Most people struggle with the basics of retail finance. Apart from the number-crunching, it is an area packed full of jargon. Many financial products are constantly evolving and getting increasingly complex. This is hugely problematic. Decisions like taking a mortgage or investing in a pension product have a massive impact on our financial lives, and on our children’s. The answer, many bankers and some public authorities say, is to throw education about financial services at consumers in adult classes or even at school. But does it really work?
Several EU countries have adopted national financial education strategies. Spain recently passed legislation to introduce financial education in both primary and secondary schools. Even Dutch Queen Máxima made the case for financial education at a recent OECD event.
Great expectations, little impact
Unfortunately, there is little evidence that providing financial education for schoolchildren improves adult financial literacy. Surveys in the US have in fact shown that consumers who took personal finance classes at school were no better at taking financial decisions than those who had not.
This isn’t surprising – how much of your maths classes do you now remember, apart maybe from your multiplication tables which you had to learn by heart?
For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions
Adult financial education programmes may be slightly more successful if the participants are targeted. For example, consumers who received training about the benefits of pension products were more likely to sign up to a plan, and save more as a result.
But low demand for voluntary financial education undermines this argument. Of 6,500 US credit card holders who were offered a free, online financial literacy course because they were considered ‘risky’ by credit card issuers, only 0.03% completed the course.
One expert in the field even questions whether financial education doesn’t produce the “illusion of knowledge.” She argues that “when people are given more information about investments, they become overconfident in their ability to invest well […] for some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions.”
If we really want to improve the financial decisions consumers take, we should look at changing the offer, not the consumer.
The cost of these programmes is another problem. Who would pay for it? Governments today are struggling to balance the books; increasing state debt to tell consumers about the dangers of over-indebtedness would have a certain irony to it. Many financial education courses today are sponsored by banks. But getting banks to tell us how to save and invest is like getting the food industry to tell us how to eat.
No, financial education is not a silver bullet.
The answer is blowing in the wind
If we really want to improve the financial decisions consumers take, we should look at changing the offer, not the consumer. At BEUC we offer a collection of rather simple remedies:
Simpler financial products – instead of trying to educate consumers about the market, wouldn’t it make more sense to simplify the products offered? Too many financial products have been designed in a way that understanding and comparing them is as difficult as nailing jelly to a tree;
Default products – there should be a default option for the consumer in case of hesitation in categories of products that are now considered essential, like pension products;
Banning toxic products – products where consumers are likely to suffer considerable detriment, such as mortgages in foreign currency, should be banned. This would avoid people buying bad products in the first place;
Affordable and quality independent advice – just as we seek advice from doctors for health problems, consumers would benefit from a system of independent, quality advisers at key financial stages in life, like when they are buying a home, planning for retirement, or receiving an inheritance. These advisors would provide advice, not education. For this to happen, the EU and national authorities should ban commissions in order to prevent biased advice.
Decisions like taking a mortgage or investing in a pension product have a massive impact on our financial lives, and on our children’s.
Rock-bottom of consumer scoreboards
Year in, year out, financial services rank rock-bottom of the services EU consumers use. If this is to change, and consumers are able to trust their banks and service providers again, the EU and regulators must take action. But please, don’t just throw education at consumers. That isn’t the answer.