How can households be supported to make better financial decisions? It seems a simple, straightforward question. We all know that families need to budget for their regular household expenditure, insure themselves against the unexpected and save for the future. But a range of factors influence their decisions on how to accomplish these goals, and understanding those influences—and their impact—is vital to figuring out how to support good decision-making.
The Think Forward Initiative is trying to get to the heart of this question, by taking a step back and first attempting to frame the challenges households face when making vital financial decisions. The recent summit brought together a wide range of experts, from economists and policymakers to leaders from the financial and technology sectors, in a “meeting of the minds”.
My role was to moderate one of seven break-out sessions, each focused on a key area influencing financial decisions. Specifically, what are the challenges to household decisions created by financial institutions, economic policy and consumer regulation?
My group first worked to understand the environment in which European households currently operate, focusing on the levers used by policymakers and regulators and the financial services offered by the industry.
Monetary policy has led to very low and in some places even negative interest rates, and financial institutions have replicated these low interest rates on risk-free savings products. Considering the global economic situation, this low-interest environment is likely to last for at least several more years, which creates a dilemma for households: is it still worth it to save? And if savers need to take more risks to achieve higher yields, are they ready to take such risks?
Understanding factors that influence decisions is vital to figuring out how to support good decision-making. The Think Forward Initiative is trying to get to the heart of this question.
Fiscal policy also plays a role, if less directly. There is strong evidence that unchecked capital accumulation creates inequalities, so there is a temptation for governments to increase tax on capital revenue and financial wealth. While households cannot easily change the wealth they have accumulated in the past, taxation on capital income and financial wealth could influence their decision on whether to consume or to save. How can they save efficiently and protect their wealth when fiscal rules change over time and taxation will probably increase (especially in countries with high public debt)?
Beyond the policy context, household decisions are also shaped by the financial services industry, which in turn is shaped by regulation. Increased regulation on financial institutions following the financial crisis has led to higher compliance costs, higher capital requirements and lower revenue for some products and services. This crunch on profitability is forcing financial institutions to evolve, but there are many other factors contributing to a disruption of the industry. Competition from fintech and the necessity to rebuild public trust post-crisis are also pointing to a need for consumer-focused financial innovation. But until that trust is rebuilt, how can households be confident that financial institutions are working in their best interests?
With the scene set, we turned to framing the challenges for each of the stakeholders—policymakers, regulators and financial institutions.
First, how can financial institutions give individuals the information, products, services and tools they need to manage their finances? We found a range of issues:
- How can they create products and services that are sustainable and adaptable for a changing world?
- How can they create personalised products and services without intrusively using people’s data?
- How can they work together to provide ongoing, holistic advice/service?
Next, how should regulators protect consumers without nannying them?
- How can regulators help savers decide how much risk they are willing to take in order to obtain appropriate returns?
- How can they determine who is capable of taking on higher levels of financial decision-making while protecting the vulnerable?
- How can they encourage (or force!) financial institutions to work together to provide households with the information, products and services they need?
- How can they effectively restrain unbridled risk-taking without stifling innovation in financial services?
Also, how can policymakers incentivise the right kind of financial behaviour?
- How can policymakers determine what is the “right” kind of financial behaviour?
- How can they anticipate the unintended consequences of monetary policies?
- How can they anticipate the unintended consequences of fiscal policies?
- How can they create a system of taxes and state benefits that households can understand and therefore react to rationally?
And finally, a question for all three stakeholders: How do you empower and engage individuals to take charge of their own personal finances?
- How can they provide full, transparent financial information without overwhelming households with too much?
- How can technology provide households with the tools they need to make good financial decisions?
- How can they help households set appropriate goals?
- How can they “nudge” people into the right behaviour without taking advantage of their influence?
Having set out the range of challenges facing the different stakeholders, we recommended that an objective for the Think Forward Initiative should be to determine how to provide “trusted, tailored and transparent financial solutions that are right over the long term, for the entire household”.
“Trusted” in the sense that households need to be assured that products and services are approved and monitored by regulators and that the financial services industry is working in their best interest. “Tailored” in that products and services should be designed for the needs of the consumer—not the financial services industry—and make the best use of data to ensure that they are right for the individual’s circumstances. ”Transparent” in that information on financial products and services must be clear and as simple as possible. And finally, “financial solutions” must be the right choice not just at the point of sale but over the long term, and not just for an individual but for the entire household.
“Trusted, tailored and transparent financial solutions” may be a simply stated goal, but achieving it is unlikely to be a straightforward process. This session, perhaps more than any other, highlighted the need for multiple stakeholders to work together to achieve the lofty aims of the Think Forward Initiative.