The banking system shoulders a fundamental responsibility to promote customers' awareness about their products.
The global financial crisis has demonstrated that financial education, along with a well-capitalized and well-supervised financial system, is of critical importance not only to the economic welfare of households, but also to the better efficiency and functioning of financial markets, even to financial stability as a whole. Therefore, in recent years, financial education has gradually come into the limelight in both developed and developing countries.
Financial education, or financial literacy, refers to a person's ability to understand finance. Specifically, this concept is concerned with the financial knowledge and skills that allow people to be able to wisely manage their money in the modern world.
If people have little capability to make good choices to manage their savings and investments by participating responsibly in financial markets, they may not be able to protect themselves from possible losses, and may miss opportunities to increase their financial security or wealth.
The banking system shoulders a fundamental responsibility to promote customers' awareness about financial products and services. In order to expand its customer base, banks must understand the real requirements of customers, and need to be aware of the risks products may carry, clearly presenting customers with sufficient information in an easy-to-understand format.
Meanwhile, with investors' appetite for complex financial products, such as structured products, banks should consider the level of customers financial knowledge, educating investors about how the products work by providing a range of accurate but simple documents, excluding potential investors who are not suited to the risks of the investments.
There are many lessons to be drawn from experiences around the world. In the United States, the subprime mortgage crisis was not only caused by lax monetary policy and financial regulation, or the result of misleading sales practices by lenders, it was also due to the reckless financial behavior of households, in particular, those vulnerable ones who should not have taken on mortgages under their financial circumstances.
In fact, individuals were frequently not aware of the risks they were exposed to, and did not always understand the terms and conditions of the mortgages they purchased - including those with low rate periods or with variable rate structures.
In recent years, British banks have set aside more than 9 billion in compensation for the mis-selling of payment protection insurance. However, the problem is not getting better. The annual number of complaints registered by the banking ombudsman has risen from 30,000 a decade ago to 264,000 in 2011.
In Hong Kong, more than 40,000 investors, many of them retirees and ordinary depositors, bought Lehman Brothers-linked minibonds before its collapse. When the bank fell, there were many who accused the banks of mis-selling these products, although eventually the issue was resolved through compromises between banks and investors.
There is strong reason to believe that it is in everybody's best interests for investors to be educated so they understand their investment options and can make rational, informed decisions. As long as their financial knowledge remains low, they will have difficulty interpreting financial information, advice and marketing, and the long-term relationship and trust between banks and clients will not be improved and developed.
Financial education is closely interlinked with financial inclusion. As a complement to financial inclusion that should be pursued in a commercially viable manner, financial education will help providers of financial products to expand their business operations to new segments of the population. Meanwhile, it can create consumer awareness on access to various types of products, and make them understand their rights and responsibilities as clients of financial services.
The more financially educated the public is, the more efficient macro-economic policy will be. Clearly, consumer and investor behavior backed with better financial literacy - better understanding of the investments and how they properly respond to monetary and fiscal policies - is vital to the success of the policies. The trust and confidence of the public would be easily earned and consequently policy objectives could be achieved if both the public and relevant authorities have mutual understanding and good interaction with one another.
It is well recognized that effective financial education should begin in schools. US Treasury Department research shows that high school graduates in the US who have received financial education have higher savings rates and a greater net worth than those without financial education.
Nowadays, as more and more young people are tempted to take on excessive debt for consumption, it is urgent to develop their financial literacy at an earlier stage. Of course, it will be beneficial later when they become adults and have to make important decisions about their personal or family finances.
Financial education should also be regarded as an important component of financial regulation. In the aftermath of the financial crisis, and facing growing demands from consumers for financial products, regulators should adopt a multi-channel approach to increase financial literacy, making investors fully understand the risks and benefits of the financial products they are buying.
Financial education is not a substitute for the effective safeguarding of consumers against abusive and fraudulent financial cases. Rather, financial regulators must further strengthen consumer-protection rule making and enforcement, improving the surveillance of financial products sales.
In China, financial education for Party and government leaders at every level plays a key role in maintaining financial stability. History shows that a large-scale financial education campaign among government leaders before the 1997-98 Asian financial crisis and the 2008 global financial crisis partly contributed to decisive financial reforms and regulations, which allowed the Chinese financial industry to more successfully weather the external storms.
The global financial crisis has changed our assumptions about the future, and as a result customer behavior is also changing; financial education will be an essential part of confidence building. It might be a costly, never-ending learning process, but the value of financial education is beyond doubt.
(Source: China Daily)