From 1 February 2011, financial services providers in the UK will be subject to a new set of guidelines.  The grandly named Consumer Credit (EU Directive) Regulations 2010 makes various changes to the way financial services companies advertise their products.  One of the most important parts of the new legislation requires companies to include a ‘Representative Annual Percentage Rate (APR)’ on their adverts.

What products do the new rules apply to?

The new Directive applies to advertisements and credit agreements for all loans to consumers under £60,260 excluding  agreements secured on land, certified business loans and investments regulated by the FSA.

It will include items such as personal loans, smaller secured loans and credit cards.

What is a ‘Representative APR’?

Companies can often charge consumers different APRs for the same product.  For example, if credit card or personal loan rates are determined by your credit rating or your income, you may not pay the same rate as someone with a lower income or superior credit history.

APR figures in the UK have also often been misleading as they don’t always take into account certain fees, such as annual charges or credit card ‘balance transfer’ fees.

The Department for Business, Skills and Innovation (BSI) defines the ‘Representative APR’ as: “an APR at or below which the advertiser reasonably expects, at the date on which the advertisement is published, that credit would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement”

In simple terms, where the APR for a loan or credit card can vary depending on an individual’s personal circumstances, the APR that is stated on an advertisement must represent at least 51% of 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, for example, balance transfer fees, and will be based on an EU average credit limit of £1,200 (unless known to be lower).