MONEY MANAGEMENT is never more important in people’s lives than at a time of financial austerity. Yet the ability of many consumers – in Ireland as in the European Union – to make well-informed investment decisions is in question. The European Commission has recognised this and made increased financial literacy among consumers a policy priority. Consumer affairs commissioner John Dalli, in meeting this challenge, has favoured a two-dimensional approach.
One facet is to educate the public on financial issues and make them better informed; another is to ensure financial institutions only offer suitable – and much better – advice to customers.
An EU-wide survey of consumers has underlined the scale of the problem. A majority felt that financial products should be simplified, while about 40 per cent did not understand what an interest rate is. It is not surprising banks have profited from the financial ignorance of their customers. As Mr Dalli pointed out, in a recent German survey 24 out of 25 banks offered bad advice to a customer keen to invest a sum of money.
The commission is now planning a “mystery shopper” investigation of European banks. This will check the accuracy of the financial advice banks offer customers and also examine whether banks are implementing a measure that helps those who want to switch financial institutions. Research has found that consumers are less likely to change their banks than to switch utility providers, phone, gas or electricity. The reason is clear: it is more difficult to do so.
Consumers need access to clear and comparable information so that they can make informed choices. The European directive on consumer credit, which member states must transpose into national law by mid June, provides a useful example of what is required. The directive requires that standardised information on consumer credit, setting out all relevant costs and charges, is made available to those who use credit facilities.
But consumers, to make well-informed investment decisions, will – as Mr Dalli has stated – need suitable advice, financial education and an ability to interpret the information provided.
That presents a challenge not just for the European commission, but also for member states and governments. A foundation laid in early education – at first and second level – can best help achieve higher standards of financial literacy when, later in life, these are most needed.