More than one person in eight thought that bank base rates were more than 10% in 2013, yet – as had been widely reported across the media – rates by then had been at a record low of 0.5% for four years.
One person in three failed to appreciate that the value of a bank account paying 3% interest would be eroded by 5% inflation. And more than one in six could not identify the available balance when shown a typical bank statement.
These findings, taken from a baseline survey of financial capability by the Money Advice Service
(MAS), are a stark illustration of the pressing need for a concerted campaign of financial education in the UK. But the need is not new.
It is almost a decade since the first Financial Capability Strategy was drawn up by the Financial Services Authority, the then-regulator, and seven years since Otto Thoresen asserted: “Good money sense needs to be as much a part of people’s lives in the 21st century as healthy eating and keeping fit,” and proposed the establishment of a generic money guidance service to ensure our financial health.
In the meantime, scandals in the financial services sector have continued. The banks’ bill for misselling Payment Protection Insurance has already reached £22bn, while interest rate swaps have been added to their list of misdemeanours.
Thousands of people have been lured into ill-advised pension-liberation schemes. Excessive interest rates on payday lending have become a pressing social issue. And boiler room and similar scams are increasing in incidence.
"Regulatory changes, including the retail distribution review, can make advice harder, and more expensive, for consumers to access"
With new pension freedoms allowing virtually unrestricted access to funds coming into effect in April, the need for financial knowledge is increasing. Yet regulatory changes, including the retail distribution review, can make advice harder, and more expensive, for consumers to access.
Progress on financial literacy is, however, being made slowly. The MAS, an incarnation of the guidance service proposed by Thoresen, was established in 2011.
It has been a controversial birth, however, and the MAS is currently the subject of a government review, which could result in its abolition. It does, however, aim to offer the kind of generic advice that should help guide consumers through the key challenges in life.
Personal finance education has also become a reality. A programme of education for schools, which has been a core requirement for virtually anyone seeking to improve financial capability, has finally been introduced, and financial literacy is now a part of the curriculum at both primary and secondary schools.
But Mick McAteer, founder of the Financial Inclusion Centre, is sceptical about financial capability initiatives. He reckons the key issue is the complexity of the industry: there are 35,000 investment products and 3,200 firms across Europe, for example. “Given that level of proliferation, financial education is not going to have much of an impact,” he says, arguing that the focus should instead be on simplifying products and ending aggressive product distribution.
One new initiative taken by the Government to this end is to establish a free pensions advisory service, Pension Wise
. This will be offered by a number of Citizens Advice Bureaux and the Pensions Advisory Service.
This service will start operating in April 2015, when the recently announced pension freedoms take effect, so it will be some time before its impact on financial capability can be measured.
The original version of this article was published in the March 2015 print edition of the Review.