international policy issues and initiatives on financial education

Outline! International financial education issues •  The framework •  Calling for financial education •  International responses: The OECD and INFE

programme •  Principles •  Pensions •  Credit

•  Need for an integrated approach

2

3

Selected International Trends

•  Increasing financial risks ( financial crisis) •  Access and inclusion issues (vulnerable

groups) •  Increased sophistication •  Increased transfer of risk to households who

are taking on more financial risk and responsibility. This is true for instance for both credit decisions (mortgage ), and retirement savings (DC schemes).

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 •  Focus on financial education but also access

and consumer protection •  Awareness is key

4

Lack of awareness"•  The problem is indeed that households may not

be aware of the risk they face •  Households may not understand the need to be

protected or overestimate their protection and their understanding

•  Thus, they do not seek protection •  and 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

•  “Less is more”: danger of overinformation •  Information is necessary but not

sufficient: individuals need to understand the information

6

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 (a process) is to improve financial literacy (the result)

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 (key role of

central banks in several countries) 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

11

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

12

Momentum due to financial crisis"

•  Findings from a survey conducted through the International Network for financial Education –  Lack of financial literacy is one of the contributors to the crisis

and in particular of its aggravation –  The crisis and its consequences have highlighted the need for

enhanced level of accountability of financial institutions vis-à-vis their clients and consumers

–  They have also raised awareness on the need for increased financial literacy and capability of households and policymakers

–  The crisis is a « teachable moment » –  The crisis is a trigger for policy actions in the financial education

area

14

OECD and INFE 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

15

OECD and INFE programme on financial education"

•  OECD and the network have become the international leader on the development of guidelines and standards in financial education •  G8 Financial Ministers recognised, at their Moscow June 2006 meeting, OECD

work on financial education and requested the Organisation to further develop financial literacy guidelines based on best practices

•  Since then multiple OECD recommendations expanded at worldwide level through the INFE

•  OECD work is now supported by policymakers all over the world •  new G20 mandate (in Seoul and Paris) for FSB, with OECD and others to report

to G20 2011 summit on policy options to enhance financial consumer protection and education and for OECD, FSB and others to develop principles for the G20 FM and CBG meeting

Key Russian role and leadership"•  In 2006 at Russian G8 Presidency, first time that financial education was on

the agenda of G8 Finance Ministers meeting •  Russia lead the G8 Finance ministers decision to mandate the OECD to

develop further guidelines, based on work already developed; strong encouragement for OECD international work

•  Later on, Russian set up a Trust Fund to support World Bank and OECD work . The OECD is notably expected to “develop standards, criteria and guidelines for financial literacy improvement and the design and operation of outreach and education programmes; this allowed for substantial developments in international guidance and analysis which will also benefit to Russia

•  And now major Russian national programme, the biggest programme ever launched by a government in cooperation with the WB

•  OECD stands ready to contribute to this programme

16

Outputs!•  Several publications

–  the first international survey on financial literacy

–  Report on financial literacy in insurance –  Report on financial literacy in pensions –  Research on behavioral issues in

financial education, on annuities, communication

–  Stocktake on methodology, financial education at school

–  etc

•  An international definition focusing on a capacity building process

OECD definition!•  OECD 2005 Definition: A Capacity Building

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”.

18

OECD Principles on financial education: a selection"•  Financial education programmes should focus on high priority

issues (credit, debt, pensions, etc) •  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 .

•  National campaigns should be encouraged to raise awareness of the population

•  Financial education should start at school. People should be educated about financial matters as early as possible in their lives

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 long-term commitments and commitments which represent a substantial proportion of current and future income

•  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.

•  .

20

OECD Principles on financial education!

•  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.

•  According to the needs of the jurisdiction, evaluation processes should inter alia involve: Evaluation on a more systematic basis of the risks, of the population’s degree of literacy, of the education needs

21

OECD good practices (building on comparative analysis)"

• Good practices for financial education on pensions ( 2008)

• Good practices for risk awareness on insurance (2008)

• Good practices for Financial education on credit (2009)

•  More to come (e.g on financial education at school 2011)

The case of pension: first communication!

•  To successfully manage risks, individuals need to understand both the nature of their pension plans and their responsibilities and to receive periodic and recurring updates on the status of their pension savings. Such updates are typically provided by the pension statement.

•  Policymakers, plan sponsors and plan members generally agree that communicating pension benefits in a clear, understandable and timely manner benefits all stakeholders, yet there is little consensus as to what information should be included or excluded from the pension statement or how that information should be presented.

•  But communication is often not enough and may not be successful. This calls for financial education and also alternative mechanisms

23

Financial education in private 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

•  Intermediaries should be encouraged to engage in initiatives increasing the population’s awareness of the need to save for retirement. However, clear distinctions should be made between financial education and commercial product recommendations.

•  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, lowest income and savings levels)

25


•  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.

•  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.

26


•  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

•  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.

27

National campaigns!•  Most of the OECD countries are facing the challenge of how to

maintain sustainable pension systems in the face of aging populations. Many have undertaken pension reforms – which frequently involve the introduction of policies which may be seen as unpalatable to parts of the population. These reforms also often involve individuals having to take more responsibility for saving for and funding their retirement income.

•  Several OECD governments have therefore launched public awareness campaigns to help explain to their populations the need for reforms, the policy undertaken and the increased responsibilities which individuals have for funding their own retirement.

28

Initial conclusions / good practices

–  Governments first need to define their role in the campaign (which should focus on explaining systematic change and building confidence)

–  When explaining reforms of a pension system objective information is essential –  Government campaigns work when they clearly distinguish between information and advice –  To be successful governments need work with many partners and to use varied channels –  Building on existing financial education work and campaigns can boost effectiveness –  Governments need to coordinate their campaigns carefully with these other stakeholders – particularly

private sector advertising –  Campaigns may be divided into different stages – e.g. an initial stage may choose to focus on opinion

leaders, who can subsequently provide independent information /advice to others –  Governments may include an element of targeting journalists in the media in their campaigns – with these

groups then able to explain reforms to the broader population. –  For campaigns to work they should not only target older people – information needs to be delivered to those

still working and the young. –  People need a unified picture of their pension options – hence projections are important –  Governments should not shy away from linking pension reform to other topics – such as labour market

issues (e.g. need to work longer) –  To have the long lasting impact aimed at, campaigns need to be on-going –  The impact of campaigns needs to be regularly evaluated –  Behavioural economics shows that some groups will not or cannot save and governments should therefore

consider linking their campaigns with other mechanisms (e.g. automatic enrolment and well designed default options)

29

Need for consumer protection:OECD Core Principle on the rights of members and

beneficiaries and adequacy of benefits !•  Non-discriminatory access should be granted to private pensions

schemes. Regulation should aim at avoiding exclusions based on age, salary, gender, period of service, terms of employment, part-time employment, and civil status. It should also promote the protection of vested rights and proper entitlement process, as regard to contributions from both employees and employers. Policies for indexation should be encouraged. Portability of pensions rights is essential when professional mobility is promoted. Mechanisms for the protection of beneficiaries in case of early departure, especially when membership is not voluntary, should be encouraged.

33

More recent work on credit (2009 Recommendation)!

•  Interesting recommendation mixing financial education, awareness and consumer protection

•  Insist also on early education (school) but also individuals’ key teachable moments through their life cycle (entry in workforce, buying a house, marriage, birth of child etc)

34

FE objectives in credit!Financial education on credit issues should help to enable individuals to: •  develop the knowledge, understanding, skills and confidence needed to

adequately appraise and understand their rights and responsibilities as credit holders and the various credit options available to them;

•  know where to look for important information, objective advice or help if they need it;

•  take informed decisions about how to protect themselves and their relatives, to adopt a proactive and responsible behaviour as regards their credit;

•  develop basic abilities of financial planning as regards their credit, taking into account their possible future income and life cycle changes; and

•  understand the consequences of bad credit choices, decisions or behaviours.

35

Selected credit recommendations!

•  Governments should contribute to promoting consumers’ awareness and a competitive marketplace by providing individuals with appropriate tools to understand their profile and needs, to compare the costs and characteristics of various credit options and to shop around for the best credit product available to them.

•  In addition to encouraging efforts to equip consumers with the tools to understand their 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. Governments should also provide information for where to seek further information and advice on how to mitigate those risks and how to file complains and seek redress

36


•  Governments should direct public awareness campaigns as broadly as possible, with specific programmes targeted at the most vulnerable groups (migrants or those with the lowest income and savings levels). Public awareness campaigns should be conducted at least on a yearly basis

•  Governments should ensure, through regulation and supervision, that credit market players provide quality information as part of their disclosure and consumer information duty, which can be distinguished from advertising and promotion.

•  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 standardised, effective interest rate that takes into account any fees, in addition to interest charges, that may be associated with the credit product or loan.

•  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 prominently displayed in the loan or credit agreement, and clearly summarizing the important terms and conditions of the loan or credit product.

37


•  In co-operation with market conduct regulators and supervisory authorities, governments should seek to inform consumers about abusive, dishonest, non-transparent, unethical and/or illegal credit market practices, and their implications for consumers. They should actively inform consumers about their right to recourse and redress, and facilitate access and affordability of recourse mechanisms. Supervisory authorities should also consider disclosing to the public the enforcement

measures and penalties issued to market players resulting from these practices.

38


•  Uniform “due diligence” standards to assess consumers’ profiles should be developed, and their use by all credit providers should be mandatory as part of the underwriting process. Consumers should receive objective and relevant explanations and advice commensurate with their degree of sophistication and needs. Sales staff or agents should be adequately qualified and trained in this respect, and their remuneration and incentive structure should be designed accordingly. This should particularly apply to complex credit products, products that carry higher inherent risks for consumers (such as variable interest rates, foreign currency loans, etc), 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 payment default or contract termination by the consumer

39


•  According to the needs of the jurisdiction, these processes should inter alia involve:

•  Evaluation on a more systematic basis of the implications of bad credit decisions or behaviours for individuals and their relatives, along with analysis of risks and/or populations that are particularly vulnerable in this area;

•  Evaluation of individuals’ degree of literacy and more or less active behaviour as regards their credit choices, decisions and exposure to potential resulting bad consequences;

•  Identification and assessment of needs for educating 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 credit-related issues, based on predefined criteria and including a cost-benefit assessment.

40

Worldwide reach"•  Setting up of the International governmental network for

financial education: •  members from more than 150 institutions representing

75 countries and international bodies •  International Meetings in Washington, Bali, Paris, Rio

de Janeiro, Rome, Beirut ; next will include, Canada, South Africa, Spain and Columbia

•  Regional programmes currently under development in South East Asia, central Europe, MENA and Latin America

•  MoU with countries (for instance Indonesia)

INFE Subgroups!•  The measurement of financial literacy and inclusion •  The evaluation of financial education programmes

–  It is important to provide financial education, however it is essential to provide efficient and effective financial education programmes.

•  Financial education at school •  The development of national strategies and related issues

•  New sub group on financial inclusion/access (but avoiding duplication)

•  New sub group on financial education and women

42

OECD/INFE work!•  work on pensions issues, which will be undertaken by the OECD in

co-operation with the IOPS •  work on credit, savings, investment with the objectives to develop

guidelines ; work on the role of financial intermediation in the financial education process

•  work on behaviour economics (essential to develop adequate financial education strategies)

•  Work on communication/awareness campaigns, social marketing and development of appropriate related tools

•  Work on vulnerable groups •  the development of the financial literacy option in PISA 2012

(support through the subgroup on financial education programmes in schools);

•  Review and adaptation of current guidelines 43

International dissemination"•  Conferences/presentations all over the world: Brazil,

Columbia, Egypt, France, Hong Kong, Hungary, India, Indonesia, Malaysia, Mexico, Russia, Singapore, Turkey, UK, USA

•  Issue a newsletter, several publications •  Co-operation with other international organisations

(IMF, EU, IOPS, FinCoNet etc.), including a close co-operation with the WB

•  Setting up of an international Gateway at www.financial-education.org, (currently in upgrading phase)

Financial education is not enough: necessary…but not sufficient"

– 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

Financial education: part of a system (pension example)!

Financial consumer protection!

•  Financial education and financial consumer protection are closely linked

•  OECD 2009 survey on financial consumer protection

•  Policies focus mainly on disclosure (which thus call for education)

• Need to test relevance of existing disclosure •  Less is more • Other tools explored in some countries •  Importance of adequate redress mechanisms

48

Integrated pillars"•  Access and inclusion •  Prudential regulation and enhanced

governance •  Consumer information and protection •  Competition •  Financial education and awareness

They are interconnected and interactive

49

50

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 process calls for national strategies, public-private partnership and important role of NGO

–  It should start at school –  Is should deal with priority areas such as pensions, credit, savings and risk

awareness –  It should allow for special role by financial institutions whose responsibility

should be encouraged –  it should address vulnerable groups –  It calls for efficient education and methodology to measure both literacy and

efficiency of the programmes –  Financial education is indispensable but financial education alone is not the

panacea; it is part of a wider policy approach, complementing prudential regulation and calling for consumer protection

–  It calls for a worldwide approach

THANK YOU

more information at:

www.oecd.org/daf/financialeducation and www.financial-education.org

51