Benchmarking financial capability
Findings from the Personal Finance Research Centre shaped an international model for assessing financial capability.
A financial capability survey methodology designed by the University of Bristol’s Personal Finance Research Centre for the UK Financial Services Authority has been described by the National Audit Office as ‘comprehensive’ and putting the UK ‘ahead of its international peers in financial capability’.
The UK methodology has since been adopted in Ireland, Canada and the Netherlands, while the World Bank uses the UK approach in low and middle income countries in Africa, Latin America, the Middle East and Asia Pacific regions, with the University of Bristol researchers as advisers.
Measuring public understanding
Financial capability is a relatively new concept, lacking a strong, established consensus about what it means. One of the four main objectives of the UK Financial Services Authority (FSA) was to promote public understanding of the financial system. In 2003, the FSA launched an initiative to develop and implement a national strategy for financial capability.
The project aimed to measure the financial capability of the nation and to project a platform against which future progress could be measured. In 2005 the FSA commissioned the University’s Personal Finance Research Centre to undertake an exploratory, methodological study to design a baseline questionnaire that could be used to measure levels of financial capability in the UK. The findings of this work informed the priorities set out within the first National Strategy for Financial Capability and are being used internationally as a model for gathering baseline data.
Attitudes, skills and behaviours... as well as knowledge
A measure of financial capability is important if an individual is expected to make important decisions regarding their mix of pensions, savings,investments and so on. The state plays a role in regulating the relevant markets in these areas, but people have to make selections between large numbers of products.
One of the main conclusions from the development stage of the project was that there was no single indicator of financial capability, but that rather it could be conceived as encompassing different areas, or ‘domains’, of people’s involvement with money and financial products. This was a significant departure from previous methodologies in that the Bristol approach not only assessed knowledge, but also attitudes, skills and behaviours, making it the first quantitative baseline survey of financial capability in the UK.
The survey measured five domains of financial capability: how well people make ends meet, keep track of their finances, plan ahead, choose financial products and stay abreast of current financial matters. It used factor analysis to create scores for each domain studied, based on the combined information from questions within that domain.
The survey found clear indications that individuals may be particularly capable in one or more areas, but lack skills or experience in others. It also enabled the researchers to identify those characteristics most strongly associated with low levels of financial capability.
Educating young people in financial capability
This research significantly contributed to the priorities set out within the first National Strategy for Financial Capability. For example, one of the findings of the survey was that young people are typically much less financially capable than their elders, even allowing for their generally lower levels of income and experience in dealing with financial institutions.
As a result, a priority within the National Strategy was to educate young people. A number of programmes were put in place including Learning Money Matters, which offered free advice, support and resources to schools and successfully reached over 2 million young people. In 2011 economic wellbeing and financial capability became a statutory part of school curriculum in England.
The National Audit Office in 2007 described the survey methodology as ‘comprehensive’, putting the UK ‘ahead of its international peers in financial capability’ so that ‘international bodies regarded the FSA’s baseline survey as a model for their own work’.