Friday 23 October 2009
Is 'Financial Capability' the solution?
I have attended two conferences this week where the focus was on building 'financial capability' in individuals by education and the provision of information as the solution to the increasing complexity of managing household finances. The conferences were very different but many of the messages were similar. The first was on financial exclusion from the mainstream and was run by the Runnymede Trust, and the second on pensions and pension reform, run by the Pensions Policy Institute. At both, many of the speakers commented on how in today's world it is becoming more and more difficult for people with low or middle incomes to know what to do for the best with their money. One of (or possibly the only) solution that many saw was to give more and more information to individuals. While accurate and easy to access information is important, I struggle to see how this will help in many cases or with some fundamental problems. It will only serve to highlight more risks, uncertainties and insecurities, and won't magic spare money for people on low incomes or whose savings are now giving no interest, or who have put their money into pensions and have now lost large chunks of their life savings because of the problems in capital markets and equities around the world.
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First I acknowledge the limits of financial capability that you mention, the economic and regulatory climate and a person's total income are not likely to be affected.
ReplyDelete(Although some people take up benefits/check tax codes and get rebates that they didn't know about before attending FC training and there is a link between FC and employability which may mean that improved FC leads to better employment prospects.)
That said there are other areas that are. Most people on low to medium incomes are simply not saving at all. In fact most people are not saving at all. And not because of low interest rates, they weren't saving when it was easy to get 6% AER on an instant access ISA. Why aren't interest rates that relevant? Because too many people don't know what interest really is and how it works. It's just a word to them. That's where financial capability comes in.
In addition poor financial capability leads to borrowing when short term saving would be more appropriate and to borrowing from sub-prime lenders at 250% APR when a credit union loan may be available at 13% APR. Both of these lead directly to a reduction in available income which has a huge knock on effect on quality of life. So in a way it can 'magic spare money' because it 'magic' away vast interest payments.
It can also result in more confident consumers demanding their rights, making use of the direct debit guarantee and hence of direct debits to save money on bills, refusing to be conned by scammers, making effective complaints and getting money back and shopping around when previously it didn't seem worthwhile. To name but a few of the benefits that I have observed.
While total income *may* be fixed the use that's made of that income is very much open to optimisation. That is the purpose of financial capability.
I agree with all of these potential and actual benefits of improving 'financial capability' and the argument here by Martha Lawton is clear and convinving. But I do think it has limits as a policy solution, and in particular that is is not the panacea for many of the issues arising in our ageing society (e.g. pensions and social care) that is being suggested in current policy discourse.
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