Financial Capability Paper

January 20, 2009

FINANCIAL CAPABILITY

Roundtable Discussion, Balmoral Hotel, Edinburgh, 18 September 2008

Background

 

• 1. Given the continuing financial exclusion of a significant number of people in Scotland alongside the density of financial services companies in Scotland, there has been a longstanding interest in policy to promote financial inclusion and capability in Scotland. More recently, financial capability issues have attracted increased interest and currency in light of the global financial crisis. The Scottish Government has been working through the Financial Services Advisory Board (FiSAB) and Financial Services Implementation Group (FiSIG) to map existing work across Scotland promoting financial capability, as part of a general programme of work to secure the future of the sector in Scotland.

 

• 2. On the 18th September 2008, following a presentation from Otto Thoresen on the findings of his review into the provision of money advice, Scottish Financial Enterprise and the Scottish Council Foundation hosted a roundtable discussion on financial capability. The event was chaired by Andrew Harris, Director of the Scottish Council Foundation.

 

• 3. Participants were drawn from a wide range of public and private sector organisations. The event was held under ‘Chatham House rules' - what follows is therefore a commentary on the discussion with no individuals named.

                                                                                                              

 

Discussion Report

The Big Picture

 

• 4. Discussion began with an overview of the big picture, reflecting on the content of Otto Thoresen's earlier presentation while drawing in views on the wider context in Scotland. The discussion was informed by a ‘snapshot' summary of current financial capability work in Scotland, drawing on a recent review of activity by FiSAB.

 

• 5. The key question raised by participants early on was essentially ‘what now for financial capability'? The Thoresen review had done a good job of reviewing money advice provision and offering a way forward for that particular element of financial capability, but everyone around the table was clear that money advice was only part of the picture. Looking at the FiSAB summary of activity, it was clear that financial education for young people in schools was receiving a great deal of attention from both public and private sector stakeholders. This reflects a sensible focus on what was described as primary prevention, trying to ensure that young people are given the skills early on to enable them to make the right financial decisions in later life.

 

• 6. However, it is much easier to audit supply than demand, and while providing financial education in a formal school setting was important, what was not clear was whether services to promote a broader form of financial capability were being sought by consumers or offered by providers. Experience around the table was that money advice and financial information was most often sought by consumers at a time of ‘crisis' or at a transition in their life, for example:
• from full-time education into work;
• from work into retirement;
• starting a family;
• buying a first home;
• negative change such as unemployment or serious illness.

 

• 7. This then offered two more modes of informing consumer decisions: secondary prevention, where timely advice can avert or minimise an emerging crisis; and a ‘life stages' or ‘transitions' approach where appropriate advice can ensure a positive transition and therefore a positive trajectory over the next stage in a consumer's life. The group felt that while secondary prevention, particularly by independent advisors such as the Citizens Advice Bureaux, would remain an important element in promoting financial capability, the area offering most potential for positive change was a transitions approach. Even in cases such as the collapse of Farepak, secondary prevention actions with people directly affected had been accompanied by an increase in unsolicited requests for advice from others made more aware of their own situation as a result.

A Focus On Transitions

 

• 8. Nevertheless, a focus on transitions in life raises its own questions, notably which transitions offer the right opportunity to transmit advice and information, and who should provide it?

 

• 9. The advantage of a focus on transitions is the increased receptiveness of consumers to advice. Evidence for this is provided in the example that midwives are routinely asked questions about financial matters by new mothers, to the extent that the FSA trialled provision of generic financial advice packs for midwives to distribute on request. This reflects evidence from public health promotion practice that certain contexts increase individuals' receptiveness to health messages. For instance, smoking cessation and responsible drinking messages have been found to be more effective when delivered as a ‘brief intervention' by a GP during a patient consultation, even if the patient has come in for an unrelated reason.

 

• 10. The pattern of offering financial advice in transitions around working life is well-established and it is now routine for people retiring or leaving the workforce due to redundancy to be offered financial advice, albeit for different reasons in each case. It is also worth distinguishing between planned and unplanned transitions - for instance starting a family versus an unexpected illness - as this will obviously affect a consumer's receptiveness to different messages and modes of delivery. For example, RBS has been working with Macmillan to offer financial advice to families affected by cancer.

 

• 11. The need to offer advice and information appropriate to different transitions reinforces the argument for continuing provision of financial education activities to adults throughout life, to ensure that they have access to relevant information. However it also imposes a requirement to ensure that provision is co-ordinated amongst different delivery channels to ensure that messages are consistent and coherent.

Trusted Intermediaries

 

• 12. The need to differentiate appropriately between different transitions, and to offer effective interventions at that precise time, raises the question of who should be tasked with providing financial advice. In discussion the group were clear that consumers are much more receptive to messages delivered by trusted intermediaries, a group that does not necessarily always include financial services professionals. Given recent damage to the reputation and credibility of certain parts of the financial services sector, already low levels of trust in financial institutions are likely to decline further. This will therefore throw the burden of providing independent financial advice on others. Interestingly, the role of registered IFAs received little discussion, the group concluding that those consumers most able to benefit from independent financial advice and information would not naturally engage with IFAs. Instead, discussion focused on the role of trusted public sector workers who engage with individuals around crisis points and transitions - for example midwives, GPs, hospital staff, teachers and local authority staff.

 

• 13. The most obvious challenges in using these ‘trusted intermediaries' to transmit financial information and advice are training, resources and time. Training would be a key issue in ensuring appropriate and consistent advice, but this obviously raises challenges for already busy professionals. In addition, even if all of these public sector professionals were to receive appropriate training, in most instances the services for which they work can provide little in the way of resources to support their deployment for anything other than core tasks. And finally, time constraints on face-to-face contact would significantly restrict the opportunity to devote time to financial advice over other, more obvious service needs. Nonetheless, given that consumers are more likely to be receptive to advice from these trusted intermediaries, there does seem to be an opportunity to transmit useful advice and information if the right mechanism can be found to do so. In the case of the FSA pack distributed to midwives, this meant production of a generic pack that midwives offered to mothers when asked financial questions, while the midwives themselves did not offer financial advice or interpret the information in the pack. This allowed them to offer some support on request, while not requiring much in the way of additional training or resource. The pack itself worked by answering simple questions and signposting users to other resources.

 

• 14. The group concluded that signposting of this kind might be the most effective way of deploying existing public sector intermediaries to help promote wider access to financial information. It would avoid the need for much additional, specific financial capability training for professionals and also ensure that clients were referred to a small number of up-to-date sources of advice offering consistent information and guidance. One related issue, however, was the capacity of the resource centres receiving these referrals to cope - Citizens Advice Bureaux, for instance, might struggle to cope with a system-wide surge in requests for advice, at least in the short-term.

 

• 15. One obvious response to these issues is to re-emphasise the role of financial institutions. However, it was widely acknowledged within the group that there are a range of issues that would make it difficult to do so. Some of these are regulatory: private sector participants highlighted the nervousness within the financial sector with being seen to offer ‘advice', which is strictly regulated by the FSA. This was seen to have eroded the traditional relationship between customers and bank managers which allowed bank managers to offer general advice and information without fear of liability. In essence, there was a sense that it was no longer possible to conceive of ‘impartial advice' being delivered within a bank context. However, as a counter-example, NatWest has just started to have independent advisers based in its branches, to offer impartial advice to those using the branch services.

Demand For Advice And Guidance

 

• 16. Of course, one necessary condition for advice to be effective, whoever it is provided by, is that the audience should be receptive. This was emphasised by some in the group, who felt that a provider-led ‘financial education' approach in this context could be unhelpful, as it turns the audience off and makes them less receptive. Instead there was a general sense that a way should be found to connect provision more effectively with consumer demand. However, it was acknowledged that many consumers would not seek advice until faced with a problem, at which point much of the advice that might be offered would come too late. Compounding this there is a range of evidence to show that many consumers have lower numerical skills than might be expected. This suggests that a continued and expanded focus on numeracy and cognitive skills in the education system (for both young people and adults) could have as much of an impact on financial capability as specific advice services. Many consumers are also reluctant to seek advice because they worry that they will not understand the information they receive. This creates a vicious circle: many consumers would benefit from financial advice but because they lack the confidence or the impetus to seek it, they either miss out on these benefits or find themselves in situations that could have been avoided and end up requiring more assistance.

 

• 17. All participants in the discussion acknowledged that it would be ideal if a greater proportion of consumers recognised their need for financial advice, or could see the potential benefits, but the current economic situation and the perceived failure of the banking system had further eroded confidence in financial sector advisers. Rather than seek to ‘educate' consumers about their needs, which would be inappropriate, it was agreed that the media had a key role to play in raising awareness of financial issues, which would in turn raise demand for financial advice.

The Role of the Media

 

• 18. The group agreed that a key part of their definition of financial capability was the idea that consumers should have the knowledge and confidence to make informed choices for themselves, even if those choices did not result in the ‘optimum' financial outcomes from a financial professional's point of view. For example, a consumer would always have the choice to take a financial product offering a lower return if they felt it suited them better than another, potentially higher-return product recommended by a professional. Achieving that outcome would require a shift in culture, for both consumers and providers of financial advice and guidance, and the media would have a key role to play in that culture shift. This would be particularly important for issues such as pensions and savings, where current levels of participation are too low and consumers appear not to be aware of important information. For example, the success of the pensions reforms planned for 2012 would depend in large part on a change in public behaviours and the media would be important in transmitting key facts about the process and the thinking behind it. One key point raised in this context, though, was the need to ensure that increased knowledge and demand amongst consumers was not met with structural barriers that prevented them acting on their new knowledge. For instance, a wider knowledge of products and options would need to be matched with measures to ensure wider access to services. In this context, one key feature of the Scottish situation that differs from the rest of the UK would be access to services in remote rural areas. Given the widespread reduction in post office and bank counter services in particular, ensuring access to advice would rest in large part in shared public services in rural Scotland, unless the trend in closures could be reversed or responded to in some other way.

Looking Forward

 

• 19. Having discussed the nature of the challenge, the group turned their attention to what needs to come next. Looking at the grid of current activity prepared for FiSAB, it was clear that there was a wide variety of activity underway, involving a range of stakeholders and providers. This raised an immediate challenge of keeping track of, connecting up and evaluating all of the various financial capability activities going on in Scotland. There was little appetite for another working group to try to keep track of everything, but the group felt that there was a need for some kind of resource, probably a website, that would capture the basic information about activities in different places and make that available to others. This could include evaluations of programmes and projects, to allow others to learn from experience more easily.

 

• 20. This raised the question of how financial capability projects should evaluated - how will we recognise success? There has not been a lot of specific research into financial education methods. Projects of this kind face a similar problem to health promotion projects: it can be very difficult to isolate the impacts of a particular project, particularly over a short timescale of one or two years. The impact of financial capability work may only be seen years later, if an individual copes more effectively with a financial issue than would otherwise have been the case. It is also notoriously difficult to evaluate personal behaviours and the way people think in anything other than top-line quantitative terms, such as levels of savings. Although these indicators are important, they are not the whole story of financial capability, and some clearer statements of the desired behaviour (or change) would be helpful in beginning to understand what works. Again, financial capability stakeholders might learn useful lessons from the health improvement experience, where there has been a lot of work on how to measure and change behaviour, particularly in identifying possible short-term indicators for longer-term, sustained changes in outcomes.

 

• 21. It was also agreed that there is a need for a forum or perhaps regional fora to provide a point of contact for different activities. This is already being done in England and Wales, via Citizens Advice Bureaux, and should be considered in Scotland. This approach would allow different stakeholders the opportunity to meet regularly to build a local consensus on what needed to be done to improve financial capability and how it should be tackled. However, some in the group cautioned against trying to develop a specifically Scottish approach, as it was by no means clear that Scotland is ‘special' in this context. Scotland's remote rural areas pose specific challenges for service delivery, but many were unconvinced that the issues are particularly different in Scotland from the rest of the UK. Nonetheless, such fora would at least provide an opportunity for public, private and third sector stakeholders to work together.

 

• 22. If that is the case, then Scottish stakeholders have an opportunity to learn from the planned UK Pathfinder projects recently announced. That way, rather than reinventing the wheel in relation to financial capability policy as a whole, Scotland can learn from the experience in England & Wales and then focus on ensuring that programmes are delivered in the right way for Scotland. This might build on Scotland's much stronger focus on community-development approaches, for example.

 

• 23. There seemed to be a case for a Scottish ‘Financial Capability Plan', which would attempt to draw together lessons learned from ongoing work across the UK and then apply that learning specifically to Scottish conditions if needs be. If a decision was taken to wait for the findings of the UK Pathfinder projects before committing to particular approaches, then an interim step would be to work to identify the trusted intermediaries who would play a role in transmitting financial capability advice in different parts of Scotland. Also, it would be useful to examine which life transitions and stages provide the most effective opportunities to intervene with different groups and begin to think about delivery methods to fit. Other ways of segmenting delivery might be by gender, through preventative measures versus crisis responses, and by age. We have to recognise that financial capability work will be competing for resources with other programmes, so it will be important to make sure that a targeted approach is used, to maximise returns.

 

• 24. More broadly, the group offered some ideas for future work to enhance financial capability. The science of social marketing seemed to offer some prospects for influencing behaviour change, and this had already been demonstrated in health promotion campaigns. However, we would have to recognise that consumers will make their own choices and any financial capability programme would have to avoid being too prescriptive. This might require some clearer thinking on the nature of personal responsibility in this context. How much responsibility should government ‘take away' from individuals? There has been a move to introduce auto-enrolment for pension schemes, while allowing individuals to opt-out, but this approach would not be appropriate in all cases.

 

• 25. One final point covered capacity. A structural shift to preventative rather than responsive services would impose very different and potentially greater demands than the current approach. Scotland should pay close attention to the work done in the UK Pathfinder projects to learn how this shift can be handled most effectively.

Conclusion

 

• 26. The group's discussions covered a very wide range of ideas and policy areas but key ideas to emerge included:

 

• a. The need for a co-ordinated Scottish approach to promoting financial capability rather than providing financial education, specified in a Financial Capability plan;
• b. Support for a shift to a more proactive, preventative approach to complement existing responsive services;
• c. Support for a ‘life stages' or ‘transitions' approach, that would provide financial information and advice to individuals and groups at key transition points in their lives;
• d. Support for the idea of ‘trusted intermediaries', such as public service providers, who could be used to signpost consumers to appropriate sources of advice at key points in their lives;
• e. The importance of a continuing emphasis on basic numeracy, literacy and cognitive skills;
• f. The need for work with the media to raise consumer awareness of financial issues generally, and to inform them on specific issues such as changes to pension arrangements from 2012;
• g. The need for more thinking on how to evaluate and audit financial capability programmes;
• h. The need for a clearer statement on the extent of individuals' personal responsibility to seek advice and make responsible choices;
• i. Support for the idea of both online and face-to-face fora to share information and learning;
• j. Interest in the use of social marketing methods and learning from the experience of health promotion programmes in influencing behavioural change;
• k. The importance of taking the opportunity to learn from the UK Pathfinder projects rather than re-inventing the wheel, focusing instead on making sure that services are delivered in a way appropriate for Scotland.

Scottish Council Foundation

December 2008

View other news from January 2009