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School of thought

Sometimes, the financial services industry seems to be under siege from all sides. Often, the policy response to such challenging times is short term.

The public pressures politicians for quick-fix solutions. Often, long-term strategies are crowded out of political debate. However, it is just such long-term and fundamental policies and, specifically, investment in financial education which are required.

The financial services industry certainly faces considerable challenges. First, not enough people, particularly the young, understand the importance of saving for retirement. Too many people are heading for a quality of life in old age below the standard they expect.

Many children are not aware of the important financial decisions they will need to make and of the impact on themselves and others.

Also, distrust in the financial services industry has reached unprecedented levels. In one survey, under 5 per cent of people said that they trusted financial advisers “a great deal”.

The industry as a whole is regarded as a bunch of rogues. Finance ads carry more health warnings than you can shake a stick at. There are more regulators than in any other industry and yet consumers still severely lack trust.

A third challenge concerns financial exclusion. Basic bank accounts go some way to ensure that all people can access mainstream financial instruments. However, they are not the full answer.

Full financial inclusion, as the Government is starting to realise, is only achieved when, first, people are engaged in a range of different products and, second, when they do this in an informed manner. To achieve the latter, we also need to look at demand. This means trying to build people&#39s financial capability through education.

So, is there a knight in shining armour to meet these challenges? There are short-term responses, ranging from simplification of products to increased regulation. However, we must not lose sight of the need for long-term measures. We have already mentioned the premium which ought to be placed on building people&#39s capacity in the first place. We need to create better informed and financially cap-able consumers.

In part, this will require improving numeracy and the adult population&#39s financial capabilities. More fundamentally, however, we need to concentrate on changing habits at an early age. When children returned to school in Sept-ember, for the first time they might have found themselves sitting through financial education classes. Teachers can now teach financial education as part of either physical, health & social education or the new citizenship classes.

When the effects of this have fed into the adult population, this could help ensure that people are less likely to be financially excluded.

It will also ensure that people are more confident and will be happier entering a high-street bank. It could make people more aware of when it is necessary to have long-term savings. This will also contribute to a healthier and more trusting relationship between consumers and the financial services industry.

Organisations such as the personal finance education group have done sterling work in pushing financial education in schools. However, there are some weak spots in this knight&#39s armour – one very immediate and one more fundamental.

The immediate one is that financial education is not part of the statutory national curriculum, that is, it is not compulsory for teachers to teach it.

They could prioritise other areas of PHSE and citizenship education. In the case of citizenship education, many teachers have opted to focus more on democracy than on financial awareness.

This is partly because of a crowded curriculum and partly because teachers lack confidence in teaching about financial matters.

Policymakers should be pushed to try and boost the profile of financial literacy and awareness in schools. However, more immediately, there is an important role that the financial services industry can play in working with schools and other organisations to make it easier for them to teach the subject.

The other chink in the armour is more long term. There is a danger that straightforward financial education will not engage secondary school pupils.

Would you have been interested in thinking about pensions when you were 14? Part of the answer can be found in making classes relevant. One way of doing this could be to focus on issues such as ethical investment. Ultimately, it would be powerful for financial education to be linked with products that people hold.

The introduction of the child trust fund could be an opportunity to make links between education and real long-term products. This policy will mean that all children grow up with an account and a pot of money invested until they turn 18, when they will have access to the money. If the CTF is used well, it could be a useful tool for teachers in financial education.

In the end, the challenges outlined above need to be met through a combination of measures. Some will be short term but others need to be more fundamental.

If we want the industry to be trusted, if we want more people to realise the need to save and if we are serious about tackling financial exclusion, we must welcome the appearance of financial education in the curriculum. How-ever, it is only a start and further progress is undoubtedly required if its full potential is to be harnessed.

Will Paxton is research fellow at the IPPR


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