Comparison rates need to capture exit fees.

A lack of awareness of comparison rates and how they work has prompted calls for them to be scrapped. A finance industry group has described them as costly, complex and open to abuse.

And a recent study found that since 2003, when mandatory comparison rates were introduced, only about a third of people have found out what they are and only about one in 10 could define them accurately.

Most people said they found the wide range of choice in the consumer credit market confusing, a situation that was not helped much by comparison rates.

The Mortgage & Finance Association of Australia, which represents mortgage brokers, says state governments are maintaining a costly system that has not served consumers well. Its attack on comparison rates comes in response to the Queensland Government's introduction of a bill to extend the life of the mandatory comparison rate regime, scheduled to lapse in July this year, to 2009.

Comparison rates are loan interest rates calculated after adding fees and charges to the lender's advertised rate. The idea is to express the full cost of the loan in the rate and also provide a basis for comparing one loan with another.

The mandatory comparison rate rules are part of the Uniform Consumer Credit Code, which governs consumer lending. This is uniform state legislation first passed in Queensland and then taken up by the other states.

The code was introduced in 1994, with the mandatory comparison rate following in 2003. The comparison rate scheme has a sunset clause, put in place to allow the states to review the effectiveness of the comparison rates before making them a permanent part of the code.

Calvert Duffy, head of legal and compliance with the brokers' association, says: "Having the ability to compare like with like is a brilliant idea. But the execution is difficult and consumers struggle with the concept."

There has been a proliferation of "off-book" fees and charges since 2003. Items such as third party valuations and legal fees do not go into the comparison rate, nor do the increasingly common and expensive deferred establishment fees.

Lenders say these fees cannot form part of the comparison rate because they do not apply to all borrowers equally and may not apply at all. Duffy says to leave them out means understating the real cost of the loan but putting them in creates inaccuracies. Either way, the comparison rate is unhelpful.

The system, though widely held to be flawed, still has its fans. Mara Bun, a senior executive of the banking industry research group Cannex, says the idea of comparison rates is a good one and the problems in the current arrangement can be fixed. "Deferred establishment fees and other exit charges are the big problem," Bun says. "The states need to look at how the [credit code] can capture those costs."

Duffy says such a project is not worth doing, even if it means better comparison rates, because consumers are not using them.

In a study published last year, researchers from the Institute for Social Research at Swinburne University of Technology found a low level of awareness in the focus groups they ran. Only 37 per cent recognised the term "comparison rate" and only 12.5 per cent could define it correctly. Among those who knew about comparison rates, the majority found them helpful but the message did not appear to be getting out widely.

Respondents said the most important factor in choosing a credit product was the interest rate, followed by fees and charges - a finding that makes the lack of awareness of comparison rates surprising.

The Swinburne report says: "The majority of people interviewed did not feel educated about the credit market. Confusing, complex and mind-boggling were words frequently used to describe credit searches."

The researchers said that similar studies in New Zealand, Britain and US also found low levels of awareness of comparison rates.