Last year the Competition & Markets Authority (CMA) issued a directive to small and medium-sized enterprises (SME) lenders to advertise their products with an annual percentage rate (APR) to show more clearly the cost of the borrowing. This proposal is to take effect from August and was mandated to allow clear comparison of products and providers.
The directive followed the CMA’s Retail Banking Market Investigation report which reviewed the markets for personal current accounts and retail banking services for SMEs. The CMA identified several problems with the way that competition works in these markets and said using an APR is the best solution.
The CMA says there is still a low level of customer engagement in SME lending market, with the great majority of SME customers going straight to their main bank when seeking finance. It reported that barriers in the market include complex and opaque prices and terms, and a lack of effective comparison tools for SME products and services.
Some lenders already publish APRs with some also providing conversion tables for consumers to compare quotations. However, many lenders which specialise in small, unsecured loans and facilities will have to make the changes.
What impact on the market?
Commenting on the arrival of mandatory APR disclosures, AABF chairman John Davies – who is also CEO of The Just Loans Group – said “What is needed is a simple and consistent way for businesses to compare the total cost of a loan which all AABF members would subscribe and adhere to,” he continued. “This is the feedback I get from fellow AABF members.”
This, in turn, will stimulate competition and encourage entry and expansion by new market players.
Conrad Ford, CEO of mandated referral platform Funding Options, commenting to AltFi says “This new requirement for small business lending APRs is a welcome step forward in market transparency.”