Timing is Everything: The Effect of Early Disclosure on Consumer Comprehension and Confidence. Paul O Shea University of Queensland

Transcription

1 Timing is Everything: The Effect of Early Disclosure on Consumer Comprehension and Confidence Paul O Shea University of Queensland

2 The Report Commissioned by the Uniform Consumer Credit Code Management Committee (UCCMC) on behalf of the Standing Committee of Officials of Consumer Affairs (SCOCA) Conducted by Paul O Shea as Chief Investigator for UniQuest Pty Ltd, the research commercialisation arm of the University of Queensland

3 Project Objective and Goals Objective: Develop pre-contractual disclosure which was more meaningful to consumers making informed choices about credit. Goals: Simplification Comprehension Relevance Comparison Cost Applicable across products

4 The Tender 2006: SCOCA produced Pre-contractual Disclosure and the Uniform Consumer Credit Code Consultation Package 2007: UCCMC and SCOCA call for tenders for Consultancy Services for the Simplification of Disclosure Regulation for the Consumer Credit Code This project is the result of that tender.

5 The Project Literature Review of 22 Databases with over 40 relevant sources identified Comprehension Testing experiments with 221 participants Six Focus Groups with 55 participants Cognitive Interviews (45-60 minute interviews testing participant comprehension and behaviour while asking for their reasons and opinions) with 70 participants Four transaction types Home loans, credit cards, car loans and store cards.

6 The Project (cont) Revised Disclosure Model (1) Literature Review Initial Comprehension Tests Focus Groups

7 The Project (cont) Process leading to Revised Design RDM (1) Cognitive Interviews Further Redesign RDM(2) Cognitive Interviews RDM (2) Final Comprehension Testing of RDM (2)

8 The Project (cont) Testing in the On-line Environment Cognitive Interviews using credit cards obtained in a simulated on-line credit transaction Testing for Timing Effects on Disclosure Cognitive interviewees asked to choose between two different examples of the same product type. Some given early disclosure, in an adapted more portable format (RDM2.1) and others ordinary or late disclosure. All ultimately received full disclosure in the RDM(2) format.

9 Historical Background Consumer credit regulation in Australia has required ever increasing levels of precontractual and contractual disclosure. Hire Purchase Acts = 13 disclosure items Credit Acts = 37 disclosure items Credit Code = 41 disclosure items Increasing demand for regulation to be based on research and evidence of consumer behaviour and benefit.

10 Disclosure Models Current Disclosure Model (CDM): Documents which comply with the UCCC and the NCCC ie Financial Table + Contract Terms Proposed Disclosure Model (PDM): Documents drafted to comply with the 2006 Consultation Package Proposals ie Schumer Box Financial Summary Table (FST) + Summary of Other Information (SOI) + Contract Terms Revised Disclosure Model (RDM): Documents drafted in response to the research findings of this project. ie RDM(1) FST + SOI + Contract Terms and RDM (2) FST only + Contract Terms

11 Cognitive Interviews Round 2 RDM(2) produced almost 100% for Home Loans and Credit Cards and 80% for Car Loans Most participants praised the usefulness of the Revised FST Marginal changes suggested by participants

12 Final Comprehension Tests Final Round of Testing using RDM(2) Participants answered almost all of the questions correctly. Cost of credit questions improved by factors of between 400% to 1,800%.

13 Cognitive Interviews Technique pioneered in the US and used in research commissioned by US Federal Reserve. Uses participants as both: Behavioural subjects; and Sources of opinion and explanation. Cognitive Interviewees could be: Asked to make choices of products Asked about their confidence in those choices Tested for their comprehension of important features of the transaction at different times throughout the process leading to a consumer credit contract. This can provide quantitative behavioural data as well as qualitative opinions and impressions.

14 Timing The Current Position The National Credit Code does not prescribe when pre-contractual disclosure should take place just that it must be prior to entering into the contract. Evidence that this is almost always immediately before. Even in home loans, some doubt about whether consumers take much time.

15 Timing The Current Position There are a lot of early contacts between suppliers/intermediaries and consumers: Home Loans = Approval letter Credit Cards = Solicitation Letter But the content of these documents are largely unregulated except for: General law against misleading conduct Mandatory Comparison Rates Disclosure is voluntary and determined by the Supplier.

16 Timing The Current Position Consumers receive full disclosure at a later time usually after they have chosen a particular product. Such choices are usually not irrevocable at law (though there are some products which will charge a nonrefundable document preparation fee) but the combination of: The volume of material in the CDM; and Pressure from suppliers to induce consumers to choose their product, whether it be the credit alone or their goods and services linked to credit; and The inertia and momentum experienced by consumers once they have made a choice. reduce the capacity of consumers to shop around in a fully informed way before committing to a particular consumer credit product. For this project, we have called this situation Late Disclosure.

17 Early Disclosure with RDM 2.1 Home Loans Provided RDM 2.1 with the Approval Letter. Credit Cards Provided RDM 2.1 with a Solicitation Letter. RDM 2.1 is the single page Financial Summary Table without the accompanying contract.

18 Method Ten (10) Cognitive Interviews with Credit Cards Eight (8) Cognitive Interviews with Home Loans Twenty (20) more with Car Loans and Store Cards (not covered today)

19 Exploring Choice/Confidence Two Home Loan Products: Happy Home Loans Pty Ltd (HHL) This product had an 8.8% interest rate and annual fees of less than $100 and repayments of $2, for the first 60 months and then $2, for the next 300 months. No mention is made, in the initial letter, of application fees or lenders mortgage insurance. This product, ultimately, produces a lower cost of credit for the consumer. This is the Low Risk Product Better Home Loans Pty Ltd (BHL) Although it has a slightly higher interest rate, at 9 %, this product promises no application fees, no mortgage insurance and repayments of $2, While possibly more attractive to some consumers, in the short term, it ultimately will cost them more. This is the Higher Risk product

20 Exploring Choice/Confidence Two Credit Card Products Easy Money Standard Rate Mastercard This product has 0% for 12 months on balance transfers and a reduced rate of 4.99% on purchases for 12 months before its standard rate of 24.99% commences. Its annual fee is $158 and its late payment fee is $100. It seems more attractive initially but its higher interest rate potentially would cost a consumer more if they only made minimum monthly payments. This is the Higher Risk Product Easy Money Low Rate Mastercard Its balance transfer and promotional interest rate only apply for six months, making it less attractive (up front) and its standard interest rate of 14.99% leads to a lower overall cost of credit if the consumer even when the consumer only makes minimum monthly repayments. This is the Low Risk Product

21 Home Loan Participants

22 Method: Steps 1 and 2 Step 1: Approval/Solicitation Letters (for each product) Late Disclosure: Letter alone Early Disclosure: Letter + RDM (2.1) Participants choose product Step 2: Questions on: Reason for Choosing product Confidence in Choice (1-5) Ease of comparison (1-5)

23 Credit Card Participants

24 Method: Steps 3 and 4 Step Three: Comprehension Test Participants again asked about confidence Step Four: Full Disclosure for Chosen Product (CP) (20 minutes) All RDM material for home loans provided for chosen product.

25 Method: Step 4 Full Disclosure Home Loans Consumer Credit Contract and Schedule Mortgage Authorities and Acknowledgements Mortgagee s Solicitor Letter Mortgagee s Solicitors Account Certificate of Independent Advice or Waiver First Home Owners Grant Authority Service Nomination form for Consumer Credit Code Credit Cards Consumer Credit Code Contract with Schedule

26 Method Steps 5, 6 and 7 Step 5: Comprehension Test Participants again asked about confidence Step 6: Full disclosure of the Other Product (OP) (Five minutes) Step 7: Comprehension Test on OP and asked again about confidence

27 Home Loan Confidence Levels Late Disclosure Group

28 Home Loan Confidence Levels Early Disclosure Group

29 Home Loan Comprehension Levels Late Disclosure Group

30 Home Loan Comprehension Levels Early Disclosure Group

31 Credit Card Confidence Levels Late Disclosure Group

32 Credit Card Confidence Levels Early Disclosure Group

33 Credit Card Comprehension Levels Late Disclosure Group

34 Credit Card Comprehension Levels Early Disclosure Group

35 Conclusions and Recommendations Consumers tend to choose lower risk products with overall lower costs of credit if provided with disclosure documents at an early stage in a transaction. Consumers want such earlier disclosure and when it is provided they report higher levels of confidence about their choices of product. These confidence levels are mostly supported by both: Demonstrated levels of comprehension; and Confirmation of their earlier choices.

36 Conclusions and Recommendations Reducing disclosure at the early stage to a single page non-referential format like RDM(2.1): Does not substantially reduce comprehension compared to RDM(2) full disclosure except for possibly one feature of each product. Mostly improves confidence levels Facilitates ease of product comparison Where possible, mandating early disclosure will improve informed consumer choice.