Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
What is the Government's Perspective on the Role of Financial Literacy and Product Disclosure?
Speech to Australian Bankers' Association Financial Literacy Summit
Radission Plaza Hotel, Sydney
2 July 2008
I would like to thank the Australian Bankers' Association for inviting me to address your financial literacy summit.
And I would also like to commend the ABA for its work in this field. Your program, "Broadening Financial Understanding", is a great example of a private sector financial literacy program.
The Government recognises the importance of financial literacy as a life skill that assists people to secure their financial wellbeing and contribute to Australia's economy.
Whatever their income level, all Australians need the skills… the knowledge… and the motivation to manage their money. As the pace of life increases and the range of consumer choices grow, financial literacy becomes ever more important.
We need to equip people with the skills to better understand their options and choices along with the tools they will need to make sound financial decisions throughout their lives.
Raising consumers' financial capabilities has lasting benefits for individuals, the financial services industry and the wider Australian society.
Having more financially literate, capable and engaged consumers offers the prospect of improved household savings performance, … reduced dependence on government allowances… and lower levels of problem debt.
Through increased economic participation and by driving competition and market efficiency, financially literate consumers are a vital ingredient in the growth of our economy.
As the OECD stated in its 2005 report, Improving Financial Literacy: Analysis of Issues and Policies:
"Financially educated consumers help increasingly complex financial markets to operate efficiently. By their greater ability to compare risk-return characteristics of different financial products
"In addition, by demanding products more responsive to their needs, they also encourage providers to develop new products and services, thus increasing competition in financial markets, innovation and improvement in quality."
Financial literacy is also important in augmenting and strengthening consumer protection.
Financially educated consumers are in a better position to manage risk and protect themselves; they are simply less vulnerable to fraud and abuse. In the long term, this can mean we need lower levels of regulatory intervention.
New role for ASIC
As you might be aware yesterday marked a new beginning in the delivery of financial literacy in Australia.
The first of July was the date that the functions of the Financial Literacy Foundation were transferred to ASIC, making it Australia's peak financial literacy body.
I'd like to provide a bit of background to the Government's decision to consolidate our financial literacy response under ASIC.
In terms of policy settings, successive governments have focused mainly on supply‑side initiatives that have delivered greater market efficiency through enhanced competition and consumer choice.
These initiatives have been complemented by efforts to promote market integrity… stability… and transparency. At the same time, the regulatory focus has shifted towards the conduct of market participants and the disclosure of information.
Historically, less attention has been paid to the demand-side of markets — in other words, the ability of consumers to engage effectively with markets.
But we now have a keener appreciation of the fact that supply-side initiatives can only be fully successful when consumers are empowered with the skills… the knowledge… and the motivation to engage effectively with markets and make informed choices.
By transferring the functions of the Financial Literacy Foundation to ASIC, we are — so to speak — bringing the supply-side and the demand-side of the equation together.
As the industry regulator, ASIC promotes informed participation in the financial system. So it is ideally positioned to take the lead in advancing financial literacy in Australia.
In talking about financial literacy, it's important to draw the distinction between financial literacy and consumer protection. If I may quote again from the OECD:
"Financial education and consumer protection are not substitutes but rather complements. The latter provides a safety net for those who are unable or unwilling to improve their financial education."
By bringing together the twin functions of financial literacy and consumer protection, the Government is strengthening the role of ASIC in safeguarding Australia's economic reputation and wellbeing.
The Way Forward
In Australia today, a large number government, commercial and consumer organisations are investing considerable resources to address issues of consumer and financial education.
While we don't always see the effective results we would like, it is important to recognise that cultural shifts take time and require concerted effort from information providers in delivering a strong and consistent message.
While the government believes that developing and supporting national consistency in consumer and financial literacy is critical in addressing barriers to behavioural change,
It also realises simply providing consumers with information — no matter how comprehensive or well-intentioned — is not enough.
Rather, we need to target financial literacy education in a way that resonates with consumers… that motivates them to get involved… and that gives them the ability to make informed decisions about how to use and manage their money.
The knowledge, innovation and established delivery channels of the private and community sectors are essential to delivering these outcomes.
This is why ASIC will develop and coordinate a long-term, national strategy that aims to harness the considerable commitments that a range of agencies have already made, to promote financial literacy.
Critical to this will be a framework that continues to foster communication and collaboration between organization such as yours in the development and delivery of financial literacy programs.
In adopting this role ASIC will be reshaping its existing financial literacy response to more closely align it with the Government's priorities, and integrate it with the existing strategies and initiatives of the foundation.
Programs will be founded on a clear understanding of the financial capability levels in the community and informed by up to date research into consumer behaviour.
ASIC will maintain a national financial literacy hub, to promote and support best practice and principles, research and resource sharing. It will aim to leverage the available resources to obtain maximum benefit, avoiding duplication and improve responsiveness to identified needs.
In its new role ASIC will develop and promote a range projects tailored for different segments of the population.
While they are designed for different groups, these projects have one common goal.
That goal is to sustain long-term generational improvements in financial literacy by creating opportunities for Australians of all ages to learn more about money — at school… through vocational and higher education… in the workplace… and in the community.
Financial literacy in schools
In the schools sector, ASIC will carry forward an initiative I launched last month. That initiative was the Professional Learning Package, which will help teachers to deliver financial literacy education from kindergarten right through to Year 10.
Australia is leading the world with this package. We are the only OECD country with a nationally agreed educational framework on consumer and financial education and a professional learning strategy.
From 2008, financial literacy education will be incorporated into the core curriculum. Students will learn about financial literacy when they study a range of subjects — English… maths… science… information and communication technology… and civics and citizenship.
The Professional Learning Package will help young people to develop one of the most important life skills they can learn — how to manage their money.
They will learn about budgeting, saving, debt and credit cards, and building on their superannuation for the long-term. They will also get a head start in developing responsible, ethical and sustainable consumption patterns.
By reaching consumers before they are old enough to sign a contract, or have their own credit card, we have an unprecedented opportunity. An opportunity to instil responsible attitudes towards money. And an opportunity to achieve real behavioural and cultural change for the next generation.
This isn't an end in itself. Rather, it is a first step in a national strategy to build financial the financial capacity of all Australians.
Financial literacy in the workplace and further education
Of course, we don't stop learning when we leave school. That's why ASIC will develop initiatives targeted to tertiary students and people in the workplace.
In this way, we can provide adults of all ages — including the younger ones who are just starting their working life — with opportunities to learn about managing their money well, whether in their personal life, or in running a business.
Beyond the specific approaches tailored for different segments of the population, ASIC will address attitudinal and behavioural barriers among the general population.
I have asked ASIC to build on the momentum created by its predecessor with its two highly successful Understanding Money information campaigns… as well as resources like the Understanding Money website and handbook… and the Women Understanding Money information sheets. I'm sure you are familiar with these initiatives.
I have asked ASIC build on the profile and success of the Understanding Money website and brand.
The work of ASIC will be complemented by a range of Government programs focused on improving financial capability, particularly for those who are most vulnerable to the consequences of poor financial decisions.
One such program is financial counselling
A skilled financial counsellor can help clients to manage their budget and get out of debt. But there's often a lot more to financial counselling than just number-crunching to deal with the immediate problem.
When Counsellors have the time and opportunity to build relationships they are able to develop an understanding of the broader factors influencing their clients circumstances and work with the individuals and families to effectively address the causes and help to break the crisis cycle.
The Government recognises the importance and effectiveness of financial counselling.
In this year's Budget, the Federal Government increased funding for financial counselling services by $20 million over four years. Specifically, we increased funding for the Commonwealth Financial Counselling program by $10 million, effectively doubling the size of the program.
As well, we will provide funding of $10 million over four years to develop and distribute easy-to-understand material to help Australians to manage their money better.
This material will cover mortgages, credit cards, hire purchase and similar financial products. It will be distributed through Centrelink's Financial Information Service and other agencies which provide financial information and counselling.
Product disclosure statements
The financial services industry's commitment to financial literacy must be matched by a commitment to effectively dealing with the inherent information asymmetries that can make it difficult for even the most knowledgeable consumers to chart a sensible path.
I'd likes to make a point of our work on providing simplified product disclosure documents as an example. I freely admit that this is something of a crusade for me!
Let's face it — we can't expect everyday Australians to read, let alone understand, 50 to 100 pages of legalese. And I am aware that the unreadability of disclosure documents has been a factor in the losses of some investors.
Consumers may lack the motivation to read lengthy disclosure documents for the same reasons they may be reluctant to take control of their finances. They may be disengaged from the whole process, suffer from information overload, or just be confused.
Overconfidence about their financial knowledge and understanding can be another barrier, as it can make consumers more reluctant to seek financial information and advice.
To remedy this situation, back in February, together with Lindsay Tanner, the Minister for Finance and Deregulation, I announced the formation of the Financial Services Working Group.
The Working Group has been charged with developing financial services disclosure documents which are brief, simple and allow consumers to easily compare products.
The Working Group has already developed a concise four-page Product Disclosure Statement for First Home Saver Accounts. They recently released Simple Superannuation Advice, a consultation paper examining the issue of "within product" or "intra-product" advice relating to superannuation products.
As the Minister for Superannuation, I am particularly concerned that all Australians have access to clear advice about their superannuation. Superannuation is compulsory, it is the largest area of unmet need for financial advice, and there are many unsophisticated investors out there. Access to sound advice is critical when people need help in making decisions about their retirement savings.
While the Working Group has already made substantial progress, the issues are more complex than simply creating shorter and more understandable disclosure documents.
We all know that some financial concepts are neither simple, nor clear. Sometimes they are hard to understand without a good foundation of financial education. And sometimes they have varying meanings. For example, if everyone in this room were asked to define the concept of "risk", I'm sure we'd have an interesting discussion!
So as well as making product disclosure clearer and simpler, we also need to improve the capability of consumers to read and understand those documents.
Improving the financial capability of consumers will mean they are more likely to understand financial concepts, and better able to engage with financial information.
We need to do two things. We need to make product disclosure documents simple and clear to understand. And we need to improve the capability of consumers to use those documents effectively.
If we can achieve both of these goals, we will be closer to the ideal market. A market in which consumers are empowered by knowledge to make better choices.
Private sector initiatives
The Governments long-term approach to financial literacy with ASIC leading the National Strategy is an ambitious agenda that aims to forge a new path of co-ordination and co-operation.
It recognises the significant contribution made by all sectors- Government, Private and NGO in addressing issues of consumer and financial education.
Unfortunately, I don't have time this morning to outline the wealth of services and products provided by the large range of organisations.
But it would be remiss of me not to mention the many valuable private sector financial literacy programs. These include initiatives run by banks, insurance providers, superannuation funds and industry associations.
One of these, of course, is "Broadening Financial Understanding" operated by the host of today's summit, the Australian Bankers' Association.
Ladies and gentlemen, it's clear that cooperation and coordination are critical to delivering the kind of financial literacy outcomes we all want.
By working together and building on your commitment, I trust that we can create a more financially literate Australia…
An Australia in which all consumers are equipped with the skills and confidence to make informed financial decisions and secure there financial wellbeing.