Simple solutions to a tragic problem

Lisa Buckingham|Mail13 April 2012

THERE are few things more depressing than surveys into the state of the nation's financial literacy. The latest, carried out for the Institute of Financial Services, reveals the utterly shocking facts that four out of five people do not know that the term APR relates to loan costs, two thirds are incapable of calculating simple percentages, and nearly 30% do not know that a standing order is a way to make regular payments.

It is easy to assume this is the reason why so many tens of thousands of people found themselves the victims of pensions mis-selling, on the receiving end of the split capital trust debacle or holding worthless precipice bonds.

And when nearly a third of people do not know that products protecting them from unforeseen events are called insurance, let alone the concept that stock markets go down as well as up, it is scarcely surprising that so many are sitting on mortgage endowment policies that will come good decades too late, if ever.

Recent suicides of people who have run up horrendous credit card or bank debts seem merely to underline the flagrant stupidity of allowing the financial sector to lure the unsuspecting with nine month interest-free deals.

Yes, finance, of a sort, is now part of the school curriculum. That may well mean such appalling statistics eventually become a thing of the past.

But financial befuddlement is not confined to individuals. Just look at New York attorney-general Eliot Spitzer's latest assault. His target - leading insurance brokers that impose so-called placement service agreements that effectively mean they charge both their client and the underwriter for the same transaction.

It happens here, too, and some leading London practitioners are calling for placement service agreements -- a clear conflict of interest - to be banned, which they will be when the Financial Services Authority begins regulating the sector next year.

Of course, any victims in these circumstances would have been companies and experienced risk managers.

If they can be caught out, how much more important for untrained buyers of financial products to improve their knowledge. Caveat emptor is unlikely ever fully to disappear. And education programmes such as those offered by the FSA and Which? can help older purchasers without access to an A-level course on personal finance.

But we still have several generations of people who are insufficiently well acquainted with the world of money. If the financial services sector wants to earn trust, to start pulling in more business and create a virtuous circle of rising stock markets again, then it is going to have to change radically.

Attempting to stamp out recent practices that range from the simply rogue to the utterly criminal would be a start.

Getting rid of the current Key Features documents that purportedly describe the financial product being sold, but are to all but a financial lawyer page after page of impenetrable gobbledygook, is a next step.

The industry must now espouse enthusiastically the vastly simplified Key Facts documents specified by the FSA.

After recent disasters that have destroyed nest-eggs nationwide, financial services companies must no longer expect people to buy products they do not understand.

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NOT so long ago, the Governor of the Bank of England would have only to hint at worries over the level of sterling for the nation to be convinced that the Bank was planning to start buying pounds or was about to increase interest rates, or both.

Yet earlier this month when Mervyn King spoke disapprovingly of the decline in the value of sterling, few took a blind bit of notice, even though it could lead to further rises in interest rates.

His concerns were noted only in the context of a lower exchange rate offsetting slower growth. 'Sterling has fallen significantly,' he said, 'by some four% on its effective rate against all other currencies.'

Quite. This 'effective', or tradeweighted rate reached its peak for this year on June 17 at 106.9 of its 1990 value, since which time it has dropped to just above 102.

That is hardly the stuff of crisis. But it is worth noting that 106 has been its average level since 2000. Should the pound continue to trade well below this average for the next few months, King's concern may well turn to alarm.

With memories of Black Wednesday in 1992 still painful, the Bank has pretty much given up on intervening in foreign exchanges other than a modest one-off effort to support the euro in the autumn of 2000.

As for a further rise in rates, the money market is actually pricing in cuts, not rises, for next year in the clearest evidence that, as far as the City is concerned, King's warnings have gone in one ear and out the other.

This could well prove a costly mistake.

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