Home / Opinion / Online-views /  Financial well-being = order in marketplace + financial literacy

The draft National Strategy for Financial Education (you can read it at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1342416428845.pdf) put together by the apex regulatory body, the Financial Stability and Development Council (FSDC), is up for public comments right now. It is a joint effort by various financial sector regulators to have a common road map for getting 500 million people financially literate over the next five years. This is a goal that is very hard to argue against. Financial literacy is one of those “good" things that battles two charges globally. One, its efficacy is not clear. Reams of research give inconclusive results about the final outcome of a financial literacy class, initiative or programme. Two, and this is more damaging, the disclosure and education road is one that moves the regulatory burden over to the consumer. Born in the US, this concept is the brainchild of a Wall Street weakened regulatory approach. Disclose product specifications to a financially literate consumer and the buck smoothly moves from the regulator to the consumer and the actual buck moves from the clueless consumer to the seller. This approach knows, for example, that by the time the educators catch up with the latest product alert, the producers and sellers would have moved to the next level. And that asymmetry of information will always benefit the seller rather than the buyer.

Shyamal Banerjee/Mint

If financial well-being is the goal of FSDC and now possibly the finance ministry (that is moving from being busy with just vendetta and machinations to getting on with work), then financial literacy has to be seen as one side of the coin. The other side of the coin is order in the marketplace. Order in the marketplace means lack of regulatory arbitrage across retail financial products, transparent product structure (mutual funds in India are possibly the most transparent in the world today—why this cannot be extended to other products is a question whose answer leads me always to regulatory capture) that allows comparison, distributor regulation and a system of effective penalties (Rs5 lakh is what the insurance regulator can impose as a fine because it is governed by an Act written in 1938.)

Once the order part of the market is sorted out, the literacy piece will fall into place. But instead of creating a huge bloated organization (that finally will get busy running itself rather than teaching anybody anything), could we look at a leaner structure? Why can’t there be a small core secretariat and staff with a mandate to be a nodal agency for financial literacy. Volunteers from product manufacturers and distributors (regulatory brownie points for raising your hand), academia and consumer organisations could put together education material and a need-based dissemination of this education. One of the best “teachable moments" is when the person has a need and is looking for information and knowledge before making a financial decision. I want to know a lot about home loans and the best deal available when I am about to take a loan. My interest is not going to be high in a literacy class that goes on about capital market structure when what I need is information to take the best decision on a home loan.

The second piece is this: the best person to deliver financial literacy is the seller of the financial product. The person buying is most open to knowledge, information and data at the point of sale. FSDC could consider turning, what is today, the weakest link in the chain—the distributor—into its strong link. If incentives are such that it’s in the interest of the seller to look after the interest of the consumer, it will be in the interest of the seller to teach as he sells. For those oddballs who like to cheat because they are twisted, have a punishing penalty system. Any literacy initiative that is not outcome oriented, that does not have outcome targets embedded in the product design of the literacy program, will be one more large slothful giant bureaucracy busy with its own needs.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

Also Read | Monika Halan’s earlier columns

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