consumers understand borrowing costs.

The regulator is seeking views on whether it should change how these rates are communicated in credit advertising.

APRs indicate the yearly cost of borrowing, including interest and fees. A representative APR means at least half of consumers receive that rate or better, and current rules require representative APRs in most credit advertising.

FCA research published today has shown that APRs are useful for comparing products, but additional information, such as total repayment figures, can also help consumer understanding. However, these finding indicated that providing different information tailored to different products can sometimes make comparison harder and confusing.

According to the research, among consumers shown an APR alone, 80% of people correctly identified the cheapest product when the lower APR meant a lower repayment. Fewer than one in five did so when the lower APR didn't mean cheaper borrowing.

“Clear information advertising credit helps people shop around,” said director of consumer finance at the FCA, Alison Walters. “But there’s evidence that APRs do not always allow people to understand the true cost of credit.

“To help people navigate their financial lives, we’re asking for views on whether there’s a better way.”

The FCA is inviting views from the industry on APRs until its discussion paper closes on 17 June.

Senior risk director at banking and credit advisory firm Broadstone, Paul Matthews, welcomed the regulator’s action and commented: “APRs have long been the cornerstone of credit advertising, but the regulator’s research reinforces a well-known challenge – they are not always a reliable proxy for the true cost of borrowing, particularly where product structures differ.

“The FCA’s willingness to revisit how borrowing costs are communicated is therefore welcome, especially at a time when affordability will be critical to a well-functioning credit market. There is a strong case for complementing APRs with clearer, more tangible measures such as total repayment or pounds-and-pence cost, provided this is done in a consistent way that preserves comparability.

“The priority should be a balanced approach that improves consumer understanding without introducing unnecessary complexity. Any move towards more flexible disclosures will need careful calibration to avoid inconsistent approaches across the market, which could ultimately undermine comparability.”

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