Scotland must do better on financial education for all

Published on Friday 5 December 2008 19:52

THE financial sector has faced a barrage of criticism recently. There can be little argument that much of it is justified, given tumbling markets and the need to nationalise banks. Equally, however, many consumers have enjoyed a spending orgy over the last few years without feeling any need to put in place arrangements to repay borrowings.

Only the spectre of recession has finally curbed excessive consumption. It is socially acceptable to say that times are difficult and that containing living costs is now a prime aim of many individuals and families.

One of the key reasons for the "lemming like" behaviour of consumers has been the poor level of understanding of financial matters which, in turn, fuels inappropriate financial behaviour.

This is hardly surprising, given the complexity of our financial system. By way of illustration:

• Government protection of cash deposits is, on the face of it, straightforward – a saver has protection up to a particular financial limit. In practice, though, it is almost impossible for the man in the street to interpret, since banks within a group may operate under the same licence, so the guarantee applies to aggregate savings, not to separate accounts.

• Annual statements of entitlement for pension scheme members are generally so complicated that the typical member is confused before reaching half way down the first page. Regulations dictate how the statement should appear, but, in the process, the essential point of communicating clear progress towards a retirement income target is missed.

No wonder there is widespread distrust of financial products.

So, what can we do?

Three major changes are required:

1 Improve financial education

2 Make products simpler to understand

3 Simplify consumer protection

Without major changes to the regulatory system, education gives the public the best chance of controlling their financial lives. Financial advisers certainly do have their place, but consumers need to know enough to ask the right questions and understand the answers.

In terms of financial education in schools, materials are available for pupils of all ages to learn the basics of financial responsibility, covering all intellect levels. Unfortunately, schools are not yet required to teach the subject, so some financial illiteracy will continue.

Adult financial education in Scotland is another matter entirely. There is very little material available, except for socially disadvantaged groups or those shortly to be released from prison.

The Financial Services Authority has identified severe shortcomings and concluded that unless steps are taken to improve levels of financial capability, we are storing up trouble for the future.

Numerous charities, such as Citizens Advice, provide help to improve financial literacy. However, the approach is disjointed with no overall strategy and is often used only when things have already gone wrong.

How can we do better? As a matter of priority, I would like to see a coherent strategy including the following elements:

1 Compulsory basic level financial education for all children

2 The development of accessible tools to educate adults, targeted at various life stages such as marriage and starting a family.

3 An impartial online resource containing simple information on a wide range of financial products.

There are many claims on public funds, but with the UK embarking upon a massive public spending spree to revitalise the economy, what more appropriate use is there for some of that money than education to help avoid a repeat of the very crisis necessitating the expenditure?

• Fraser Smart is regional director of employee benefits consultancy Buck Consultants.