Financial education is like ‘motherhood and apple pie’.
No one is supposed to criticise it. But, at the risk of appearing iconoclastic, the evidence suggests that it doesn’t really work.
There are exceptions, of course, but many of the studies quoted by advocates are based on self-reported surveys – for example, consumers saying they feel more confident or intend to save.
Thankfully, we are starting to see consumer groups being more realistic about financial education.
But, why do so many opinion formers and commentators still advocate financial education? We see four, sometimes overlapping, groups.
The first are newly involved in financial services (MPs are a good example). Understandably, they assume financial education must be a good thing – until the penny drops.
The second group are industry representatives who support financial education to ward off regulation. You know how it goes – ‘we don’t need any more of that intrusive, innovation-stifling, nanny-state regulation, let’s empower consumers instead’. It’s also attractive for corporate social responsibility departments.
The third group are market ideologues (often competition economists) who really believe that information asymmetry theory explains market failure and, if we can only educate consumers, this will level the playing field.
The other type of market ideologue thinks consumers must be financially educated as it is character building. They also don’t like the so-called nanny state, and believe that consumers have a duty to play a full and active role in a market society.
The fourth group are those who want financial education to work. There is a sizeable cottage industry of charities and academics who rely on financial education initiatives to make a living.
Of course, we might say that, even if financial education doesn’t work, surely it can’t do any harm.
But, it can be harmful if policymakers divert limited resources away from interventions that do work. With an oversupply of unnecessarily complex, opaque, risky, poor value products the priority should be to first simplify and clean up the market. Financial education might then stand a chance of adding value.
*Financial education is not the same as active behavioural interventions – for example, trusted intermediaries ‘nudging’ consumers to adopt positive financial behaviours. This does seem to work in the right conditions.
Mick McAteer is co-founder and co-director of The Financial Inclusion Centre