Financial Education and Consumer Protection ~ Measuring Effectiveness 3 rd International Forum on...

Financial Education and Consumer Protection

~ Measuring Effectiveness

3rd International Forum on Financial Consumer Protection and Education15 December 2005, Kuala Lumpur

Christina TanDeputy Director & Head, Consumer Issues DivisionMonetary Authority of Singapore

Outline

Common Threads in Consumer Protection and

Financial Education Tools to Measure Effectiveness of Financial

Education Sharing Singapore’s Experience

Common Threads in Financial Education & Consumer Protection

Common Goals

To enable consumers to achieve fair dealing

To enable consumer make more informed and effective financial decisions

To enable consumers to resolve disputes with financial institutions

Complementary Approaches

Regulatory Framework

On-going Supervision

Enforcement & Remedial Action

Financial Education


General consumer protection laws

Industry specific requirements / standards that promote fair and transparent markets

Industry codes and best practices

Consumer panels that provide feedback on financial services regulations and policies



Proper approval / licensing and supervision of industry players to ensure that prudential and conduct standards are met


Effective enforcement against industry players who breach regulations

Consumer compensation mechanisms


Common Yardsticks



Enforcement & Remedial

Action

Mostly indirect indicators

Examples:

Number and nature of complaints

Inspection findings

Number of institutions operating without required license

Errors or omission of information in sales materials / offer documents

Enforcement actions





Financial Education

Focus of this presentation

Financial Education

Empower consumers to make informed and effective financial decisions

Equip consumers with knowledge and ability to resolve disputes with industry players


More regulators are taking on the role of financial education. Why?

Move towards disclosure-based regime

Ageing populations

Increasingly more complex products

Consumers have greater access to variety of financial products.

Larger number of consumers are involved in financial markets

Consequences of poor financial decisions

Trends Underscoring Need for Financial Education

Benefits of Financial Education

Empower consumers to make more informed investment decisions

More sophisticated investors help the market grow in depth and liquidity

Less reliance on the state

But does financial education really work?

Studies Show That Financial Education Makes A Difference

USA - 1.5%1 increase in average savings rates among adults who attended high schools in states with financial education requirements in public schools.

USA - Availability of retirement-focused financial education in the workplace increased average savings rates by 1.65%2.

Source: 1) Bernham D., Garret D., and Maki, D “Education and Saving: The Long Term Effects of High School Curriculum Mandates”, National Bureau of Economic Research, USA, July 1997; 2) Bernham, D. and Garret, D. “The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households”, National Bureau of Economic Research, USA, June 1996

Studies Show That Financial Education Makes A Difference

Australia - The lack of financial education costs the average wage earner $790,0003 over their lifetime.

Source: 3) Study by government taskforce on financial literacy, Australia October 2005

Tools to Measure Effectiveness of Financial Education

Common Threads in Financial Education

Provide information to help consumers make informed decisions

Seminars, talks, publications, portals, helplines, investor alert lists

Focus on retirement planning / pension plans

Start financial education in schools

Provide information on channels to resolve disputes

Close collaboration with industry and consumer associations

Variety of Yardsticks

Outreach Statistics

Feedback Forms & Surveys

Complaints (e.g. nature of complaints, percentage of complaints resolved)

Economic & Social Indicators (e.g. credit card rollover statistics, household debt statistics, bankruptcy rates, number of individuals on financial assistance schemes)

Common Finding: Room for Improvement in Financial Literacy

Japan – 71% lack knowledge of equities and bonds; 57% lack knowledge of financial products in general; 29% lack knowledge of insurance and pensions

Korea – High school students had failing scores in test measuring ability to choose and manage a credit card, to save and invest for retirement, and awareness of risk and insuring against it.

Source: Findings on financial education compiled by OECD, Oct 2005

Australia – 37% of those with investments did not understand that investments can fluctuate in value

United States – 50% of adults and 66% of high school students fail basic economics test.

United Kingdom – fewer than 40% of respondents are confident about making financial decisions

Many consumers overestimate their knowledge of financial issues

Source: Findings on financial education compiled by OECD, Oct 2005

Common Finding: Room for Improvement in Financial Literacy

Challenges in Measuring Effectiveness

Key Challenges in Measuring Effectiveness

Experience & circumstances

Knowledge & understanding

Skills

Personality

Confidence & attitudes

BEHAVIOUR

Many Factors Influence Consumers’ Behaviour

Source: Adult financial capability framework developed by UK FSA and Basic Skills Agency, 2004

No One Perfect Tool

Key challenges:

Understanding consumer attitudes and behaviour in making financial decisions

Identifying cause-effect relationships between financial education and making of financial decisions

Monitoring long term effect of consumers’ financial decisions

Sharing Singapore’s Experience

Approach to Empower Consumers to Achieve Fair Dealing

Enhancing Disclosure, Market

Conduct & Professional Standards

Facilitating Consumer Redress

Enhancing Financial Education

Financial Advisers Act (FAA)Securities & Futures Act (SFA)

Financial Industry Dispute Resolution Centre

MoneySENSE national financial education programme

Enhancing Disclosure, Market Conduct & Professional Standards

Examples of requirements under FAA / SFA:

Disclosure requirements for investment products

Market conduct requirements (e.g. financial advisers need to have reasonable basis for product recommendations)

Minimum professional standards for representatives conducting regulated activities






Financial Advisers ActSecurities & Futures Act




Financial Industry Disputes Resolution Centre (FIDReC) is a one-stop centre for all financial sector retail disputes

Covers banking, insurance and capital markets disputes

Dispute Resolution Scheme is an alternative to the court process, affordable

2-staged process (mediation & adjudication) Decisions are binding on financial institutions,

but not on consumers

Success of Previous Dispute Resolution Schemes

Consumer Mediation Unit (Banking)

376 Complaints, Enquiries and Feedback in 2004

97% Resolution Rate

Insurance Dispute Resolution

1,022 Complaints and Enquiries from Feb 03- Mar 2004

100% Resolution Rate

Dispute Resolution Process

2 Stages

Mediation Case Manager

AdjudicationPool of Adjudicators

Most Cases resolved at this

stage (95%)

Monetary Awards can be

made at this stage.






Financial Advisers ActSecurities & Futures Act



Enhancing Financial Education To Develop Well-Informed Consumers

In a disclosure-based regime, consumers bear the principal responsibility for protecting their own interests. MAS cannot protect consumers from investment risks.

Disclosure-based regime cannot work if consumers do not know how to make use of the information disclosed to them.

Financial education helps to empower consumers to make informed choices.

MoneySENSE Industry Working Group (MIWG)

Financial Industry Assocns

Consumers Assocn

MoneySENSE Structure Rests on Partnerships

MAS

MCYS MOM CPF Board

MOE

People’s Assocn

Financial Education Steering Committee (FESC)

- Feedback- Conduct activities- Report on industry

initiatives

Funding, Endorsement, Overall Policy

Direction

Structured Approach Helps Us Focus Our Efforts Systematically

Tier II : Financial Planning

Tier III : Investmen

t Know-How

Tier I : Basic Money Management

Three tiers of financial literacy

Priority: Build Strong Foundation First

No endorsement or promotion of specific organisations, associations or products

Variety of Channels & Yardsticks

Target Audience YardsticksChannels

Interactive Skits

Seminars / Talks /

Workshops

Games / Contests

Media Articles

Consumer Guides / Website

Families

Low-Income / Financial Assistance

School-children

Retirees / Pre-retirees

Working Adults

Housewives

Outreach Numbers

Feedback Forms

Webpolls / Survey

Contest Participation

Website Hit Rates

Seminars: Are They Effective?

Tools Used to Measure Effectiveness:

Quiz questions to test understanding

Forms to get feedback on content, speakers, materials, etc

Request participants to list 3 things they learnt

0 10 20 30 40 50 60 70 80 90 100

Basics and features of ILP

Questions to ask a Financial Adviser before buying

Various charges of an ILP

Disputes resolution available at FIDReC and CASE

Interpreting annual statements of an ILP

Personal responsibility to regularly review own ILP

Investment risks of an ILP are fully borne by the policyholder

Invest in different funds to achieve desired degree of diversification

Allocation rates

Free look period

Difference between an SP and an RP policy

Seminars: Are They Effective?

Request Seminar Participants to List 3 Things They Learnt

Some participants could list quite detailed areas

Source: Above chart based on analysis of feedback forms received at a MoneySENSE seminar on Investment Linked Insurance plans in 2005

High recall for general messages

Workshops: Are they Effective?

Most effective when there is follow-up action

E.g. Workshops for low income families where volunteers follow up with attendees on targets set for savings and expenditures. “Graduation” ceremony is held for workshop participants.

Learning thru Play: Is it Effective?

Concepts include:

Money management

Business cycle changes

Job changes / upgrade skills

Risk mgt (Insurance)

Investments

Learning thru Play: Is it Effective?

Sample Feedback Analysis

94% felt that they can understand more about the subject matter.

89% felt that the game board is a useful tool to learn about financial life skills.

83% felt that they have learnt new skills which they can apply in real life situations.

5% felt the game board is not relevant to them

Media Columns: Are they Effective?

0% 10% 20% 30% 40% 50%

Cheque

CPF

Insurance Stm

Insurance BI

Credit Card

ILP BI

SMS entries

SMS Contests to Gauge Readership & Knowledge

Simple documents attracted most readers.

Newsletters: Are they Effective?

Visit MoneySENSE website for more tips and download a budget template

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Surge in website hit rates when newsletters are published. 15% of visitors clicked on budget template.

Newsletters: Are they Effective?

SMS Poll: Make a Commitment

1. Check how much savings you have

2. Set a target for saving for emergencies

Rule of thumb: 3-6 months income

Findings• Poll attracted people who are already saving (average 3

months’ income)• Participants aim for higher end of recommended range

(average 6 months)• Participation rate is a fraction of quiz questions. Could be

due to unwillingness to divulge personal information.

National Financial Literacy Survey

Objectives

Measure current levels of “financial literacy” among different segments of Singaporeans.

Gauge Singaporeans’ attitudes towards financial matters.

Identify gaps in financial knowledge and actions.

Identify areas where more consumer education is needed & the most effective channels for delivery.

Defining Financial Literacy

“the ability of individuals to make informed judgements and take effective decisions in

managing their finances”

Actions Knowledge

Key attributes:

• What steps Singaporeans have taken to manage their money.

• What active plans Singaporeans have made to plan for their future / retirement.

• For Singaporeans who invest, what steps they have taken to understand what they invest and monitor investment performance.

Key attributes:

• What level of understanding do Singaporeans have of the risks and implications of common financial products:

• - Loans.

• - Life insurance policies.

• - Investment products.

Research Methodology

External research consultant commissioned to undertake this survey.

Face-to-face interviews with a representative sample of 2,023 persons aged 18 to 60 years old.

Research covered only analysis of findings based on the responses of those surveyed. Does not include analysis or comparison with findings of other studies.

While any scoring system has its limitations, we considered it useful to construct a Financial Literacy Score to provide a basis for benchmarking.

Survey Findings are Encouraging

AC

TIO

NS

Generally good money management habits.

Singaporeans recognise the importance of planning for their finances and have taken some basic steps in financial planning.

Singaporeans who invested take a considered approach in their investment decisions.

KN

OW

LE

DG

E

Generally knowledgeable about their loans.

Understand risks inherent in investments & importance of diversification.

Areas for Improvement

Inadequate Savings for Emergencies Only 32% of Singaporeans have cash savings of at least 3 times their monthly income.

Inadequate Retirement Planning Only 24% have actually calculated how much they would need when they retire.

Inadequate Understanding of Common Financial ProductsSingaporeans are not aware of basic features of common financial products such as life insurance, unit trusts and structured deposits.

Developed a Financial Literacy Score

Financial Literacy Score

X 100

(Adjusted aggregated score for Action + Adjusted aggregated score for Knowledge)

(Score range value for Action + Score range value for Knowledge)

=

Scored questions which test Singaporeans’ financial actions and knowledge.

Weighted score assigned for each response.

Scores were aggregated and normalised across a 0 – 100 scale to derive a Financial Literacy Score.

Total Singapore Population

Action Knowledge Financial Literacy Score

Tier I Basic Money Management

72 76 74

Tier II Financial Planning/Retirement Planning

64 61 62

Tier III Investment Know-How

67 59 58

TOTAL 70 65 67

Financial Literacy Scores By Tiers

Financial Literacy Score by Education(Total Financial Literacy Score)

73

72

70

70

73

64

56

76

70

71

63

59

51

41

0 20 40 60 80 100 120 140 160

UniversityDegree/Postgraduate

(75)

Polytechnic/Diploma(71)

JC/Pre-U/A-Levels(71)

Secondary (66)

ITE (65)

Primary (56)

No formal education(47)

Action

Knowledge

Financial Literacy Score by Monthly Household Income(Total Financial Literacy Score)

72

72

70

70

71

70

69

62

80

77

74

70

66

62

56

52

0 20 40 60 80 100 120 140 160

> $10k (77)

$6k - $9,999 (75)

$5k - $5,999 (72)

$4k - $4,999 (70)

$3k - $3,999 (68)

$2k - $2,999 (65)

$1k - $1,999 (61)

<$1k (56)Action

Knowledge

Main Survey Findings by Segments

807266

Mean

55

Moderately Low

Average Moderately High

High financial literacy

Low financial literacy

27% of Students25% of Housewives33% of Unemployed

40% of Retirees

34% of Working Marrieds

All other segments:•Students

•Working Singles•Working Marrieds•Working Parents

•Pre-retirees•Housewives•Unemployed

•Retirees

Financial Literacy Scores by Segments

Tier 1 (Basic money management)

Tier 2 (Financial planning)

Tier 3 (Investment know-how)

Overall Mean Score

Retirees 65 55 50 59

Unemployed 68 53 58 61

Students 71 51 57 62

Housewives 72 60 51 64

Pre-retirees 73 63 58 67

Working Singles 77 64 62 70

Working Parents 77 68 63 71

Working Marrieds 80 71 65 74

Total Population 74 62 58 67

E.g. Need initiatives to educate retirees how to manage their

retirement funds

Identify desired outcomes (e.g. x% increase in financial literacy scores)

Set measurable outcomes (e.g. x% with at least 3 months savings for emergencies) for each segment

Implement programmes to achieve desired outcomes for each segment

Conduct next financial literacy survey in 2 to 3 years’ time

Conduct dipstick polls in the interim

Next Steps

~ Thank You~

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