Tag: Financial Literacy

ASIC announces review of school banking

As the lead Australian Government agency for financial capability, ASIC announced that it will commence a review of school banking programs in primary schools.

Across the country young people are learning about money at school. Financial literacy education is embedded in the Australian Curriculum and teachers draw on a range of materials and programs to support an understanding of money and financial concepts.

Students are learning about the value of money, the cost of living, compound interest, identifying a scam, choosing a mobile data plan and starting a business.

It is essential that young people develop the knowledge and the skills they need to engage effectively with financial products and services. Attitudes and behaviours around money can be shaped from an early age and education is a key component to support stronger financial capability and to better prepare young people to manage financial decisions throughout their life.

School banking programs are offered to primary schools as a way of encouraging and supporting the importance of savings through regular deposits facilitated by the school.

To better understand how school banking programs are operating, ASIC will undertake a review of school banking programs. ASIC’s review:

  • will seek to understand how these programs are implemented and how they are marketed to school communities.
  • will consider how students are engaging with these programs and the accounts established through these programs while they are at school and after they leave school.
  • will assess the benefits as well as the risks of school banking programs, and will set out principles for appropriate conduct and good practice in this area.

Deputy Chair, Peter Kell said, ‘Transparency around school banking programs is important.  ASIC wants to understand the motivations and behaviours around school banking programs to ensure they ultimately serve the interests of young Australians, and to enable school communities to have an understanding of the potential impact of these programs.’

ASIC will consult with various stakeholders including from the education sector, consumer organisations, other regulatory agencies, as well as the banks offering the programs.

It is expected the review will be complete by mid-2019.

Background

ASIC is the lead Australian Government agency for financial capability, consistent with its strategic priority and statutory objective to promote confident and informed consumers and investors.  ASIC’s financial capability program includes:

›     Leading the National Financial Capability Strategy;

›     Providing consumer information via ASIC’s MoneySmart;

›     Delivering ASIC’s MoneySmart Teaching program; and

›     Implementing ASIC’s Indigenous Outreach Program.

The National Financial Capability Strategy, led and coordinated by ASIC, seeks to broaden the reach and impact of financial capability initiatives that assist Australians to be in control of their financial lives.

School banking programs are programs where a bank has a relationship with a school to offer deposit products to their students.  These students are encouraged to establish bank accounts and make ongoing deposits into those accounts at the school.

Consumers need critical thinking to fend off banks’ bad behaviour

From The Conversation.

The irresponsible (if not predatory) lending and the selling of “junk” financial products highlighted by the Financial Services Royal Commission should raise concerns for regulators, educators and parents interested in financial literacy.

Research shows a strong correlation between financial literacy and literacy and numeracy skills. Literacy and numeracy are critical for, among other things, making sense of product disclosure statements and understanding the impact of loan terms and interest rates on the total amount to be repaid.

But teaching financial literacy requires going beyond these skills, by cultivating a healthy scepticism of financial institutions and the capabilities and confidence to make informed financial decisions.

There is a strong relationship between a low socioeconomic background and low financial literacy in both adolescents and adults.

It’s not just disadvantaged and vulnerable groups that struggle with financial decision-making. People who are highly educated in finance also make poor decisions – for instance, by focusing too much on growing their assets and ignoring risks.

But studies show that when regulation is effective and the financial system can be trusted, even consumers with limited financial knowledge and information-processing capabilities have the potential to deal with complex financial decisions.

For example, when considering mortgage protection insurance, applicants stand to benefit from knowing the actual risk of events like serious illness or injury that can affect their ability to meet monthly loan repayments.

Building financial capability

One way to develop better financial literacy is through simulating real-world risks, rewards and decisions in safe and supportive environments. For instance, families can play games like Monopoly and The Game of Life.

Secondary school students also have access to more sophisticated online simulations, such as the ESSI Money Game and the ASX Sharemarket Game.

Hypothetical scenarios like these provide opportunities for role play, where students can practise drawing on evidence and using it to think and reason about situations.

A recent survey of teachers of Year 7-10 commerce students revealed that more could also be done to teach students how to compare and choose between banks and financial products and services, what to do in the case of a financial scam, and how to escalate an unresolved complaint.

But we also need to take a look at the role banks play in financial education. Programs like the Commonwealth Bank’s Dollarmites Club and Westpac’s Solve to Save teach children about money on the banks’ terms.

A key call to action in these programs is often to open a bank account and activate a savings plan. In the Solve to Save program, parents pay a $10 weekly subscription, which is “automatically refunded” to their child’s nominated Westpac account every week they complete three mathematics exercises.

Late last year, in response to criticism by the consumer advocacy group Choice, the Commonwealth Bank stopped kickback payments to schools related to its longstanding Dollarmites scheme.

While the banks may be proud of their investment in these education programs, they serve to position the banks as experts in money matters while cultivating trust and brand loyalty.

What does it really mean to be smart with money?

Misguided trust has exposed vulnerable individuals to the moral hazard of the banks – and underscores the importance of improved financial regulation and education moving forward.

Given that borrowing decisions are complex, multidimensional and often emotional, it’s important to consider any lender’s motives, or “What’s in it for them?” Banks are profit-driven. This means an important question to ask oneself is: “Where can I get information and support that is independent, comprehensive and easy to understand?”

In the current climate, teaching capabilities for a healthy scepticism and personal agency is the way forward.

We also need to change the public perception of what it means to be financially literate. The conventional focus on individual responsibility and wealth accumulation is flawed.

Arguably, this focus has contributed to the need for a Financial Services Royal Commission. Whether you are a bank, a mortgage broker or a consumer, the impact of your decisions on others must be carefully considered.

While education can contribute to preparing all Australians for informed financial participation, the task is challenging.

Authors: Carly Sawatzki, Assistant Professor, University of Canberra; Levon Ellen Blue, Lecturer, Queensland University of Technology

Financial literacy is a public policy problem

From The Conversation.

It’s pretty common nowadays to see the likes of the Reserve Bank of Australia or the Australian Bureau of Statistics issue warnings about the size of Australian household debt. The reason is that the consequences of poor financial decisions often reach far wider than an individual or family.

The global financial crisis showed us how rapidly financial contagion can spread – one person’s debt is another person’s asset, so when the debt is written off so is the asset. However, there has been little improvement in financial literacy in the wake of the financial crisis, the lack of which was one of the underlying causes.

For instance, surveys just prior to the global financial crisis revealed that many Americans taking out home loans either did not read their loan documents or did not understand them. This meant that, in many cases, they did not understand that they were signing teaser loans where the interest rate starts out very low but increases after a few years.

This lack of financial literacy combined with predatory lending caused the subprime loan crisis, the precursor to the full blown financial crisis.

What is financial literacy?

Financial literacy refers to the ability to make sound financial decisions based on knowledge, skills and attitudes, taking into account personal circumstances.

Low financial literacy is particularly concerning in home loans. In an alarming parallel to the United States before the financial crisis, roughly one third of interest-only mortgagees do not understand that their repayments make no inroads into their debt, and that their interest rates will jump considerably after the interest-only period of the loan has expired.

But it isn’t just that low financial literacy increases risk. It is also important for achieving a productive economy. Economic efficiency requires borrowers to not only have good information but to understand it. This allows them to weigh up the costs of borrowing with the benefits that they expect to receive.

If the information is distorted, either deliberately by lenders or through the misunderstanding of borrowers, they will miscalculate the benefits and capital in the economy will be misallocated. Economists call this market failure, a lot of which occurred in the housing market in the United States before the global financial crisis.

Financial literacy isn’t improving

Evidence suggests that financial literacy has not improved since the global financial crisis, and may have gotten worse.

A survey of adult financial literacy in Australia found that in 2014 the number of people who could actually recognise an investment was “too good to be true” – for example a financial asset promising to pay a return much higher than the going return on similar assets and for no greater risk – had actually declined, to 50% from 53% just three years earlier.

The survey also found that those who recognised that good investments (something with relatively low risk) may fluctuate in value fell to 67% from 74%.

But financial literacy education must also go hand in hand with general literacy and numeracy. The Productivity Commission found that 14% of the adult population had relatively low literacy skills in 2011-12. This is defined as being able to, at best, locate basic information from simple texts but being unable to evaluate truth claims or arguments.

The report also found 22% of the population had low numeracy skills, meaning that they can count, add and subtract and do other basic arithmetic. But they cannot understand statistical ideas, mathematical formula or analyse data.

In other words, a significant proportion of the Australian adult population are not equipped to understand the effect of an interest rate increase on their loan repayments, or understand a loan document that includes an interest rate increase after an initial period.

Fixing the problem of financial illiteracy cannot wait until people are in the throes of negotiating home loans and credit cards. And it should definitely take place before Australians resort to pay day loans.

This was the aim of the Australian Government’s National Financial Literacy Strategy, that ends this year. The strategy proposes a number of educational initiatives including embedding financial literacy in the school curriculum, a formal teacher training program, and development of educational resources and tools.

The strategy draws on similar steps that have been adopted by other countries and recommended by the Organisation for Economic Cooperation and Development (OECD).

The problem is that the curriculum is a crowded space. Financial literacy must compete with the latest fashions in school education as well as traditional curriculum content.

Fighting for curriculum space for financial literacy is a political exercise which governments must play hard. For example, by attaching serious funding to the achievement of financial literacy indicators at the school level, and training and certification for teachers. Increasing financial literacy isn’t just in the best interest of individuals, we all benefit from a more literate population.

Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

ASIC committed to improving the financial capabilities of Australians

ASIC has released the National Financial Literacy Strategy for consultation.

The National Financial Literacy Strategy is a framework to guide policies, program and activities that aim to strengthen Australians’ financial literacy and capability.

The five priorities in the National Strategy are:

  • Educate the next generation, particularly through the formal education system;
  • Increase the use of free, impartial information, tools and resources;
  • Provide quality targeted guidance and support;
  • Strengthen co-ordination and effective partnerships;
  • Improve research, measurement and evaluation.

A key feature of the National Strategy is collaboration across different sectors, including government agencies, community organisations, the education sector and financial services firms.  ASIC is leading a public consultation process to shape the National Strategy from 2018 and is seeking feedback on a number of issues including:

  • updating the language of the National Strategy from ‘financial literacy’ to ‘financial capability’ to reflect a growing focus on behaviours that support better financial outcomes;
  • expanding the priority audiences identified under the National Strategy, for example to include people with disability (and their families or carers) who are navigating choices and options under the National Disability Insurance Scheme, or people in newly arrived communities who are attempting to understand and access financial services;
  • broadening stakeholder reach and engagement with the National Strategy, including through the use of new technologies and;
  • improving research, measurement and evaluation.

‘Building financial capabilities requires a long-term commitment to lay the foundations for behavioural change over time.  We all confront significant financial decisions at key points in our lives, such as leaving school, having children, or reaching retirement.  To help people develop healthy financial habits and make better decisions about money we’re seeking feedback on the National Strategy’, said ASIC Deputy Chair Peter Kell.

‘I encourage people to share their views with us through this process.  Your input will help us shape a National Strategy that supports positive outcomes for individuals and communities now and into the future’, Mr Kell said.

ASIC invites feedback on the consultation paper from all interested stakeholders. Submissions are due by Friday 17 November 2017.

 

ASIC’s Releases MoneySmart tips for home buyers

ASIC has launched a series of videos to help consumers make MoneySmart decisions when buying a home. Some would say, better late than never!

The recommendations on budgeting are especially pertinent.  However a weakness of the MoneySmart calculators are they they are static, we think they need a calculator to show the impact of changing interest rates for example. That said, the TrackMySpend App is a really useful tool to get to grips with what is being spent.

TV personality Shelley Craft hosts five videos featuring essential tips on the key decisions involved with a buying a home including:

  • How to get a home loan;
  • Working out how much you can afford with a mortgage;
  • Saving to buy a home;
  • Understanding the hidden costs of buying a home and;
  • Being a guarantor for a home loan.

‘For many people, buying a home is likely to be their biggest investment. We encourage home buyers to take the time to understand their individual financial position and be aware of what they are committing to with a home loan. And it is always a good idea to shop around for the best deal’, said Peter Kell, ASIC’s Deputy Chairman.

‘It can be challenging to build a home deposit, a good place to start is to create a budget to understand how much you can comfortably afford to save, borrow and repay. ASIC’s MoneySmart offers a range of useful calculators and resources, including the savings goals and mortgage calculators, to help Australians take control of their money and reach their savings goals’, added Mr Kell.

Shelley Craft emphasised the importance of the issues addressed in the video series including the real costs involved with buying a home, saving for a deposit, the first home owner grant, interest rates and mortgage repayments.

‘Buying a home is full of excitement but it can also be stressful, especially the financial aspects’, said Shelley Craft, ‘it’s important to take your time, consider all your options and be sure to ask lots of questions, so you understand what you’re signing up for’.

‘Don’t rely on just one source when you’re shopping around for a home loan because saving even half a percent on the interest rate can save you thousands of dollars over time’, added Ms Craft.

To see ASIC’s financial tips for home buyers visit ASIC’s MoneySmart website.

Background

ASIC is the Australian Government agency responsible for financial literacy, consistent with its strategic priority to promote confidence and trust in the financial system. ASIC supports the financial capability of Australians to improve their financial knowledge and skills and develop the attitudes and behaviours to make good financial decisions.

ASIC leads and coordinates the National Financial Literacy Strategy, which sets out a national framework for financial literacy work in Australia. The Strategy highlights the importance of people having access to tailored resources and tools, and addressing the financial issues facing vulnerable sectors of the community. People experiencing high financial stress and crisis are identified as one of a number of priority audiences in the National Strategy.