The problems are real, and they are getting worse.  Nearly half of Canadians read too poorly to operate in today’s complex world, and their numeracy scores are worse.  Debt levels are too high, and savings too low.  Financial products are becoming harder to understand just as individuals are forced to take more responsibility for their social safety net.  Too many Canadians have limited or no pension coverage.  Financial fraud is a large and growing problem.

A continuum from basic skills to investor capability.  The most basic definition of financial literacy is having the knowledge, skills and confidence  to successfully carry out the financial transactions encountered in everyday life.  The Financial Literacy Continuum moves from the simplest forms of financial awareness to higher levels of capability and up to sophisticated investor education.   

Many efforts to address financial literacy.  The financial literacy “industry” is growing along multiple lines:

• Each province has its own efforts, some of them quite considerable.
• The Federal Government has launched a national task force on financial literacy and funds several agencies working in the field.
• Non-profit agencies do some important work regionally and nationally.
• Financial service companies devote considerable time and money to provide basic financial education to their consumers.

A growing consensus.
With several studies and conferences behind us and a growing industry devoted to advancing financial literacy in Canada, there is an emerging national consensus.  Canada must:

• Make financial literacy a national priority.
• Teach these skills to the young… and to adults, when they need it most.
• Better coordinate public/private / non-profit efforts.
• Test to see what financial literacy training programs work best.  Benchmark with specific targets to allocate funding.
• Learn from best international practices.

FAIR Canada calls for political leadership.  It is high time for all levels of governments and the civil service (including educators!) to join together with private industry and the non-profit sector to establish a national financial literacy strategy and to devote the resources necessary to see it implemented. An early test of political will is to ensure that financial literacy education is added to curriculums at high schools and throughout the formal and adult education systems.

Financial literacy education is not enough.  Although individuals must assume more responsibility for their financial affairs, the financial services industry must be accountable for products that harm consumers.  Regulators must become more proactive in their efforts to protect consumers and to punish fraud, misleading advertising and other violations of the public trust.

The Problems are Real

• Nearly half of all Canadians read too poorly to function well at work and in daily living.  Numeracy (mathematical skills and knowledge) scores are even worse. These results are from a 2003 survey.  A more comprehensive Statscan survey of Canadian financial capability has been delayed and is now planned for 2010.
• Only one-third of Americans older than 50 – and less than half of high school seniors – correctly answered all three questions in a simple financial literacy test.  Smaller scale tests in Canada have produced similar results.
• Financial services companies regularly complain that low levels of client understanding prevent more advanced discussions of financial planning and investment concepts.  Instead, they are compelled to go over the most basic ideas.

 … and are Becoming more Important

• Debt levels are too high.  Too many Canadians use their credit cards like cash, and fail to understand the consequences of not paying more than their minimum monthly balances.  Canada’s debt-to-income ratio has more than doubled in the past twenty years.  In 2008 Canadians owed $1.40 for each $1 in disposable income.
• Savings rates are too low.  One third of Canadians have no savings at all.  58% have no financial plan.  The national savings rate fell from 20% in the 1980s to negative territory by 2005, recovering to a still-low 3% in 2008.
• Financial products are more complex.  Products like floating rate mortgages, blended savings/stock market products, and investments such as structured products, hedge funds and derivatives require a more sophisticated understanding of risk and return.  Often such products entail high fees that hurt returns.
• Individuals now have more responsibility.  Governments have downloaded much of the responsibility for providing for retirement and other aspects of the social safety net onto the average Canadian.  Old Age Security and CPP payments provide for only the barest of essentials.  Large deficits created to fight the recession will likely lead to a combination of higher taxes and lower services going forward, even as the economy begins to recover.  Coupled with worsening unemployment and rising debt levels, it will be even harder to rely on the Government to provide for retirement and social safety net basics. 
• Pension plans are changing.  Only 38% of the Canadian labour force belongs to a workplace pension plan.  Close to 10 million Canadian workers do not have a private pension plan.  Defined benefit pension plans are in steady decline, reserved for an elite group of industrial workers and civil servants.  The more widespread defined contribution plans require informed input from their owners.
• Financial fraud is a large and growing problem.  An estimated 1.1 million Canadians have been victims of financial frauds; 25% are repeat victims.  Too many of these cases target the most vulnerable segments of society, particularly the elderly.  Even in the few cases where the regulators, the police and the courts manage to apprehend and convict the criminal, the lost funds are almost never recovered.  There is no compensation fund to help the victims of fraud.

A Growing Industry to Address the Problem

A small industry has developed around financial literacy in Canada, as more people come to recognize the importance of this issue.

• Virtually each province funds its own efforts.  British Columbia has led the way as the first (and so far, only) province to have a mandatory course in financial literacy on its high school curriculum.  Other provinces offer financial literacy courses but they are not required to graduate.
• The Investor Education Committee of the Canadian Securities Administrators, the umbrella group of provincial and territorial regulators, conducts annual surveys on investor literacy and created a program called the Financial Fitness Challenge.
• Ontario’s Investor Education Fund has a website with unbiased information about all types of investment products.  Investor Ed has a number of innovative approaches.  “Funny Money” (co-sponsored by IIROC) uses humour and cartoons to educate youths about the basics of personal finance.
• Quebec’s regulator Authorité des marchés financieres and the RCMP have both produced some comprehensive pamphlets and web materials about identifying financial fraud – a topic much in the news over the past few years.
• The Federal Government has recently launched a high profile national task force on financial literacy.  The Financial Consumer Agency of Canada, tasked with protecting and informing consumers with a particular emphasis on financial literacy, has sponsored conferences and a variety of programs.  FCAC in partnership with BCSC has launched The City, a web site teaching financial life skills to teachers and students.
• Non-profit groups are active regionally.  Social and Enterprise Development Innovations (SEDI) is a national not-for-profit organization dedicated to helping low-income Canadians achieve economic self-sufficiency, by focusing on financial literacy, asset-building and entrepreneurship.  SEDI seeks to work with community organizations in order to reach the millions of youths and adults (including immigrants) who cannot be reached through schools.  Other organizations are concentrating on providing financial services and training for low-income Canadians.
• Several banks, insurance companies and other financial services companies devote considerable time and coin to educating Canadians in the basics of financial literacy – including some laudable efforts to reach immigrant groups in their native languages.  Some of the educational material produced by industry is product-centred and not sufficiently objective.
• The Investment Funds Institute of Canada (IFIC) sponsored a conference on financial literacy in June 2009, which followed up on a much larger conference in Montreal in September, 2008.

Emerging Consensus

Enough work has been done to build a growing consensus about some key points:

Financial literacy/capability must be a national priority.  All Canadians need the skills and confidence to properly manage their financial affairs, in order to participate fully as citizens.  Individuals must be better prepared to take more responsibility for their own financial security.

As a nation we need a more financially literate consumer to ease the burden of welfare, old age pensions and other demands on the public purse.  It is in the interest of all employers and financial service providers to have a more informed workforce and consumer.

Teach these skills to the young…  The best time to teach people financial literacy is when they are young.  We should integrate financial literacy and numeracy throughout the curriculum over time, to make it relevant to students at different stages.  Web-based games and other Internet methods should reinforce these important lessons to increase their absorption.

Basic financial literacy should be a requirement to graduate from high school: students should demonstrate a basic understanding of savings, compound interest, the effect of debt, and other personal finance essentials. Courses should at least introduce students to the basics of savings, investments and financial markets, including the wide range of investment vehicles.

… and to adults, when they need it most.  Adults only learn about financial matters when it really concerns them.  More sophisticated adult financial education programs now target their audience at “inflection points:” marriage, new home purchase, birth of a child, death of a parent (inheritance), and the like.

Better coordinate public/private/non-profit efforts.  The various pots of funding and different programs have to be pulled together in a more focused effort.  Public/private/non-profit partnerships should align their efforts.

Test to see what financial literacy programs work best.  We need to more rigorously analyze results of the various programs to teach financial literacy.  Public money should be allocated based on firm targets and on rigorous benchmark studies.  The StatsCan study now scheduled for 2010 should establish a base case of where we stand, nationally and regionally, across different demographic and economic groups.  It should be followed with regular surveys every other year to monitor progress and to uncover particular areas of weakness.

Learn from best international practices.  The U.K., U.S. and New Zealand have launched national financial literacy strategies.  Small and large practices and studies from around the world should shorten our journey.

FAIR Canada Calls for Political Leadership

We applaud heightened awareness of the importance of financial literacy.  It is high time for all levels of government – federal, provincial, municipal, and the civil service (including educators!) – to join together to establish a national financial literacy strategy and to devote the resources to see it implemented.

The financial services industry has already demonstrated a willingness to step up with funding for financial literacy programs.  If politicians get on the same page and line up leaders from the  financial and other industries, more funding will flow.  Governments must play a leading role to ensure that all information is unbiased and not “pushing” particular financial products.

The first area for political leadership is on the education front.  Despite consensus about adding financial literacy as a requirement to high school curriculums, there are challenges in making room in those curriculums, the concerns of current teachers (often not very knowledgeable in these matters), and a host of other opposition. These are issues of political will.

Financial Literacy is not Enough

More responsibility for individuals…  True, individuals have to take more responsibility for their personal financial affairs.  Placing blind trust in an advisor or chasing after investment products that promise huge returns are sure roads to financial ruin.

… does not let the industry “off the hook.”   Yet we must be equally careful to not blame the victim.  The financial services industry must be tasked with designing financial products that perform as advertised, without huge surprises or unseen risks to consumers.  The love of financial innovation has led to too many products that produce handsome returns for their manufacturers but few benefits – and often, much harm – to their purchasers.

Regulators must do their part.  Regulators must take a more proactive role in protecting  consumers.  They should ensure that new products are not toxic, even at the cost of slowing down innovation.  Regulators should police financial services advertising and suitability.  Regulators, together with legislators and the courts, must enact and enforce significant punishments to act as a deterrent to those who violate the norms.

Limitations of financial literacy.  In an interesting 2008 paper, U.S. law professor Lauren Willis claims that we should not over-rely on financial literacy education.  There is little proof that it works and it is no substitute for better-designed products and a tighter regulatory regime.  See our accompanying write-up in this newsletter.

Change the rules about accredited investors.  The current statutory definition of an “accredited investor” as someone with sufficient resources to absorb the (too frequent) losses is designed to make life easier for financial service providers than to protect individual investors.  Definitions of sophisticated investors should include specific standards of financial education and product knowledge.