Wednesday, 16 January 2013

Formal Financial Education: a response

Twitter: @Sophie Robson2

Financial education has been much in the news this week, in anticipation of Thomas Docherty MP's private members' bill to include financial literacy in the national curriculum. Many organisations believe that personal finance should be taught to young people, to enable them to make the best financial decisions for them - Pfeg, in particular, and MyBnk, have done much to bring this issue into the national consciousness. As the author of a report on young people and financial services, I believe that it is crucial that young people are offered some education in finance.

But this view is not without its detractors. Others believe that financial education is ineffective: after all, they argue, learning about finance at school is surely dull, and it is very difficult to measure any impact. Two articles in particular - Matthew Lynn's in MoneyWeek and Sophie McBain's in the New Statesman - stand out. Both make strong and eloquent arguments against the inclusion of financial education at school. 

Lynn (article is unfortunately subscriber only) believes financial products should be more user friendly and easily understood from the outset. It is a dysfunctional and uncompetitive financial market, he argues, that causes the misselling of financial products and complicated products He feels that this is something that could be better remedied by improvements to the banking industry, not by teaching young people to understand the complex products and terms that they might encounter.

McBain, meanwhile, actually cites my report which found that 66% of young people aged 18-25 received no financial education at all at school or university. She feels that it is the financial professionals, especially the financial advisers, and not the general population who should be getting more financial education. She cites a communications professional, Christopher Jones-Warner, who estimates that only about 22% of his financial services clients are actively planning for retirement. If these people aren't savvy about financial planning, the argument goes, what hope is there for the rest of us? 

Both are right of course - financial products do need to be simpler to understand - you have only to look at the confusion surrounding pensions to see that how damaging this can be. And of course financial advisors, and anyone working in the financial services industry for that matter, should be competent and responsible when managing their own finances. 

But it seems to me that both of them significantly overestimate the amount young people do know about financial services. A number of those quoted in the report felt confused about its jargon: many were uncertain about simple concepts such as APR and compound interest. More alarmingly, of those who were contributing to a pension scheme (another hot topic this week), more than 40% had no idea what type they were paying into. And as for student loans, several even admitted that they had not known that interest was payable on it. In other words, many young people lack basic knowledge, and the evidence above shows how it is already affecting them. 

It is certainly true, as Matthew Lynn writes, that in order to get a good deal on a mobile phone, it is not necessary to understand about the inner workings of a mobile phone, any more than learning about bricklaying and cement mixing will help you get a good deal on a  mortgage. But those who advocate financial literacy teaching in schools are not expecting their students to become experts: they are simply hoping to give young people access to information that might protect young people from hardship in the future. After all, loansharks are still rife in many impoverished areas, and student loans are going to continue to plague young people long after graduation, and saving for a deposit on a first home is likely to play on young (and not so young) minds until banks begin lending more freely again. 

I look forward to seeing Docherty's members' bill on Friday. It is unlikely to be perfect: after all, how it can be squeezed into an already packed curriculum is already contentious, and purely theoretical, classroom based learning won't be sufficient to capture schoolchildren's imaginations. But it is certainly a step in the right direction.   

1 comment:

  1. An excellent article, thank you Sophie.
    I agree that it is essential that young people receive some sort of financial education. Learning by mistakes out in the real world can be a costly business