review

The importance of financial education: OECD policy brief

Evidence type: Review i

Context
The study
Key findings
Points to consider
Key references
Full report

Context

The growing complexity of financial services markets, which has increased responsibility on and risk to consumers, has made financial education and the awareness of it increasingly important for consumer financial wellbeing. If consumers are not financially literate, they may not be able to choose the right savings and investments or prepare adequately for their retirement and they may be at risk of fraud. OECD released the first major international study of and guidelines for financial education Improving Financial Literacy based on best practice from OECD countries.

The study

The paper was commissioned by the OCED and is presented as a policy briefing which reviews key evidence from OECD research and research in its member countries and sets out how the OECD is helping national governments to improve consumer financial literacy. The evidence and learning points are structured around five questions:

Why is financial education important?
How can it be achieved?
How financially literate are we?
Is financial education effective?
What more should be done?

Key findings

Why is financial education important?

Individuals are increasingly being asked to shoulder sole responsibility for their financial wellbeing; complex financial markets, especially in emerging markets, pose particular risks to consumers; internationally, personal insolvency has increased at least in part due to widespread availability of credit; for some financial literacy is hampered by being without a bank account.

How can it be achieved?

OECD recommendations include a role for governments, financial services providers, employers, trade union and consumer groups in providing and coordinating fair and unbiased financial education.
Financial education should start early in schools and focus on important financial life planning and capability building, especially for retirement.
Provision of (distinguishable) private advice sector and public sector (government and regulatory body) information; provision of clear product documentation and avoidance of difficult-to-understand small print and a responsibility on financial institutions to ensure customers understand the services they use; national campaigns and free information (including web sources) on high-risk issues such as fraud.

How financially literate are we?

Financial literacy is low in most countries and across individuals’ education and income levels; consumers often overestimate what they know; countries are increasingly aware of the role for financial education but engaging consumers is not easy and some find financial matters stressful.

Is financial education effective?

Measuring the impact of financial education is difficult and costly; evaluated programmes have been shown to be effective including in relation to increasing pension saving, reducing mortgage default and levels of outstanding borrowing; however, for it to benefit individuals’ financial literacy and wellbeing, financial education must be supported by consumer protection, market regulation, inclusion and approaches which automate beneficial financial behaviors.

What more should be done?

Key issues include: Persuading consumers of the need to improve their financial literacy; financial education in schools; financial institutions in providing financial education to customers and staff; experience and best-practice sharing between organisations and countries; better identification of financial education need by life-stage; greater/better evaluation of programmes.

The OECD is pursuing work in relation to retirement saving and insurance.

Points to consider

This is a narrow review of the OECD’s own evidence and position and is not a comprehensive review of the literature on the importance of financial education. The statistics referenced are not clearly sourced, and it is therefore difficult to assess their robustness, although their use in the paper is largely for illustration. It is nonetheless relevant, and the key lessons are widely applicable to financial education programmes in a wide range of countries, including in the UK, either with advanced or emerging economies.