Today is National Financial Education Day. Readers might think that there are already too many national and international days for too many things. But don’t worry: actually, we are only aware of those that affect us most directly – a few days ago it was World Alzheimer’s Day, and, in my own interest, I investigated what it was all about. And they are usually cheap – although not all. What I would like to discuss now, from the CaixaBank Chair of Corporate Social Responsibility, is: does financial education have anything to do with social responsibility?
If readers ask this question from the point of view of a financial or educational institution, the answer is clearly yes. If social responsibility is the responsibility of businesses for their impacts on society, the social responsibility of a bank, a fund, or a financial advisor must begin with their impacts on those that are closest to their business, that is, their clients and their employees.
OK, readers say: but what is a financial institution responsible for to its clients? Well, for the effects that their actions (and their omissions, of course) have on their clients: for the quality of their products, for their profitability and for their risk, for their tax implications and, in short, for everything that appears in their contracts, including the so-called small print.
In other words, financial institutions, their directors and their employees must be aware of these impacts. And this is where financial education comes in. Because very often clients do not understand what the annual interest rate is, or what an interest rate risk, exchange rate risk or liquidity risk mean. Therefore, the first duty of institutions is to explain all this to their clients. And as personal financial culture is very different, it will be necessary to adapt to their personal conditions. The first duty of institutions is, therefore, to give clients all the necessary information. And not just in writing, with long paragraphs full of strange terminology, but simply, so that it is understood. In the end, a contract will have to be long and exhaustive, but it should not do anything more than highlight the important concepts or provide a summary of what is most important: I once read that President Reagan didn’t like to receive any report longer than one sheet of paper.
However, readers say, when we talk about financial education we are thinking of something else: of courses, conferences, books, websites, etc. Yes, of course, if we had all studied those courses at school it would now be much easier to understand what the director of a financial institution is telling us when we talk about a debit card or a guaranteed fund.
Therefore, financial education seems to me to have two dimensions, or perhaps even three. The first and the most important dimension is the one that directly affects clients, clearly explaining to them what they need to know – and not just what they decide to ask – about the transaction in question. This is a clear, direct social responsibility, the same as a microwave salesman has when he explains to the purchaser that it is not a good idea to dry off their newly-washed dog in the machine. Or the manufacturer of medicines when it reminds us of that incredibly long list of bad things that could happen to us if we take the pills.
Fine, readers will say: but all those explanations are made to protect the manufacturer or the salesman from costly claims that could be made against them if clients misuse the product. Correct, of course. But the important thing is that, if clients misuse a product they will come to harm: and that is what social responsibility is concerned about. Whether it ends up in the courts or not, it is no longer a matter of social responsibility, but a matter for the legal department or for regulatory compliance.
I said earlier that financial education has a second dimension: educating the general public, especially young people, because they are at an age to learn, and because they have all their lives ahead of them to make use of this knowledge. And also because financial institutions do not know who their future clients will be, meaning that we all win if everybody’s ability to understand products and transactions, risks and profitability improves. And because, if clients come better prepared, the conversation with them will be simpler, briefer and more direct.
Financial education, like other forms of education, has what economists call “spillover effects: if we improve the economic and financial knowledge of our fellow citizens, it is easier for them to make fewer mistakes and easier for us to help them not make them, and we will all benefit. And again, this is social responsibility in a broad sense: improving people, businesses and decisions improves society in general.
However, who is ultimately responsible? I don’t know: each person, each institution has to ask themselves that. In theory, the person who understands the subject and has the training and resources also has the responsibility. And logically, those people will be in financial institutions – or in academic ones. This means that yes, those who specialise in financial matters have skills and knowledge that are useful to others, and it would be worthwhile to put them at the service of everybody.
And to finish, this leads me to the possible third dimension of social responsibility of financial institutions concerning financial education. Because these institutions do many things that are provided to clients and to society in general, that are not called social responsibility. And this could be used to fulfil a broader social responsibility. For example: when they publish their balance sheets, by adding a few paragraphs that explain any items that are not easy to understand. Or when they announce a new product, by having a link to a web page that explains its important points. Or by publishing articles or blogs commenting on aspects of financial education. Or a thousand other things.
There are definitely too many national and international days for too many things. But when businesses sit down to think about what their responsibilities are to society and to their clients, with a little imagination many things will occur to them related to financial education and that will be proof that they are responsible. And we will all benefit from that.
