Thank you for this opportunity to talk to you today about financial literacy. It is a very fitting topic on which to conclude the Macquarie Bank lecture series on fraud.
Today, I would like to talk about the importance of building consumer capacity to combat fraud through education generally, and financial literacy in particular. I would also like to talk about the important reforms the Government has introduced to strengthen consumer protection in the delivery of financial services.
Let me begin by saying that it is an unfortunate fact that fraud will always be with us. The roots of fraud are conspiracy and deception, two human traits that have been around since creation and do not look like disappearing any time soon.
Every successive Australian Government since Federation has done their part to put in place laws and regulations to minimise the risk of financial fraud. But we only have to look around to see that fraud still prevails. It prevails in the biggest corporations as well as in the smallest non-profit organisations. It is perpetrated by complex cabals as well as by streetwise scammers.
Of course, we can regulate to minimise the opportunities for fraud in society and we can put in place safety nets to lessen the impact of fraud on consumers if it occurs.
But in all of this, I am reminded of the words of U.S. Supreme Court Justice, Louis Brandeis. In 1914, before becoming a Supreme Court Justice, he wrote an influential book on the US Banking Sector called Other People's Money. In looking at the best way of combating fraud, he famously concluded that "Sunlight is said to be the best of disinfectants and electric light the most efficient policeman".
Today, sunlight is still the best disinfectant against financial fraud. Financial fraud wilts under the spotlight of wider community awareness. We only have to look at recent property marketing scams to see that once consumers are made aware of the scam, the incidences of fraud start to decline rapidly.
To similarly build on Justice Brandeis' words, the Government has been working hard to provide the grid for electric light that is needed to provide national illumination of these issues.
This is where education plays such an important role. Today the Treasurer has released a discussion paper on Australia's Demographic Challenges which builds on the work of The Intergenerational Report released last year.
One of the challenges looked at in the discussion paper is education, where it is clear that a greater improvement in education levels would have widespread benefits for the economy and society over time.
At present, our educational attainment remains below the best performing OECD countries in some areas. For example, an estimated 12 per cent of 15 year old Australian students, and around 20 per cent of the adult population, continue to have very poor literacy skills.
This is despite the fact that the Commonwealth provides around $8 billion in funding to the States and Territories for education.
Low literacy levels have a direct impact on people' long-term ability to understand things such as financial statements or consumer contracts.
Similarly, children who do not attain basic numeracy skills will be disadvantaged for life in their use and management of money.
Here, the Commonwealth Government has provided over $7 billion to fund the Numeracy Research and Development Initiative which has already seen the development of agreed national benchmarks in numeracy at Years 3, 5 and 7.
Financial Literacy
Last year, the Australian Securities and Investments Commission also investigated the need to incorporate financial literacy into the Australian school curriculum as a core skill for young Australians.
And, I would like to personally thank Peter Kell who is here today from ASIC for his work in this area as well as to congratulate him on his appointment as Chief Executive Officer of the Australian Consumers Association and his new role as a member of the Government's National Consumer and Financial Literacy Taskforce.
Improving financial literacy is something that this Government strongly supports. It is fundamental to our vision for building the capacity of Australians to understand and derive benefit from today's modern marketplace.
As markets have matured and been reformed, we have seen an ever-increasing range of financial products and services to suit consumer needs. This new era of choice and flexibility has unfortunately not kept pace with some consumers' ability to understand what these changes can deliver for them. To a sizeable number of people, the world has simply become more complex.
We know that the costs of financial illiteracy can be huge, as illustrated by the $800 billion in losses to consumers over the last three years revealed by ASIC's investigations into prospectuses and scams.
That is why it is important to engage consumers and raise their level of awareness on issues such as investment choice, the relationship of risk versus reward, the responsible management of money and, of course, the hallmarks of contemporary scam practices and fraud.
And, it is important to do this in a collaborative way with the organisations that assist and have dealings with consumers. This is to ensure that we are all sending messages that are consistent and effective.
In other words, to hark back to Justice Brandeis' metaphor - to make sure that all the different electric lights who are out there illuminating consumer issues are doing so collaboratively as part of a nationally-agreed grid.
On Monday I announced the first ever National Consumer and Financial Literacy Taskforce to be chaired by Paul Clitheroe, who I am pleased to see here today. Paul is widely regarded by Australian consumers as "Mr Finance" and I can think of no better person to Chair such an important body.
The Consumer and Financial Literacy Taskforce will develop Australia's first national strategy to provide consumer and financial education across public, private and community sectors.
Although a diverse range of programs already exist, like the Macquarie Bank Foundation which contributes more than $2.5 billion a year in community grants to grass roots initiatives, the Government recognises there is a need for a national and collaborative approach to consumer and financial literacy that builds on the many good programs across the country.
The need for an overarching program is, unfortunately glaringly obvious. Look no further than media headlines proclaiming teenagers can send a staggering 600 text messages a day, to realise the importance of financially skilling our youth.
Warning bells are also sounding with the news that Australians spent $13.7 billion on credit cards in the lead-up to Christmas.
Clearly no one age group has a monopoly on gullibility and the scourge of financial illiteracy can transcend earning capacity or life circumstance.
The 15 member taskforce will be charged with developing a plan to equip all Australians with the skills to make important financial decisions over the course of their lives – from school days to retirement.
The Taskforce will be working closely with industry and stakeholders and will release a discussion paper for consultation by May and deliver its final report to Government by August this year.
It is an ambitious task headed by some of the top people in their field.
The Taskforce marks a renewed, more targeted and more collaborative approach to consumer education in this country.
Of course, building consumer capacity is but one side of the Government's strategy to improve consumer wellbeing and combat the detriment suffered from fraud.
Over time, the Government has developed a robust legislative framework that protects consumers from undesirable business practices.
The Trade Practices Act 1974 provides wide ranging protection to consumers
from unconscionable, misleading or deceptive conduct and is vigorously enforced by the ACCC.
The Government has also strengthened consumer protection in the delivery of financial services through the introduction of the Financial Services Reform Act 2001 (FSR Act) which, as many of you would know, comes into full effect from 11 March 2004.
The FSR Act raises the standards bar for financial services providers and the information that must be given about financial products.
The Government has also provided ASIC with significant additional funding totalling $90.8 billion over four years to enhance its enforcement and compliance capacity, including a dedicated amount of $69 billion for the implementation and enforcement of the FSR Act.
You have already heard from the Treasurer about the particular challenges that face consumers in planning for financial security in retirement.
Today, the combination of the age pension and Superannuation Guarantee savings will allow Australians to retire with higher living standards than previously possible.
However, many individuals may wish to have an even higher level of retirement income than these resources will provide. For these future retirees, financial literacy undoubtedly plays a key role in assisting them to meet their retirement income expectations through savvy savings and investment strategies.
The Treasurer has already highlighted the importance of planning in order to obtain a desired lifestyle in retirement and announced a number of retirement income initiatives designed to improve the accessibility, flexibility and integrity of the retirement income system.
These initiatives reduce the red tape and provide more choice in how people finance their retirement.
In particular, the introduction of a market-linked complying pension will increase competition and the choice available to consumers.
However, individuals must be able to understand the risks associated with market-linked complying pensions. This is because, while at times these products may offer very high returns, they are not guaranteed and they come at a higher risk.
Looking more broadly, the true nature of "risk" is something that many consumers seem to ignore or be unaware of.
Staying on the topic of superannuation, ASIC and the ATO recently issued a stern warning to consumers to be aware of 'early release' scams for superannuation.
These schemes specifically target people on low incomes, and those in financial difficulty who are having trouble paying their phone bills, credit cards or mortgages.
In the worst cases these people have had their superannuation stolen. Clearly, this situation is avoidable if a consumer is financially literate enough to be aware of the scam.
Superannuation is a long term investment for retirement and the Government is committed to keeping it safe, secure and to ensure it is not diverted for other purposes.
Many of you here today would be aware of the thousands of Australians who chance their hand in high risk money-making schemes. Of course, promoters refer to them as "schemes", while we here today would probably be more comfortable in referring to them as "scams".
Promises of a 'risk-free investment', 'be a billionaire in three years' and 'get-rich quick' have returned very little but misfortune to the trusting investor.
And, it is really a lack of awareness of how these systems work that result in the consumer following the false promises of instant wealth instead of prudently investing in products that will ensure genuine wealth creation.
By now many of you would be aware of the so-called Nigerian scam where a letter or email is sent from a person claiming to have a legitimate fortune that they are trying to transfer out of Nigeria.
The scammer asks for your bank account details and a payment to assist with the transfer. Of course, when you send your money you never hear from the scammer again, or they get back to you and ask for more.
This type of scam dates back to the 1500's and, with the event of the war in Iraq, has resurfaced again in the form of an email from a person asking for help in retrieving hidden riches from Iraq. In one case the person claimed to be a concubine of Uday Hussein!
Information about these and many other scams are documented on a number of Government websites, including fido.asic.gov.au, and scamwatch.gov.au. The Government also publishes the very popular Little Black Book of Scams which is now in its fourth edition.
As a general rule, consumers should be very wary of investments that appear to be too good to be true. This is also the case for property investment where recent cases have illustrated the need for consumers to seek independent information and advice rather than necessarily relying on the word of the property promoter.
Many people will say "why don't you just prosecute more of these scammers?" but it is an unfortunate fact that by the time action can be taken, much of the money is gone and many of the people have vanished.
Money lost in scams is almost never fully recovered and the cost of investigating and prosecuting scammers can be difficult and costly; particularly where the scam involves multiple jurisdictions.
Which brings me back to where I started and that is that we need to recognise that many of the issues that we face are behavioural ones rather than regulatory ones.
Just as we cannot totally legislate away financial fraud and scams, we cannot rely on legislation to stop people wasting or mismanaging their money.
But in both instances, we can look to do more to shine the light on practices that we consider to be undesirable.
And we can also build people's capacity to deal with the financial decisions they need to make throughout their life.
I would like to thank the Macquarie Bank for the opportunity to speak today and I would like to encourage everyone here today to respond to the Australia's Demographic Challenges discussion paper and to the discussion paper to be released in May by the Consumer and Financial Literacy Taskforce. It is through your collaboration that we will ensure better outcomes for consumers.