In June the OECD issued recommendations to increase the financial awareness of consumers. Analysing the financial crisis has led to the conclusion that questions of financial literacy and consumer protection have not been given sufficient attention in the supervision and regulation of the financial sector.
The OECD has put together a list of good practices to promote financial education and awareness relating to credit and the strengthening of consumer protection. They are part of a broader project of consumer education and supplement the recommendation on principles and good practices for financial education and awareness issued in 2005.
Reforms needed in practices in financial markets
Financial institutions and intermediaries have an important role in promoting clarity of information, which should become part of good governance and responsible operating practices in the industry. Credit market players are liable for ensuring that any staff involved in the provision of loans or credit products to consumers are suitably trained and qualified to assist them in their credit decisions. Financial institutions and intermediaries should ensure that consumers understand the concepts used and the meaning of credit terms. The OECD also recommends the use of standardised forms to facilitate better understanding of the credit product being offered. Credit institutions are also encouraged to post on their Internet sites complete information on their credit products, including their characteristics and a fee table. Consumers should also be offered information and campaigns to promote financial literacy, but such information should be kept separate from other marketing materials and advertising.
Financial institutions should be encouraged to develop short-term credit products and tailored distribution channels in response to the demand for small quick loans at fair prices, particularly for disadvantaged consumer groups. The granting of such credit could involve guidance to improve financial literacy and advice on repaying the loan.
Mortgages are for many consumers the most important debt they will take on in their lifetime. The recommendation calls for legislative measures to ensure that credit institutions assess the consumer's financial position before making the credit decision.
The significance of financial literacy
It is important to recognise the significance of financial literacy and it should be promoted both as part of a wider financial education effort and through distinct projects. This calls for cooperation between all stakeholders and financial education should be conducted as early as possible in a person’s life. Financial education work should take into account individuals' key teachable moments throughout their life, e.g. entry into the workforce, buying a house, birth of a child, etc. The objective is to help people to
- develop the knowledge, understanding and skills needed to adequately appraise and understand their rights and responsibilities as credit holders and the various credit options available to them
- know where to look for reliable information and help
- know how to protect themselves and their relatives and to make thoroughly considered and responsible decisions on the credit markets
- develop their abilities of financial planning, taking into account possible future income and life cycle changes
- understand the consequences of bad credit choices and negligence in managing their debt.
The reliability, transparency, and effectiveness of and competition in markets are promoted through monitoring solvency, supervising practices employed in the market and through consumer protection. In the future, education regarding credit should be perceived as an important complementary aspect to the above activities to promote the functioning of markets. It's important to note that education can't replace supervision, but it can complement the effects of supervision.
Research data is needed
The effectiveness of financial education is difficult to develop without research data. There is much demand for research in at least the following areas:
- the effects of bad credit decisions on consumers and their families should be surveyed more systematically, with special focus on analysing the risks encountered by disadvantaged consumer groups.
- research should also focus on the effect of consumers' financial literacy and own initiative on their credit decisions and exposure to bad credit decisions
- the educational needs of the population should be surveyed and assessed – what differences are there between consumer groups and what are the reasons behind the lack of information in certain areas
- the success of financial education programmes should be evaluated systematically.
Financial Literacy and Consumer Protection: Overlooked Aspects of the Crisis - Release of OECD’s Recommendation on Good Practices on Financial Education and Awareness Relating to Credit