Financial Education and Consumer Protection ~ Measuring Effectiveness 3 rd International Forum on Financial Consumer Protection and Education 15 December 2005, Kuala Lumpur Christina Tan Deputy Director & Head, Consumer Issues Division Monetary Authority of Singapore

Outline  Common Threads in Consumer Protection and Financial Education  Tools to Measure Effectiveness of Financial Education  Sharing Singapore’s Experience

Common Threads in Financial Education & Consumer Protection

Common Goals  To enable consumers to achieve fair dealing  To enable consumer make more informed and effective financial decisions  To enable consumers to resolve disputes with financial institutions

Complementary Approaches Regulatory Framework On-going Supervision Enforcement & Remedial Action Financial Education

Regulatory Framework  General consumer protection laws  Industry specific requirements / standards that promote fair and transparent markets  Industry codes and best practices  Consumer panels that provide feedback on financial services regulations and policies Complementary Approaches

On-going Supervision  Proper approval / licensing and supervision of industry players to ensure that prudential and conduct standards are met Enforcement & Remedial Action  Effective enforcement against industry players who breach regulations  Consumer compensation mechanisms Complementary Approaches

Common Yardsticks Regulatory Framework On-going Supervision Enforcement & Remedial Action  Mostly indirect indicators Examples:  Number and nature of complaints  Inspection findings  Number of institutions operating without required license  Errors or omission of information in sales materials / offer documents  Enforcement actions

Complementary Approaches Regulatory Framework On-going Supervision Enforcement & Remedial Action Financial Education Focus of this presentation

Financial Education  Empower consumers to make informed and effective financial decisions  Equip consumers with knowledge and ability to resolve disputes with industry players Complementary Approaches More regulators are taking on the role of financial education. Why?

 Move towards disclosure-based regime  Ageing populations  Increasingly more complex products  Consumers have greater access to variety of financial products.  Larger number of consumers are involved in financial markets  Consequences of poor financial decisions Trends Underscoring Need for Financial Education

Benefits of Financial Education  Empower consumers to make more informed investment decisions  More sophisticated investors help the market grow in depth and liquidity  Less reliance on the state But does financial education really work?

Studies Show That Financial Education Makes A Difference  USA - 1.5% 1 increase in average savings rates among adults who attended high schools in states with financial education requirements in public schools.  USA - Availability of retirement-focused financial education in the workplace increased average savings rates by 1.65% 2. Source: 1) Bernham D., Garret D., and Maki, D “Education and Saving: The Long Term Effects of High School Curriculum Mandates”, National Bureau of Economic Research, USA, July 1997; 2) Bernham, D. and Garret, D. “The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households”, National Bureau of Economic Research, USA, June 1996

Studies Show That Financial Education Makes A Difference  Australia - The lack of financial education costs the average wage earner $790,000 3 over their lifetime. Source: 3) Study by government taskforce on financial literacy, Australia October 2005

Tools to Measure Effectiveness of Financial Education

Common Threads in Financial Education  Provide information to help consumers make informed decisions  Seminars, talks, publications, portals, helplines, investor alert lists  Focus on retirement planning / pension plans  Start financial education in schools  Provide information on channels to resolve disputes  Close collaboration with industry and consumer associations

Variety of Yardsticks  Outreach Statistics  Feedback Forms & Surveys  Complaints (e.g. nature of complaints, percentage of complaints resolved)  Economic & Social Indicators (e.g. credit card rollover statistics, household debt statistics, bankruptcy rates, number of individuals on financial assistance schemes)

Common Finding: Room for Improvement in Financial Literacy  Japan – 71% lack knowledge of equities and bonds; 57% lack knowledge of financial products in general; 29% lack knowledge of insurance and pensions  Korea – High school students had failing scores in test measuring ability to choose and manage a credit card, to save and invest for retirement, and awareness of risk and insuring against it. Source: Findings on financial education compiled by OECD, Oct 2005

 Australia – 37% of those with investments did not understand that investments can fluctuate in value  United States – 50% of adults and 66% of high school students fail basic economics test.  United Kingdom – fewer than 40% of respondents are confident about making financial decisions  Many consumers overestimate their knowledge of financial issues Source: Findings on financial education compiled by OECD, Oct 2005 Common Finding: Room for Improvement in Financial Literacy

Challenges in Measuring Effectiveness

Key Challenges in Measuring Effectiveness Experience & circumstances Knowledge & understanding Skills Personality Confidence & attitudes BEHAVIOUR Many Factors Influence Consumers’ Behaviour Source: Adult financial capability framework developed by UK FSA and Basic Skills Agency, 2004

No One Perfect Tool Key challenges:  Understanding consumer attitudes and behaviour in making financial decisions  Identifying cause-effect relationships between financial education and making of financial decisions  Monitoring long term effect of consumers’ financial decisions

Sharing Singapore’s Experience

Approach to Empower Consumers to Achieve Fair Dealing Enhancing Disclosure, Market Conduct & Professional Standards Facilitating Consumer Redress Enhancing Financial Education Financial Advisers Act (FAA) Securities & Futures Act (SFA) Financial Industry Dispute Resolution Centre MoneySENSE national financial education programme

Enhancing Disclosure, Market Conduct & Professional Standards Examples of requirements under FAA / SFA:  Disclosure requirements for investment products  Market conduct requirements (e.g. financial advisers need to have reasonable basis for product recommendations)  Minimum professional standards for representatives conducting regulated activities

Approach to Empower Consumers to Achieve Fair Dealing Enhancing Disclosure, Market Conduct & Professional Standards Facilitating Consumer Redress Enhancing Financial Education Financial Advisers Act Securities & Futures Act Financial Industry Dispute Resolution Centre MoneySENSE national financial education programme

Facilitating Consumer Redress  Financial Industry Disputes Resolution Centre (FIDReC) is a one-stop centre for all financial sector retail disputes  Covers banking, insurance and capital markets disputes  Dispute Resolution Scheme is an alternative to the court process, affordable  2-staged process (mediation & adjudication)  Decisions are binding on financial institutions, but not on consumers

Success of Previous Dispute Resolution Schemes Consumer Mediation Unit (Banking) 376 Complaints, Enquiries and Feedback in % Resolution Rate Insurance Dispute Resolution 1,022 Complaints and Enquiries from Feb 03- Mar % Resolution Rate

Dispute Resolution Process 2 Stages Mediation Case Manager Adjudication Pool of Adjudicators Most Cases resolved at this stage (95%) Monetary Awards can be made at this stage.

Approach to Empower Consumers to Achieve Fair Dealing Enhancing Disclosure, Market Conduct & Professional Standards Facilitating Consumer Redress Enhancing Financial Education Financial Advisers Act Securities & Futures Act Financial Industry Dispute Resolution Centre MoneySENSE national financial education programme

Enhancing Financial Education To Develop Well-Informed Consumers  In a disclosure-based regime, consumers bear the principal responsibility for protecting their own interests. MAS cannot protect consumers from investment risks.  Disclosure-based regime cannot work if consumers do not know how to make use of the information disclosed to them.  Financial education helps to empower consumers to make informed choices.

MoneySENSE Industry Working Group (MIWG) Financial Industry AssocnsConsumers Assocn MoneySENSE Structure Rests on Partnerships MASMCYSMOMCPF BoardMOEPeople’s Assocn Financial Education Steering Committee (FESC) - Feedback - Conduct activities - Report on industry initiatives Funding, Endorsement, Overall Policy Direction

Structured Approach Helps Us Focus Our Efforts Systematically Tier II : Financial Planning Tier III : Investment Know-How Tier I : Basic Money Management Three tiers of financial literacy Priority: Build Strong Foundation First No endorsement or promotion of specific organisations, associations or products

Variety of Channels & Yardsticks Target Audience Yardsticks Channels Interactive Skits Seminars / Talks / Workshops Games / Contests Media Articles Consumer Guides / Website Families Low-Income / Financial Assistance School-children Retirees / Pre- retirees Working Adults Housewives Outreach Numbers Feedback Forms Webpolls / Survey Contest Participation Website Hit Rates

Seminars: Are They Effective? Tools Used to Measure Effectiveness:  Quiz questions to test understanding  Forms to get feedback on content, speakers, materials, etc  Request participants to list 3 things they learnt

Seminars: Are They Effective? Request Seminar Participants to List 3 Things They Learnt Some participants could list quite detailed areas Source: Above chart based on analysis of feedback forms received at a MoneySENSE seminar on Investment Linked Insurance plans in 2005 High recall for general messages

Workshops: Are they Effective? Most effective when there is follow-up action E.g. Workshops for low income families where volunteers follow up with attendees on targets set for savings and expenditures. “Graduation” ceremony is held for workshop participants.

Learning thru Play: Is it Effective? Concepts include:  Money management  Business cycle changes  Job changes / upgrade skills  Risk mgt (Insurance)  Investments

Learning thru Play: Is it Effective? Sample Feedback Analysis  94% felt that they can understand more about the subject matter.  89% felt that the game board is a useful tool to learn about financial life skills.  83% felt that they have learnt new skills which they can apply in real life situations.  5% felt the game board is not relevant to them

Media Columns: Are they Effective? SMS Contests to Gauge Readership & Knowledge Simple documents attracted most readers.

Newsletters: Are they Effective? Visit MoneySENSE website for more tips and download a budget template Surge in website hit rates when newsletters are published. 15% of visitors clicked on budget template.

Newsletters: Are they Effective? SMS Poll: Make a Commitment 1.Check how much savings you have 2.Set a target for saving for emergencies Rule of thumb: 3-6 months income Findings Poll attracted people who are already saving (average 3 months’ income) Participants aim for higher end of recommended range (average 6 months) Participation rate is a fraction of quiz questions. Could be due to unwillingness to divulge personal information.

National Financial Literacy Survey Objectives  Measure current levels of “financial literacy” among different segments of Singaporeans.  Gauge Singaporeans’ attitudes towards financial matters.  Identify gaps in financial knowledge and actions.  Identify areas where more consumer education is needed & the most effective channels for delivery.

Defining Financial Literacy “the ability of individuals to make informed judgements and take effective decisions in managing their finances” Actions Knowledge Key attributes: What steps Singaporeans have taken to manage their money. What active plans Singaporeans have made to plan for their future / retirement. For Singaporeans who invest, what steps they have taken to understand what they invest and monitor investment performance. Key attributes: What level of understanding do Singaporeans have of the risks and implications of common financial products: - Loans. - Life insurance policies. - Investment products.

Research Methodology  External research consultant commissioned to undertake this survey.  Face-to-face interviews with a representative sample of 2,023 persons aged 18 to 60 years old.  Research covered only analysis of findings based on the responses of those surveyed. Does not include analysis or comparison with findings of other studies.  While any scoring system has its limitations, we considered it useful to construct a Financial Literacy Score to provide a basis for benchmarking.

Survey Findings are Encouraging ACTIONS Generally good money management habits. Singaporeans recognise the importance of planning for their finances and have taken some basic steps in financial planning. Singaporeans who invested take a considered approach in their investment decisions. KNOWLEDGE Generally knowledgeable about their loans. Understand risks inherent in investments & importance of diversification.

Areas for Improvement  Inadequate Savings for Emergencies Only 32% of Singaporeans have cash savings of at least 3 times their monthly income.  Inadequate Retirement Planning Only 24% have actually calculated how much they would need when they retire.  Inadequate Understanding of Common Financial Products Singaporeans are not aware of basic features of common financial products such as life insurance, unit trusts and structured deposits.

Developed a Financial Literacy Score Financial Literacy Score X 100 (Adjusted aggregated score for Action + Adjusted aggregated score for Knowledge) (Score range value for Action + Score range value for Knowledge) =  Scored questions which test Singaporeans’ financial actions and knowledge.  Weighted score assigned for each response.  Scores were aggregated and normalised across a 0 – 100 scale to derive a Financial Literacy Score.

Total Singapore Population ActionKnowledgeFinancial Literacy Score Tier I Basic Money Management Tier II Financial Planning/ Retirement Planning Tier III Investment Know- How TOTAL Financial Literacy Scores By Tiers

Main Survey Findings by Segments Mean 55 Moderately Low Average Moderately High High financial literacy Low financial literacy 27% of Students 25% of Housewives 33% of Unemployed 40% of Retirees 34% of Working Marrieds All other segments: Students Working Singles Working Marrieds Working Parents Pre-retirees Housewives Unemployed Retirees

Financial Literacy Scores by Segments Tier 1 (Basic money management) Tier 2 (Financial planning) Tier 3 (Investment know-how) Overall Mean Score Retirees Unemployed Students Housewives Pre-retirees Working Singles Working Parents Working Marrieds Total Population E.g. Need initiatives to educate retirees how to manage their retirement funds

 Identify desired outcomes (e.g. x% increase in financial literacy scores)  Set measurable outcomes (e.g. x% with at least 3 months savings for emergencies) for each segment  Implement programmes to achieve desired outcomes for each segment  Conduct next financial literacy survey in 2 to 3 years’ time  Conduct dipstick polls in the interim Next Steps

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