Cicero Policy Briefer

Issue 19, December 2007

Measuring financial capability: How the problem of financial capability can be tackled

By Anne Kiem, Director of External Affairs, ifs School of Finance

We have all seen the statistics and read the headlines about the state of financial capability in the UK, and a report soon to be released from the EU implies the problem is not just restricted to the UK, but is widespread across Europe. The credit crunch has begun to bite, and with the economy beginning to slow many more may find their financial planning to be inadequate. We also know that a significant number of people worry so much about their own finances that it affects their relationships and their productivity at work. The question is: what to do about it?

Within the UK there are numerous agencies working to educate consumers about financial products and the need for financial planning, providing seminars and leaflets. Many of these are of a very good quality, but however good these materials are there is a question of measurability. How can we judge if a particular programme is delivering changes in behaviour?

The response from the ifs School of Finance, an educational charity, was to begin by developing financial capability qualifications for young people: to teach people about managing their finances before they are in a position where they could get in to difficulty. The qualifications are designed to take young people through the basics—for example, opening a bank account, comparing mobile phone tariffs, understanding the consequences of taking out a student loan or using a credit card.

The ifs School of Finance is campaigning for Government to add personal finance to the core curriculum, putting it on an equal footing with history, geography and other subjects that are compulsory for schools to offer, though not compulsory for students to take.

However, the Government has decided that it is sufficient for financial capability to be included in the form of add-ons to other qualifications. For example, personal finance will be incorporated into existing subjects such as personal, social, health and economic education (PSHEE) and even introduced into maths. We believe this to be inadequate. PSHEE is neither compulsory nor examinable, and as we know maths scares many people! The last thing we need is for people to associate managing their own finances with complex maths topics such as trigonometry.

As noted earlier, we believe it is important to be able to measure the effectiveness of any financial capability programme. An examinable stand-alone subject, such as those we offer, measures a level of knowledge. Furthermore, an independent study conducted by the University of Manchester showed that an ifs personal finance course impacts positively on students’ personal financial management—with 85 per cent saying they spent or saved money more efficiently as a result. It also revealed a strong opinion among participating students that the course was relevant, useful and related to real life issues. The benefits of a meaningful course cannot be underestimated.

This report follows a previous study conducted in the USA that found student scores on a test of personal financial literacy following a specific financial education course were significantly higher than those on a non-specific course.

The ifs now has four qualifications for 14-19 year olds: two at GCSE equivalent level, an AS and an A2 equivalent. These are all QCA-accredited qualifications, with the AS and A2 carrying UCAS tariff. There are over 10,000 students currently studying towards these qualifications. While we are very happy with this number, there are still many more students who could benefit.

We have encountered a few challenges along the way, not least the availability of teaching staff with the confidence to deliver the programme. As a result, training days are offered to introduce new teachers to the course.

Building on these qualifications we have recently introduced a similar qualification for adults aimed at people who would like to learn how to manage their finances effectively and with confidence. We need to provide for adults who want to learn how to manage their money, but have never had the opportunity before now. The adult programme has modules in areas identified by the FSA as requiring solutions—for example, mortgages for consumers, borrowing and debt management, savings and investments.

Much more needs to be done to increase not only the number of young people learning about personal finance, but adults too. The FSA Strategy for National Capability has raised some interesting challenges for the future, as the lack of meaningful financial education may damage society as a whole in the long term. At the ifs School of Finance we believe specifically targeted education beginning at a young age is vital, but that we also need to cater for adults who have missed receiving this information.

The European Commission (EC) is soon to publish its recommendations for the provision of financial education throughout the continent, and although the issue is first and foremost a matter for individual member states, it believes more can be done to provide sound financial education.

Perhaps other EU member states should consider looking at programmes that have been independently proven to positively change financial behaviour, such as those being offered by the ifs? In fact, the EC has already voiced strong support for the work of the ifs School of Finance and in particular with our approach to the financial education of young people, stating: “We thoroughly support the provision of financial education in schools, and see the type of subject matter that your programme covers as being extremely useful to young people as they build their life skills.”

Anne Kiem is the Director of External Affairs at the ifs School of Finance and can be contacted here.

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