A Representative APR is a financial service concept in which credit or loan interest rates quoted through advertising media are required to take into account all charges associated with a product, in addition to the interest rate.
History
For years, financial services companies have been required to quote an
Annual Percentage Rate (APR) in any credit terms or advertisements. Up until 2010, all businesses had to comply with the Consumer Credit (Advertisement) Regulations 2004 (2004 Regulations).
[Department for Business, Innovation and Skills,]
Regulations Implementing The Consumer Credit Directive: Quick Start Guide"
Aug 2010, page 3
However, all
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
member states adopted a new Directive in April 2008. This has been implemented in the UK by the Consumer Credit (EU Directive) Regulations 2010, which came into force for all UK companies on 1 February 2011.
While the Directive is similar to the existing policies adopted in the UK, there are a couple of major changes. One of the most important of these is introduction of a ‘Representative APR’.
What the new rules say
Th
Department for Business, Skills and Innovation (BSI)is clear on what the new Directive means for financial services providers and consumers in the UK. The BSI states:
“If an advertisement includes an
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
or any amount relating to the cost of credit, it must also include a
representative example.
[CompareAndSave.com](_blank)
Emma Skinner (Ed.):
What is a Representative Example?
Published 2010-11-17, Retrieved 2011-11-18 This must contain certain standard information including a representative APR. The example must be clear and concise and must be more prominent than the information that triggered the inclusion of the example.”
[Department for Business, Innovation and Skills,]
Regulations Implementing The Consumer Credit Directive: Quick Start Guide"
(2010), page 5
Products the new rules apply to
The new
Directive applies to
advertisements
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
and credit agreements for all
loans
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
to consumers under £60,260 excluding:
[Bond Pearce]
Consumer Credit Directive sets advertising regulations"
Published on 2010-06-09, Retrieved 2010-11-18
* agreements secured on land
* business loans (certified)
*
investments
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
regulated by the
FSA
Definition of ‘representative APR’
The
APR for financial services products often varies from customer to customer. This is particularly true if loan or
credit card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
rates are determined by an individual's income or
credit rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
.
In addition, the problem with the current way of working out an APR is that it often doesn't take into account certain fees, such as credit card balance transfer fees or annual charges.
So, in instances where the APR for a financial product can vary, the APR that is stated on an advertisement must represent the business that the financial services provider expects to come from that advert. A representative APR will also take into account other charges associated with the product (in addition to the interest rate) and will be displayed within th
Representative Example
A company works out its ‘typical’ APR by taking into account past business that has arisen from advertising similar products, ideally over the previous 12 months. Th
Financial Services Authority (FSA){{Webarchive, url=https://web.archive.org/web/20090227043541/http://www.fsa.gov.uk/ , date=2009-02-27 suggests to companies that they “list the APRs your customers have paid over the past 12 months. The representative APR you state in your advert should not be less than the APR paid by at least 66% of consumers on the list.”
[Financial Services Authority:]
Mortgages and Home Finance Advertising"
- Retrieved 2010-11-18
However, from 1 February 2011, this calculation changed. The BSI reports that: “The Representative APR must reflect at least 51% of business expected to result from the advertisement. The standard information must be representative of agreements to which the Representative APR applies.”
A representative APR will be based on a
credit limit
A credit limit is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit (sometimes called a credit line, line of credit, or a tradeline).
This limit is based on a variety ...
of £1,200 (unless known to be lower).
Additional services and security
Another subtle but important change to the rules now make it essential for financial services providers to display, in prominent text, whether there are any obligations on a consumer to enter into another
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
(for example, if you have to take compulsory insurance products with a
mortgage loan
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
). In this situation, the cost must be shown with:
* no less prominence than standard information
* the representative APR
The nature of any
security
Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and social ...
must also be specified.
References
Banking
Interest rates