Enhancing financial literacy

The banking system shoulders a fundamental responsibility to promote customers' awareness about their products

The global financial crisis has demonstrated that financial education, along with a well-capitalized and well-supervised financial system, is of critical importance not only to the economic welfare of households, but also to the better efficiency and functioning of financial markets, even to financial stability as a whole. Therefore, in recent years, financial education has gradually come into the limelight in both developed and developing countries.

Financial education, or financial literacy, refers to a person's ability to understand finance. Specifically, this concept is concerned with the financial knowledge and skills that allow people to be able to wisely manage their money in the modern world.

If people have little capability to make good choices to manage their savings and investments by participating responsibly in financial markets, they may not be able to protect themselves from possible losses, and may miss opportunities to increase their financial security or wealth.

The banking system shoulders a fundamental responsibility to promote customers' awareness about financial products and services. In order to expand its customer base, banks must understand the real requirements of customers, and need to be aware of the risks products may carry, clearly presenting customers with sufficient information in an easy-to-understand format.

Meanwhile, with investors' appetite for complex financial products, such as structured products, banks should consider the level of customers financial knowledge, educating investors about how the products work by providing a range of accurate but simple documents, excluding potential investors who are not suited to the risks of the investments.

There are many lessons to be drawn from experiences around the world. In the United States, the subprime mortgage crisis was not only caused by lax monetary policy and financial regulation, or the result of misleading sales practices by lenders, it was also due to the reckless financial behavior of households, in particular, those vulnerable ones who should not have taken on mortgages under their financial circumstances.

In fact, individuals were frequently not aware of the risks they were exposed to, and did not always understand the terms and conditions of the mortgages they purchased - including those with low rate periods or with variable rate structures.

In recent years, British banks have set aside more than 9 billion in compensation for the mis-selling of payment protection insurance. However, the problem is not getting better. The annual number of complaints registered by the banking ombudsman has risen from 30,000 a decade ago to 264,000 in 2011.

In Hong Kong, more than 40,000 investors, many of them retirees and ordinary depositors, bought Lehman Brothers-linked minibonds before its collapse. When the bank fell, there were many who accused the banks of mis-selling these products, although eventually the issue was resolved through compromises between banks and investors.