3 September 2014

Address to the Australian Bankers' Association Financial Literacy Conference 2014, Sydney


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This is a transcript of the Parliamentary Secretary to the Treasury's address to the Australian Bankers' Association Financial Literacy Conference 2014 in Sydney.

Thank you for the opportunity to speak today.

Financial literacy is important to me, as it is to all of you.

Greater financial literacy means people have the power to manage their financial affairs, meet their financial goals and plan for their retirement.

And the benefits extend beyond strengthening households and small businesses. Indeed, a more financially literate population leads to a more resilient financial system.

Of course, individuals with higher levels of financial literacy make better financial decisions. 

It is my view that the best way we can protect consumers is to give them the power to protect their own interests, by improving their understanding of financial products.

All the product disclosure statements in the world really won’t mean a thing to someone who doesn’t understand them.

Improved financial literacy has the potential to reduce reliance on regulation to protect consumers.

For example, improved financial literacy may lessen the need for prescriptive requirements around disclosure, since consumers are more likely to know what information they will require to make decisions.

In summary: the best consumer protection is consumer education.

Financial literacy also creates a more resilient financial system, as consumers avoid higher risk financial products if they are not adequately compensated for the risks associated with those products.

Promoting the sensible and prudent use of credit also benefits the wider economy, by contributing to economic growth and employment.

Small business operators with a greater degree of financial literacy are better able to look after cash flow and manage their budgets.

Increased financial literacy for small businesses improves their chances of accessing credit to start or expand, as they will understand what documentation the banks require and how to prepare this.

An increase in small business activity as a result of improved financial literacy, of course, delivers economic benefits.

As we saw with the global financial crisis, the impacts of participants misjudging the risk/return trade-off of complex financial products can have severe implications on the overall financial system and economy.

Whether it be in managing savings, preparing for retirement, or insuring property or themselves, as the economy has evolved, individuals have been required to make increasingly complex financial decisions.

Improved financial literacy offers the prospect of better household savings performance and retirement incomes, lower risk to household wealth, and smaller levels of problem debt.

Most Australians are generally financially literate, although there remains room for improvement.

The most recent ANZ Survey of Adult Financial Literacy in Australia highlights groups with lower average levels of financial literacy.

This includes people less than 25 years of age, those with no formal secondary education, people on lower incomes or with fewer assets, workers in in ‘blue collar’ professions, and females.

Of course, financial literacy levels will vary within each of these groups.

Industry has an important role helping these groups lift their understanding of financial products.

We all that small businesses require funding to start up and grow.

The 2013 CPA Australia Asia-Pacific Small Business Survey found that banks remain the most popular source of finance for small businesses, and that six per cent of respondents believed that their business would not grow in 2014 because of problems accessing finance.

But it appears there is an information gap between borrowers and lenders.

A small business owner knows a lot more about their business model, credit history and their own expertise in running a business than the bank.

It is difficult for banks to assess the risk of lending to a business, and this may mean that businesses with very good prospects miss out.

The Australian Bankers’ Association’s recent research work with the Council of Small Business Australia found a gap between what the bank expects of small businesses and what small businesses think the bank wants.

We can narrow this information gap by making sure small businesses understand what banks are looking for. If we provide this information, small business loan outcomes are likely to improve.

Improvements to small business financial literacy more broadly will also help develop the confidence of owners when engaging with financial institutions.

Some small business owners found the process of applying for finance too complex and confusing, and have simply abandoned applications, or not even attempted to apply for finance.

Let me now turn to the Financial System Inquiry in a bit more detail.

The Inquiry is undertaking a thorough examination of Australia’s financial system to make sure it is best placed to support future economic growth and the evolving needs of our nation.

The Inquiry released its interim report on 15 July and invited another round of public submissions, which closed on the 26 August.

The Inquiry has touched on several of the issues I raised today.

In relation to financial literacy, the Inquiry noted the information imbalances which are detrimental not only to consumers of financial products and services, but to the overall efficiency of the financial system.

In particular, many consumers lack the literacy to understand disclosure documents.

Importantly, the Inquiry sought feedback on the overall effectiveness of financial literacy strategies in boosting consumer confidence and decision making, and achieving improved literacy over the long term.

The Inquiry is also considering enhancing the flexibility of the current disclosure framework to deliver better consumer outcomes and reduce costs for industry.

We are grateful for all of the Inquiry’s work so far, and the contributions many people and organisations who made submissions and participated in the Inquiry’s consultation processes.

I, along with my ministerial colleagues, look forward to receiving the final report from the Inquiry.

ASIC is the Australian Government agency responsible for financial literacy.

In keeping with this role, ASIC is responsible for developing, leading and coordinating the implementation of the National Financial Literacy Strategy for 2014-17, which I launched recently.

And I will take this opportunity to thank the Financial Literacy Board for their great work, and, in particular, the Chairman Mr Paul Clitheroe AM.

ASIC has several programs that support the priorities of the National Strategy.

ASIC runs the MoneySmart website, which is a dedicated website for consumers and investors.

The websites covers all aspects of personal finance for individuals at every life stage, and its tools and calculators regularly help more than 400,000 Australians every month.

ASIC also runs the MoneySmart Teaching program, which supports and promotes financial literacy in schools.

Building the financial literacy of young Australians is critical to achieving improvements in financial literacy for every generation.

Other Australian Government agencies also make a significant contribution to the priorities identified in the National Strategy.

Improving the financial literacy of Australians is a long-term initiative.

It requires sustained action by government agencies and the private sector over time to ensure we reach all Australians who may benefit, starting at school. A core principle underpinning the National Financial Literacy Strategy is therefore 'shared responsibility'.

Budgeting and saving, responsible use of credit, financial planning including for retirement, diversification and understanding of risk and reward are all important.

Working together across sectors allows us to best embed and reinforce these core financial literacy concepts. Collaborative action brings together a valuable mix of resources, expertise, experience and insight to develop a range of measures and products to help improve financial literacy.

The National Strategy provides a roadmap to guide and encourage participation by all organisations with an interest in this vision.

Many organisations involved with the National Financial Literacy Strategy are represented here today and the Government is grateful for their support.

Ladies and gentlemen, I think you’ll agree that while Australians possess some basic financial knowledge, there is still a long way to go.

We need to make sure that all individuals and small businesses possess the necessary knowledge, skills, capabilities and capacities to manage their own affairs and access finance where needed.

That is why improving financial literacy is central to the Government’s vision of a strong and productive economy.

We are committed to working together with industry and stakeholders to raise the level of financial literacy among individuals and small businesses.

I look forward to working with you as we work together to better position Australia and its financial system.