Individuals, organizations, and the government must work together to empower individuals to make the most of their money.
The topic of “financial capability” is heating up in the UK. It is defined as “the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes but is not limited to access to appropriate financial services” according to the Center for Financial Inclusion.
In short, financially capable individuals are able to make informed decisions about how to use their money, take actions that reflect their aims, and successfully balance risk with reward as well as the short term with the long term, according to the Money Advice Service.
Those with low financial capability include individuals who have no retirement savings, are struggling to save to buy a house, cannot read a bank statement, cannot pay unexpected bills, do not keep track of their finances, and cannot make decisions about financial products.
It is a highly complex problem, impacted by both individual and societal factors, that not only impacts individuals but the entire economy. It cannot be solved with a single initiative, but instead requires a collective and holistic solution involving individuals, organizations, and the government working together.
With this goal in mind the Money Advice Service has created the UK Financial Capability Strategy, as part of which it will serve as the backbone organization to bring everyone together to reach the common goal of empowering individuals to make the most of their money and manage it better. It is not about influencing the amount of money individuals have but what they do with it. Individuals must believe they have the ability to become financially capable.
The Money Advice Service is looking to create initiatives that mutually reinforce one another and are tested in their success through shared targets and measurements. Initiatives will need to target people across all lifestages. This includes tackling the pension crisis, whereby older individuals do not have enough savings for retirement, and improving the financial capabilities of younger individuals with student debt who are struggling to save to buy a house.
It seems both the government and other organizations are beginning to take this message on board. The government recently unveiled plans to give those struggling with problem debt six weeks of “breathing space”, whereby they would be free from further interest, charges, and enforcement action so they can seek financial advice. Whether this is enough time is questionable, but it is encouraging to see greater sympathy for individuals in financial stress.
Meanwhile the financial services industry is working to create better products and services in order to foster an environment in which individuals can become financially capable. Examples include the protection industry trying to narrow the protection gap and the Chartered Insurance Institute’s Building Resilient Households project.
The financial services industry must ensure complex products are made simpler and more transparent. Our recent 2017 UK Consumer Insurance Survey highlighted that there is still high misunderstanding among consumers in terms of what type of protection products they have.
Employers are also taking a bigger interest in their employees’ lives, acknowledging the prevalence of mental health, stress, and illness in the workplace, all of which can impact individuals if they are unable to work.
There is a long way to go, but it seems there is a clear pathway emerging to solve the complex problem of financial capability.
By Danielle Cripps, General Insurance Analyst