Twenty eight credit card companies have agreed to change the way they advertise introductory rates of interest. They include the major card issuers such as high street banks and finance houses.

The companies (named in note 1) have agreed not to describe introductory interest rates as APRs (annual percentage rate) after the OFT expressed concern that this practice breached consumer law and could mislead consumers. Examples of such adverts for introductory rates included phrases such as: '0% APR on balance transfers for six months' or '3% APR fixed until 1 July 2002'. APRs are supposed to reflect the cost of credit over the lifetime of an agreement.

The companies who have agreed to change their advertising are Abbey National plc, Alliance & Leicester plc, The Associates, Bank of Scotland, The Boots Company plc, Capital One Bank (Europe) plc, Clydesdale Bank plc, Direct Line Financial Services Ltd, Egg plc (Prudential Banking plc), Furness Building Society, Halifax plc, Hamilton Direct Bank, HFC Bank plc, HSBC Bank plc, Liverpool Victoria Friendly Society Ltd, Lloyds TSB Bank plc, MBNA Europe Bank Ltd, Morgan Stanley UK Group, National Westminster Bank plc, Nationwide Building Society, Paramount Bank, People's Bank of Connecticut, Providian National Bank, RBS Advanta, The Royal Bank of Scotland plc, Sainsbury's Bank plc, Tesco Personal Finance Ltd, Woolwich plc.

In April 2000 the Office of Fair Trading announced:

Household names are among lenders who have been told to stick to the rules on annual percentage rates (APRs) when advertising credit.

The OFT has issued guidance which tells lenders that:

• The cost of Payment Protection Insurance (PPI) must be reflected in the APR when it amounts to a condition of a loan. Some lenders offer discounted interest rates which are only available if PPI is taken out.
   
• Advertising a minimum APR is only acceptable if a typical APR is also given. The latter should be more prominent.

Failure to comply may leave a company open to prosecution under the Consumer Credit Act, the consumer protection authority said. Trading Standards take the lead on such cases. Offenders can be tried either in a Magistrates Court or a Crown Court. Those found guilty in the former can be fined up to £2,000. The maximum sentence in a Crown Court is two years' imprisonment or a fine or both.

The OFT’s aim is to stop loan advertisements which promise more than they offer. A typical example of where the cost of PPI is not obvious is where a loan without PPI is offered with an APR of 12.6 per cent and the same loan with PPI is offered at 10.4 per cent. Had the PPI been properly reflected in the total cost of credit, the APR would have been 19.7 per cent.

A typical example of using a minimum APR is an advert that promotes personal loan rates "from only 9.9 per cent APR." When a consumer telephoned asking for a loan, an APR of 14.8 per cent was quoted. It was not clear in the advert that the low rate was limited to certain types of loan or that consumers had to meet specific conditions.

The Director General of Fair Trading, said:

‘We are receiving an increasing number of complaints about credit advertisements that do not comply with the regulations. Lenders want to advertise competitive rates but too often the headline figure is being used to hook new borrowers rather than describe what is on offer. Borrowers must be given sufficient information to enable them to compare products. Some of the breaches may be through ignorance of the regulations, but, in other cases, consumers are being deliberately misled.

‘Some lenders are trying to hide the cost of PPI by linking it to a discounted interest rate. While PPI may be useful, it is being aggressively promoted and I am concerned that borrowers are being tempted into taking out something that may not suit their circumstances and without knowing how much it will cost them in the long term. Some firms have argued that where PPI includes a life insurance element it should not be included in the APR but we do not agree. This point will be put beyond doubt when new regulations will come into force in April.

‘Similarly low APR adverts are common currency but don’t actually live up to expectations. When inquiries are made potential borrowers are finding that for all sorts of reasons the loan they are offered comes with a much higher APR. The purpose of APRs is to enable consumers to compare products. Lenders cannot continue to subvert this aim without expecting action to be taken against them.’