Improving borrower education on credit and debt, including potentially bringing in exams for those looking to take on “excessive debt”, would be a better way of controlling debt than having more regulation on lending, according to the head of a financial services company.
Speaking to The Adviser, the managing director of Empower Wealth and chair of the Property Investors Council of Australia, Ben Kingsley, urged regulators to take a “level-headed approach” to challenges in the credit space before imposing further regulations off the back of inquiries like the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“I hope we have a level-headed approach to this,” Mr Kingsley said.
Mr Kingsley added: “Although I was surprised and shocked [when I heard of] a couple of examples that have been raised in the royal commission, I still haven’t seen systemic risk in terms of lending practices and I don’t think there needs to be too much pulling of the levers to change the way in which credit is being distributed out to the economy.”
The managing director of Empower Wealth said that he believes there should be more of a focus on providing borrowers with better financial education to ensure that they’re aware of the risks involved with assuming debt before doing so.
“I want to see education for people who are taking on debt, in terms of understanding their obligations,” Mr Kingsley said.
He continued: “It shouldn’t just be about regulators protecting consumers and consumers not taking responsibility for the lending they undertake.
“I think there’s definitely room for improvement in terms of educating people around the risks and rewards of borrowing money, and I’d like to see more happen in that space as opposed to further tightening in regards to credit.
“We’re at record low levels of credit defaults, so, from that point of view, it’s a timely reminder of making sure everyone’s playing fairly out there, but let’s not throw the baby out with the bath water.”
When asked what he thinks should be done to improve education standards and reduce credit risk, Mr Kingsley told The Adviser that the industry has a “joint responsibility to educate consumers around money management and credit risk engagement”, and called for stronger financial education in schools and for the bolstering of ASIC’s MoneySmart program.
“That’s where the secret lies,” the MD added.
Mr Kingsley also proposed that prospective borrowers could sit exams before taking on “excessive” debt.
“For people taking excessive debt that’s beyond their risk, there may even be an opportunity for them to sit some type of exam or some type of requirement around their knowledge and education before you might lend money excessively to those types of people.
“I just want everyone to be accountable. Where the risk lies is around basically regulating to the lowest common denominator. Usually, those lowest common denominators may be foolish around money.”
Mr Kingsley continued: “I don’t think our regulation should get down to that level. We’d be stifling growth if we were all restricted because of the 5 per cent of people who don’t know what they’re doing. That is not good for productivity growth, jobs and prosperity.”
Financial literacy in the spotlight
There have been increasing concerns raised from those in the broking industry about the lack of accountability placed at the consumer’s feet when it comes to borrowing money. These include suggestions that there has been “overkill” in terms of the level of scrutiny and regulation that is being brought in around lending, and that the increasingly “impractical” nature of bank credit decisions.
However, the federal government has set financial literacy in its sights, announcing earlier this year that it will establish a new financial literacy body tasked with distributing community benefit payments from banks to organisations that boost financial literacy and capability.
The new independent body (with a working name of Financial Capability Australia) will be overseen by the Financial Literacy Board and chaired by executive director of ipac securities Paul Clitheroe AM.
Minister for Revenue and Financial Services Kelly O’Dwyer stated that such payments will be used by the new body to administer grants to organisations that seek to improve the financial literacy and capability of consumers, while also supporting other government initiatives including the National Financial Literacy Strategy, the government’s Women’s Workforce Participation Strategy and the More Choices for a Longer Life package.
“Financial literacy and capability is critical for economic empowerment, including for Australian women and young and older Australians,” Ms O’Dwyer said in a statement.
“This new body will be a game-changer, a lasting institution that will support consumers and build financial capability for all Australians no matter what their circumstances.
“It will become Australia’s peak body in championing financial literacy and capability among Australians. It will use funds received as a result of corporate wrongdoing to educate and empower Australian consumers of financial products and advice.”
Many brokers already offer financial literacy programs to their clients and local communities, with one broker, Mhairi MacLeod (founder and principal of Astute Ability Group), partnering with the Mortgage and Finance Association of Australia (MFAA) earlier this year to roll out a broker-led financial literacy program.
Speaking to The Adviser in May, program developer Mhairi MacLeod commented: “Financial literacy in this country is really at a low and I believe that the sectors that really could benefit from it are our youths and the disadvantaged.
“From those in schools to community groups and even correctional services, there are a lot of young adults who really need to get a better understanding of financial literacy, which leads to a greater wellbeing as they move into adulthood.
“As brokers invest heavily in the local community, it made sense to me to have brokers teaching these skills to students, which will then be reinvested back into the community long-term.”
She concluded: “This isn’t a short-term game. It’s about longevity and being socially responsible — giving back to communities is a huge thing, because, without that, communities don’t grow.”
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