Transcript Slide 1

Financial education and
awareness: OECD work
and perspectives
Budapest, 2nd October
2008
André Laboul, Head of OECD Financial
Affairs Division
1
outline
•
•
•
•
The framework: increasing risks
This calls for financial education and awareness
OECD principles
OECD good practices in pensions, insurance and
credit
• Other OECD work, including the Network and
the gateway
• Behavioral issues
• Conclusions
2
OECD Trends
We observe that individuals face increasing
financial risks and costs due to:
• reduced public and/or corporate pension
benefits
• increased health costs borne by ageing
individuals in the framework of reduced public
health generosity
• increased longevity (good news which can
become a nightmare)
• increased frequency and magnitude of natural
and man-made catastrophes
• increased financial instability (see current
crisis)
3
Past gains in longevity
Life expectancy at
birth has increased
an average of 2.2
years per decade
over the last
century in OECD
countries.
Financial risks are more and more
transferred to individuals
• Households are taking on more financial risk and
responsibility. This is true for both credit decisions and
retirement savings.
– The shift to defined contribution pension schemes transfers both
investment and longevity risks to individuals. Will they make
the right decisions?
– The market for adjustable, variable, interest only mortgage loans
(sometimes also in foreign currency) has exploded in several
countries and transfer interest rates risk on households
Example
Share of mortgage loans on variable interest rates
Percent of mortgage loans with adjustable and fixed rates in percent of total
mortgage loans
100
90
80
Short- and long-term fixed
Per cent of all loans
70
Variable
60
50
40
30
20
10
nd
s
et
he
rla
N
en
m
ar
k
D
Fr
an
ce
da
an
a
C
te
s
St
a
d
te
ni
U
Ita
ly
d
ed
en
Sw
Ki
n
d
te
ni
U
Ire
la
n
m
gd
o
an
y
er
m
G
Au
st
ra
lia
in
Sp
a
Fi
nl
an
d
0
Source: OECD Economic Outlook 78, “Recent house price developments: the role of fundamentals”, p. 131.
07/07/2015
AMF - titre de la présentation
6
Increasing financial risks and
transfer of risks to households
• This calls for a new regulatory approach
• New focus on market conduct and not only
on prudential regulation of financial
institutions
• Focus on access, competition, consumer
protection and financial education and
awareness
• Awareness is key
7
Lack of awareness
• The problem is that households may not be
aware of the risk they face
• Households may not understand the need to be
protected or overestimate their protection
• Thus, they do not seek protection
• Consumers may not understand the products
which are offered and may not be able to
compare
• They may overestimate their understanding
• That they may…just not care
Call for further information and
awareness
• Transparent information and disclosure is
key. This is the minimum
• Information should be understandable;
plain language should be used
• Information is necessary but not
sufficient: individuals need to understand
the information
9
Call for financial education
– Many individuals are ill-equipped to face risks
and make proper financial decisions
– This calls for improved financial education
and awareness on
• Risks
• Financial ,pensions , insurance products
• Their rights and responsibilities
– The goal of financial education is to improve
financial literacy
Broader impact of financial
education
• Financial education will help build more
efficient financial markets by:
—improving confidence
—encouraging the development of new products and
services
—and thus increase competition, innovation and
product quality
• Financial education can also help to reduce
poverty and improve social cohesion
The situation is serious
• Recent surveys show that the level of financial education
is low in most countries, including in developed
countries.
• Worse: consumers often overestimate their financial
understanding and thus do not seek to improve it
• This is all the more important as the process of financial
education takes time
• Financial education is not just for investors. It is
essential for the average family trying to balance its
budget, save for children’s education and save for
retirement
Solutions are encouraging
• We have found that good financial education
programmes are effective: they can increase
workers participation in pension plans,
reduce mortgage and credit delinquency, and
more generally, increase consumers
confidence in themselves and in financial
institutions.
A role for all stakeholders
• Governments and financial authorities working
hand in hand with parliament (including national
campaigns, coordination)
• Schools
• Financial institutions
• Employers
• Trade unions
• NGO’s, etc.
There is a strong call for national
strategy and public-private
partnership
14
Win-win strategy for financial
industry
• When objectively promoting financial
education and awareness, financial
institutions help:
• Improve confidence and trust in financial markets,
products and institutions
• Improve risk awareness and thus increase demand
for protection
• Improve understanding of products and their
advantages and thus increase demand
• Reduce losses through better prevention and
mitigation
15
Policymakers awareness
•
•
Momentum for financial education:
– President Calderon “estrategica nationale del cultura financiera”
– President Bush advisory Council
– G8 Finance Ministers ‘ call for improving financial education
– OECD Council recommendations
– Communication from European Union
– Financial education 2008 year in Indonesia
– And now the Hungarian initiative for a national strategy
Recent turmoil
• Various factors were at play: liquidity, risk appetite, securitisation,
regulatory arbitrage, rating agencies, accounting rules, lack of
responsibility
• But clear recognition of lack of financial education and awareness of
both individuals and institutions
16
OECD programme on financial
education
• Recognising the need for policymakers and other
relevant stakeholders to meet the objective of
improving financial education, the OECD
launched in 2oo3 its “international programme
on financial education”
• Under the aegis of the OECD Committee on
Financial Markets and the OECD Insurance and
Private Pensions Committee
17
OECD issued the first international
publication on financial education
 Analytical and
comparative framework
 Assessment of the
Financial Literacy of
consumers
 Some specific issues:
o Investment/retirement
o Financial education on
credit and debt
o the unbanked
OECD Definition of financial
education

A capacity building process
“Financial education is the process by which
financial consumers/investors improve their
understanding of financial/insurance products and
concepts; and through information, instruction and/or
objective advice develop the skills and confidence to
become more aware of financial risks and
opportunities to make informed choices, to know
where to go for help, and take other effective actions
to improve their financial well-being and protection”.
19
OECD Principles on financial
education
• Financial education programmes should focus on high priority
issues, which depending on national circumstances, may include
important aspects of financial life planning such as pensions, basic
savings, private debt management or insurance as well as prerequisites for financial awareness such as elementary financial
mathematics and economics.
• Financial education should be taken into account in the regulatory
and administrative framework and considered as a tool to
promote economic growth, confidence and stability, together with
regulation of financial institutions and consumer protection . 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.
OECD Principles on financial
education
•
•
•
•
National campaigns should be encouraged to raise awareness of the
population about the need to improve their understanding of financial
risks and ways to protect against financial risks through adequate
savings, insurance and financial education
Appropriate specialised structures (possibly embedded within existing
authorities) in charge of promoting and coordinating financial education
should be encouraged at the national level and regional and local public
and private initiatives as close to the population as possible should also be
promoted.
Financial education should start at school. People should be educated
about financial matters as early as possible in their lives
Specific websites should be promoted to provide relevant, user-friendly
financial information to the public. Free information services should be
developed. Warning systems by consumer, professional or other
organisation on high-risk issues that may be detrimental to the interests of
the financial consumers (including cases of fraud) should be promoted
21
OECD Principles on financial
education
•
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’
accountability and responsibility should be encouraged not only in
providing information and advice on financial issues, but also in
promoting financial awareness of their clients, especially for longterm commitments and commitments which represent a
substantial proportion of current and future income. For the latter
two, financial institutions should be encouraged to check that the
information provided to their clients is read and understood
• Requirements to specify the types of information (including where
to find information and the provision of general comparative and
objective information on the risks and returns of different kinds of
products) that financial institutions need to provide to clients on
financial products and services, should be encouraged.
22
OECD Principles on financial
education
• 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
• The development of methodologies to assess existing financial
education programmes should be promoted. Official recognition of
financial education programmes which fulfil relevant criteria
should be considered. Further research on behavioural economics
should be promoted.
23
OECD Principles on financial
education
• In order to achieve a wider coverage and exposure, the use of all
available media for the dissemination of education messages
should be promoted.
• In order to take into account the diverse backgrounds of
investors/consumers, financial education that creates different
programmes for specific sub-groups of investors/consumers (i.e.
young people, the less educated, disadvantaged groups) should be
promoted. Financial education should be related to the individual
circumstance, through financial education seminars and
personalised financial counselling programmes.
• Small print and abstruse documentation should be discouraged
Information should be in as clear and simple a format as possible
24
OECD Principles on financial
education
• According to the needs of the jurisdiction, evaluation processes
should inter alia involve:
• Evaluation on a more systematic basis of the risks that could affect
individuals and their relatives, along with analysis of risks and
populations that are particularly exposed;
• Evaluation of the population’s degree of literacy and more or less
active behaviour as regards their risk exposure, protective or risk
mitigation actions;
• Identification and assessment of the education needs of the
population with respect to specific groups, risks, products and
players as well as the reasons for any shortcomings;
• Systematic evaluation of measures and programmes intended to
enhance education on risk and insurance issues, based on
predefined criteria and including a cost-benefit assessment.
25
OECD good practices (building on
comparative analysis)
• Good practices for financial education on pensions
(endorsed by OECD Council in 2008)
• Good practices for risk awareness on insurance
(endorsed by OECD Council in 2008)
• Good practices for Financial education on credit
• (to be submitted to the OECD Council in 2009)
Pensions
•
•
•
•
Major source of income for retirees
Major lack of understanding
Long-term and complex contracts
Important for public pensions, DB
schemes and even more for DC
• Transfers of longevity and investment
risks
Pensions
•
•
•
Governments and other public authorities should explain public policy
clearly (particularly where mandatory savings are involved) – including any
pension reforms taking place, the changes in the pension environment,
increased individual responsibility and demographic and other changes
requiring individuals to save more for their retirement – in order to
maintain transparency and confidence in the pension system and thereby
encourage individual saving for retirement.
Governments and other public authorities should direct public awareness
campaigns as broadly as possible, given the widespread lack of
understanding of pension issues. In addition, specific programmes targeted
at the most vulnerable groups (migrants or those with the lowest income
and savings levels) can also have a significant impact.
Governments and other public authorities should work towards making
individuals aware of their limited knowledge of financial matters, and
pension products in particular, stressing the risks of not having an adequate
income in retirement, and should provide information on where to seek
further information and advice on how to mitigate these risks.
Pensions
•
Governments and other public authorities should strive to ensure that
reliable information of projected public pension income is delivered on a
regular basis by public pension providers in order for individuals to have a
clear and prudent projection of potential retirement income.
•
Plan sponsors should inform employees of any pension plan offered to
them, its broad structure, a projection of what benefits can be expected and
any responsibilities which it entails for them.
Plan sponsors should be encouraged to provide financial education for
pension plan members, or should at least provide plan members with
information on where they can find such training
Where plan members take responsibility for investment decisions, such as
in defined contribution type pension plans, plan sponsors should at least
ensure that workers are aware of this responsibility and have access to
information which can help them make informed investment decisions
•
•
•
Pensions
• Where a plan sponsor’s role in the provisioning of the pension plan
allows, and where they are aware that employees’ or members’
contributions to their defined contribution pension plans are
significantly insufficient to ensure an adequate retirement income,
they should alert employees or members to this risk.
• Where employees or members are offered a range of investment
options, plan sponsors should consider limiting, in a well-structured
fashion, the number of investment choices available (or provide a
‘two tier’ choice between a basic system and a system offering more
sophisticated investment choices) and should provide a suitably
structured default option in order to help employees or members
make optimal pension investment decisions.
Pensions
•
•
•
•
•
Pension funds, fiduciaries, providers and intermediaries should produce
information for individuals on the design, operation and performance of
pension funds and retirement products which is timely, accurate and
accessible.
They should be encouraged to supply prudent projections of retirement
income which can be expected from pension funds and retirement products.
Any institution providing information should check that the information
has been understood.
In defined contribution schemes, a single source with clear and comparable
information on the types of investment, including risk and return profiles,
and the costs involved is required
Financial education should be encouraged for trustees and other pension
fund fiduciaries to ensure they have the necessary skills (over and above any
‘fit and proper’ requirements) to make suitable decisions and fulfil their
fiduciary duty. Information and suggested questions could be provided to
individuals to help overcome asymmetries of information and allow them to
evaluate advice from financial intermediaries successfully.
Insurance
•
•
•
•
Governments’ involvement in this education process should be mainly aimed at
enhancing awareness of major risks and the need for adequate protection, including
through various insurance instruments, and at enabling individuals to attain a
sufficient level of knowledge, understanding and skills in order to adopt a responsible
stance and make sensible choices as regards insurance issues. In this connection, a
series of actions should be encouraged, including:
Promoting a “culture” of responsibility for personal protection, in particular by
educating people about notions relating to risk, risk mitigation and compensation
including possibilities offered by insurance tools and basic insurance mechanisms
and products:
School curricula, in particular at the secondary level, should encompass more specific
notions relating to risk and insurance (taught separately or within finance or
economics classes), including, inter alia, basic insurance mechanisms and products
and the major dynamics and components of the insurance market;
Promoting and developing prevention and information programmes and campaigns
regarding seriously damaging risks, vulnerable populations, innovative or complex
insurance products and products implying a greater transfer of risks to individualssuch as unit-linked-, possible underinsurance, overlapping and/or over insurance,
key contract clauses and conditions as well as applicable rights and obligations of
consumers as regards insurance products and insurance market players.
Insurance
• Good selling practices should include the development of
mechanisms for the assessment by sales staff or agents of clients’
level of understanding, who should be adequately qualified and
trained in this respect. This should particularly apply to complex
insurance products, insurance products involving long-term
commitments or commitments which represent a substantial
proportion of current and future income or products which involve
an important transfer of risks to policyholders.
• Depending on the country context, associations of insurance market
players, consumers’ associations, employers, trade unions, other
NGOS and institutes specialised in insurance issues, should also
contribute to financial education programmes. For instance, these
social and business partners should be encouraged to conduct
surveys on the needs of consumers as regards risk awareness and
education on insurance issues and on how consumers prefer to
receive such information.
Insurance
•
•
•
•
Programmes aimed at improving the level of awareness and education on
risk and insurance should consider making use of a large variety of means
so as to ensure that a wide audience - including targeted and vulnerable
groups- may be appropriately and effectively reached.
This should imply, according to national circumstances, encouraging:
Broad media coverage (i.e. radio, television, print journalism, billboard
advertising and internet), and the organisation of events to raise awareness
on insurance issues and on the importance of financial education in this
area. In this perspective, risk awareness and knowledge of insurance issues
of the main players in the information and instruction channels (i.e. the
media, teachers, educators and parents) should be reinforced;
The development of high-profile sources of reliable, objective and free
information and/or specific bodies or centres through which insurance
stakeholders could - possibly - co-ordinate to offer consumers information,
education, assistance and advice on insurance issues;
Insurance
•
•
•
The development of various tools - internet sites, but also guides,
brochures, leaflets and other available traditional or modern
communication methods - enabling consumers to consult reliable sources
for comparisons of the products offered by various insurance market
players and to assess their level of protection against potential risks - e.g.
through calculators and quizzes -, as well as their own knowledge of their
insurance requirements and of how their policies operate.
For the most severe risks, without limiting the freedom to contract, under
and/or inappropriately-covered risks, default mechanisms, which take into
account potential temporary or long-term deficiencies in financial education
or the passive behaviour of consumers, should be considered and properly
regulated.
Similarly, the insurance and financial sectors should also be encouraged to
develop innovative insurance products (e.g. microinsurance) and tailored
distribution channels that can best meet the need for protection of
consumers particularly of the most vulnerable segments of the population.
Credit
•
•
•
Governments should work towards making individuals aware of their
limited knowledge on credit-related issues, stressing the risks and
implications of. having bad credit behaviour and of making inadequate
credit decisions, and should provide information for where to seek further
information and advice on how to mitigate those risks and how to file
complains and seek redress if they think their rights have not been
respected.
Government toll-free hotlines should be promoted and available to
consumers as source of neutral information and as a means of obtaining
impartial answers to questions they may have about their rights,
responsibilities or about credit options that may be available to them.
Governments should develop tools to assist citizens self-assess the
appropriateness of them entering into certain types of loans or credit
products given their personal circumstances. Tools and calculators should
also be developed to help consumers evaluate the costs and consequences of
bad decisions or behaviours
Credit
•
•
•
•
To facilitate product comparison by consumers, governments should promote the use
by all creditors and lenders, in their advertising campaigns and marketing and
disclosure documents, of a unique and standardized, effective interest rate that takes
into account any fees, in addition to interest charges, that may be associated with the
credit product or loan. (In neighbour countries, or countries that are part of an
economic union, whereby citizens of one county can freely apply for loans or credit
products in another country, governments should agree on a common approach to
calculating this effective interest rate).
To enhance consumers’ awareness, governments should promote the use by all
creditors and lenders, and for any type of loan or credit product, of a box or table
prominently displayed in the loan or credit agreement, and clearly summarizing the
important terms and conditions of the loan or credit product.
Any public policy promoting asset building through consumers’ use of credit products
should be accompanied, as an integral part, by a broad public consumer education
strategy, tools and programmes to allow consumers make wise, rational and informed
credit decisions.
Financial information sharing platforms (such as credit bureaus or credit reporting
agencies) should be promoted to allow consumers to receive the benefits of credit
ratings And, where such platforms are in place, governments should promote
consumers’ free access to their credit reports.
Credit
•
•
•
Any market player involved in the provision of loans or credit products to
consumers should be suitably trained, qualified and regulated.
As a rule, the role and responsibilities of all credit market players in the
financial education process should be clearly defined and promoted and
should become part of their good governance with respect to their credit
holders and/or customers. The accountability of credit market players, and
in particular of independent intermediaries who represent their clients in
this respect, should encompass accurate provision of quality information
that can be distinguished from advertising and promotion.
Any credit provider should use due diligence in assessing consumers’
profile. Consumers should receive objective and relevant explanations and
advice commensurate with their degree of sophistication and needs from
sales staff or agents who should be adequately qualified and trained in this
respect. This should particularly apply to complex credit products, products
involving long-term commitments, or commitments which represent a
substantial proportion of current and future income or which feature
important penalty clauses in case of default or contract termination by the
consumer.
Credit
•
•
•
•
Credit market players should be encouraged to post, on their Internet sites,
complete information on their credit products and loans, including their
characteristics and a fee table.
Credit market players should be encouraged to engage in further initiatives
to increase individuals’ awareness of their rights and responsibilities as
credit holders, of the importance of good credit behaviour and the
implication making bad credit decisions, of tools available to help them
shop around for the best option, as well as providing unbiased information
on credit related issues. These activities should be clearly distinguished
from marketing promotion and advertising.
Intermediaries or third parties engaged in the credit markets, which have
direct interactions with consumers (through advertisement or direct credit
transactions) should be subject to the same requirements and expectations
regarding consumers’ awareness and education, and have the same
liabilities in that respect, as any market participant.
Credit
• Mortgages are for many consumers the most important debt they
will take in their lifetime. Because of their long term nature, their
size, and their unique and often complex characteristics, special
consideration should be given to the protection and awareness of
consumers entering into a mortgage agreement.
• Mortgage lenders and intermediaries should clearly state to
potential lenders the implications of them providing inaccurate
information or making misrepresentations on their loan
applications.
• Consumers should not be prevented from, or limited in their ability
to, comparing mortgage options or products and from obtaining
quotes from many loan or credit product providers and/or
intermediaries.
Credit
•
•
•
According to national circumstances, legislation should encourage clear,
transparent and plain language disclosure on mortgage agreements. For
instance, lenders should be required to prominently display, in their
mortgage agreements, a summary of key terms and conditions of the loan
(e.g., amount, amortization period and term, interest rate and variable rate
features, description and cost of optional services that the consumer
accepted, any fee and charge associated with the loan, and how the penalty
– if any – will be calculated in case of prepayment, etc).
According to national circumstances, financial education material dealing
with mortgage issues should include information about the benefits for
consumers, when they can afford it, of paying off their mortgage faster and
about ways of doing so without extra costs or penalties.
Regulatory considerations should be given to making mortgage lenders and
intermediaries responsible for ascertaining consumers’ credit needs and for
determining whether consumers have the capacity to repay a loan that
satisfies those needs, especially in a variable interest rate environment.
Current OECD work
• OECD has become the international leader on
the development of guidelines and standards in
financial education
• G8 Financial Ministers recognised, in June 2006,
OECD work on financial education and requested the
Organisation to further develop financial literacy
guidelines based on best practices
• recently supported by policymakers like Secretary of
US Treasury Paulson (May 2008) the Council of the
European Parliament (June 2008) or the Mexican
Minister of Finance (July 2008)
42
Current OECD work
• Current development of guidelines on
•
•
•
•
•
•
Financial education on credit
Policy handbook on risk awareness
Pension information
Annuities
Insurance and financial intermediaries
financial education at school, etc.
• In-depth comparative policy analysis on
related topics
43
Current OECD work
• New methodology to assess financial
literacy and financial education
programmes
• Survey on financial literacy (including at
school, possibly through PISA)
• Creation of a governmental international
network (with representatives from
financial authorities from more than 60
countries)
44
Current OECD work
• Setting up of an international Gateway at
www.financial-education.org
• Numerous international conferences
– India, Russia, Turkey
– Most recent one in USA: 6-8 May 2008, co-sponsored
with US Treasury (230 participants from more than 50
countries)
– Next one in Indonesia: 21-22 October 2008
– Supporting national events: Querétaro, 11 July 2008
• Co-operation with other international
organisations (WB, IMF, EU, etc.)
45
International Gateway on financial education
www. Financial-education.org
Need to assess financial
education
– It is important to provide financial education,
however it is essential to provide efficient and
effective financial education programmes
– This calls for systematic assessment and
related methodology (also an OECD project)
– But difficult especially for long term products:
pensions, mortgage credit, insurance
– Lack of comparable data
47
Financial education is not
enough
– Other measures are needed to overcome
consumers myopia and passive behaviour
– To deal with fraud, miss-selling
– To protect consumers against bankruptcies
– And more generally to protect consumers’
rights
Behavioural factors like inertia or passivity
may block consumers
Additional mechanisms may be needed…
• A number of studies in behavioural finance relate
financial behaviour to psychological factors. These
studies show, for example, that due to inertia and
procrastination, individuals will not sign up for a
retirement savings plan even though they know they
should
• As a consequence of inertia, individuals tell themselves
they will enrol “tomorrow”. Tomorrow, however, never
comes. Other studies find that employees often do what
is easiest, which may be doing nothing. Or they rely on
state intervention (samaritan dilemnia)
Combating inertia
• Automatic enrolment/default mechanisms which
transfer the options from opt in to opt out
• Similarly, plans can be designed such that workers
commit to increasing their contribution rate in these
savings plans each time they get a raise. Plans such as
the Save More Tomorrow plan, implemented in the
United States, is based on research showing that
individuals prefer future opportunities to save over
current ones, that inertia and procrastination keep
individuals in programmes once enrolled, and that loss
aversion makes individuals reluctant to increase
retirement savings if this reduces take-home pay.
Financial education: part of a system
(pension example)
Ensuring Adequate Retirement Income
Regulation
Financial
Education
Other
Approaches
Consumer
protection
Provision
Of
Information
Management
of
Investment
Funds
Awareness
Information
Content and Delivery
Behavioural
Characteristics
Of
Consumers
Instruction
Advice
Automatic
Enrolment
Integrated pillars
• Access
• Prudential regulation and enhanced
governance
• Consumer information and protection
• Competition
• Financial education and awareness
They are interconnected and interactive
52
Conclusion
• In the framework of increasing risks and increasing transfer of risks, of
gaps in coverage and lack of education and awareness, there is a strong
need for improving financial education and awareness
• This is calling for national strategies
• Involving multiple stakeholders and public-private partnership
• Financial education is indispensable but financial education alone is not
the panacea; Behaviour factors play a key role
• Financial education should be integrated in wider regulatory framework
including access, prudential regulation, consumer protection competition
• Through its analytical and methodological work and the development of
international principles and best practices, the New international
Network on financial education and the new Gateway , the OECD will
help countries at worldwide level in promoting further financial
education and awareness
• In this respect, we stand ready to provide any assistance we can to
Hungary
53
THANK YOU
more information at:
www.oecd.org/daf/financialeducation
and www.financial-education.org
54