Tuesday, 5 November 2013

Improving Financial Literacy & Inclusion

Bethan Jenkins wants to help consolidate your existing financial
education and inclusion measures into one "easy" managable law.
(Pic : Click on Wales)
With one backbench law passed, another set to be passed later this month, and a third in consultation,  a fourth Member's Bill was recently granted leave by the National Assembly to be introduced.

Bethan Jenkins AM (Plaid, South Wales West) won a ballot to introduce a Member's Bill in July. What was originally titled a "Financial Literacy Bill", has since been redubbed the Financial Education and Inclusion Bill.

The Bill hasn't been drafted yet, and if the blog's still going I'll return to it when it is. Subject to consultation, Bethan explained on the Plaid Cymru website and Click on Wales that the proposed law has two main components.

The Essential Bit
  • Promotion of financial education to help future generations manage their money.

It's been acknowledged that the Welsh Government have made significant improvements to financial education, and training teachers to teach it. There are always those who fall through the net though, and "providing opportunities" to learn something doesn't always mean it's covered to its fullest extent.

There are at least three subjects financial education naturally falls under – maths, business studies and PSE - as well as extra-curricular activities like Young Enterprise. Only maths and PSE are compulsory, but you would fully expect concepts like the following to be taught to everyone :
  • The meaning of common financial jargon (i.e APR, endowments, equity).
  • How common financial products work (i.e. mortgages, tariffs, tenancies, pensions).
  • Day-to-day budgeting and how to judge a "good deal" and a "good investment".
  • Consumer protection and employment rights.
  • Fundamentals of economics and business.
With the possible creation of a separate "numeracy" maths GCSE in Wales, you would expect "everyday maths" (like that listed above) to form the backbone of the new qualification. It could even help PISA results as the test questions often include scenarios like those above.

The mooted proposals are about more than the classroom though.

Financial education has been massively improved in Wales, but
children often learn about the "big" financial matters informally.
(Pic : The Guardian)

Since the introduction of tuition fees and student loans, university has become as much about finances as academics. There are loads of "student deals" (which might not be as great as they seem) and more options for accommodation from the private sector. Many students seem pampered in terms of cars, iPads etc. (which require greater upkeep costs, like special insurance) often trying to hold down jobs in addition to studying.

If you don't get the right advice beforehand, you're effectively thrown in at the deep end. Considering there are plenty of sharks out there, it's not the best way to introduce young adults to the realities of personal finance. For those who leave full-time education earlier, or even leave the military having had everything provided for them, they're perhaps in an even tougher position.

Even after you've left education or training behind, there's the bewildering array of products available from banks and building societies, as well as issues surrounding long-term investments like housing and the often-overlooked issue of pensions.

So Bethan's proposals make financial education lifetime learning, perhaps becoming a statutory responsibility of student pastoral services (in FE colleges and universities), housing associations and public bodies like local authorities as much as teachers.

You could - as I suspect many people will - argue that tweaking the existing curriculum to include more financial education is better than a new law. That should be done anyway. However, because the aims here are broad – going beyond the classroom – using the full extent of the law is necessary to lock it in as a permanent feature, instead of it becoming another throwaway strategy or framework.

Ensuring future generations know the value of money
and how to check the small print is a no-brainer.
(Pic : The Guardian)

The only thing I'd pick up on is that because there are so many types of "literacy" nowadays – computer, scientific, physical and now financial - this could open the door to umpteen future "literacy bills"  creating an inflexible "curriculum by statute".

So it's worth ensuring the word "literacy" - even if dropped from the title - doesn't become as abused in the Senedd as "sustainable/sustainability".

Managing your finances tracks you from the first time you receive pocket money to beyond death. As a topic in its own right it's worthy of legislation, and in many respects it's as important as basic literacy, basic numeracy and sex education.

If this starts young and is successful, then the long-terms benefits could be enormous; creating a generation of consumer-savvy individuals who can make wise choices, are willing to save and look for bargains, and who are much harder to dupe - improving not only their bank balances but their quality of life too.

The outline principles of the proposed Bill have the support of various organisations, as well as financial education campaigners like moneysavingexpert.com's Martin Lewis. They're also likely to enjoy significant cross-party support in the Senedd, with all the foundations of an important, possibly groundbreaking, law.


The Difficult Bit
  • Providing greater powers for local authorities to promote financial inclusion – to help people with their current debt problems.
It's worth pointing out that a lot of the hinted measures here – like "one stop shops" for online advice and promotion of the Money Advice Service – overlap with the first part. I doubt there'll be any problems there as there's no harm in ensuring people get the pre-existing help they might need.

The problem is that it's framed as, in the main, cracking down on payday lenders, loan sharks, scammers and cold-callers who might exploit those on low incomes. The Assembly became victims of doorstep cold-callers themselves last week, while - coincidentally - payday lenders have been in the news today, defending themselves to a House of Commons committee.

Yes, they're usurious bastards, but are they the
right target for the right reasons?
(Pic : The Mirror)
The main way it's been "combated" to date is through local authorities blocking payday lending websites from public computers (in libraries and community centres etc.). Both Bethan Jenkins and prospective Ogmore Plaid candidate, Tim Thomas, have tried to get Bridgend Council to follow suit - unsuccessfully so far - and the issue has been raised regularly in the Assembly.

It's a blunt measure that should only be used in extreme circumstances, as it's generally not a good idea to go around blocking websites you "don't like". You could apply the same criteria to seemingly unrelated websites for the same reasons - like homoeopathy, psychic medium, gaming and conspiracy sites. It's also a largely redundant measure when you can get Wonga-type loans through smart phones.

I don't understand why payday lending is being targeted specifically, when borrowing from "legitimate" lenders often carries greater risks. You default to a payday lender, you might be aggressively chased for debts or have your income garnished - which would certainly cause problems. You default to a bank, you might lose your home.

As Miserable Old Fart said in June, payday loans are used by those who live from paycheck to paycheck, and who face an unexpected expense before their next paycheck's due. Hence they're unsecured loans "approved in five minutes". People use them because they're fast and polished.

Payday lenders are only guaranteed to get their money back, and make a profit, through quick repayments which are normally taken directly from bank accounts. The interest on a short-term loan is usually around 20-30%, but annual interest (APR) is in the 1000s of %. The annual figure – which politicians and others highlight for criticism - is a red herring as the loans are supposed to be paid back over days and weeks, not months and years.

Trouble starts when people on squeezed or fixed incomes – like pensioners, students and those reliant on welfare – are seduced by promises of "quick money", take out loans they simply shouldn't, and end up paying them back in smaller instalments over a long period (because they can't pay back in lump sums). If they fall behind, or are encouraged to either extend terms or pay off their payday loan with another payday loan (so-called "rollover loans"), accumulation of late payment fees and interest makes default inevitable.

Yes, people are often driven to it as a last resort, it's usury and the companies are - to be frank - complete shits, but payday lending has its place in certain circumstances. So surely the issue is ensuring people understand things like payday lending so they're not taken advantage of, knowing when and when not to use them.

Credit unions and saving clubs might seem "friendlier", but
aren't always the right option and carry risks themselves.
(Pic : The Guardian)
I'm worried some people, upon hearing about an Assembly-led "crackdown on the spread of payday lending", might get the impression Welsh or local government will try to get their money back or ease their debts regardless, when it's more complicated than that.

Most measures will have to be preventative. The first part certainly will be, the second part is in danger of coming across as well-meant but slightly paternalistic.

One hinted solution is pointing people towards credit unions, or freeing credit unions and other organisations like housing associations to collaborate, helping people manage their finances with the support of community organisations so they have a ready alternative to payday loans.

Credit unions and alike give the impression of being friendly, inclusive, community-based "Mams clubs", but are in no shape to take on banks or payday lenders....yet....and carry risks of their own. In fairness, Bethan clearly pointed that out in the Assembly debate :

"However, they (credit unions) are not the alternative, because we know that many people at the moment are deemed to be too risky to be taken on by the credit unions because of their financial issues. So, we need to come to and explore other options, as credit unions are perhaps not the one-size-fits-all solution that some politicians and others think they are."

I hope herself and others don't lose sight of that, or any moves to "promote" credit unions (or things like saving clubs) could come back to haunt them.

Bethan also says she wants to concentrate on a topical "doorstep issue" that people are concerned about instead of the constitution – hallelujah! But it's highly likely this law might....inadvertently drag the constitution into the debate.

This probably falls under education, social justice and local government, but aspects of the second part – if pursued to its maximum extent - could accidentally cross into consumer protection and financial service regulation, both of which are non-devolved. The Bill itself will have to be carefully-worded to prevent a legal challenge.

If this were framed as a public health issue - instead of some
"fight" against payday lending and the impact of welfare reform
- would AMs have a more powerful arsenal?
(Pic : The Guardian)
The trouble there is that the second part needs a "stick" to work to its fullest extent. I'm not sure how to do that in the absence of financial regulation powers.

As well as boosting promotion of alternatives, I suppose AMs might be able to tiptoe around any problems. They could "screen" payday lenders by pushing the defined limits of existing powers to breaking point, instead of taking the "ug!" route of trying to clobber them.

If this were framed as a public health issue instead of social justice, AMs could have options that would've otherwise been off the table.

In terms of the case being built for this, it wouldn't hurt to concentrate on mental health problems arising from debt (definitely within Assembly powers), not things like welfare reform.

They could, for example (dependant on powers) :
  • Use "public health" - (i.e. prevention of mental disorders/distress caused by debt) - as a reason to restrict public advertising of high-interest products, perhaps extended so interest rates for all financial products are in large print or cover a large part of advertising (like cigarette packet warnings) for example.
  • Give local authorities greater freedom to create doorstep cold-calling "no go zones" (perhaps including special roadsigns/window stickers) for the "most vulnerable residents" (i.e elderly, carers and long-term disabled). Penalties for those who breach them could be used to help fund financial inclusion schemes or debt relief charities.
  • Prevent companies that charge more than X% APR from:
    •  working with public bodies/being awarded public contracts
    • sponsoring publicly-funded events or sports teams in Wales
    • (or, indeed) being accessible on public computers
  • Tighter planning regulations for betting shops, casinos, "cash for gold" and pawn shops; perhaps including duties to display/have prominent "financial health warnings".
  • Place statutory duties on the Welsh Government and health authorities to monitor gambling addiction and mental health issues resulting from financial problems as part of their statistics gathering.
It might work like existing tobacco restrictions. It wouldn't affect payday lenders ability to trade, just giving them hints that unless they change their business practises they'll be "put on watch" in Wales.

On the whole, some potentially great stuff can come out of this and there's a lot to like.

I just hope it doesn't touch down on Planet Plaid, entangled in some "fight" in order to score ideological points, but done in a manner that risks derailing the whole thing.


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