Consumers need financial education
Written by Martin Upton
Wednesday 4th May 2016
The financial crisis of 2007-2008 has had seismic ramifications on both domestic and global economies and in the UK has also resulted in significant regulatory and financial services industry activity to restore confidence, financial stability, protect consumers and prevent such carnage happening again.
These changes have made significant improvements for consumers in many areas although certain groups of consumers have suffered from unintended consequences in some product areas.
Examples of the latter range from ‘mortgage prisoners’ (middle aged borrowers with existing interest only mortgages that are unable to remortgage) to savers who have been getting paltry returns as a result of the double whammy of historically low interest rates coupled with the effects of the government’s Funding for Lending scheme which greatly reduced the banks’ appetite for attracting retail deposits.
The aim of the regulators is to ensure that providers treat customers fairly and that consumers can regain their trust and confidence in a stable financial services industry.
There is however one additional area of concern that needs attention is financial education. Many financial products are a virtual necessity in today’s fast moving world, and, choosing the most appropriate product often requires more than an element of knowledge and confidence.
There’s insufficient consumer understanding about debts, assets, risks to make appropriate and confident financial decisions. Many people don’t have a ‘maths brain’ and even more have never had any financial education.
Bearing in mind that some financial products are one-off decisions with very long term consequences – for example the choice of an annuity – it’s not surprising that many consumers simply aren’t sufficiently confident about their financial decision making.
There’s also an ‘advice gap’, which in part was exacerbated by the regulatory abolition of trail commission and platform rebates, which sees the less affluent either unable, or reluctant, to pay for professional advice.
Personal finance education became a compulsory part of the English secondary school curriculum in 2014 and this will undoubtedly help those of tender years and future generations. But where does this leave many of today’s adults who have never had any formal financial education?
Citizens Advice Bureaux (CAB) say that 8 million people have problem debt and that 40% of adults have less than £300 in savings. CAB know that debt can lead to mental and physical health problems and can also create real strains on relationships.
This backdrop makes it even more alarming that anyone who has become a first time property buyer in the last seven years has never experienced the effects on variable rate mortgage repayments of an increase in the bank base rate. They could be in for a real financial shock.
Schools, universities, employers, trusted intermediaries and financial providers can all have a part to play in improving financial education and understanding. But even if employers play their part, where would this leave the ever growing numbers of the self-employed?
There are a series of life events when consumers need to engage with financial providers – first bank account, first credit card, first mortgage – and these provide a real opportunity for providers to offer advice and education at the point of considering the products. Similarly pension auto-enrolment is an ideal touchpoint for employers to get involved.
There are some very complicated products available and some expert commentators have suggested that there should be an industry wide suite of simplified financial products that would be encouraged to compete on price and service.
Another suggestion is that the government could further endorse the importance of financial education by appointing a Minister for personal finance.
I’m very pleased that we at the True Potential Centre for the Public Understanding of Finance (PUFin) are heavily involved in catering for the consumer need for personal finance education. Following on from our earlier courses ‘Managing My Money’ and ‘Managing My Investments’ PUFin are now launching the third in our trilogy of free online courses ‘Managing My Financial Journey’ on 25th April 2016.
The course lasts for four weeks and at the end of it participants will have gained a full insight into how the financial services industry operates and how to transact business with knowledge and confidence.
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance
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