Finance companies must boost clients’ financial literacy
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Financial illiteracy is not a new issue by any measure. But the Covid-19 pandemic has exacerbated and exposed vulnerabilities and inequalities within our society, including the wide gap between those who know how to manage their finances and those who struggle to do so.
If collective action is not taken by both the public and private sector to close these divides, we will see even more pervasive systemic inequalities in Britain and elsewhere.
The pandemic revealed a hard truth for many; that, around the world, access to financial education and the security it offers has been precarious for many years now.
In February 2020 — before the pandemic took hold in the UK — the country’s Financial Conduct Authority revealed that 57 per cent of adults surveyed in a poll felt nervous, overwhelmed, or stressed speaking to financial services providers, or found it hard to find suitable financial products or services. Some 37 per cent struggled to assess financial products or found it difficult to shop around.
Several factors contributed to this worrying trend. They include upheavals in retirement funding, following the shift from defined benefit (DB) pension plans to defined contribution (DC) plans.
These are compounded by changes in consumer habits, with people moving away from using cash in favour of short- and long-term credit products. Meanwhile, the number of savings and investment choices continues to increase, with options ranging from simple to complex.
Put simply, while demands on the individual to make financial critical decisions have increased (and show no sign of stopping), the supporting financial education to inform that decision making has not kept pace.
As a financial services industry leader, I have seen these changes happening as the global financial environment morphs at breakneck speed, underpinned by the rapid acceleration in the use of technology.
For millennials and Gen-Z, retirement will seem like a distant prospect, but the truth is that many are unprepared for that reality. Retirement planning has wholly shifted from being the responsibility of employers and governments to that of the individual.
According to the Pensions Policy Institute, a leading retirement research organisation, DB scheme closures have led to fewer employees in the private sector being covered by DB schemes. The number of active members covered by DB schemes has dropped from 3.5m in 2006 to about 1m in 2020.
The closure of these DB plans in favour of DC ones thrusts the onus of long-term investment planning on to people who aren’t currently prepared to manage those long tail risks.
FT Financial Literacy and Inclusion Campaign
As the way we work evolves, people are increasingly exposed to “pension savings opportunity gaps”, with gig economy jobs and zero-hours contracts not typically offering retirement benefits. Similarly, most people now change jobs many times during their lifetime — a trend that doesn’t create natural opportunities to save steadily for retirement.
While the responsibility for retirement planning has shifted largely to individuals, a prolonged low-interest rate environment has simultaneously eroded people’s savings. This has prompted them to take a more active look at their finances overall.
While investors today have more choice than ever, fuelled largely by globalisation and technological advances, people need the right tools to be able to understand the opportunities and risks to manage their money and make their money work for them.
Both private and public sector organisations need to act.
The Chinese have an old proverb for crisis: be aware of the danger but recognise the opportunity. As I contemplate the world we live in now, this truth has meaning for me when I consider my upbringing and the responsibility I have as a leader in financial services. While statistics demonstrate the lack of widespread financial literacy, there is a great opportunity for both the public and private sector to help elevate collective financial literacy levels.
Support to enhance financial literacy needs a twofold approach. Firstly, companies that offer financial products also need to provide transparent educational materials to help clients make better-informed financial decisions.
The journey towards proficient financial literacy must be presented as a critical part of the customer service and embedded in the company’s culture. Whatever products or services are offered, companies should consider how those offerings will be received in the market and who will be using them.
Financial literacy education gives young people the foundations for future prosperity — and can help economically disadvantaged people out of deprivation. Join the FT Flic campaign to promote financial literacy in the UK and around the world
In addition, organisations should embed financial literacy into their ESG (environment, social and governance) strategy. Resources should be earmarked for independent programmes that support financial literacy at all stages of life, from youth through adulthood.
My passion for education, influenced by my background growing up as a Chinese American, was a catalyst for me to personally become a founding donor of the Financial Times’ Financial Literacy Inclusion Campaign.
Working at a publicly traded company, my colleagues and I have looked at how to evolve our ESG strategy to address social issues, with the aim of increasing resources to independently-run, education-focused programmes.
As an example, IG Group has an existing partnership with Teach For All, an international non-profit organisation that looks to improve grassroots education. Here in the UK we also partner with Teach First, providing the organisation with funds and access to our people and their knowledge of financial markets. These programmes are just the start, as we are evolving to support more financial literacy programmes directly in the coming months.
Concurrently, we have created a variety of online educational resources for our client base, ranging from technical education to macro analysis of markets for people at varying stages of their investment knowledge.
We also take steps to ensure they have a level of understanding about financial products before they utilise the more sophisticated products on our platform. It’s worth acknowledging that some products carry more risk than others. The crucial issue is ensuring potential investors are properly informed before they begin their foray into online trading.
We recognise the need to be collaborative. The private sector must work together and enhance the efforts of public sector organisations furthering financial literacy.
Not every product offered on the market will be right for every person. However, enabling people to make choices based on a solid foundation of education will make a considerable difference in improving the overall financial health, not just of individuals but of society at large.
Technological innovation and the investment landscape will continue to evolve at pace. Empowering people with the knowledge they need to capitalise on these changes has the potential to be transformational.
June Felix is global chief executive of IG Group