Financial education is needed, but is it enough?

We have been plunged into deep water and told to swim, but we cannot Why? Because we know nothing about swimming. This remarkable insight was recently made by the Organization for Economic Cooperation and Development (OECD) after at least 15 years of promoting reforms that tend to shift responsibility for crucial financial decisions from the state and the banks to individuals. OECD has become aware, albeit after some delay, that the average citizen is too unaware of the basics of finance in order to make the decisions that are optimal for his or her welfare. Freedom to decide about one’s investments is very good, but something more than that is needed. In Greece, we got a very good lesson what it means for a financially illiterate person to invest. The stock market bubble of 1999 saw a million Greeks decide they had become experts on stocks. Almost all of them saw the value of the stocks they got nearly evaporate. Banks and other financial institutions throughout the world are actively pushing what they call «de-mediation» and what for them translates to «no more (income from) interest, just commissions.» Their traditional job was to accept deposits and loan to those who needed credit, with all the risks such activity entailed. Now, they prefer selling a range of financial products (bonds, shares, mutual funds etc) and getting commissions without undertaking risk. As these products become more complex, so does the sophistication needed to understand them. OECD also insists on pushing private pension schemes, arguing that the money invested in them will be more effectively spent. This means citizens must choose from many products and undertake the risk, again. However, some basic research across the world showed most people had little knowledge of even financial basics, such as compound interest. In Japan, for example, 71 percent of adults surveyed in 2000 knew nothing about investing in shares or bonds and 29 percent were completely in the dark concerning taxes, pensions and insurance. OECD has published a list of «Principles and Good Practices for Financial Education and Awareness,» the most important of which are the following: – Financial education should be provided (by the state) in a fair and unbiased manner. Programs should be coordinated and developed with efficiency. – Financial education should start at school. People should be educated about financial matters as early as possible in their lives. – The role of financial institutions in financial education should be promoted and become part of their good governance with respect to their financial clients. – Financial institutions should be encouraged to clearly distinguish between financial education and information and «commercial» financial advice. Financial institutions should be encouraged to train their staff on financial education and develop codes of conduct for the provision of general advice about investment and borrowing, not linked to the supply of a specific product. – For those financial services entailing long-term commitment or having potentially significant financial consequences, financial institutions should be encouraged to check out that the information provided to their clients is read and understood. Small print and abstruse documentation should be avoided. – Financial education programs should focus on high-priority issues, such basic savings, private debt management, insurance or pensions. -The awareness of future retirees about the need to assess the financial adequacy of their current public or private pension schemes and to take appropriate action when needed should be encouraged. – The promotion of financial education should not be substituted for financial regulation, which is essential to protect consumers (for instance, against fraud) and which financial education is expected to complement. The above list, well-meaning as it might be, unfortunately sounds more like wishful thinking than something applicable. Still, OECD insists the lack of financial education is a very serious matter with considerable potential consequences. «Financial education is absolutely essential in our society, as the responsibility and risk for financial decision increasingly shifts to individuals,» said Lorenzo Bini Smaggi, president of OECD’s Financial Markets Commission. He further warned that «we may face serious economic and social problems in the near future.» Let us take this warning into advisement. But let us also think about OECD’s idea of financial education and what it really means. Improving the level of citizens’ economic and financial awareness is undoubtedly necessary. It can only have good results. However, society must ponder if transferring such a great part of responsibility and risk for financial decisions to citizens is desirable or is better left with specialized institutions.

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