This Research Note explores the potential trade-off between the standardisation and comparability provided by a rules-based regulatory approach and the effects on consumer understanding of the more flexible, outcomes-focused Consumer Duty.
This online experiment compared how different types of cost-of-credit information influenced consumers’ ability to compare the cost of credit products.
Read the research note (PDF)[2]
Read the research note annex (PDF)[3]
Key findings
- Participants had a poor understanding of annual percentage rate (APR) and the impact of repayment duration on total cost.
- Despite poor consumer understanding of APR, it appeared to be an important metric for making credit decisions, with many participants adopting a ‘low APR = low total cost’ rule of thumb when deciding which products cost less in total.
- However, the ‘low APR = low total cost’ rule of thumb was often applied even when it did not hold true.
- Providing APR for one product and not for another impaired comparability (participants’ ability to identify the lower total cost product).
- Supplementing APRs with the total amount repayable improved comparability.
- Additional information was generally welcomed. However, not all types of extra supporting text helped participants. For example, providing an additional explanation about the impact of repayment duration on total cost had a limited effect on comparability.
- Better comparability did not require improved conceptual understanding.
This note complements and informs a discussion paper[4] as part of the FCA’s review of the CONC 3 financial promotions rules for consumer credit.
Authors
Jesal D. Sheth, Lucy Hayes, Isaac Keeley, Mia Mayixuan Li, and Jackie Spang (during her time at the FCA).
Disclaimer
Research notes contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views.
The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement.
To the extent that research notes contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.