- As a result of the GFC, financial literacy programmes have proliferated globally
- There is concern that some financial literacy programme providers may provide poor or biased advice
- Poor financial literacy is one of the greatest contributors to social inequality
By Tony Malkovich
People used to say a fool and his money are soon parted.
But the GFC taught us that you can be savvy and sophisticated when it comes to money — and you can still lose the lot in a flash.
So you can see why financial literacy programmes to help people make the most of their money have flourished in recent years.
In the wake of the GFC, they’ve almost become a global growth industry.
Australia and New Zealand both launched national financial literacy strategies last year, adding to national initiatives underway in Canada, the US, UK, Japan and those of the OECD.
The programmes aim to help people better understand their finances and make better financial decisions. They often offer advice on saving and budgeting, credit cards and phone plans, insurance and investing scams, and even how to plan your wedding.
But how well do financial literacy programmes work?
“In Australia, we’re in the early days of introducing financial literacy programmes,” says Air Commodore Robert MC Brown FCA.
“As to whether they work, the jury’s out. It will probably be 20 years before we know how well they work and one of the great challenges is to develop ways to measure the outcomes of such programmes.”
Brown is a respected financial services and superannuation commentator and the Chairman of the Australian Defence Force Financial Services Consumer Centre. He’s also on the Australian Government’s Financial Literacy Board, but says his comments are his personal observations as a chartered accountant and do not necessarily represent those of any organisations.
“I think the more general financial literacy programmes become, the less useful they are,” he says.
“I believe from my observations, and some quite good outcomes that we’ve achieved in schools and in workplaces, where the programmes are specifically designed to the circumstances of the users then they’ve got the best chance of working well.”
As an example of tailored programmes he cites Australian Securities and Investment Commission’s MoneySmart Teaching programme for primary and high school students, and programmes offered to Defence personnel.
In Australia and New Zealand, financial literacy programmes are proving popular not just with governments but also with banks, banking associations and other financial organisations.
So is there a danger that more generic financial literacy programmes might become more like PR exercises?
“There is a danger of that because the financial services industry still has work to do in terms of genuinely reforming itself by removing conflicts, which we all know about from various scandals over the past decade,” Brown says.
“It would be easy for the financial services industry to fund, facilitate and sponsor financial literacy programmes as a way of deflecting from what really needs to happen.
“I’m not suggesting they are deliberately doing that but I would say there is a danger of that happening.”
So if all investment advisers and banks operated ethically, could we have avoided many of the financial scandals of recent years?
Would we still need financial literacy programmes?
“I think the short answer is ‘no’, we wouldn’t,” says Brown.
“But I think an important point to make is that we must not overstate what these programmes can do, they are only a part of the mix.”
He says there are a couple of other factors at play when things go wrong and people get their fingers burnt.
“In the end, if the financial advice industry operated without remuneration conflicts of interest and without all the conflicts that go with vertical integration — which are generally around remuneration arrangements — then we wouldn’t need financial literacy programmes, or we wouldn’t need many of them,” says Brown.
“There are always going to be advisers who do the wrong thing — the industry often calls them ‘bad apples’, but it’s not about bad apples, it’s a structural issue.”
That raises a wider issue, and the responsibilities of those at the top.
“Until the industry, right at the top level, at the directors’ level, accepts that we need to comprehensively remove all the remuneration conflicts — and that it’s not just about disclosure and getting rid of a few bad apples — until we do that, we’re never going to solve the big problems.”
I think the importance of financial literacy and education is huge — because it’s the best opportunity for generational change. It’s also a significant driver for future sustainable financial health of our countries.
The recent Financial System Inquiry is the latest attempt to help solve such big problems in Australia.
Chaired by former banker David Murray, the report basically found that Australia’s financial system gives consumers a raw deal. It cites scandals such as the 80,000 investors who lost more than A$5b due to the collapse of Storm Financial, Opes Prime, Westpoint, Great Southern, Timbercorp and Banksia Securities.
The report says financial literacy is important — but can be problematic.
“In terms of fair treatment for consumers, the current framework is not sufficient,” it says.
“The most significant problems related to shortcomings in disclosure and financial advice, and over-reliance on financial literacy.”
Nevertheless, the inquiry says it supports industry and government efforts to increase financial inclusion and financial literacy — but with a warning.
“… in the Inquiry’s view, increasing financial literacy is not a panacea. Further measures are needed to support the fair treatment of consumers,” it says.
Hugh Elvy also believes financial literacy programmes still have to find their feet and it’s too early to judge their effectiveness.
“The reality is that financial literacy is just like any sort of education, it takes time,” he says.
However, he says these programmes are vital and positive initiatives that Chartered Accountants Australia and New Zealand supports.
Elvy is the Financial Services Leader at Chartered Accountants ANZ. He’s responsible for the development and implementation of financial advisory services strategy and policies.
“With the programmes that have been around, we don’t know yet if there has been widespread behavioural change, and that’s the key issue with financial literacy programmes. It’s not just that you’ve handed out leaflets or whatever, but can you actually measure behavioural change?
“There are pockets and examples of behavioural change but at this stage I don’t think we can actually see widespread change. Though I believe in time we will.”
He says over the past few years Chartered Accountants ANZ has started providing financial literacy resources and information through its website in three main areas: for students and educators, for consumers, and also for company directors.
“In particular, from a consumer perspective we have worked in partnership with the Government’s MoneySmart Week initiative,” says Elvy.
“And we have a focus on financial literacy for directors because if you are a director of a public company you need — and have a responsibility — to be able to read its financial statements and understand what’s going on in the company,” he says.
Craig Fisher FCA says there’s another imperative for making people more financially literate: it’s necessary for social equality.
“I think poor financial literacy is one of the greatest drivers for an increased, and increasing gap, between the ‘haves’ and ‘have nots’,” he says.
Fisher is the Chairman of RSM New Zealand and an Audit Director at RSM Hayes Audit.
He believes not only does poor financial literacy lead to social inequality within a country, but also possibly between countries, such as Australia and New Zealand.
He says Australians are likely to be more financially literate than Kiwis simply because they’ve had to come to grips with a compulsory superannuation scheme.
With the voluntary KiwiSaver retirement scheme only having started a few years ago, Fisher argues that Kiwis have not had the same driver to engage in discussions about financial literacy.
“We’re in an entirely different space than Australia because we haven’t had 20 years of compulsory superannuation,” Fisher says.
Another factor might be New Zealand’s simpler tax system. In New Zealand, for instance, generally capital gains tax is not paid and there are no local or state taxes apart from property rates. Instead, most of the heavy tax work is done by income taxes and GST.
While national strategies are worthy, Fisher says it’s important that everyone realises they have a part to play in raising financial literacy levels: individuals, the government, accountants, educators — and the media.
“I think the importance of financial literacy and education is huge — because it’s the best opportunity for generational change. It’s also a significant driver for future sustainable financial health of our countries,” he says.
Tony Malkovic is an award-winning freelance journalist.
This article was first published in the March 2015 issue of Acuity magazine.