Financial Capability: Where Next?

Richard Nolan

Operations Director

The Financial Services Forum

Is financial education really the Government’s responsibility or the industry’s? How do we persuade consumers to manage their finances more efficiently? Is the ‘sensible finance’ message as much for the well-off as the vulnerable? What role can financial services providers play to make a real difference? We ask our Members.
Knowledge is power
Malcolm Kerr, Director, Financial Services – Insurance, Ernst & Young
In November 2003, John Tiner, then Chief Executive FSA announced a Strategy for Financial Capability; “…providing consumers with the education, information and generic advice needed to make their financial decisions with confidence”. A partnership of individuals and organisations was then established and a road map for delivering a step change in the financial capability of the UK population was created.
That map seems to cover a surprisingly wide area. For example the recent Issue 17 of the National Strategy for Financial Capability Newsletter makes specific reference to a number of initiatives aimed at “hard-pressed families, redundancy and unemployment, the needs of the over-40s, wellbeing, money matters for the armed services, young adults not in education, employment or training, working with offenders, supporting people with a learning disability move into independent living and training frontline housing staff to support their tenants” .
These are laudable objectives. But are they affordable? The FSA budget for the financial capability strategy is £22.7m this financial year. And that also has to cover ambitious plans for increasing financial capability via work with schools, colleges and employers.
The FSA ‘Making the most of your money’ seminars have involved 700 employers, 4,500 seminars and over 80,000 consumers. As a presenter I can confirm that the seminars resonate with the audiences and the feedback is positive. The key questions remain. How much has capability improved and to what effect?
Communication, information and education are improving. But motivation is more challenging – particularly in the area of savings.
Research for Scottish Widows by the Institute for Fiscal Studies last year identified barriers to saving included having debts and needing to pay them off, requiring too much effort to find the best deal, lack of trust in providers, having no money available and difficulty in understanding how to go about saving. It is only this last barrier that will be addressed by the capability strategy.
Ernst & Young estimate that there are around 8 million mass market consumers who are in a position to save but do not choose to. Hopefully the ‘Streamlined Advice’ service that is being proposed by the ABI will enable providers to reach out to this segment. Couple this with new technology and workplace sales supported by ‘Making the most of your money’ seminars and we may see a whole new breed of savers.
Who really needs educating?
David Chellew, Head of Marketing, HSBC Global Asset Management
The danger with education is that it can be very patronising. It’s not education people want when they buy anything, it’s information.
Information is empowering. Information leads to informed choices. And it comes in many forms. Good information is clear information. It offers a new perspective on a tired and lingering problem. A solution to a need as yet unsaturated; a thirst for knowledge not yet quenched. Everyone likes information. The only thing more treasured than knowledge is opinion. People love opinion more. There’s no point having knowledge if you cannot interpret it to do something. Time is short and consumers need information fast, presented clearly and without prejudice or imbalance. To make a decision they want views – views from sources that they trust to inform and validate their own perspectives. To reassure. To adjust and to validate. Clear views make an impact in every sphere of life. They influence decision making, whatever the issue, whatever the view.
People want multiple perspectives on an issue to form their own view, not because they need to be told. Financial services is changing. The internet is a prime driver of change – the place where most people will go first to search for information on financial products. The role of advisers in consumers’ minds is going through a metamorphosis as a result. Advisers ratify choices and may influence the selection of a provider. Consumers want reassurance that the decision they have made is the right one. To deliver peace of mind by imparting a view. Would education negate the need for this?
If there are things our industry gets wrong, it is that the problem that needs to be solved is education? That is really deflecting the issue from the real problem. Our inability to be clear.
To provide information. To release ourselves from the fear that stops us from providing a view because the regulator might not like it. People only need to learn things if they are not obvious, easily fixed or already solved. The issue in our industry is related to the provision of information. There is too much of it and it’s not right. Information merged with view that confuses rather than clarifies. Passive information and weak opinion merely masquerades as a stance.
The need for education of the customer is a failure in the system, a protection from an industry that is feared for its opacity.
It is not a success. Teach my kids Mandarin at school. They’ll need that. If they want a financial product, teach them how to use the web. It’s our industry that needs educating not our kids. It is time for us to go back to school.
“…it was not actually terribly difficult to make money in the securities
Simon Philips, Managing Director, Structured Marketing Solutions
Peter Baring’s statement shortly before his bank collapsed is a reminder of how the problems of financial capability exist at the highest levels of corporate management. Indeed, you could argue that the lack of financial capability demonstrated by business leaders in recent years has had a more devastating effect on the economy and society than any credit-fuelled consumer bingeing. In their hunt for profitable new business, banks developed products that went beyond the capability of clients, and their own management, to understand them. All the regulatory checks and balances were there, alongside professional qualifications and detailed legal contracts; there was even plenty of publicity given to the potential conflicts within investment banking – the research issue, the prop trading desks. It would be hard to argue that bank bosses and corporate and institutional clients were poorly equipped to understand their markets, but the events of the past two years show that professional managers are as likely as ill-informed consumers to get caught out – the difference is only one of scale and complexity. Even the motivations are the same – peer pressure, persuasive salesmen, fear of missing out.
When it comes to clients’ financial capability, the underlying conflict, as always, is between the interests of the client and the interests of the bank – between championing the clients’ interests over the opportunity to push more complex, high margin products.
In his book “Traders, Guns & Money”, Satyajit Das explains how aggressively some banks pushed structured products to corporate and institutional clients – often with little concern for a long-term relationship: ….scorched earth banking. “You take the client for everything in a single trade – you “smoke them”. So much for putting clients’ interests first. Is the corporate banking business such a jungle that it’s always a case of ‘buyer beware’, that a client’s lack of capability is something to be exploited, rather than improved? Surely not. Now, more than ever, there is an opportunity within corporate financial services for a ‘service-led’ proposition that is built on a trusted relationship.
The challenge for marketing teams – and management – is to ensure consistency of delivery. It’s one thing to create great communications that stress client-centricity, quite another to see that it’s delivered on a daily basis throughout an organisation. Such an approach will acknowledge and improve clients’ financial capabilities, rather than take advantage of them.
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