Financial Capability: the Government's long-term approach

 A NIACE Response to The HM Treasury paper

Published: April 2007

Summary and Recommendations

Background

1. The National Institute of Adult Continuing Education (NIACE) is an independent non- governmental organisation and charity. Its corporate and individual members come from a range of places where adults learn: in further education colleges and local community settings; in universities, workplaces and prisons as well as in their homes through the media and information technology. NIACE’s work is supported by a wide range of bodies including the DfES (with which it has a formal voluntary sector compact) and other departments of state, by the Welsh Assembly Government, Local Government Association and by the Learning and Skills Council. The ends to which NIACE activities are directed can be summarised as being to secure more, different and better opportunities for adult learners, especially those who benefited least from their initial education. NIACE works to secure both formal and informal learning at all levels.

Expertise in financial capability and financial literacy

2. NIACE research, development and consultancy work is commissioned on a regular basis by central and local Government, the European Union, the Higher Education Funding Council for England, the Learning and Skills Council, charitable trusts, community organisations and others. It undertakes large-scale national quantitative surveys, evaluations, qualitative studies and case studies of good practice. It has considerable experience of gathering evidence to support policy planning.

3. NIACE has been involved in promoting and developing financial learning for adults for over six years and was a member of the AdFLAG group. Much of our own work has been based on the recommendations of that group and the current themes are:

4. In the course of this we engage actively with HM Treasury; HM Revenue and Customs; Department for Work and Pensions; Department for Education and Skills and the Home Office.

5. NIACE collaborates closely with the Financial Services Authority’s Financial Capability team, sitting on the Families’ Working Group and supporting a number of other FSA activities. We have active contacts with a wide range of other organisations including universities and colleges; local authorities; the financial services industry; professional and sectoral bodies; Citizens Advice; voluntary organisations and trade unions. The Boards of NIACE and the Basic Skills Agency have recently agreed that the work of the BSA in England should transfer to NIACE. Recent and current work includes:

6. This experience allows NIACE to offer informed comment on both strategic issues around Financial Capability and also more practical concerns about design and implementation. NIACE welcomes the opportunity to respond to this consultation because it:

Scope

7. NIACE believes that the current definitions of Financial Capability are too narrow and also too focused on the relationship between the public as consumers of retail financial products and the Financial Services Industry. A wider definition of financial and commercial skills should be developed.

8. The Government’s definition of Financial Capability, as set out in paragraph 2.39 of the paper states:

“Financial Capability is a broad concept, encompassing the people’s knowledge and skills to understand their own financial circumstances, along with the motivation to take action. Financially capable consumers plan ahead, find and use information, know when to seek advice and can understand and act on this advice, leading to greater participation in the financial services market.”

9. This and other statements, such as the repeated references to the public as “consumers”, convey the impression that the Government believe that the main objective of Financial Capability is to provide the public with the skills and confidence to increasingly engage in the purchase of retail financial products. NIACE believes that this is unhelpful because:

10. One obvious area of knowledge and skills that currently finds little or no place in the Government’s discussion is that relating to the whole business of earning money. Important national policies designed to support entrepreneurship and wealth creation are seldom linked to the Financial Capability agenda as if the skills required to gain an income are wholly unconnected to the skills adults use to make best use of that money once it is earned.

11. NIACE believes that the Government should promote a wider concept of personal finance skills than that currently associated with the public use of the term “Financial Capability”. Fuller discussion is needed but we believe it should seek to relate skills and knowledge associated with earning money with the skills needed for savings and consumption. It should acknowledge the range of contexts in which people exercise commercial skills and judgement. For example, many hundreds of thousands of citizens currently exercise financial skills in the management of voluntary organisations (many increasingly important in the delivery of public policies) and yet such activities find no place either in the Government’s consultation paper or in the FSA’s National Financial Capability Strategy.

12. NIACE recommends that in developing policy on learning about financial skills the Government takes more account of existing knowledge and practice on adult learning, taking account of the difference between information and education.

13. There is a tendency for Government and others to assume that the provision of “consumer” information for adults automatically leads to learning and effective use of that information. In schools this is quite different where many of the learning programmes being promoted by the Personal Finance Education Group (Pfeg) are properly integrated with other parts of the curriculum.

14. Where adults are concerned, there is all too frequently an articulated or tacit assumption that grown-ups are able to manage these processes for themselves when presented with appropriate information. Educational research from NIACE and many others demonstrates clearly that is seldom the case. As just one example, many, many thousands of people have made use of the interactive “Chip and PIN” simulation that we have developed on the www.moneymatterstome.co.uk  website, demonstrating that, even when people have read “instructions” for a process, many still want to develop confidence by “playing” in a safe environment before using the knowledge in real life.

15. NIACE is concerned that many initiatives being developed by Government and, indeed, by other private and voluntary sector organisations rely too heavily on an information- based approach that may not meet the learning needs of the adult population.

16. By focusing the Financial Capability agenda on skills and behaviour in the retail financial markets, the Government is creating barriers to linking the development of financial skills to other areas of Government education policy.

17. Research by NIACE and others highlights the demographic changes taking place in UK society and emphasise the need to improve the skills of the existing adult population as well as preparing young people for entry to the labour market.

18. Employers of all kinds are increasingly requiring their employees to exercise more commercial judgements in the workplace than in the past. In effect, more workers are being asked to manage their own work. In many situations, this requires the use of financial judgements about work being done and the cost-effectiveness of acting or not acting in a particular way. NIACE believes that broadening the vision of the financial and commercial skills that people need beyond those represented in the present Financial Capability agenda could have an appreciable benefit to the overall drive to increase productivity in the workplace.

Building Evidence

19. NIACE recommends that the Government takes a far more active role in setting quality standards and promoting good practice in financial learning.

20. Since the report of the AdFLAG Committee, there has been an explosion of activity intended to assist the public in improving its financial skills. The role of the FSA in developing its National Financial Capability Strategy has been central. NIACE congratulates the FSA for interpreting its remit in a broad rather than a restrictive way.

21. But the FSA could never be in a position to co-ordinate the multiplicity of initiatives and programmes that emerged in the wake of AdFLAG, many of them, for example, developed by small local voluntary organisations with little or no connection to nationally agreed frameworks for standard setting or quality control.

22. In the last three years, in particular, the “marketplace” for Financial Capability work has been characterised by the bewildering number and range of organisations involved. While the outcomes of some have been captured and assessed, many more came and went with no real evaluation being undertaken. Moreover, sometimes funding has been provided for pilot projects with little apparent regard for how any lessons learned might be rolled-out on a wider regional or national context. One of the main reasons for this has been the lack of a common evaluation framework. NIACE believes that this, in turn, cannot be properly developed without a wider common understanding of the objectives of public policy.

23. The FSA’s Baseline Survey was a brave and effective first step into the field of defining and measuring Financial Capability. As discussed above, NIACE believes that the definition of Financial Capability underpinning the survey is too restrictive, nevertheless it offers a route into the assessment of effectiveness. NIACE urges the Government to develop the Survey and other evidence-based tools into useful models for evaluating the effectiveness of practice.

Co-ordination

24. The FSA has done good work and proposals to create a Ministerial Group to help co-ordinate policy are welcome but the importance and multi-dimensional nature of the subject means that there is a case to establish a new organisation to co- ordinate the efforts being made by so many players.

25. The financial skills of the nation are a matter of national importance and yet co-ordination of work done in this area exists only in some sectors. At a national level there is no meaningful co-ordination. The work of the FSA has been co-ordinated to good effect within its own sphere and it is hoped that the Ministerial Group that is to be formed will begin to co-ordinate the work of Departments of State.

26. However, really effective co-ordination at a national level requires many other groups and organisations to be “brought into the tent”. Of these, some of the most important would be:

27. Perhaps the most pressing area in need of co-ordination on a national basis is that of funding. At the present time the main “blocks” of funding are from Government, the Financial Services industry itself through corporate social responsibility and similar initiatives and from the FSA, whose funding is derived from the levies from the Financial Services sector. At time of writing it is unclear whether the recently announced increase in the FSA levy will have any adverse affect on the level of funding coming from the industry through corporate social responsibility activities.

28. How and whether a private organisation decides to use its resources within the law is a matter for its owners, shareholders, staff and customers to decide. NIACE believes however that a high-profile, influential and genuinely independent advisory group could not only create a more effective national effort but also help to raise the profile of financial skills by acting as a focus for the work currently being done by other bodies.

29. The Steering Group of the FSA National Strategy recognised the limitations of the current framework for Governance of the national approach to Financial Capability in a brief paper in October 2005, in which they explored some other models for the governance of activity in this area. NIACE recommends that the Government revisits this paper and explores the options described for co-ordinated governance structures involving both public and private commitment.

General Financial Advice

30. NIACE believes that a national Generic Financial Advice service would be a valuable addition to the public services. Attention must be paid to appropriate skill levels and training for advisers and also to the relationship between this advice and levels of financial knowledge and skills among the public.

31. The FSA Advice Working Group, the Resolution Foundation, Citizens Advice, the Personal Finance Society and others have highlighted well the fact that a large section of society, not previously identified as being particularly disadvantaged, has effectively been disenfranchised from appropriate and accessible advice on personal finance matters. While recognising the importance of the issues raised as examples for comment in 5.2.6, our comments focus on questions related to adult learning, the first relating to skills required to deliver the service and the second relating to the learning of the public at large.

32. There are two main models proposed for a national service: a single dedicated organisation operating with paid-staff (Resolution Foundation) and a network based in the Voluntary Sector making use of the unpaid services of Authorised Financial Advisers (Citizens Advice/Personal Finance Society). While the second of these models seeks to make use of the existing skills of professional advisers in both Citizens Advice Bureaux and IFA practices, adopting the first model would clearly have significant costs in terms of staff training and development and serious thought must be given to these training requirements in what is after all a new discipline. NIACE urges the Government to recognise that this training would need new approaches and could not simply try to adapt training that has been developed for other purposes.

33. The first paper produced by the FSA Advice Working Group (Building Financial Capability in the UK: the role of advice, July 2004) suggested a relationship between financial information and financial advice and that this space needed to be filled by education. It is recognised by many participants in this debate that Generic Financial Advice will work better if those seeking it have a level of financial awareness and understanding beforehand. The Resolution Foundation’s own research has indicated that many people who might use a national service would be looking for confirmation for decisions they had already considered. We urge the Government to not merely to focus on the interface between Generic Financial Advice and Regulated Advice – but also to focus on the interface between levels of individual financial knowledge and skills and the Generic Financial Advice process. NIACE believes that some contributions to the debate on Generic Financial Advice have seen its primary purpose as being to act as a kind of filter between the public and Regulated Advice but suggests that the main public value for such a service would be as a complement to raising individual financial skill levels rather than what could be seen as a marketing aid for the Financial Services industry. As such it must deliver a broader scope of advice than that currently provided by many Authorised Financial Advisers, encompassing areas of personal finance such as State Benefits and workplace financial issues.

Conclusion

34. The concept of financial capability is inextricably bound up with learning. NIACE applauds the excellent work carried out on this subject by many involved in learning, particularly in schools. Through the work of Pfeg and others, Financial Education is now becoming embedded in the learning of hundreds of thousands of school children. The Government must also help those organisations and professionals engaged in adult learning to find the same focus for the importance of financial skills for the adult population. This will involve harnessing the best of what is currently being offered, helping to improve and innovate where necessary and above all creating a national co- ordinating focus for this work.

35. NIACE has no objection to anything in this paper being made public and would be pleased to answer any questions relating to this response. In the first instance, these should be directed to Howard Gannaway (howard.gannaway@niace.org,uk).

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