The effectiveness of mandatory comparison rates: information, capacity and choice: final paper

The mandatory comparison rate (MCR) regime was introduced in 2002 to address perceived problems with the new Consumer Credit Code (1994). It would appear that there were two distinct but related issues underlying the establishment of the MCR regime: a concern about the increasing reliance of finance providers on fees and charges, allied with the increasing complexity of financial products available; and a desire for a simple basis of comparison to assist consumers in choosing between providers and products. The comparison rate (which was an optional part of the original consumer credit code) is an interest rate for the duration of a fixed term loan that includes both interest charges and ascertainable fees and charges. The legislation requires suppliers of fixed term consumer credit to include a comparison rate when advertising credit using interest rates, to provide customers with a schedule of comparison rates for 'typical' loans when offering credit products to consumers and to include the comparison rate in the loan contract. The introduction of the consumer credit code was a significant component of the deregulation of the financial system. The claimed benefit of deregulation is that it will deliver flexible and responsive markets directed by consumer preferences. Maximising these benefits requires informed consumers with the capacity to make evaluations of the products on offer. This research was an attempt to test the degree to which the MCR assists in this outcome. Our research found that once consumers understood the comparison rate, most felt that it would be useful in helping to make consumer credit decisions. Given the complexity of consumer credit, the issue is not whether a single indicator can encapsulate all aspects of products but whether it is helpful to consumers in decision making. Our research has demonstrated that many consumers are uncertain and confused when searching for and negotiating credit. There are two main challenges to improving the usefulness of the MCR: improving consumer awareness and understanding of the measure through public information and consumer education campaigns; and adjusting the current pre-contractual provision of the MCR so that consumers are provided with a comparison rate for the loan amount in which they are interested. There is a need for more research on patterns of information seeking and options for information dissemination by various modes, including word of mouth, family networks, print and online.