The main feature of most financial products is that producers and distributors gain far more than savers and investors. Ironically, the same is true of financial literacy. Whether savers benefit or not, a large number of people in the government and the private sector have a nice occupation in delivering financial literacy. Even well-funded organisations are looking for ways to claw money out from the government and foreign agencies for financial education.
On 17 July, all financial regulators together released a draft paper titled “National Strategy for Financial Education”, prepared by a sub-committee of the FSDC (Financial Stability and Development Council). The objective is nine-fold: Inclusive growth, more financial knowledge, freedom from exploitation, avoidance of over-indebtedness, promoting entrepreneurship, positive spillover effects, shifting of pension responsibility to individuals, behavioural change and deeper financial markets. I couldn’t spot reversing climate change and eliminating global hunger among the objectives. Four of these overlap with other objectives. Most importantly, all the objectives are undermined by what is happening on the ground — the production, delivery and regulation of financial services.
Since FSDC is in the lead, all regulators are on board in this noble effort. I have read the draft paper out of some curiosity since Moneylife runs free literacy seminars and has become the largest investor and consumer organisation in two years. The genesis of our efforts, further strengthened by the feedback we get from savers, is simply this: even the smartest of citizens have neither the time, interest nor even the ability to convert themselves into experts on insurance, mutual funds, credit cards, etc. This is why most retail financial transactions happen through “advice” coming from relatives, friends, colleagues (trust) or the sales pitch of financial companies (push). The solution could be larger amounts of generic financial education — but, frankly, there is no market (metaphorically) for it.
Why is financial literacy a buzzword today, like corporate governance was in 2001, after the previous global market crash? Why are enormous amounts of money and resources being spent in the name of spreading literacy? The reason is part herd mentality, and part naïve belief in knowledge and education as the panacea for financial problems.
The draft paper says: “Financial literacy develops confidence, knowledge and skills to manage financial products and services enabling them to have more control of their present and future circumstances.” Anybody who has a nodding acquaintance of human behaviour in financial situations knows that this is theoretical rubbish. If financial literacy is basic, it is boring and useless. If it is advanced, you will soon end up looking searchingly at the role of financial services companies, intermediaries and regulators. And who would support that kind of literacy effort?
But the bigger reason is that financial literacy is a way of passing on to customers, the blame that regulators and policymakers have failed in their job of market development and customer protection. After all, if an investor has suffered losses, the cause was his greed and ignorance. Of course, it cannot be that the product was harmful, approved by the lax regulator and mis-sold by the intermediary.
Everybody assumes that savers and investors are greedy and illiterate. What about the greed, illiteracy and lack of accountability of financial services companies? What about the illiteracy and lack of accountability of the regulators? If short-changed investors react to this, by pulling money out of the stock market and mutual funds and putting it in bank fixed deposits, they are again condemned as foolish.
With only a bit of exaggeration, financial literacy efforts in India are like running a massive campaign on the benefits and processes of purifying water at home even as a municipal corporation pumps polluted water through the city system.
The draft paper correctly points out that the increasing range and complexity of products has made it very difficult for an ordinary person to take an informed decision. So, what should be the answer? Reducing complexity — or throwing more money at making customers understand this complexity!
What more should be done, apart from reducing complexity? It requires a fundamental change in approach. A paper, “A new approach to financial regulation: building a stronger system”, presented to the UK Parliament in February 2011 and prepared by the Treasury says, “The willingness of consumers, whether retail customers or financial professionals, financial firms or large corporations, to enter into financial transactions will ultimately depend on the extent to which they have confidence that regulated firms will conduct themselves appropriately.” For this, the UK has revamped its regulatory system and created the Financial Conduct Authority, correctly placing far greater emphasis on the conduct of a few profit-oriented business entities rather than millions of “illiterate” investors.
How far are we from this logical thinking? We are nowhere near this because it would mean admitting first that there are fundamental flaws in the regulatory approach itself. Given the current state of production, distribution and regulation of financial products, financial literacy efforts are needed to cover up the fact that 90 per cent of financial products are irrelevant and nobody really pays for financial crimes and malfeasance. Spending taxpayers’ money on bloated bureaucracies is an easier and more self-serving option than doing something that customers truly need.