HERE is a suggestion for the City’s top banks: each should make an immediate and very large donation to a special new educational fund for financial literacy. I’m talking real money here, hundreds of millions for each of the mega-banks, as well as contributions from big insurers and wealth managers – when I first started campaigning for this idea last year, I even suggested that Goldman Sachs should start the ball rolling by forking out £1bn. The exact sums don’t matter: what is needed is to raise a mind-bogglingly large pot of cash that captures the public’s imagination.
Britain faces an immense challenge, which only fresh and innovative thinking can tackle. Innumeracy and financial illiteracy are rife among the public, which means that millions are unable to cope with a complex, modern society and to properly fend for themselves. The government has failed to tackle this, thanks to decades of useless educational policies. So the private sector needs to take this matter into its own hands, for the good of the public as well as – indirectly, and over time – its own self-interest.
Let me explain exactly what I mean – and what I’m not advocating. I’m not calling for pro-City advertising or a lobbying campaign, or for a recruitment drive, or for anything of that nature. What I want is a real, purely educational campaign, for children as well as adults, teaching people to understand numbers and their personal finances. That’s it. This is clearly in the public interest – but it would also help the banks. In the short-term, donations would deflect from the populist anti-City rage. In the longer-term, consumers would make better decisions, reducing disputes with the industry; people would be more comfortable with financial products, and finance in general, and therefore less likely to view banks, funds and insurers as inherently evil or corrupt.
The situation at the moment is dire. Many people fail to grasp fully even the most basic of financial products. Even fewer understand elementary statistical concepts such as compound interest, let alone ideas such as probability distributions, all of which are crucial to informed decisions. In an era when people live longer and state pensions are useless, millions are unable to work out how much they need to save if they ever wish to retire; others don’t understand the consequences of using finance to buy cars or how much extra they would end up paying. There is also limited understanding of basic economics or of how to value assets, including property, making bubbles much more likely.
While this is obviously relevant for consumer-facing firms, such as retail banks, IFAs, insurers and pension providers, it is indirectly of equal importance for wholesale institutions such as investment banks or hedge funds. If the public doesn’t grasp finance, it will believe the simplistic explanations of the economic crisis peddled by demagogues.
As I have written previously in this space, the principle of caveat emptor – let the buyer beware – is at the heart of capitalism. Individuals must accept responsibility for their actions. But gross ignorance among the public has facilitated the blame game; everything is always “missold”, never misbought. It’s time for the City to put its hands in its pockets – and to make an investment it wouldn’t regret. Any ideas or case studies from readers on how to promote mass financial literacy would be much appreciated.
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