Last week, Canada’s latest financial literacy strategy, Count Me In, Canada, appeared, begging the question of how many more cross-country consultations, expert advisory panels and aspirational proposals we will have to endure. Likely many more.
Two points must be understood.
First, what an average family needs to know about basic day-to-day household finance and what it needs to know about managing all of its financial decisions over the long term are qualitatively different. As different as what drivers need to know about filling their gas tanks and what they need to know about fixing their airbag triggering mechanism. Achieving a basic level of financial literacy for all Canadians is a laudable and perhaps even achievable goal. Imagining that Canadians can be taught to understand and manage a complex, fast-changing set of financial instruments is absurd.
Second, firms in financial services industry talk about financial literacy out of both sides of their mouths. Their primary goal is, understandably, to make money. One way they make money is by taking advantage of the lack of financial literacy among their clients — creating complex debt contracts that shroud costly features, exploiting behavioural biases to encourage borrowing for unnecessary consumption, and paying financial advisors to steer clients their way. Hiring a small staff dedicated to financial literacy and donating a few million dollars to financial literacy efforts is a small price to pay if it allows business-as-usual to continue. That effort would backfire, however, if Canadians actually became more financially savvy. Clearly, then, the enthusiastic support of the financial services industry for efforts to improve financial literacy is a good indicator of how unlikely those efforts are to succeed.
In contrast to the heroic aversion to reality of financial literacy enthusiasts, Barrie McKenna makes the industry’s conflict of interest clear. Recognizing the lack of knowledge among their customers, “… financial industry players often exploit [the] knowledge gap by being vague about what they’re selling, and, more importantly, how they’re paid.”
By diverting attention toward financial literacy and away from their own business practices, the industry has thus far resisted any regulation that would limit the extent to which they can exploit the illiteracy of their clients. So let’s forget financial literacy education …. middle-class Canadians will be helped far more and far faster by regulations that require financial advisors to act in the best interests of their clients. Forget financial literacy education … tighten the regulations governing the complexity of mortgage and credit card contracts. Forget financial literacy education … make low-cost, in-person expert advice available to all Canadians.
Of course, I could be wrong. After all, “… the Government of Canada has recently secured a commitment from Canada’s banks to establish a five-year Financial Literacy Partnership Fund of $10 million …” (p.10 of Count Me In, Canada). Perhaps the banks could publish the business case with which they justify this $10 million investment to their shareholders. Maybe the business case would show that bank profits would increase if Canadians made better-informed financial decisions. If so, I’ll stop writing that the industry supports these pipe dreams of financial literacy only to divert the attention of a credulous government from much-needed regulation.
Lauren Willis’ Against Financial Literacy Education” (2008) presents a far better and far more comprehensive argument against financial literacy education than I could ever construct. My apologies for stealing the first three words of her title.
John Stapleton’s Welcome to the Financial Mainstream documents the need of low-income people for basic financial literacy.