On 1 June 2023, the FCA published a statement on the annual percentage rate of charge (APRC) calculations. The APRC is one measure used by lenders when disclosing the associated costs of a mortgage contract to customers, showing the annual cost of a mortgage over its lifetime.
The statement explains that systems issues have led some firms to incorrectly calculate the APRC at the time when interest rate expectations rose sharply amid market volatility in Autumn 2022. Problems have arisen where calculating an APRC for a mortgage where the reversion rate is lower than the initial introductory rate period.
Where this is the case, the FCA states that the APRC should be calculated on the basis that the initial rate will continue to the end of the mortgage term, rather than reverting to the lower reversion rate after the initial fixed period. This is set out at MCOB 10A.3.1R(5). The FCA says it understands firms and their service providers are working to ensure these calculations are corrected as soon as possible, and urges all firms who are not currently complying to take prompt action to address this.
While the FCA considers that, in general, an APRC calculated on incorrect assumptions is unlikely by itself to deprive borrowers of the ability to make informed choices, it flags that consistency in the way the APRC is calculated does help those who use the APRC to compare the cost of different products. It is therefore important that any non-compliance is rectified. Borrowers who feel they have made their decision based on an incorrect APRC should speak to their lender.
The FCA will allow firms time to bring their systems into compliance and it expects firms to do this as soon as practicable. During this time, the FCA‘s rules remain applicable and the FCA may ask firms to confirm their compliance in writing. In addition, firms may also need to consider the market disclosure implications of non-compliant systems. The FCA will continue to monitor the market, including any changes in product pricing that further expose this calculation issue.