We carried out research into financial literacy rates in parents with mortgages on Mumsnet; almost half (44%) of respondents said they would need to research the meaning of the term loan-to-value, a third (31%) would need to do the same for standard variable rate, and around a quarter said they would have to look up base rate (25%) and annual percentage rate (22%).
This happens, despite the UK being a developed marketplace, with tight regulation around disclosures, advice and a strong consumer rights culture.
It hurts some people more than others. Women and lower-income individuals often show less financial literacy than others.
According to a US study, young adults have higher confidence in their skills…but have lower skills. This means that sections of our society face higher risks of getting into uncontrollable debt or staying on a bad mortgage deal, because they simply did not understand the product they took.
Why should the industry care?
A financial adviser is there to advise. Not teach. But how can we balance discomfort about levels of financial nous in society with the practical interaction with a customer?
I would argue brokers have a role to play.
With the current state of financial illiteracy, consumers seek financial advice, often pay for it and may still end up taking out an inappropriate mortgage or manage it unwisely.
Thousands of homeowners across the UK are currently overpaying up to £3,400 by languishing on a standard variable rate (SVR), despite having consulted an expert before taking it out.
People stay on these high rates, not because they don’t want to save money, but because they either don’t know they are losing out or because they are unsure of what to do, who to see or fear looking stupid.
So, what can we do about it?
The key intervention has to be putting financial literacy and core skills in the national school curriculum.
However, international best practice, most notably from New Zealand, shows that a combination of public and private action is called for.
Private players can play their part in making sure products are transparent and presented in plain language, and also by reaching audiences that do not learn best in school-like settings. Further research from the US found that many adults have negative associations with school, and actively avoid going back, even for free and well-intended support.
We believe that online players and robo-advisors play a huge part in democratising advice.
There is evidence that having an anonymous ask feature on financial websites makes people far more likely to ask questions that they are too embarrassed to ask in face to face situations. People fear being rejected, judged or mocked by advisers who are sometimes perceived as the financially literate elite (often predominantly white and male) who answer their questions.
Taking anonymous questions, without credit checks and for free, is a very important tool as it is the financially illiterate and vulnerable who rely on this the most.
Online functionality can help: mobile-enabled websites, instant alerts, personalised dashboards, information boxes and most importantly easy to digest language, all can lead to greater access and understanding than old-fashioned non-interactive paper can.
Like many worthy societal goals, improving financial literacy will be hard, take time and require state and private actors to move mountains.
But as an industry, we can do our bit too – we need to.