We note that the Call for Inputs specifically highlights a desire to simplify the retail conduct rules and “address potential areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit.”
We will comment solely on the mortgage market and our principal suggestion is to abolish the requirement to quote an APRC, or any other form of APR.
We recognise that an APR is helpful in comparing the cost of some types of borrowing, such as unsecured loans, where the interest rate is normally fixed for term and any fees are known up front. However, for mortgages, except perhaps for fixed for life mortgages, including Lifetime Mortgages, the APRC is not only not helpful, but positively misleading.
The majority of mortgages have an initial fixed rate for only 2 – 5 years but the average length of mortgages has increased significantly over recent years. The shorter the initial term and the longer the mortgage term the more misleading is the APRC.
One technical consequence of the APRC being misleading is that it renders all ESIS and mortgage offers non-compliant as MCOB requires all communications to be “fair, clear and not misleading”!
The basic problem with the APRC of course is that is makes assumptions which everyone knows will be wrong. If borrowers generally simply reverted to a lender’s SVR for the remainder of the term after an initial deal the APR could be a useful way of highlighting a high revert to rate.
The second APRC required to be quoted in an ESIS and mortgage offer is equally unhelpful and even more difficult to understand. Taking a sample of a few 5 year fixed rate mortgage offers from different lenders the second APRC calculated on the assumption of an increase of 0.75% in the revert to rate is between 2.6% and 3.2% higher the the basic APRC.
In the real world even the small proportion of borrowers who haven’t historically chosen a product transfer or remortgage at the end of their initial deal (or to move home) is likely to be even smaller in a Consumer Duty world, where lenders have a regulatory requirement to deliver good outcomes for retail customers at every stage of the customer journey.
Despite the APRC becoming a mandatory requirement over 8 years ago few mortgage market participants, let alone borrowers, could explain accurately how it is calculated, which unnecessarily complicates the advice process, despite MCOB helpfully providing an equation to calculate the APRC:
