Signing a credit agreement is not the first point at which the law expects a borrower to understand it. Before a regulated credit agreement is made, the lender or a credit broker must provide an explanation that puts the borrower in a position to judge whether the deal suits their needs and finances. The requirement sits in section CONC 4.2 of the Financial Conduct Authority (FCA) Handbook and applies across the UK; this guide describes it as the Handbook stood on 24 September 2026.
What the explanation must cover
Under CONC 4.2.5R, before making a regulated credit agreement the firm must give an adequate explanation of specified matters, advise the customer to consider the information disclosed under section 55 of the Consumer Credit Act 1974 (and that, if given in person, it can be taken away), give an opportunity to ask questions, and explain how to ask for more information. The matters are the features that may make the credit unsuitable for particular uses, how much must be paid periodically and, where it can be worked out, in total, features that could have a significant adverse effect in a way the customer is unlikely to foresee, the principal consequences of missing payments, and the effect of any right to withdraw and how it is exercised.
The consequences that must be explained
The rule lists consequences to be covered where applicable, depending on the type of credit and the customer’s circumstances: the total cost of the debt growing, default charges or interest for late, missed or under-payments, an impaired credit rating and its effect on future access to credit, legal proceedings including charging orders and their costs, repossession of the home or other property, and, where an article is taken in pawn, that it might be sold if not redeemed. For pawn agreements the explanation is limited to the consequences and withdrawal matters. The consequences of missing payments are also the subject of the guides to arrears rules and the 14-day right to cancel.
How much explanation is needed
CONC 4.2.7G tells firms to consider, to the extent appropriate, the type of credit, its amount and duration, its actual and potential costs, the risk to the customer, which is likely to be greater the higher the total cost relative to the customer’s finances, the purpose of the credit if known, the customer’s level of understanding where that is evident, and the channel used. CONC 4.2.6G says the explanation should enable the customer to make a reasonable assessment of whether they can afford the credit and to understand the key risks. Where there are joint borrowers, the firm should consider whether separate explanations are appropriate.
Spoken and written explanations
The explanation and advice may be given orally or in writing, but where the matters about unsuitability, the payments or the right to withdraw are given orally or in person, the explanation of the unforeseeable-effect features and the consequences of missed payments, plus the advice to consider the disclosed information, must be given orally as well (CONC 4.2.5R(3) and (4)). A lender does not have to repeat the explanation if a credit broker has provided it, but the lender must take reasonable steps to be satisfied that the broker did so (CONC 4.2.11R). The role of brokers is covered in the guide to credit brokers and comparison sites.
Extra rules for short-term loans
CONC 4.2.8R requires that, for high-cost short-term credit, the lender or broker must explain that the agreement would be unsuitable to support sustained borrowing over long periods and would be expensive as a means of longer-term borrowing. For credit token agreements such as credit cards, CONC 4.2.15R adds further points, including the implications of making only minimum repayments and that interest rates or charges may be increased.
Protections against waiving the explanation
A customer saying an explanation is unnecessary does not remove the duty: CONC 4.2.9R says the firm must still comply, and CONC 4.2.10R prohibits encouraging or inducing a customer to waive the right. Firms must let customers request further information without undue cost or delay (CONC 4.2.12R) and cannot require customers to acknowledge that the explanation was adequate, although they can ask for acknowledgement that an explanation was provided and can ask whether the customer has understood (CONC 4.2.13R and 4.2.14G).
Limits of the rule and what a breach means
CONC 4.2.1R disapplies the section for agreements above £60,260 unless they are residential renovation agreements, for agreements secured on land, and for some overdraft and deferred payment agreements, although firms should still consider whether explanations are appropriate in those cases. Separately, CONC 4.2.3G notes that failure to comply with the statutory disclosure regulations made under section 55 of the Consumer Credit Act means the agreement is enforceable against the borrower only with a court order. A borrower who thinks they were not given the required information can ask for a copy of the agreement under sections 77 and 78 and consider a complaint.
FAQs
Does a lender have to explain a payday loan orally?
Not always. CONC 4.2.5R allows written or oral explanation, but where certain matters are given orally or in person, the explanation of the risk and default consequences must be oral.
Can I be asked to confirm I understood everything?
A firm can ask whether the customer understood and can require acknowledgement that an explanation was provided, but cannot require acknowledgement that it was adequate.
Does CONC 4.2 apply to every loan?
No. CONC 4.2.1R excludes certain agreements, including those above £60,260 (unless residential renovation) and those secured on land.
The bottom line
CONC 4.2 requires lenders and brokers to explain the payments, risks and consequences of a regulated credit agreement before it is made, orally in some circumstances, with a specific warning for high-cost short-term credit. A borrower cannot be pushed to waive the explanation, and non-compliance with the underlying disclosure rules can make an agreement enforceable only through the courts. This is general information, not financial or legal advice.