Good morning.
I'd like to start by saying thanks to The Australia Institute and the Consumer Law Action Centre for inviting me here today to launch The Australia Institute's discussion paper – Choice Overload – Australians Making Financial Decisions.
I note The Australia Institute is an independent public policy research centre funded by grants from philanthropic trusts, memberships and commissioned research. As such, this research was not commissioned by or sponsored by anybody with a commercial motive.
I welcome The Australia Institute paper as an important contribution to ongoing initiatives to improve financial literacy and the simplification of financial product disclosure statements.
The research highlights the link between financial literacy and good choices – but also the importance of access to adequate, comprehensible product information.
The Rudd Government is committed to developing strong, evidence-based policy so it's fair to say the work of the Institute – together with similar bodies - is of interest to our own work though no one source would determine policy outcomes.
I was interested in this particular research, however, because there is a coincidental link between this paper and some of the government's own thinking and policy in the financial services space.
Most people have had the experience that the Choice Overload paper highlights. That is, at some point in their personal financial decision making, they are faced by overwhelming choice, and a lack of time, understanding or interest – so they may put a decision off, make no decision or make a bad one.
Perhaps you can identify with a classic experiment (Iyengar and Lepper 2000) referred to in the discussion paper where two groups of supermarket shoppers were given a different number of jam products to sample. The first group had six options and the second group had 24 to choose from. After tasting the jams, nearly 30 per cent of those given a limited range of options ended up purchasing some jam. By contrast, a mere three per cent of those who were given the extensive range option actually made a purchase.
In each case, the research showed that in particular settings too much choice can be overwhelming.
The research also draws an obvious link between financial literacy and decision making – where those who are educated and informed tend to make good decisions while those who don't have that knowledge are less likely to make a decision or make a bad one.
Drawing on the research findings:
- Some 42 per cent of respondents agreed that "when I need to make a financial decision, I often find that there is too much choice," while only 18 per cent disagreed;
- 46 per cent agreed financial investments are too complicated to understand properly, while only 20 per cent disagreed.
- 44 per cent of respondents agreed that superannuation is too complicated to understand properly, compared with just 26 per cent who disagreed.
- While positive about choice per se, some older people and those on lower incomes are sceptical about extensive choice in their personal finances
- Many young people, on the other hand, see choice as inherently good.
Yet, as the paper notes: "Most people have to make financial decisions over the course of their lives. Some of these choices are rewarding, bringing piece of mind and future prosperity. But some can be bewildering, particularly as financial products become more complicated and harder to understand."
"It is the responsibility of governments to ensure that information given to consumers is not mis-leading or manipulative, to maintain a regulatory environment in which more straightforward choices are possible, to make independent information readily available and to address the needs of people who tend to struggle with financial decision-making.''
As I said earlier, one of the reasons we are launching this paper today is that we see lots of links between it and the policies we are currently developing or implementing.
The Rudd Government, through its Financial Services Working Group, is working to ensure investors have access to simple, short and readable disclosure documents for financial products ranging from the new First Home Saver Accounts, to superannuation funds and margin loans.
The purpose of this group is to see financial product providers produce simple, short, standard and most importantly – readable financial services disclosure documents – documents that pass my personal gauge of effectiveness – the "Burnie Pub Test''.
As a first step, the group will look at First Home Saver Accounts, then margin lending and superannuation products.
Under changes announced in the Federal Budget, the functions of the Financial Literacy Foundation will be transferred to ASIC.
As a result, ASIC will become the national hub for identifying gaps in financial literacy and addressing them. As a national regulator, we believe it is in the best position to do this.
Finally, the paper makes the interesting observation that in some instances, consumers should be allowed "to choose not to choose''. They may lack knowledge, interest or time to make a choice. And, that is why – sometimes - in areas that are compulsory like superannuation – having access to a quality default option can be as important as providing choice.
The reality is that most super fund members do not choose an investment option in their super fund despite a choice of hundreds of options in some cases. What these people do have access to is a default investment option in their superannuation. Most default options are balanced options – though this is not always the case.
The point is that the default options should provide a minimum standard that consumers can rely on.
A further area where it is necessary to introduce a default is lost superannuation accounts. With 6.1 million lost accounts containing almost $12 billion – and increasing exponentially each year – it is clear that millions of Australians fail to consolidate their accounts – though they have the choice to do this.
Identifying the accounts, filling in the forms and providing proof of identity – many simply give up.
That is why the Rudd Government plans to introduce an automatic consolidation system with an opt-out provision using our Tax File Number system – to re-unite Australians with their lost superannuation accounts.
Thanks ladies and gentleman – I now open the floor up to questions.