The subjectFinancial education has emerged over the past decade or so as part of that small collection of universally acknowledged ‘good things’, which also includes motherhood and apple pie. This is hardly surprising: there is justifiable alarm at the British public’s generally low levels of financial literacy, ranging from a lack of mathematical skill that leaves most unable to grasp concepts such as compound interest, through to poor understanding and even less trust and confidence when selecting financial products.
Since the Financial Services Authority (FSA) conducted the first
national measure of ‘financial capability’ in the UK in 2005, lots of organisations have projects in progress to address the financial literacy gap, including the FSA’s successor, the Financial Conduct Authority, and the Money Advice Service, which is responsible for drawing up the UK’s
Financial Capability Strategy.
Financial education is now part of the secondary school curriculum, and a number of big financial services companies have programmes intended to increase public awareness and understanding. But will any of this activity amount to anything substantial? Or, to put it another way, how realistic is it to assume that we can teach people to run their finances competently?
The examThe findings, which are part of the Government’s ongoing Wealth and Assets Survey, were
published this summer in a paper called
Financial capability in Great Britain, 2010 to 2012. The authors of the paper, Andrea Finney and David Hayes of the University of Bristol’s Personal Finance Research Centre, questioned respondents about six aspects of their financial capability under the headings: making ends meet; planning ahead; organised money management; controlled spending; staying informed; and choosing products.
Passing the testThe results were striking. Categories such as making ends meet, organised money management (knowing how much you are able to spend) and to some extent controlled spending (a preference for saving up rather than buying on credit) relate most closely to what you could call ‘housekeeping’ – the approach that people take to managing their money over the relatively short term in order to stay on an even keel. In these areas, people generally obtained their strongest scores.
The authors produce a mean score out of ten for each of the six categories. In each category, a mean score is calculated for each quartile of respondents. In making ends meet, the average score was 7.0; the average for the lowest-scoring 25% of respondents was 4.2; and for the top 25% was 9.6. Similarly, in organised money management, the overall average was 6.7; the lowest 25% averaged 3.9; and the top 25% 9.3.
Could do betterBut when you turn to the other three categories (planning ahead, staying informed and choosing products) the financial literacy gap becomes all too obvious. The mean overall score for planning ahead – “the extent to which someone makes provisions for future expenditure from current income”, according to the rubric – was 2.3 out of 10.
The bottom 25% averaged just 0.5 and even the top 25% managed just 5.1 on average. It gets worse. The bottom 25% of respondents managed an average score of <0.1 for staying informed. According to the footnotes, this “indicates a score of greater than zero but less than 0.05”. In this category, the overall average came out at 3.2, the second lowest of the six.
The choosing products category produced the greatest range of scores, the bottom 25% averaging 1 and the top 25% 10 out of 10.
Lessons learntMy point in setting out these findings is simply to suggest that areas of financial capability that relate most closely to longer-term decisions about investment, as opposed to day-to-day money management, produce generally lower scores across the board, even for the most competent respondents. This seems to me to have important implications for the financial education agenda.
Arguably, people score poorly in areas relating to investment not because they lack the knowledge, but because thinking about these things does not come naturally to them – perhaps because they tend to focus on the immediate future rather than the long term, or are not interested in these areas and so are less inclined to make the effort to learn about them.
This is not a problem that is going to be answered quickly or easily by arming people with a little more understanding of financial matters than they currently possess, even if that were generally achievable.
Change the curriculumThe clear conclusion I would draw from this is that, in areas that require long-term thinking, we would do much better to develop a well thought-out framework of non-binding default options to ‘nudge’ decision-making in a sensible direction – such as we can see in the workplace pensions system – than by spending a month of well-intentioned Sundays imparting financial literacy to a silent majority that simply isn’t listening.
The original version of this article was published in the September 2015 print edition of the Review.