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Capable hands

Financial capability looks set to build up a head of steam this year now that the Treasury has set out its long-term approach and plans to achieve “the vision of more financially capable consumers.”

It has also appointed Aegon UK chief executive Otto Thoresen to look into establishing a national approach to generic financial advice. Both the Treasury and the Thoresen review are seeking views.

So, what will this mean for advisers? The cynics might say it will make no difference but it is possible that, if it works, in the long-term, it might just lead to more people seeking financial advice.

The Government wants to ensure that people are able to make the best-informed decisions about their finances. by providing personal finance education in schools, generic financial advice to adults and various other programmes specifically focused on those who are most vulnerable to the consequences of poor financial planning. If all this is achieved, it will undoubtedly lead to more financially capable investors.

The challenge of building financial capability is not an easy one, however, and it is important to recognise that different consumers will have differing levels of need.

Broadly speaking, financially capable consumers should be able to act on their knowledge of financial issues to take the financial decisions most appropriate to them, in other words, to be empowered to make the most of financial services, including advice, to meet their needs.

Of course, not everyone will be in a position to seek regulated financial advice. Many will simply be looking for budgeting and debt management skills. These consumers are not the target market for financial advice. Neither should they be.

The IMA has long advocated the need for financial advice for consumers wanting to invest in the stockmarket but only where it is appropriate for them to do so.

In other words, unless people are managing their debt effectively, have the necessary insurance protection in place and have spare cash for a rainy day, it is not wise for them to invest in the stockmarket.

But it is possible that some of those who might benefit from increased financial capability might see the benefit of seeking regulated advice. If the Government is serious about getting people to make their own financial decisions and to encourage saving for the long term, then surely a key success criteria will be to educate more people about the benefits of advice and long-term savings. And education around long-term savings has to include pensions.

There is clearly a need for more education around the tax benefits of saving through a pension and the different options available. This is where workplace education schemes might come into their own, with advisers benefiting from potential partnerships with employers keen to help their employees understand pensions.

All in all, the Government’s leadership in establishing an effective programme of financial education is to be welcomed.

Its involvement is crucial in improving consumers’ financial capability, in particular, their willingness to engage with the financial services industry to make sound financial decisions.

Mona Patel is head of communications at the Investment Management Association.

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