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Improving financial literacy among Australians – the flipside of regulation

Improving financial literacy among Australians – the flipside of regulation

April 7, 2014 12:24 PM | Posted by Christopher Brown and Pinar Ozer | Print this page

The Inquiry terms of reference, although broad, demonstrate an overwhelming emphasis on the regulation of the financial system and its institutional participants. What is notably missing is the equally important goal of improving financial literacy among consumers to enable them to protect themselves.

Events over the past decade have demonstrated the importance of financial literacy. Storm Financial, Westpoint and other financial collapses, perhaps, may not have occurred if the community had been better educated. This has been acknowledged, to an extent, by previous government inquiries – for example, increased access to good financial advice, in the hopes of improving financial literacy, was one of the policy objectives behind the Ripoll Report that led to the Future of Financial Advice (FOFA) reforms.

While, arguably, we are ahead of other countries in this respect (e.g. UK where the debate centres around what bankers get paid and spending your 'pension pot' on Lamborghinis), we still have a way to go. Accordingly, an important goal for the Inquiry should be on improving these standards. But exactly should the Inquiry be focusing on to achieve this end?

Government and industry will both need to play a key role and have a degree of responsibility for the success of any program to improve financial literacy. Industry's incentive is self-evident –winning the hearts and minds of your target markets means you will thrive commercially.

For its part, government can help by not over-regulating the retail wealth industry, as this stifles innovation and possibly backfires in terms of consumer protection. We have perhaps seen a bit of regulatory overreach with the recent FOFA reforms (and the stalled attempts to bring some commercial rationality back into them).

What I would like to see is a considered debate on whether consumers should be protected from themselves (which is a little bit how the current system works), or whether they should be empowered to protect themselves.

The solution is not necessarily a legislative or regulatory one. But the role of the regulator, policy settings (including the whole objective of the disclosure regime), the licensing regime and the complexity in which it has all become mired, do warrant careful reconsideration.

At the heart of all of this is the main stakeholder – the consumer – and what can reasonably be expected of him or her. We need to move to a state where we can expect more of consumers because they are better educated.

Accordingly, any reconsideration of the effectiveness of the current system needs to balance consumer protection, product innovation and the commercial interests of the sector. It is in everyone's interests that we have a strong, sustainable and thriving wealth management industry in Australia in the long term. This is something which we may have lost focus on in the recent debate.