Financial Capability…. in the news again.
Katija Dew, Programme Director for Financial Inclusion at the Wales Co-operative Centre comments on financial capability and its importance in helping people to manage their money better.
In a report published this week, the Treasury Committee called for an independent review on whether the Money Advice Service (MAS) should continue to exist as a statutory organisation. Irrespective of the specific findings about MAS, it is interesting to note how we have changed our thinking about financial capability.
There was a time when we promoted ‘financial literacy’. Typically ‘taught’ through chalk and talk, financial literacy training was primarily about numbers and mechanisms on pieces of paper. ‘Do you understand what APR is and how to calculate how much interest you will pay?’ we would ask. We duly counted how many people attended the training and it was fine. At the same time, we were assessing how many people in Britain were unbanked. It was scandalous that as many as 3 million people didn’t have a bank account and policy makers raced around to get people signed up. This was financial inclusion, pure and simple. No bank account means exclusion, signing up to a bank account means inclusion, particularly if you tell people what an overdraft is and what APR is payable. But what about using that bank account well? That didn’t seem to matter, having the account and the knowledge was enough.
But the thinking moved on and the Money Advice Service has been part of that move. I heard the term ‘financial capability’ there first. As a debt adviser I would regularly hear ‘yes, I know that doorstep lender is expensive and the APR is sky high, but I can pay the weekly amount.’ Financial capability is about knowledge, relating this to one’s own circumstances and having the confidence to make appropriate choices.
But then we moved on further. A fascinating piece of Money Advice Service commissioned research ‘Money Lives’ examined exactly how people chose to manage their money, despite often admitting that they knew they shouldn’t spend in that way. The knowledge was there, the capability was there but the choices were still questionable. The participants knew it but they couldn’t explain their behaviour. This ‘money behaviour’ is the crux of the matter for me. It’s about knowledge, capability, confidence, habit, culture and aspiration.
The stakes get higher and higher though. Those conversations about doorstep lenders at 500ish% APR are now about payday lenders at 4000ish% APR. We can restrict some forms of lending, but if people don’t choose to manage their money differently they will always find someone very happy to lend to them on extremely unfavourable and sometimes dangerous terms.
So what do we need to do? We need to keep encouraging people to think about their money and how they can make themselves better off by choosing to manage it more effectively. That doesn’t mean lecturing others on not taking a loan. It’s about them making an educated choice about that loan, what happens afterwards and what it means to them. For example a credit union will always encourage someone to budget so that they can pay back their loan to them and put a small amount into savings at the same time. In the long term they will have a low interest, insured loan which gives them a bonus pot of savings at the end which they can use for whatever they want.
In the first instance whilst people in other places are thinking about the Money Advice Service and its future, we need to keep helping people to take control of their own circumstances. The www.moneymadeclearwales.org website is an excellent place to start and may link you to the Money Advice Service provision as it was created with their support. The tools are clear, helpful and importantly for us in Wales it is a bilingual facility.
Financial capability that leads to good ‘money behaviour’ is key. Knowledge is necessary, as is the availability of affordable and fair financial products. But if we don’t know how to manage our money well, we aren’t going to be motivated to do it. And if we aren’t motivated to do it, there’s no point in having the knowledge and facilities, is there?