Financial understanding key to success

Consumers urged to take on greater responsibilities and plan for the longer term, writes William Kay

It got the best laugh of the day. The lady from HSBC was in a school classroom exchanging euros for pounds. "You've given me £10," she told a pupil. "At the current exchange rate that is worth €14. But, because I'm a bank, I keep €1, so you only get €13."

HSBC is a generous supporter of the Personal Finance Education Group (Pfeg), which hosted the City seminar this week, which featured the foreign-exchange vignette. But for many of the 300-strong audience, it seemed to sum up a more cynical reason for the financial service industry's involvement in education: to get the kids, at an early stage, used to the idea that the banks et al always take their slice.

The event was held to celebrate the third anniversary of Excellence and Access, a Pfeg project aimed at "raising the quality and quality of personal finance education in schools".

On the day the event was held, the Financial Services Authority (FSA) published its Risk Outlook for 2004, making it plain that there was a greater need for financial understanding among consumers. Callum McCarthy, the FSA's chairman, said: "Consumers will have to take on greater responsibilities and need to think about the risks involved. A major theme in this year's report is the need for consumers to provide for their future over the longer term. They are becoming responsible for decisions previously taken by government or by employers.

"Given the way government policy is developing here and in many western economies, with the state being rolled back in areas such as pension provision and funding for education, it is all the more important that consumers take control of their finances over the longer term. This means thinking hard about what levels of debt they can afford, against a background where most commentators expect interest rates to rise, and when continuing low levels of inflation mean that debts, once incurred, will not be eroded by inflation. That is why we are encouraging consumers and also firms to think not only how they will cope with a relatively benign set of economic circumstances, but also about what risks they face and how to manage these."

But a survey by Barclays bank this week found that only four in 10 parents think that their children have a good understanding of money matters and more than half felt that their children's understanding ranged from "little or none" to "some". But three-quarters of parents believe that financial education for children is important. Almost two-thirds of parents are more likely to discuss money matters than sex education with their children. And one in eight said that they would not discuss either money or sex with their kids.

Paul Morrish, the savings and investments director at Barclays, said: "Encouraging children to learn more about money and financial management at a young age is vital in helping to address the long-term provision issues which we are currently facing in the UK. At Barclays, we would like to see more children with a good understanding of how to manage their finances and feel that, in addition to education, one of the best ways to learn the basics of money management is to give them their own accounts to run."

Pfeg's Excellence and Access initiative has reached 150,000 children in 300 secondary schools in England. But, as Ron Sandler, the Pfeg's chairman, readily acknowledged this week: "The task ahead is immense." The scale of the problem is shown by the fact that there are 4,500 schools and 12 million children in England, without counting those in Scotland, Wales and Northern Ireland. Mr Sandler added: "Resources are our major constraint."

John Tiner, the chief executive of the FSA, announced that the authority would double its contribution to Pfeg this year, from £60,000 to £120,000. But he added that more was needed, through government money, contributions from the financial services industry or both. Pfeg's income last year was only £843,000 and Mr Sandler says he needs £2m to finance the next stage, reaching one in seven school leavers by 2007. That would mean reaching 1.7 million children; more than 10 times as many as the current score.

One of Pfeg's main funders, the Association of Investment Trust Companies (AITC), this week went further than the FSA, calling for a levy on UK-regulated financial services firms. It also called on the Government to move personal finance education higher up the policy agenda and to provide core funding, as well as National Lottery money.

Daniel Godfrey, the AITC's director-general and Mr Sandler's predecessor as chairman of Pfeg, said: "Goodwill and good intentions are not enough to deliver a compelling, long-term financial capability programme - adequate funding and commitment from central government are also required. AITC recognises the funding pressures the FSA is under, and suggests that the financial services industry contributes to a levy.

"It is also critical that the Government mandates sufficient time and moves personal finance education higher up the policy agenda, in addition to providing core funding. Consumers will benefit from improved financial awareness, and the financial services sector will benefit from more sophisticated consumers - demand should rise, distribution costs will fall and the risks of mis-selling could decrease.

"This is also a programme with significant public policy implications, with the objective of increasing the UK's savings levels and reducing dependence on state benefits. So, the Government should support the programme and demonstrate its importance by being prepared to provide a baseline of funding, administered by the FSA, but ring-fenced from other FSA budgets."

The AITC also wants personal finance to be part of Ofsted's assessment of schools and argues that the Government's proposed Child Trust Fund should be linked to personal finance education in schools. Mr Godfrey said: "This could be a greater boost to the efforts to build an informed savings culture than the money itself."

Mr Godfrey received little encouragement from the Government's representative at the Pfeg gathering. In the absence of Charles Clarke, the Education Secretary, Stephen Twigg, his parliamentary under-secretary, said: "There is a real hunger to learn about personal finance. We all want to extend financial literacy and competence. There is a great deal more that we need to do to ensure that we have it in every school, and the highest possibly quality of financial education." But he gave no commitment to increase government funding for the subject, and said it was best located within other subjects, such as mathematics, citizenship and personal, social and health education.

Industry supporters of financial teaching believe that this will be the central battleground in the next few years. John Whiting, tax partner at PricewaterhouseCoopers and a former president of the Chartered Institute of Taxation, said: "It is only a few years since we were told by the educational establishment that there was no room at all for personal finance in the classroom. Now they have found room for it, but it has to be wrapped in something else.

"We have to keep knocking at the door until it becomes a curriculum subject in its own right."

HOW TO GIVE YOUR KIDS THE INSIDE TRACK ON MONEY

* Make it fun. Play games involving cash, whether it is working out the odds on a game or deciding how much to spend on different items.

* Use a simple idea such as slices of cake to show how much money goes on food, bills and other household expenses. Cut one slice for regular savings, and another for special spending, such as holidays, trips to the seaside and other treats.

* If you give your children regular pocket money, encourage them to save some for a special reason, like a DVD, rather than spending it all in one go. That way, they will start to appreciate how much things cost and what is important to them.

* The amount you give in pocket money will probably grow as your children get older and find out how much friends receive. But don't take their word for it: ask other parents about the going rate, and then decide what you think is reasonable.

* Talk to your child about how much things cost when you're shopping. The supermarket is a good place to do this, as you can point out the prices and compare the cost of different products. You can then make them choose: say you've only got £5 left, so should you buy a pizza or a bottle of lemonade?

* The best way to help children learn more about saving and managing their own money is for them to have their own account. But you don't have to go to a bank to do this: you can be the banker and help them to record money in and money out.

* When they are old enough, point out to your children that seemingly free services, such as street lighting, schools and even lollipop ladies, have to be paid for. That sort of thing comes from taxes which we all pay, one way or another.

Source: Barclays bank