Financial literacy education edu regulating our saving and spending habits

2 Consumer Financial Education as a Novel 3 Pension Privatisation and the Emergence of the Financial Education Project in the UK 71 4 A Financial Literacy Indicator—Measuring Consumer Fi

Financial Literacy Education

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To Will

This project started 7 years ago as part of my Ph.D thesis The project’sinitial aim was to explore the causes of the global financial crisis and itsimpact on and restructuring of the national and international financialarchitecture I was particularly intrigued by popular discussions about therole that consumers played in thefinancial crash Specifically, discussionsand regulatory discourses about how consumers were seen increasingly asintegral parts of the financial system and as significant for its “proper”function As such, there was a growth in calls to regulate consumerbehaviour in the financial services market

In the course of my research, I have discovered that such calls resulted

in and often manifested themselves through the proliferation of sumerfinancial education programmes Consumer education in prudentand measured risk-taking and risk management became one of the mostpopular regulatory responses in dealing with increased household vul-nerability to and dependence on financial markets

con-However, that is not to suggest that other regulatory measures werenot considered or indeed adopted In the UK, for example, in addition tofinancial education programmes, financial regulators deployed different

vii

regulatory tools aimed at strengthening consumer ability to navigatefinancial markets safely and effectively.

For example, measures such as the law authorising automatic pensionenrolment were passed to address some well-documented behaviouralheuristics that affect consumers’ ability to save enough for their retire-ment Also, financial advice given to consumers when entering intomajor financial transactions (such as getting a mortgage) was mademandatory The UKfinancial regulator believed that this would protectconsumers from aggressive selling practices employed by somefinancialinstitutions and curb consumer excessive risk-taking Even consumeraccess to credit was tightened to make sure that those who lackedfinancial resilience would not expose themselves to additional financialrisks and strains All of these measures were quite popular not only in the

UK but also internationally

Yet, such measures did not seem to address the very foundations ofconsumer vulnerability—the increasing consumer dependence on highlyunstable and volatilefinancial markets and consumer individualisation offinancial risk-taking (the problems that were so insightfully documentedand explained by a number of great legal scholars with whom I wasfortunate to have productive conversations over a number of years: ToniWilliams, Kate Bedford, Iain Ramsay, Iain Frame, DonatellaAllessandrini and Paddy Ireland) At this point in my research I changed

my focus away from explaining the causes of the financial crisis tounderstanding how and why consumerfinancial education became such

an important regulatory tool infinancial markets Essentially, I wanted toexplore how and if consumer financial education would be able torespond to and address various consumer vulnerabilities in thefinancialservices market Unfortunately, I discovered a number of serious limi-tations to this regulatory novelty To my surprise, these limitations wereneither widely discussed in legal scholarship nor were they clearly iden-tified by regulators and policy makers

Thus one of the key tasks of this book was to list and interrogate some

of these limitations and to start a serious conversation about consumerfinancial education and its regulatory potential In other words, this booknever attempted to make any normative claims about the value offinancial education or the usefulness of being financial savvy In

principle, there is no or significant harm in knowing more about andunderstanding money and finance However, the situation is materiallydifferent when specific regulatory expectations are attributed to con-sumers throughfinancial education programmes It is my contention thatfinancial education projects create a regulatory illusion that consumerdecision-making can be controlled in desirable ways Yet it sidelinesother, possibly more effective, measures of consumer protection.Second, the book sought to explain why consumerfinancial educationbecame such a popular regulatory measure To do so, I explored thehistorical development of financial literacy education in the UK anddiscovered its close links to the neoliberal order, its effects, and modes ofgovernance In that,financial literacy education was often presented as aneffective measure for those who were “left behind” by the processes andpractices of privatisation, financialisation and securitisation Yet otherand possibly more effective regulatory measures were not given seriousthought and consideration.

While this book has not suggested any specific alternative regulatorymodels (as this would be too much of a colossal task for one project),

I sincerely hope that future research will However, the limitations tofinancial education documented in this book could be a useful guide inthinking about possible alternatives For example, a regulatory focus onabusive and exploitative product selling practices byfinancial firms couldpotentially have a much more significant impact on consumer excessiverisk-taking Similarly, consumer vulnerability and susceptibility to thefluctuations of the financial market could be reduced or at least rea-sonably managed if regulatory attention was directed towards supportingand sustaining the socio-economic structures on which consumers rely.For instance, developing or expanding programmes and financial assis-tance for the unemployed; investing in skills training and requalificationprogrammes; extending financial support to the most vulnerable groups

of consumers such as single parents, low-skilled workers, includinglow-skilled migrant workers and the disabled

Some countries have indeed followed a much more socially inclusiverestructuring of the socio-economic and economic-political order AsJane Kelsey demonstrates in her work, Iceland is perhaps one of the mostvivid examples of this type of restructuring Socially redistribute

programmes and practices were implemented by the feminist-led ernment (throughout the 1990s and 2000s, up to 2013) to build a moresocially equal and just society in Iceland.

gov-These are just a few suggestions as to how regulatory measures could

be designed to have a materially positive impact over thefinancial, socialand economic well-being of consumers Further comparative research inthis field could explore how regulatory measures other than financialliteracy education provide better support and protection for consumers

As with many research projects, this one benefited greatly from manycontributions and suggestions from many generous people I want toexpress my thank you to many colleagues of mine and great scholars whotook the time to look at my work and provided useful feedback ondifferent parts of this project My sincere thanks to DonatellaAllessandrini, Iain Ramsay, Paddy Ireland, Jane Kelsey, Iain Frame, KateBedford, Will Mbioh, Emilie Cloatre, Serena Natile, Lucy Welsh,Amanda Perry-Kessaris, Niamh Moloney, Johnna Montgomery andKendra Strauss I also want to extend my thanks to the many amazingPGR students at Kent who have created a very exciting and engagingspace for people like me to expose my ideas to the scrutiny of amethodologically diverse but highly supportive community I would like

to express a very special thank you to my former supervisor and greatfriend, Toni Williams, whose work inspired my research and who pro-vided continuous guidance throughout Finally, I want to express myappreciation to the immense intellectual as well as emotional support thatWill Mbioh has given me The numerous discussions and debates that

we had and continue to have are of immense value to me Without hiscontribution, this project would not have been possible

Asta Zokaityte

2 Consumer Financial Education as a Novel

3 Pension Privatisation and the Emergence

of the Financial Education Project in the UK 71

4 A Financial Literacy Indicator—Measuring Consumer

Financial Knowledge, Skills and Attitudes to Money 113

5 Personal Finance Education at English Schools 153

6 Edu-Regulating Consumers Through Access

7 Financial Crisis and the Money Guidance Service:

Building Consumer Financial Resilience 237

xi

8 Conclusion 275

Introduction

A year ago my partner and I decided to buy a car Since we were bothrecent Ph.D graduates on a very limited budget, we went for asecond-hand car It was ourfirst “big” purchase, so we wanted it to be assafe and comfortable as possible After some research and visits to cardealership centres in Kent, we selected Invicta Motors Ford as our dealer.All the exciting things came first: picking the right model, the propertiesand colour of the car,finding out more about its history, test-driving thepotential “candidates” and even taking photos in order to share ourexperience with others When we hadfinally selected one car that tickedall of our boxes, we then had to arrange payment for the car, which is, ofcourse, the difficult part of the transaction This difficulty for us asconsumers came in three different forms

First, there came the sales pitch, and I am not talking here about thesales pitch for the car The dealer was very excited and passionate aboutselling us other related products such as car insurance, payment pro-tection insurance, car service insurance, consumer credit, etc Having hadprevious experience with sales pitches and being aware of what was takingplace, we managed to successfully decline almost all of these products(we did get consumer credit at the end) If someone has been through

© The Author(s) 2017

A Zokaityte, Financial Literacy Education,

DOI 10.1007/978-3-319-55017-6_1

1

this before, she probably knows that salesmen are usually very insistent

on their customers taking up these products, and it is not always an easytask to navigate your own interests through the maze of hard sell.Second, we had to make arrangements for the payment Although mymother very generously agreed to pay the full price of the car, we decidedthat we would only take a part payment from her, covering the other partwith credit We had two options: to get credit from our bank or from thedealer The total payable price for the credit depends on the individual’scredit score Tofind out your credit score, a credit history check needs to

be made As probably everyone knows, every single credit check tively affects your credit score so consumers are not, with good reason,encouraged to do this very often Understandably, I was worried thattwo, consecutive checks would have a negative impact on my credithistory, which is still very “fragile” and recent In addition to this, thesaleswoman repeatedly insisted that their dealership would “beat” anyprice offer available on the market She also reassured us that the interestfor credit would not exceed 8% Having quickly browsed online tocompare prices, and taking into consideration all the above, we decided

nega-to purchase credit from the car dealership

When the clear parameters of the transaction were finally set, it wastime to start printing all the relevant documentation For many, readingthe extensive terms and conditions of their contracts is probably the leastpleasant stage of any purchase However, for me it was, in fact, quite atreat Being a lawyer and knowing very well how important these doc-uments are, I took quite a long time going through those documents

I wanted to understand what I was agreeing to The saleswoman was nottoo enthusiastic about my interest, to say the least She joked about hercolleagues who do not bother printing all of the forms since their cus-tomers do not read them At times, while I was attentively reading whatwas given to me, she stared at me holding a pen and other documents toencourage me to speed up since there were many more to be looked at.Moreover, before handing out the forms that I had to sign, she providedshort summaries of what a particular document was about Phrases such

as“this just confirms what we’ve agreed before”, “this forms explains indetail what we’ve already discussed” were meant to “help” me “get onwith this”, so to speak, as soon as possible So we did The transaction

was finalised within 2 h, and we could finally take our new car and aheavy bag of documents home.

The reason I am telling this personal story is to illustrate the relevance

of this book to a wide readership These complexfinancial decisions that

we as consumers make almost every day have become a mundane part ofour lives We had to train ourselves to be or“become” financial managersand experts of our personal finances Some have suggested that it isindeed much easier these days to befinancially aware due to the growinggeneral interest in personal finance

Articles on financial planning feature daily in our largest newspapersand magazines TV channels and radio stations have their own shows andprogrammes dedicated to money matters Major publishers are busyworking on self-help books in the area of personal investment andhousehold financial management Financial institutions, banks andfinancial advisors offer lessons, games, apps and other interactive plat-forms to their customers to engage in and learn more about financialbudgeting A number of charitable organisations have recently joined themovement to advocate and support the institutional development ofpersonal, financial education Employers, particularly those responsiblefor the management of large pension schemes, are increasingly investingmore money in teaching their employees about retirement planning.Personalfinance as a subject of teaching and learning is also embraced byeducational institutions Personal finance is now taught in schools anduniversities to help schoolchildren and students deal with the evercomplex world of money markets

However, perhaps the most innovative yet the least discussed opment of personal finance is taking shape in the area of regulation.Regulators and policy makers across the world are espousing personalfinance education as an original and far-reaching technique of regulation.This movement is endorsed not only by local governments (Australian,British, Canadian, American, German, Russian, Brazilian, French andothers), but also by international organisations such as the World Bank,the International Monetary Fund, the Organisation for EconomicCooperation and Development, and the G20 New strategies and policiesare adopted and new regulatory bodies are set up in order to institu-tionalise personal finance education within national and regional

regulatory frameworks Incorporation offinancial education into peoples’daily lives is the prime and ultimate objective of these developments.

So what exactly is personal finance education? Why is there such anoticeable increase in the regulatory interest around personal finance?Furthermore, why have regulators and policy makers selected to use it as

a regulatory technique for governing households, consumers and cial markets?

finan-The aim of this book is to provide some answers to these questions

I explain whatfinancial education is and what it does My main focus is

on the regulatory side of consumerfinancial education Thus, I conceive

of financial education as a form of regulation that uses interactivemethods such as education and advice, to govern consumer behaviour

To have a greater understanding of what financial education does andhow it works, I examine its institutional development in the UK One of

my objectives is to articulate intelligibly to the reader the regulatoryrationale of the financial education project Yet equally, if not moreimportantly, another objective is to problematise this regulatory ratio-nale, exposing tensions and inconsistencies in, and limitations to, thefinancial education project

At this point, the reader might wonder why I am looking atfinancialeducation as a regulatory enterprise, or more generally, what doesfinancial education have to do with their day-to-day lives? Is it worthspending hours of their valuable time reading this book?

The reader might be persuaded to persevere if they knew that thisbook is not merely an intellectual, academic exercise that starts a newinquiry intofinancial literacy education In fact, it gives a very practicalexplanation of the ways in which we as consumers think about and actaround money What is more, it analyses the expectations imposed on us

by the financial education movement Finally, it evaluates these tations in relation to our actual behaviour and decision-making So how

expec-do we behave aroundfinance and how do we make our financial choices?

An extensive number of studies show that we are not very good withourfinances It is suggested that we as consumers lack the necessary skillsand abilities to make prudent and rationalfinancial decisions Not only

do we fail to properly understandfinancial products and services sold to

us, we are also highly disinterested in anything that is even remotely

linked to finance and financial markets To put it simply, we are sidered to be financially illiterate In general, we tend not to think toomuch about our retirement; we do not usually save money for a rainyday; we accumulate a lot of debt; we also spend our money on things thatare not always necessary to us; we rely on financial advice given to us byour friends and relatives rather than by financial experts and we are notvery good at keeping an eye on our spending These are just a fewexamples of the type of behaviour that would normally be considered asfinancially illiterate However, to understand what financial illiteracymeans, a brief summary of some key studies on consumer financialliteracy is merited here.

con-Financial Literacy Tests and Surveys

Consumer financial literacy is still a fairly new phenomenon If in theearly 2000s barely anyone showed any interest in the topic, by the late2000s consumer financial literacy had become one of the hottest topics

in the news Financial literacy is basically defined as the ability to read,understand and processfinancial information as well as act upon it whenmaking financial choices People’s financial literacy levels are oftendetermined using financial literacy tests, questionnaires and surveys.Academic scholars, NGOs, governments and private actors all seem to beactively involved in designing and conducting financial literacy surveys.These financial literacy studies are often quite diverse The method-ological approaches and tools that are used to produce these studies candiffer considerably For example, some financial literacy studies arenational in their scope Others are international and seek to compareliteracy levels across different states Some surveys measure financial lit-eracy levels of the population at large, whereas others focus on specificgroups, such as women, children, migrants, or the elderly Somefinancialliteracy studies are privately funded while others are publicly run andfunded

Regardless of these differences, financial literacy studies tend to findconsumer literacy and numeracy levels to be very low Financial literacystudies report serious limitations on the ability of consumers to

comprehend, process and evaluate financial information presented tothem So what does this really mean?

Well, first, financial literacy surveys demonstrate that people lackknowledge and understanding of specialised, financial terms and con-cepts This adversely affects consumers’ ability to make sense of thefinancial products and services sold to them The OECD financial lit-eracy survey illustrates this point quite well The OECD questionnaire offinancial literacy was developed in 2011 It is one of the most commonassessment tools used by nation states across the world to measureconsumer financial literacy levels.The survey, amongst other things,1

tests consumers’ command of financial language The concepts of

“inflation”, “risk diversification” and “risk and return on investment” areused to assess the general understanding of specialised, financial termi-nology (OECD 2011) The OECD survey findings conducted in 14countries2 revealed that while consumers are more familiar with theconcept of inflation,3the concepts of“portfolio diversification”4 or“riskand return on investment”5 is far less clear The lack of command offinancial terminology affects consumer ability to successfully process andunderstand information on financial products and services

Second, surveys on consumer financial literacy also point to anotherprevailing problem Consumers generally have low proficiency in literacyskills, by which it is meant that they have limited“ability to understand,evaluate, use and engage with written texts”.6 For example, the OECDSurvey of Adult Skills demonstrates that consumers have low proficiency

in a great number of information-processing skills According to thesurvey, more than 48% of respondents are proficient at the lowest level inliteracy The lowest level of proficiency, in essence, means that con-sumers can:“regularly complete tasks that involve very few steps, limitedamounts of information presented in familiar contexts with little dis-tracting information present, and that involve basic cognitive operations,such as locating a single piece of information in a text or performing basicarithmetic operations, but have difficulty with more complex tasks”(OECD2013, p 56)

What is more, respondents with low proficiency levels in literacy oftenlack higher-order cognitive skills These skills allow people to makecomplex inferences, disregard irrelevant or inappropriate details, identify,

interpret and assess more than one piece of information These surveysbasically suggest that the ability of consumers to understand financialproducts and services are heavily dependent on their cognition.Cognition is, in effect, the extensive mental processing that is involved inacquiring, processing and comprehending knowledge That cognition hasinfluence over consumer decision-making is supported not only byfinancial literacy studies but also by empirical findings in behaviouraleconomics and psychology Behavioural economists have questioned theability of consumers to use and process information rationally Instead,they have argued, consumers make decisions using various heuristics andbiases; that is, various mental shortcuts and rules of thumb that affecttheir choices (Tversky and Kahneman1974) So, for example, consumerscan make different choices which were informed by the same informationbut framed and delivered to them differently (this is so-called FramingEffect), or they can make choices that prioritise present-day payoffs overfuture ones, discounting the fact that their future selves would not haveacted in such a way (this is called the present-bias) My encounter withthe car dealer exemplifies this very well Although I clearly understoodthe significance of reading the terms and conditions of my contract, thepressure that was put on me during the sale affected my ability to assessthe documents rationally Instead, I relied heavily on the saleswoman’sverbal representations and completely ignored the numbers When I wassigning the contract, I failed to notice that the interest rate on credit hadbeen changed from 8 to 13.4%.

Third, financial literacy tests and surveys suggest that consumers lackadequate numeracy skills Quantitative literacy is generally understood asthe ability to read, understand, process and work with numbers This canrange from simple capabilities and skills necessary to understand andcompare numbers, to those that require a higher level of arithmeticcalculation and understanding As I have argued elsewhere,

To comprehend the complexity of financial products and evaluate them accordingly, consumers often need to calculate simple and compounding interest, consider amortization costs and probabilistic information, par- ticularly when assessing the risk factors of a financial transaction.

A number of long-term financial commitments, such as getting a

mortgage or planning for retirement, involve making sound judgements about risk, probabilities and chance Financial literacy surveys repeatedly find that consumers are not equipped enough to make such difficult choices (Zokaityte 2016 )

Empirical research that examines consumer decision-making processesoftenfinds that consumers have very poor arithmetic skills in the area offractions and probabilities For example, a 2005 experiment carried out

by a group of economists investigated whether investment making is affected by the format within which information is provided toindividuals (Rubaltelli et al 2005) Information on investment waspresented to participants in the monetary value as well as the percentagevalue The study found that consumers’ views on the investment wereinfluenced by the format of the information presented to them.Participants in the experiment felt that the investment fund lost morewhen the information on fund performance was presented in percentageterms rather than in monetary terms

decision-Other scholars have also shown that consumers struggle to make sense

of numbers when the amounts substantially exceed their daily experience(Willis 2008) In her seminal work on financial education, Willis hasargued that“someone who easily distinguishes between $250 per monthand $300 per month for health insurance could fail to appreciate thedifference between a $252,000 and a $259,000 mortgage after a $7000broker fee is added Large dollar values can be too big to comprehend forthose who rarely encounter them” (Willis 2008)

Finally, financial literacy studies suggest that consumers are notwell-equipped to understand and manage risk Risk illiteracy is generallydefined as consumer limited ability to make well-measured andwell-balanced decisions about uncertain future Studies show that con-sumers, for example, tend to underestimate potential risks of unexpectedlife events Some consumers ignore these future events altogether (TNSBMRB 2015) The Money Advice Service in the UK that conductedresearch on consumer financial capability has concluded that “not only

do people underestimate the likelihood and financial impact of a lifeevent, they also overestimate their financial resilience—including howlong savings would last and what other sources of income would be at

their disposal” (TNS BMRB2015) Some consumers purposively avoidthinking about the probability of bad events happening to them, or ifthey do, they are overly optimistic about their ability to cope with theseevents (TNS BMRB 2015).

All thesefindings suggest that the average consumer generally lacks thecapabilities necessary for them to successfully navigate the complexities ofthe financial services market They struggle to understand specialised aswell as more generic information presented to them They also havesevere difficulties processing and working with numbers, and their ability

to understand and manage risk, which is an inherent part of almost everyfinancial product, is very limited, to say the least

Financial literacy surveys and tests have done well at documentingthese problems These studies have contributed to our better under-standing of the ways in which we as consumers think about and makefinancial choices They also made us more aware of our cognitive skillsand their influence over the decision-making process These are concretemerits of the existing research on consumer financial literacy However,there are other parts of financial literacy scholarship which are muchmore problematic One engages with the demographic dimensions offinancial literacy, while another promotes education as a response to theproblem of financial illiteracy To explain why I view this type of liter-ature dangerous or, at least, problematic, it is important to give a briefsummary of their key arguments and suggestions

The Demography of Financial Literacy

Most financial literacy surveys collect information on respondents’ age,gender, education, ethnicity, class and religion These demographicfactors are then used to make broader observations about consumers’financial literacy levels For example, a number of financial literacy sur-veys find that women are generally less financially literate then men(Atkinson and Messy 2012) Young people and the elderly are oftenfound to have lower financial literacy levels than the middle-aged(Atkinson and Messy 2012) Lower financial skills and abilities are alsomore frequently detected amongst ethnic minority groups and migrants

(Atkinson and Messy 2012) This scholarship basically links people’sfinancial literacy levels to their earnings, educational qualifications, age,ethnicity and gender (Monticone2010; Lusardi et al.2009; MasterCardWorldwide2011) In doing so, these studies rank social groups, such asmigrants, low-income earners, women and the young, based on theirgeneralised levels offinancial literacy.

Some international surveys offinancial literacy use countries as units ofmeasurement, and rank them based on financial literacy levels.The OECD financial literacy questionnaire is arguably one of the mostwidely used international surveys that compare literacy levels acrossnation states According to the OECD survey, countries like Germany,Ireland, Sweden and Denmark are considered to be the most literate,whereas Poland, Armenia, Italy, Greece and Spain were found to be theleast literate (Atkinson and Messy 2012) Geographies offinancial lit-eracy and financial illiteracy have been drawn even within countries.Some parts, particularly poorer ones, are often found to be less literatethan the richer regions It is hardly surprising that, for instance, Moscowand St Petersburg are found to be the most literate places in Russia, withliteracy and numeracy levels significantly decreasing further East (Clark

2014a,b) The southern part of Italy has been found to be lessfinanciallyliterate than the northern part (Clark 2014a, b) The UK’s financialliteracy map is also quite predictable: reportedly, the southern part hashigherfinancial literacy levels than the northern part (Clark 2014a, b)

So why do Ifind these findings problematic? Well, for one thing, thisresearch makes simplistic connections between financial literacy levelsand the respondents’ age, gender, ethnicity, religion or income It pre-sumes that financial literacy, defined as skills and abilities to manageone’s finances successfully, is somewhat universal and, thus, able to betested across different segments of the society It assumes that there arefinancial literacy rules and techniques that people can follow and applyuniversally in order to become savvy financial managers A particularstandard of decision-making is used in these financial literacy tests tojudge against people’s actual behaviour For example, planning for one’sretirement or paying bills on time are often considered by these tests andsurveys as an indicator offinancial literacy Therefore, if you fail to payyour bills on time, if you struggle to make ends meet or if you did not

make any retirement plans, you are more likely to be found byfinancialliteracy tests to be illiterate.

This approach however completely ignores the contextuality of sonalfinance It fails to acknowledge that the environment within whichpeople make financial decisions, influences their behaviour, reasoningand attitudes towards money The environment can act as an enablingforce, for example, allowing high-income earners to save money for arainy day or plan for their retirement Yet the environment can also act as

per-a disper-abling force, limiting, for instper-ance, low-skilled workers’ willingness

to pay off their debts on time Again, if we take my personal experiencewith the car dealer as an example, we begin to see how this is true When

we took our car home, I looked at the terms and conditions of mycontract again It was then that I realised the price for credit was 13.4%instead of the promised 8% At that point, I had an option to terminate

my credit agreement and pay off my debt using my mother’s funds.However, I did not feel it was the right thing to do My mother hadprovided unsparing support for a number of years while I was doing myPh.D and I did not feel comfortable taking more from her So I decided

to keep the credit agreement, paying much more than I expected orwanted to Simply put, I ignored what might have been the mostfinancially literate decision and, instead, went for what I deemed at thetime to be the most ethical one

This utter disregard of the ways in which demographic, social, tural, economic and other factors influence people’s financialdecision-making, questions the reliability of financial literacy surveys.Most financial literacy tests bundle all of the factors/life circumstancestogether claiming that financial literacy skills have the greatest influenceover people’s financial decision-making However, I want to suggest thatfinancial literacy studies fail to prove that the lack of financial skills is toblame for what is considered to be illiterate financial behaviour Thiscannot be done until and unless a proper analysis of each and every factor

cul-is carried out We need to know, for example, if consumer inability topay off personal debts is determined by financial illiteracy, suddenlyincreased financial commitments, reduced income, illness, the loss ofemployment or other circumstances At the current moment, however,

the absolute majority offinancial literacy surveys neglect these very realand possible influences.

Instead of pretending that these factors and life conditions do notexist, or are not worth engaging with, I bring them into my analysis InChap 3 of the book, in which a study of the UK’s financial literacysurvey is presented, I map out some of these contextual conditions thatshape and determine people’s financial behaviour and attitudes tomoney Also, in the last chapter of the book that looks atfinancial adviceprovided by the UK Money Advice Service, I consider the viability ofsuch advice in relation to people’s actual living conditions and circum-stances The purpose of this exercise is to show the complexity andmultiplicity of consumer financial decision-making that cannot andshould not be reduced to people’s financial skills This particular point islinked to another part offinancial literacy studies that is highly prob-lematic—that of financial literacy education

Financial Literacy Education: Tackling

Consumer Financial Illiteracy

Studies on consumer financial literacy are not limited to questionnaires,surveys and tests designed to measurefinancial literacy levels A body ofliterature has recently emerged that claims to have found a solution to theproblem offinancial illiteracy According to the key representatives of thisscholarship,financial education is viewed as the best way to tackle wide-spread financial illiteracy amongst consumers In fact, the benefits offinancial literacy education seem to be extended even further A number ofother social ills such as consumer overindebtedness,financial exclusion,financial ignorance and economic instability are claimed to be reduced as aresult offinancial literacy education (Financial Services Authority2006;Financial Consumer Agency of Canada 2005; Financial LiteracyFoundation 2007; Bucher-Koenen and Lusardi 2011; Commission forFinancial Literacy and Retirement Income2012; García et al.2013).Financial education is praised for being an innovative, creative andeffective measure that can build consumerfinancial knowledge and skills

It has also been suggested that financial education can empower sumers in thefinancial services markets Greater financial knowledge andskills can help consumers shop around and navigate the complexities offinancial markets.

con-As a non-violent, wide-ranging and “soft-touch” intervention intopeople’s life, financial education became very popular amongst policymakers and regulators across the world Since around the late 2000s,governments and international organisations have increasingly advocatedfor the inclusion of financial education into the national and interna-tional architecture of financial regulation Information disclosure is nolonger seen as adequate enough to address the problem of financialilliteracy However, financial education is perceived as complementingexisting measures on consumer protection Since it introduces novel,interactive techniques of regulation, such as teaching and learning, andadvice giving, it is argued that consumer financial education will helpconsumers to make sense of thefinancial information presented to them

In this book, I question this line of reasoning, which is pervasive notonly in the existing scholarship on financial literacy but also in policyreports and financial regulations My key argument is that financial lit-eracy education is unlikely to strengthen or increase consumer protection

in the financial services market I do, however, acknowledge thatfinancial education could potentially be effective in reducing consumerinformational vulnerability in financial markets As an edu-regulatorymeasure, consumer financial education uses interactive techniques, such

as education, advice and guidance to govern consumer behaviour Theseinteractive techniques can indeed result in more protection to consumersthan mere information disclosures, labelling or warning signs.Nevertheless, I argue that consumer financial education is severely lim-ited to what it can do in terms of consumer protection and empower-ment At its very core, financial literacy education does not provideprotection for consumers against risks that cannot or are very difficult to

be managed through information

During their lifetime, people are exposed to a variety of risks Theserange from macroeconomic circumstances such as economic instability,financial crisis, austerity cuts or institutional discrimination to morepersonal experiences, such as illness, loss of social networks, loss of

employment, engagement in unpaid social care and voluntary work.These risks cannot be successfully managed or reduced using education,information or advice Since all of these social, economic, cultural spheres

of life are not divorced from people’s financial life, they interact witheach other and they shape each other As a result, a great variety ofmeasures other than education is required to enable individuals to con-trol and manage these risks

Regrettably, the project of consumer financial education ignores theimpact that these circumstances have on people’s financial experiencesandfinancial decision-making To put it very bluntly, it fails to see that,for example, people’s inability to pay bills on time might be conditioned

by their lack of income, not by their lack offinancial skills In the sameway, a lack of retirement planning might well signal someone’s deeperproblems such as the precariousness of work or unemployment

Consumer financial education mis-attributes these complex social,economic and cultural circumstances to people’s lack of financial literacy

It becomes particularly dangerous and, indeed, highly unproductivewhen policies and regulations designed to protect and help consumers, infact, mask the source of their vulnerabilities The aim of this book is toquestion and troublefinancial il/literacy—a phenomenon that appears to

be very technical and easily separable from people’s social, economic andcultural experiences In doing so I seek to explore how various circum-stances and conditions, not just consumerfinancial skills and knowledge,influence their financial behaviour and decision-making I humbly hopethat this book will put an end to dominant, simplistic representationsand marginalisation of the most vulnerable consumers who are the leastcapable of managing their financial and economic lives through infor-mation, education or advice

Book Overview

Regulatory calls to improve peoples’ financial literacy skills and ability tounderstand and manage their money are growing at an exponential pace.Governments, financial regulators, NGOs and private, financial actorsacross the world are devising various financial education strategies and

programmes, which seek to educate consumers infinancial matters Thisbook aims to respond to the growing popularity of and demand for,consumerfinancial education The book problematises the conventional,mainstream narrative offinancial literacy education as a viable technique

of consumer empowerment and protection Instead, it argues thatfinancial literacy education contributes to further responsibilisation andmarginalisation of consumers in financial markets

The book presents an original contribution to the understanding of anunder-researched area of consumer financial education Its principalfocus on regulatory dimensions of consumer financial education isarguably the most distinctive quality of the book New conceptualframeworks introduced in the book offer academic audiences an inno-vative way of thinking about the project on financial literacy education.The concept of “edu-regulation”, defined as a legal regime that useseducation to govern consumer behaviour and consumer markets, is usedthroughout the book to theorise and problematise financial literacyeducation as a regulatory project The concept of “financial knowledgedemocratisation” is introduced to conceptualise and understand thedefinition of financial literacy that is used to govern consumer behaviourvia financial education projects

In the book, I expose serious and sadly often ignored limitations tousing information and education as tools for consumer protection

I challenge the mainstream representation offinancial literacy education

as a viable solution to consumerfinancial exclusion and poverty Instead,

I argue that the project on financial literacy education fails to edge important dependences between consumer financial behaviour andthe socio-economic, political and cultural context within which they live.The argument is made that these international and national calls for evergreater financial education oversimplify and underestimate the com-plexity of consumer financial decision-making in our modern times.Chapter 1, “Consumer financial education as a novel edu-regulatorytechnique” maps out academic literature on sociology of indicators, socialstudies of finance and legal scholarship on financial literacy education.Borrowing insights and observations from this literature, the chapterintroduces two novel, conceptual frameworks that are used throughoutthe book to examine the financial education project

The concept of“edu-regulation” is developed to analyse and consider adistinct, legal regime designed in the UK to govern consumer behaviourand consumer markets through the use of information, education andadvice The concept of edu-regulation emerged as a result of careful anddetailed scrutiny of different financial education programmes rolled out

in the UK.7 It helps to theorise variousfinancial education programmesadopted by the UK’s policy makers and financial regulators with an aim

to police and regulate householdfinancial decision-making

The chapter’s key argument is that these edu-regulatory policies andprogrammes are used to expand consumer access to financial informa-tion,financial education and financial advice Naming this process “thedemocratisation offinancial knowledge”, the chapter introduces anotherconceptual framework The democratisation offinancial knowledge as aconcept is used in the book to theorise ever greater broadening, deep-ening and expansion of consumer access to financial knowledge Thisconclusion is of particular importance since the key aim of this concept is

to shift the academic debate on and analysis offinancial literacy tion from access tofinance to one on access to financial knowledge Thisconcept provides analytical space to interrogate and question the neu-trality, universality and objectivity offinancial knowledge It provides ameans to question the ways in whichfinancial knowledge participates ingovernance of consumer financial markets

educa-It is suggested in this chapter that the project on consumerfinancialeducation aims to democratise consumer access to highly restrictive andproblematic financial knowledge Various financial education pro-grammes and policies do not develop and facilitate access to all kinds offinancial knowledge Instead, the financial education project builds access

to financial information, financial education and financial advice largelyoriented towards consumer activation and integration in financialmarkets

Chapter 2, “Pension privatisation and the emergence of the financialeducation project in the UK” provides an introduction to pension pri-vatisation and pension financialisation in the UK The chapter situatesedu-regulatory programmes and policies within a broader historical,political and economic context It describes how the Conservativegovernment and, later, New Labour promoted private pensions and

encouraged people’s direct and indirect participation in financial servicesmarkets The chapter identifies and examines two major failures: pensionmis-selling scandals of the late 1980s and the early 1990s, and the pensiongap It shows how the consumer was re-imagined and re-conceptualisedinto a responsibilised subject, who lacks information and knowledge toparticipate effectively and safely in the financial services market Thechapter’s principal argument is that consumer financial education wasintroduced by New Labour to respond to the failures of pension privati-sation Besides tax-favoured reforms in the pensions market, financialliteracy education was used by New Labour to strengthen the processesand practices offinancialisation The democratisation of consumer access

to financial information, financial education and financial advice wasarticulated by the UK government and the FCA as a necessary project forconsumer protection as well as for the smooth and stable functioning ofthe social welfare system

Chapter3,“A financial literacy indicator—measuring consumer cial knowledge, skills, and attitudes to money” presents the financial lit-eracy measurement project This project is one of the core edu-regulatoryprogrammes in the UK The chapter describes and explains the ways inwhich consumer financial knowledge, financial information and financialskills came to be measured, compared, assessed and ranked by thefinancialcapability measure It shows how the construction of the financial capa-bility measure has created a new phenomenon—levels of consumerfinancial capability It further demonstrates that this measurement exercisehas divided people’s day-to-day financial decisions and financial practicesinto two groups: financially literate and financially illiterate The chaptersuggests that this categorisation grossly simplifies people’s experiences withfinance and financial markets Consumer financial literacy levels are mainlyand exclusively defined through consumer ability to actively and safelyparticipate in thefinancial services market The argument is put forwardthat this conceptualisation strips the socio-economic, political and culturalcontexts away from thefinancial literacy standard and fails to acknowledgeits relational dimension

finan-Chapter 4, “Personal finance education at English schools” analysesanother edu-regulatory programme—personal finance education at school

To do so, it looks at the Personal Finance Education Group (Pfeg) ThePfeg leads the national campaign to educate children across England infinance Its campaigns and programmes are endorsed and financially sup-ported by the UK government and the Financial Conduct Authority Thechapter examines the structure, organization and activities of the Pfeg, todemonstrate the government’s and the Financial Conduct Authority’scomplex and challenging task to bring personal financial education toEnglish schools It argues that the project of schoolfinancial education asrun and operated by the Pfeg celebrates the interests of thefinance industry.The chapter exposes a deep tension within this project, where the interests

of the financial sector are not easily and comfortably aligned with theinterests of the schools, children and their parents This tension is furtherexamined through the analysis of educational programmes and materialsproduced by the Pfeg The principal contention of the chapter is that thePfeg’s educational programmes and projects fail to deliver well-balancedand fairfinance education to English schools Instead, these educationalmaterials are used by largefinancial firms to market and sell their financialproducts and services to existing and prospective consumers: teachers,children and their parents

Chapter 5, “Edu-regulating consumers through access to financialadvice” introduces the third edu-regulatory programme on consumerfinancial education It examines the development of a regulatoryframework for the provision offinancial advice The chapter shows howlegal reforms and changes to the regulatory framework for the provision

offinancial advice facilitated the democratisation of financial knowledge.Specifically, it describes how the UK government and the FCA havecreated two distinct legal regimes for the provision of financial advice.Reforms of the regime for regulatedfinancial advice were largely inspired

by many mis-selling scandals that caused significant consumer detriment.Therefore, to protect consumers from the provision of poor- orlow-qualityfinancial advice, the FCA has imposed certain restrictions onand requirements for financial advisors This reformed market for reg-ulated financial advice was later used by the financial regulator as animportant measure of consumer protection Identifying certainfinancialmarkets as complex and particularly risky to consumers, the FCA has

made the provision of regulated financial advice to consumerscompulsory.

In addition to that, concerns over consumer financial exclusion havegalvanised and inspired the creation of a different legal regime for theprovision of genericfinancial advice which was not regulated To respond

to problems of lack of or inadequate engagement withfinancial markets

as well as people’s financial poverty, the UK government and the FCAcreated the Money Advice Service (MAS) As a part of the new regulatoryframework for the provision of generic financial advice, the MAS wasexpected to integrate more consumers into the financial services market.Free of charge and easily available access to financial advice was seen toshape consumer need for financial products and nudge them towardscertain financial decisions

The development of both regulatory regimes on the provision offinancial advice, it is argued, is legitimised by discourses concerningconsumer financial illiteracy In other words, the democratisation ofregulated as well as genericfinancial advice is by and large supported andjustified by the need to influence and perhaps change the ways in whichconsumers interact with financial markets The chapter suggests thatboth regulated and de-regulated models represent a de-contextualisedunderstanding of people’s financial decision-making These regimesembody an assumption that consumer access to expert advice or greaterintegration into financial markets would empower consumers and helpthem enjoy the advantages offinancialisation This regulatory approach isexclusively designed to address consumer informational vulnerability.However, this perspective on consumer decision-making ignores and fails

to properly account for factors other than financial information andfinancial knowledge that often determine people’s choices As such, thismis-conception of consumer financial decision-making used by bothregimes exposes serious limitations to effective consumer protection viademocratised access to financial advice

Chapter6,“Financial crisis and the Money Guidance Service: buildingconsumerfinancial resilience” continues to explore the third edu-regulatoryprogramme Specifically, it pays particular attention to the activities andoperations of the MAS The chapter examines various forms and the content

of financial advice materials provided to consumers by the MAS

The suggestion is made that the MAS aims to build and strengthen sumerfinancial stability and ability to keep up with financial commitments.Drawing from social studies offinance, the chapter argues that the con-ceptualisation of householdfinancial instability as embraced by the MAS ishighly de-contextualised and problematic As such, its services are not tar-geted at all consumers but rather at those who are most likely to experiencefinancial instabilities in their lives, and therefore, pose greater risks toeffective and safe functioning of the globalfinancial system The chapterconcludes by stating that the democratisation of financial knowledgethrough the provision of money guidance seeks not only to recruit peopleintofinancial markets (as demonstrated in previous chapters of the book)but to stabilise and discipline their financial behaviour once they haveentered the market.

con-The Conclusion does more than synthesize the key arguments sented in the book It explains the importance of my researchfindings toour day-to-day lives Here I argue that the project onfinancial educationignores the complexity of consumer day-to-day financial decision-making The financial education project assumes that greater consumeraccess to information and education on money matters will help us tobetter navigate financial markets and make appropriate and prudentfinancial choices However, this approach simplifies our financialdecision-making and ignores the socio-economic, cultural and politicalenvironment within which we make our choices As such, consumerswho, for instance, fail to save money for their retirement might do so notthrough lack offinancial education but rather because of lack of stableincome, which prevents them from effective retirement planning.Thisfinding is of particular importance to all of us since the currentfocus on financial education as a tool for consumer protection shiftsregulatory and policy focus from structural problems present in finan-cialised, political economies to individual responsibility More impor-tantly, thesefinancial education initiatives and programmes mis-attributevarious socio-economic problems to people’s lack of understanding orinability to successfully navigate the financialised world Contrary towhat has been suggested in the conventional literature,financial educa-tion largely fails to strengthen consumer protection or reduce consumerexposure to financial risks In fact, financial education contributes to

further marginalisation of consumers who are the least capable ofmanaging theirfinancial and economic lives through mere information,education and advice.

3 The response rate of correct answers ranges from 57% in Armenia to 94%

of respondents selecting the correct answer.

6 The OECD Survey of Adult Skills categorises adult literacy into 5 ficiency levels Level 5 is the highest proficiency level on the literacy scale Only 0.7% of respondents have the highest proficiency in literacy and

pro-“can perform tasks that involve searching for and integrating information across multiple, dense texts; constructing syntheses of similar and con- trasting ideas or point of view, or evaluating evidence and arguments” Level 1, on the other hand, is the lowest proficiency level in the literacy scale Respondents falling within this scale can only “complete simple forms, understand basic vocabulary, determine the meaning of sentences, and read continuous texts with a degree of fluency” (OECD 2013 ).

7 Speci fically, the book focuses on three “edu-regulatory” policies which are part of a larger financial education project in the UK: the construction of

a financial literacy measure, the establishment of the Money Advice Service and the institution of compulsory financial education at English schools.

Atkinson, A., and Messy, F 2012 Measuring Financial Literacy: Results of the OECD / International Network on Financial Education (INFE) Pilot Study OECD Working Papers on Finance, Insurance and Private Pensions [Online] Available at: http://www.oecd-ilibrary.org/docserver/download/ 5k9csfs90fr4.pdf?expires=1434709874&id=id&accname=guest&checksum= 6A86CED581850CCAE5457F2CFAA98B1E Accessed 16 Dec 2014 Bucher-Koenen, T., and A Lusardi 2011 Financial Literacy and Retirement Planning in Germany Journal of Pension Economics and Finance 10 (4):

565 –584.

Clark, G 2014a Financial Literacy in Context: A Rejoinder Economic Geography 90 (1): 29–31.

Clark, G 2014b Roepke Lecture in Economic Geography —Financial Literacy

in Context Economic Geography 90 (1): 1–23.

Commission for Financial Literacy and Retirement Income 2012 Charting a Course: A Review of Financial Education in New Zealand [Online] Available at: http://www.cffc.org.nz/assets/Documents/Fin-Ed-Charting-a- Course-2012.pdf Accessed 20 Oct 2013.

Financial Consumer Agency of Canada 2005 Why Financial Capability Matters Ottawa: Financial Consumer Agency of Canada [Online] Available at: http:// www.fcac-acfc.gc.ca/Eng/resources/researchSurveys/Pages/WhyFinan-Pour- quoi.aspx Accessed 15 Sept 2014.

Financial Literacy Foundation 2007 Financial Literacy: Australians Understanding Money [Online] Available at: https://www.moneysmart.gov.au/media/209293/ australians-understanding-money.pdf Accessed 27 Mar 2015.

Financial Services Authority 2006 Financial Capability in the UK: Establishing

a Baseline London: FSA [Online] Available at: http://www.fsa.gov.uk/pubs/ other/ fincap_baseline.pdf Accessed 19 June 2014.

Garcia, N., Grifoni, A., Lopez, J., and Mejia, D 2013 Financial Education in Latin America and the Caribbean: Rationale, Overview and Way Forward OECD [Online] Available at: http://www.oecd-ilibrary.org/ finance-and- investment/financial-education-in-latin-america-and-the-caribbean_5k41zq7 hp6d0-en Accessed 22 Apr 2015.

Lusardi, A., Mitchell, O.S., and Curto, V 2009 Financial Literacy among the Young: Evidence and Implications for Consumer Policy The National Bureau

of Economic Research [Online] Available at: http://www.nber.org/papers/ w15352.pdf Accessed 15 Dec 2014.

MasterCard Worldwide 2011 How Well Do Women Know Their Money: Financial Literacy Across Asia/Paci fic, Middle East, and Africa [Online] Available at: http:// www.masterintelligence.com/content/intelligence/en/research/reports/2011/ how-well-do-women-know-their-money-financial-literacy-across-asiapacific- middle-east-and-africa.html Accessed 20 Mar 2016.

Monticone, C 2010 How Much Does Wealth Matter in the Acquisition of Financial Literacy? The Journal of Consumer Affairs 44 (2): 403–422 OECD 2011 G20 High-Level Principles on Financial Consumer Protection OECD [Online] Available at: http://www.oecd.org/daf/fin/financial- markets/48892010.pdf Accessed 8 Feb 2014.

OECD 2013 The Survey of Adult Skills [Online] Available at: http://www oecd.org/skills/piaac/Skills%20(vol%202)-Reader%20companion–v7%20eBook

%20(Press%20quality)-29%20oct%200213.pdf Accessed 6 July 2016 Rubaltelli, E., S Rubichi, L Savadori, M Tedeschi, and R Ferretti 2005 Numerical Information Format and Investment Decisions: Implications for the Disposition Effect and the Status Quo Bias The Journal of Behavioral Finance 6 (1): 19–26.

TNS BMRB 2015 Financial Capability and Wellbeing The Money Advice Service [Online] Available at: https://53b86a9de6dd4673612f-c36ff983a9 cc042683f46b699207946d.ssl.cf3.rackcdn.com/financial-capability-and- wellbeing.pdf Accessed 2 June 2015.

Tversky, A., and D Kahneman 1974 Judgment under Uncertainty: Heuristics and Biases Science 185 (4157): 1124–1131.

Willis, L.E 2008 Evidence and Ideology in Assessing the Effectiveness of Financial Literacy Education Scholarship at Penn Law [Online] Available at: http:// scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=

1196&context=faculty_scholarship Accessed 19 Jan 2015.

Zokaityte, A 2016 Financial Literacy and Numeracy of Consumers and Retail Investors Capital Markets Law Journal 11 (3): 405–413.

edu-I will explain why financial literacy education should be viewed as amodern edu-regulatory technique that aims to govern consumer beha-viour through information, education and advice Second, I will holdfinancial literacy education to be an instance of the democratisation offinancial knowledge As such, it emphasises a recent and novel develop-ment in the area of consumerfinancial regulation, where the expansion ofconsumer access to information, education and advice has become evermore important However, before I explain in much more detail themeaning and significance of these concepts, I believe it is necessary tosituate my work within a wider scholarship onfinancial literacy education.For this reason, in the Introduction, I have placed financial literacyeducation within contemporary political, cultural, social and economicdebates I have shown the intensification of policy interest and

© The Author(s) 2017

A Zokaityte, Financial Literacy Education,

DOI 10.1007/978-3-319-55017-6_2

25

proliferation of regulatory programmes on financial literacy educationworldwide, but is financial literacy education a novel invention of ourtimes, or can it be shown to have been reimagined in new, contemporaryforms?

Interest in education concerned with monetary and financial matterscould date back to at least the nineteenth century, when various publicfigures and academic writers debated the meaning of thrift, the effec-tiveness of household economics and the relationship between people’smorality and their spending and saving behaviour (Straus and Kirby

1920; Yates and Hunter 2011; Tucker 1990; Harding 1893;Oberholtzer 1892; Bowman 1922) In fact, the historian Calder hasargued that people were always concerned about money managementand control offinance As he has explained:

Money matters It always has Of Jesus’ thirty-three parables, fifteen are stories about coins, debts, or investments The Buddha, not normally given to aphorisms about money, nevertheless is represented in the Pali canon as saying the wise and moral man ‘should divide his money in four parts; on one part he should live, with two expand his trade, and the fourth he should save against a rainy day’ In feudal China, the merchant-statesman Fan Li amassed an enormous fortune following the advice of his teacher, Ji Ran, who said, ‘One must not allow money to be idle ’ Fan Li’s maxims, still in print 2,500 years later, counsel those who handle money to ‘Be vigilant in credit control’, ‘Don’t be penny-pinching’, and ‘Don’t under save-keep reserve funds strong’ Clearly, money has always mattered, even when there was not a lot of it (Calder 2012 , p 348)

State interest infinancial education and its use to regulate populations isalso not new Thrift education, for example, was extensively used by the

US government during the First and Second World War to mobilisepeople to take action Adults as well as children were encouraged to savemoney and invest their savings in purchasing thrift stamps and libertystamps to providefinancial support for America in its most demandingtimes (Walter 1928; Bowman 1922; Rousmaniere 1997; Jones 1924;

Herald1920; The Bourbon News 1919; The Polk County News1919;The Evening Independent 1918; Berkeley Daily Gazette1918).

A more recent public and scholarly re-engagement with financial eracy education was stimulated by major transformations of modernpolitical economies that have become increasingly financialised Thesedebates and writings, predominantly produced in the Anglo-Saxonworld, situate the emergence and development offinancial literacy edu-cation within a broader political, economic, social and cultural project offinancialisation Privatisation and financialisation of retirement provisionare often mentioned as one of the key drivers of consumer literacyeducation (Erturk et al 2007; Pearson 2008; Waine 2009) Increasingfinancialisation and securitisation of people’s income streams other thanretirement provision are also used to justify the need for the globalmovement towards consumer financial education (Bryan and Rafferty

lit-2011; Beggs et al 2014)

What is particularly unique to this contemporary resurgence offinancial literacy education is the increased involvement of regulators andpolicy makers in pushing forward the financial education agendanationally and internationally This agenda is state funded, highlycoordinated and pervasive, aiming to reach out to different segments ofsociety in a targeted way Based on how the effectiveness of financialliteracy education is perceived, two broad approaches could be singledout One perspective, which has also become the mainstream view,considers financial literacy education to be an effective and appropriatetool of state intervention in the financial services market Anotherapproach, however, is much more critical offinancial literacy education

My own research contributes to and complements the latter approach.The two concepts introduced in this chapter predominantly aim toexplain this resurgence and the institutional, regulatory layering that isbuilt around financial literacy education Edu-regulation and thedemocratisation of financial knowledge are used to investigate theobjectives as well as the consequences of the financial education agenda

in the UK, specifically, and the global world, more generally Theseconcepts allow us to identify serious limitations to thefinancial educationagenda and question if any meaningful impact over the protection ofconsumers is viable Before I elaborate on these arguments further, it is

first important to briefly summarise the mainstream approach, which is

at the very heart of this book’s critique

Mainstream Approach to Financial Literacy

Education

The mainstream approach tofinancial literacy education regards it as apositive, non-violent and effective state intervention in consumerfinancial markets It views financial literacy education as an empoweringtool that can build consumer resilience and protect consumers bystrengthening their bargaining power The academic interest infinancialliteracy education has mainly grown from a number of failures offinancial market regulation

Initially,financial literacy education predominantly served to promoteand support greater pension privatisation across countries Given thatsome countries have shifted the responsibility for social welfare from thestate to the individual,financial education was expected to facilitate thetransition The policy research work undertaken by the Organisation forEconomic Cooperation and Development (OECD), which is perhapsthe key international advocate forfinancial literacy education, illustrateswell this approach (Galer 2002; OECD 1998, 2000, 2003a, b) In theearly 2000s, the OECD describedfinancial education as a necessary toolfor consumer recruitment into the pensions market:

…let us be clear: this move will not be a panacea since they may just reallocate the risks away from companies (fund sponsors) and transfer them to the “ordinary people” in our societies Here the problem arises of the capacity for individuals to protect themselves adequately, in the absence of proper financial education and consumer regulation How satisfied can we be that the existing levels of financial education are “ad- equate” in this regard? Although we must recognize that this is still very much uncharted territory, let me say that I have very serious doubts about the state of affairs on this ground (Johnston 2004 , pp 3–4)

Related to this, financial literacy education was seen as a panacea forpension mis-selling Referring to the 2001 collapse of the EnronCorporation, one of the OECD’s representatives has argued that:

…American workers are further sensitized to the basic tenets of managing

a retirement investment portfolio Unfortunately, however, many of these workers have not sought or do not have access to professional investment advice Nearly 70 percent of workers look to family and friends for financial advice while the remainder consults with financial planners and financial services firms for professional advice on financial products and investment decisions…The current situation among American workers might serve as a model as to what not to do! Policy makers must take a very careful look at the level of investment education and advice available

to private pension participants (Brahs 2002 , pp 5–6)

In just a few years, the regulatory interest infinancial literacy educationhas grown immensely Not only have more countries and internationalinstitutions rolled out projects onfinancial education, but its regulatoryambitions have evolved and expanded1 (OECD 2009; Rutledge et al

2010; Ledgerwood et al 2013) This became particularly evident afterthe financial crisis when the G20 placed financial literacy education onthe international regulatory agenda (G20 2011) Portrayed as systemi-cally dangerous to the global financial system, consumers were criticisedfor a failure to think and act responsibly towards theirfinances (Rutledge

et al.2010; Rutledge2010; The Lord Turner2009; OECD2009) As aresult, financial education emerged as a central regulatory mechanism torespond to these problems

Academic support for this regulatory turn to financial literacy tion can primarily be found in economics scholarship (Shiller 2008;Gallery and Gallery2010; Garcia2011; Inderst2011; Gathergood2012;Collins2012) In essence, this body of academic work has identified andfocused on two interrelated problems that are typically experienced byconsumers when making choices First, lack of access to information andfinancial advice is regarded as having contributed to high exposure to

financial risks Shiller’s explanation for the financial crisis, in fact, tures this approach well:

cap-Low-income individuals who took out risky subprime mortgages, with interest rates that would soon be adjusted upward, were often unaware of the known risks inherent in such mortgages They had no clue that there was a real risk that, in the event of a crisis, they would not be able to refinance their mortgages Why not? Because there was little economic impetus to provide such information through established communication channels Thus these new homeowners unwittingly assumed hazardous risks (Shiller 2008 , p 123)

Contrary to this, the financial resilience of wealthier consumers duringthe financial crisis is explained by their easy access to financial infor-mation and advice:

Financial advice magazines did indeed report on these risks So, while the higher-income subscribers to those publications got the story and stuck overwhelmingly to conventional fixed-rate mortgages, many lower income people were left with personal tragedies (Shiller 2008 , p 123)

Second, financial literacy education is articulated as an effective way ofreducing cognitive errors and mistakes to which consumers are suscep-tible when making financial decisions2 (Gathergood 2012) Advice andeducation-based consumer protection is presented as superior to theinformation-based approach, which was traditionally used to protectconsumers through techniques such as disclosure and labelling Adviceand education, the argument made, are interactive, regulatory techniquesthat are attentive to consumer behavioural biases (Inderst2011; Galleryand Gallery2010) Essentially, this academic work suggests that greatereducation or professional consultation can potentially help consumersovercome problems such as overconfidence, inertia, information over-load, confusion over jargon, or heuristic decision-making.3