European Commissioner for Internal Market and
Increasing Financial Capability Conference
Good afternoon, Ladies and Gentlemen:
It is a pleasure to bring to a close this conference on Increasing Consumer Financial Capability. The discussions you have had today, and the fact that so many of you have gathered to address this issue, speaks volumes about the importance that this topic has gained. These are subjects that I am personally very interested in.
As has been mentioned many times today, the market for financial products is highly varied, and often complex. As we know from demographics, the laws of economics and the Maastricht Treaty, individual consumers and their families will have to take on more and more responsibility for their financial futures, and in doing so, have to deal with managing risk, including longevity risk. In this context, consumer information, education and empowerment are essential. Not just for the benefit of our citizens. But to balance the supply and demand sides of financial services. Good, knowledgeable consumers will help improve quality. Chase out the sharks. Strengthen due diligence. Reinforce regulatory quality.
It is easy to forget just how much has changed in recent years. When I was a young graduate starting out in the professional world in the early 1970s, the financial landscape was a lot simpler. I only had a handful of banks to choose from. There was no question of being feted with a wide choice of student loans or credit cards, much less incentives and freebies to take them out. And many of my peers considered that hiding money under the mattress was a secure way to provide for the future.
Now, all of us have to make frequent and complex financial decisions. An equivalent young person starting out in life today can be expected to juggle the repayment of student loans, manage day-to-day consumer credit, seek out a home loan to get himself on the first rung of the property ladder and have to think early on about pension arrangements. And this isn't even his full time job! In addition, people are bombarded with a wide variety of sophisticated financial products for saving and investment that contain embedded derivatives and often risks that are not readily apparent to the investor.
People often ask why the Commission is interested in financial capability. My answer is that improving people's ability to make financial decisions is in everyone's interest, and goes hand in hand with our wider financial services policies.
Benefits of financial capability
Greater financial capability helps citizens to save money, time and worry. They are more likely to use a range of financial services that can make their lives easier. Long-term benefits should include reducing levels of problem debt, potentially increasing savings and making appropriate use of insurance products. People who understand their financial circumstances, and the options or advice available to them, are more likely to make sensible choices and make adequate provision for the future. They are less likely to have purchased products that they don't need, be tied into services that they don't understand, or take on risks that have the potential to drive them towards insolvency.
It benefits Member State governments and, ultimately, taxpayers. After all, people who make informed financial decisions are less likely to experience financial difficulty and have to rely on State benefits.
It is beneficial to employers and educational institutions, as employees and students who are not preoccupied with financial problems can focus better on the job in hand.
It is beneficial to financial services providers. Consumers who are able to select products confidently and competently make far better customers, as they choose products and services in line with their needs, are less likely to default, and are more likely to maintain good savings rates. Active consumers drive competition and help firms to become more efficient, innovative and globally competitive.
And last but not least, from my perspective, it helps to drive the Single Market, as informed consumers do not shy away from shopping around, even cross-border.
I believe wholeheartedly that these are goals worth striving for.
Consumer protection vs consumer empowerment
Some people fear that by devoting our attention to financial capability, the Commission wants to draw away from core consumer protection. Nothing could be further from the truth. The provision of high-quality financial education is a key element of consumer protection. This is not an “either/ or” situation. The best way to protect consumers' rights is to empower them to make appropriate financial decisions. Break down the asymmetric information barriers.
If you look at the range of our financial services policies, consumer protection, consumer empowerment and consumer choice is at the very core. From life insurance to payments. From consumer credit to investment services. From prospectuses to capital markets, with market abuse rules. Consumer and investor welfare are our top priority. If we see that existing legislation is not working for consumers, we go back to it to see how we can make things better. This is what we are doing with investment fund information disclosure and the distance marketing directive, for instance. Across the policy spectrum.
And when we are developing these proposals, we make considerable efforts to bring in the viewpoint of consumers and users of financial services. The Fin-Use expert group provides us with very useful input from a consumer and user perspective. We receive helpful advice from consumer and retail investor representatives in our many specific expert groups. And we are enhancing our dialogue with consumers further through our consumer-oriented newsletter, Fin-Focus, and the Financial Services Consumer Group.
The Commission will shortly come forward with a Green Paper on Retail Financial Services in which we will outline our objectives in moving forward to create a real Single Market for retail financial services, and the actions we are taking to meet these objectives. In consolidating our existing and planned initiatives in this area, we want to make sure that consumers can get a better deal; enhance consumer confidence in financial products and services; and empower consumers to make appropriate financial decisions. The Green Paper will be open for consultation and I invite you to let us know your views.
The need for empowered consumers
As I mentioned, one of our key objectives going forward is to empower consumers – whether they are engaged in the market via investing, borrowing, saving or insuring. Financial products are inherently complex. The long-term nature of products such as mortgages means that people don’t get very many chances to make repeat purchases, to make mistakes and ‘learn by doing’, as you might do with other items such as buying a car. Equally, it can take many years to establish how a pension or long-term savings product is performing and whether it is meeting expectations.
New and innovative products are appearing all the time. Developments in technology give wide access to a wide range of complex financial products and services. A single European market in financial services increases the range of products on offer. The degree of choice can be overwhelming.
Numerous studies have shown that many people find personal finance difficult, and are not able to assess the risks that they are taking on. They find it difficult to read and understand the information provided to them.
By helping to develop better informed, better educated and more confident citizens we can enable them to take better responsibility for their financial affairs and play an active role in strengthening the consumer demand side of financial services markets.
Financial education: State of play
If we look at the current state of play in efforts to increase financial capability, it is obvious there is a lot of work to do. As you have heard today, financial education is delivered through a variety of channels in EU member states. In order to have an overview of what is available, the Commission has recently contracted an external study to map out financial education schemes in the EU member states, and to analyse the functioning of these schemes. We look forward to seeing this overall picture when the report is ready by September 2007.
However, we already have a general picture of the different types of financial education provision.
Some national public authorities, including financial regulators, are delivering strategies to improve financial capability.
In others, financial industry associations have developed financial education schemes together with other relevant stakeholders such as consumer associations or community groups.
In many cases, individual financial institutions provide some kind of education scheme, from the development of explanatory brochures or websites through to offering their staff to deliver information sessions in schools.
These are all valiant and significant efforts. I applaud all of you here today that are involved in such important work. I would particularly like to thank today’s speakers for their contribution and insights on what has been achieved to date.
However, there are clearly some gaps left to fill. For instance, there is a distinct lack of financial education in the school curriculum in most jurisdictions, and I would call on Member States to consider this. Has the time not come to teach finance to our children – alongside cooking, maths, Latin and gymnastics? Surely, yes.
Role of European Commission
So where does the European Commission fit in when it comes to financial capability?
As I have stated in the past, I see the primary responsibility as resting with Member States and with the financial industry. I see the Commission’s role as twofold. 1: Raising awareness of the issue and 2: encouraging best practice.
In developing our policy on financial capability, we will draw on both the feedback you have given us today and on the findings of the study on financial literacy schemes I mentioned. Some of the options that we could consider include the development of best practice guidelines, bringing practitioners together as we have today or backing an awards scheme for successful financial education programmes.
I must tell you I have far more confidence in the benefits of good financial education than I have in the effectiveness of some of the copious pages of risk and health warnings we see on financial product literature that is required by regulators. It would be interesting to do a study on how many consumers actually read and understand such regulatory impositions.
We hear a lot about "Social Europe". I think the subjects discussed today are one of the key futurist elements of a real Social Europe that serves its citizens. And I will be even more provocative. Those Member States that decide to take consumer financial education really seriously – from the classroom to the grave – will be the ones that carve out a real competitive advantage in the medium term. These policies are not add-ons. They are essential.
So let me thank you once again to all those who have contributed to making today possible – not least to those who have given us some excellent and thought-provoking presentations.
Let's all make a real difference to empowering European consumers. Together, let us make financial literacy a reality. The sooner the better.