Alongside the ‘bad behaviours’, the Royal Commission has shown that Australians often understand little to nothing about the financial products they are signing up for, how they work, or what they are getting in return. Is it time corporates thought more deeply about the bricks in the financial wall confronting Australian consumers as they try to make crucial choices?
This week in numbers:
- 19.5 – the number of hours NAB spent on the stand this round, more than two and a half times more than the rest of the banks put together, and a third of the total round (with CBA at 5.5, ANZ at 2 and no Westpac)
- Only 11% of public submissions to the Commission pertained to super
- 0 indigenous words for superannuation
As we make sense of the task ahead for the industry – restoring trust – we’ll share our observations as communicators. There’s no silver bullet fix, but there are ways to stop, or slow, the reputational crisis.
Was this the most boring week of the Commission yet?
Has it lost its teeth? Even the ‘Baby-Faced Assassin’ appears to have lost some of his bloodlust, more frustrated and fed-up than in pursuit.
That’s not to say there weren’t significant revelations. There were.
As we noted last week, in part the blandness is due to a lack of case studies and some witnesses’ approach of tussling over every inch of ground.
If super is an issue that affects nearly every Australian – which it does, even indirectly – why the disinterest?
Partly, because few Australians regularly stop to think about their super. Certainly, many worry about the end goal – will it produce enough to live off comfortably and provide them with options and security in their retirement? But not many take the time to look in depth at their fund(s) and compare across the market.
The mandatory set-and-forget structure of super serves an important purpose – preservation. It also produces passivity, which is unhelpful.
Said the Joker to the Fool
AMP Super’s chairman Richard Allert was asked this week whether customers were foolish to put savings into investments that lost money.
Of course no customer would choose an investment with a comparably lower or negative return. If they understood that’s what they were doing.
So this week’s commission cast consumers as less foolish, and more ambivalent and ill-informed.
There have been calls to address both the ambivalence and the understanding – this week and throughout the Commission so far. Australians must become more engaged consumers and ‘vote with our feet’.
Why so passive? It could be a historic lack of sharp competition and choice amongst our banks; fatalism about the real difference between products; lack of information and clarity from providers; competing priorities for our time and attention; and many other micro-factors. The fatalism stems in part from a lack of trust, at its worst an assumption that ‘they are all as bad as each other’.
We can and do address some of these factors through policy – notably competition and transparency. Many are speculating about the contents of the Commission’s interim report due at the end of September, although with a November round of hearings on the policy questions that have arisen so far, it’s hard to say how significant those contents will be.
Regardless, industry reform is only one piece of the puzzle.
Consumer passivity is, unfortunately, its own penalty.
Hopefully, one of the positive indirect impacts of the prominence of the Commission will be to shake us up in our attitudes to our moneykeepers.
With trust continuing to fall both in both financial services providers and the regulators that are supposed keep them in line, people will likely begin to look more closely at the service and products they are getting.
This year’s Ethics Index, released this week, showed a serious 12 point drop in the Banking, Finance and Insurance sector to its lowest ever score, with more than half of Australians considering it unethical.
Life insurance (-26) and retail banks (-17) are seen as particularly lacking. Australians put the finance sector’s ethical lack down to poor corporate culture (30-38%) and poor corporate governance (31-37%).
If you don’t know, now you know
46% of Australians (15-74) – seven million citizens – would struggle to understand simple documents such as job applications, maps and payroll forms.
This is no easy thing to address, even before we start on financial literacy or it’s cousin informed financial choice. It is still crucial that we do address these things. Commercial literacy, financial literacy and the faithful but simple presentation of financial product and service information are all key.
As a nation, our lack of understanding and clarity about the financial services we rely on is deeply problematic.
You can address systematic problems and correct for market failings with a trifecta of policy and industry initiatives, technology, and education. But of the three, the latter takes precedence. Policy will never be perfect, technology can be ignored, but the astute consumer is a failproof guardian of industry standards. Smarter customers make for better industries.
As QC Michael Hodge pointed out at the start of this round, 46% of Australians (15-74) – seven million citizens – would struggle to understand simple documents such as job applications, maps and payroll forms.
We’ve seen in earlier rounds that this financial illiteracy is costing Australians heavily. Not only economically, but, inevitably, in social, emotional and real-life terms. Parents that were guarantors to their children’s business loans without understanding the potential consequences were bankrupted. Farmers bamboozled by the terms of their loans lost their homes, businesses, marriages, livelihoods, inheritances and legacies. For indigenous Australians, the bureaucracy and impenetrability of financial services on offer often keeps them in the yoke of an inescapable cycle of debt.
And, as ever, those most affected by their literacy levels are often least equipped. It comes as no surprise that those for whom money is tightest often have the least knowledge or resources for their finances, while those who are better off are far more likely to be well informed and to get expert advice. We saw the effects on indigenous and rural populations in the last round. Research shows women have strikingly lower financial literacy than men, and are far more passive and unconfident around their investment options – and they also retire with 47% less super than men. Young people are likely to be on their lowest salary across their lifetime, but they are also the least financially literate. The HILDA survey also found that the unemployed, the single and those without a high education all struggle with ordinary financial concepts.
And, according to the Productivity Commission, Australians are even less financially literate when it comes to super and retirement planning than other financial matters generally.
Time for change
We wouldn’t accept this level of education in any other area of this importance. And yet, it’s the one skill we know people will use all the time, and for their whole life.
Even for those seemingly less seriously affected, poor financial literacy has long-reaching effects on their lives and our economy. We cannot continue to have a population that doesn’t know what is happening with its money. This week has shown, alongside failings in the providers, that – as a nation – we are ill-equipped to conserve and grow our wealth.
This lack of knowledge will be hereditary unless we take steps to better arm the generations that come to understand and leverage financial products for their own good.
Whatever the answer or answers are, they can’t come soon enough – the Commission has shown that if we fixed it today, it would already be overdue.
For example, SMSF’s are set to continue to rise rapidly. The number of SMSFs grew 50% in the last eight years, and 30% of Australians not currently running an SMSF intend to do so in future, with 13% planning to start their own SMSF within the next 12 months. And yet, the recent ASIC report on SMSFs found that many current members lack a basic understanding of their SMSF and their legal obligations as SMSF trustees. A third of members didn’t know that an SMSF must have an investment strategy; 30% had no arrangements in place for their SMSF if something happened to them; and 29% thought they were entitled to compensation in the event of theft and fraud involving the SMSF. ASIC noted the need for greater financial literacy for SMSF trustees.
Similarly, the plunge in trust has put many Australians off using financial adviser services. Which means they will need to develop better expertise themselves around their finances.
Other nations make clarity of financial services a focus. Ex-Bank of England Deputy Governor Dame Minouche Shafik has said that during her time there, the BofE did research on the writing of Dr. Seuss for the clarity and accessibility of the language – and compared it to its own reports. It found that its reports exempted much of the public from understanding, and accordingly made a concerted effort to simplify.
Our Kelly O’Dwyer M.P. and others have emphasised our need to do the same. And with the announcement in May of Australia’s new body to boost financial literacy, hopefully we are moving in the right direction.
Communicating products clearly with customers is also a brand responsibility. We’ve seen from this Commission that when that communication fails, deliberately or not, it can be disastrous for customer trust. But brands can go above and beyond to support financial literacy improvements for Australia.
This is a happy instance where doing the right thing – for your customer and the economy – is also the smart thing commercially.
An informed customer is a sticky customer. A discerning customer can be logically appealed to by the strength of your offering. And a customer that picks you for the strength of your product, and understands your service, will be more satisfied and a brand advocate.
Right now, there are too many bricks in the wall of financial information confronting us when it comes to choices – big and small.
So, defeated by the impenetrable nature of the information about credit cards, mortgages, insurance, super and much more, we, as individuals, turn away or point blindly and live with the consequences – too often to our own detriment.
We, as corporates and communicators, owe it to our customers to be clear about what we do. We will build a better industry for ourselves if we also help them become more financially literate. And it will go a long way to beginning to repair the damaged trust.
We’ll be back in September with our daily roundups. Until then.
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