The effectiveness of mandatory comparison rates: information, capacity and choice: consumer research issues paper

This issues paper is part of a research project investigating of the effectiveness of mandatory comparison rates in guiding consumer choices. Comparison rates are a measure of the total cost of a fixed term loan, including interest and all fees and charges, by using a single percentage rate. This, it is argued, enables consumers to more easily compare the overall cost of loan products. Mandatory comparison rates have been in force since July 2003 and are due to sunset 30 June 2006 (dependent on the outcome of a Regulatory Impact Statement currently being undertaken). The consumer credit market is marked by increasing product proliferation and differentiation. In addition, fixed term credit products span a broad variety of type from relatively short term personal loans, through to longer term personal loans for items such as cars and boats, on to home mortgage finance. In the public realm, consumer decision-making is often treated as a black-box; how people go about making choices and the key factors in those choices is little understood. Developing regulations aimed at improving information available to consumers and thereby increasing their capacity to make decisions poses a number of challenges including the greatly differing capacities of consumers to understand and use financial information. This research, funded by the Victorian Consumer Credit Fund, will provide an evidence base for strategic analysis by Consumer Affairs Victoria and other interested parties including the Ministerial Council on Consumer Affairs. The central question addressed is: have mandatory comparison rates proven to be an effective regulatory option to ensure that consumers are able to make informed choices between different credit options? While there has been primary research on some aspect of consumer credit decision-making, and particularly on financial literacy undertaken in Australia there has been no primary research on consumers’ understanding and use of comparison rates. This discussion paper presents the findings of consumer research undertaken to address this gap.