The world may be a financially more sophisticated place today than a generation ago, but financial literacy skills don’t appear to be keeping up. Research from Stanford Business School suggests ‘worldwide, just one in three adults are financially literate’, finds ‘women, poor adults and lower educated respondents are more likely to suffer from gaps in financial knowledge’ and argues that it’s an issue across developing and advanced economies alike.
Assessments of financial literacy typically measure foundational, widely encountered concepts such as interest rates, interest compounding, inflation and risk diversification. Increasingly, digital skills are also in the mix, and for good reason: a 2020 study of European consumers found 13% of adults to have experienced financial loss because of online scams or fraud.
‘Those who go through life making poor financial decisions will end up with a far lower standard of living’
Lagging behind
As this AB article demonstrates, ACCA members worldwide have long viewed financial literacy as ‘a critical life skill’ that is ‘vital for creating a financially inclusive society’, while Keith Hall, former assistant governor of the Reserve Bank of Australia, cautions: ‘Those who go through life making poor financial decisions will inevitably end up with a far lower standard of living than was otherwise achievable.’
However a recent OECD report found that, globally, ‘behaviours such as comparing products, shopping around when buying financial products and services, or seeking advice from independent sources are not common’, and recommended a targeted, evidence-based approach to financial education provision.
Over the past two years the European Commission has developed specific financial competence frameworks aimed at adults and children and younger people, and is calling on member states to utilise them to ‘develop concrete policies, programmes, and learning materials on financial literacy’.
‘There should be a lot more education on the ultimate extra cost of purchasing a product by way of a loan’
Against this background a 2023 Bank of Ireland survey found Ireland lagging global peers with an average financial literacy score of 54%, compared with Australia at 64%, Germany at 66%, and the UK at 67%.
What needs to be done?
The National Financial Literacy Strategy report recommended:
- financial education for adults with specific needs or consumers in specific circumstances
- an increased focus on independent investor education, particularly for adults
- financial education on managing debt and to help those struggling with debt
- financial literacy for SMEs
- digital financial literacy to help consumers
- financial literacy opportunities within the curriculum.
Source: Department of Finance
While the report found basic numerical skills to be strong, knowledge of savings and tax reliefs was weak. There was significant age disparity: 18-34 year olds score lowest (48%) compared with 58% for over 65s, a particular concern given the rising popularity of crypto among younger men.
Taking responsibility
Shane O’Toole FCCA is the author of Fit Money: The Key to Financial Freedom, written to address the lack of financial knowledge he saw among clients when working as a practitioner (see AB article) and to highlight the role accountants can play in sharing their knowledge.
He says there’s a clear responsibility on government ‘to create and support initiatives which drive good financial health. There should be a lot more education on borrowing money and the ultimate extra cost of purchasing a product by way of a loan rather than savings.
‘I have worked with some very wealthy people who are not good with money and those earning a moderate income who are financially astute. However, wealthy people can pay for professional advice whereas the general public need to be led by government initiatives.’
In 2023, the Department of Finance announced plans for a National Financial Literacy Strategy (NFLS), initiated with a call for submissions and leading to publication of an evidence base last March, with final details expected by the end of this year.
‘Our aim is to work together to enhance financial knowledge in an increasingly digital world’
Among its positives, the report found ‘a wide range of work being undertaken by stakeholders in financial education in Ireland’; of the 56 organisations that made submissions, 44 currently provide financial education in some form. Bank of Ireland, for example, plans to invest €4m to reach 110,000 people via a range of financial literacy initiatives in 2024 and 2025.
However, there were questions around effectiveness. Of the 111 financial literacy initiatives identified, only 32% incorporated specific key performance indicators.
Good habits
July saw the minister for finance, Jack Chambers, hosting a stakeholder event to discuss the priorities and potential contributions to the NFLS, which brought together 91 public and private sector organisations from the financial services industry, education, civil society and government departments and agencies, as well as the Competition and Consumer Protection Commission, the Central Bank of Ireland, the OECD and the Financial Consumer Agency of Canada.
Chambers said: ‘Our aim is to work together to enhance financial knowledge, which will help people to make better financial decisions, better understand the information that is provided to them, be more confident in transacting their financial affairs in an increasingly digital world.’
‘Managing money is like managing health; you get away with poor habits for a while but there is a cost’
Lessons from other jurisdictions will likely provide important reference points for the NFLS. Introduced in 2020, the UK Strategy for Financial Wellbeing is a 10-year framework that involves both working with existing organisations and delivering services directly. In Denmark, financial education is compulsory for students aged 13-15, a fact the World Economic Forum says contributes to a 71% financial literacy rate, among the highest in the world.
‘Managing money is like managing health; you get away with poor habits for a little while but ultimately there is a cost,’ O’Toole says. The test of the NFLS’s success won’t be any one particular outcome in any one group, but how it promotes better decision-making among all of us over the long haul.
