Taming the pound

There were a couple of articles in the free London papers on Friday that suggest that the powers that be still don’t understand human behaviour.   It would be funny, except for the fact that they show that the public are still going to pay more than they need, because the powers that be are part of the problem, not the solution.

One, the front page in the Metro, was about how advisers to Government use their knowledge to help their rich clients dodge tax laws.

Twenty five years ago, I used to point out to clients that I couldn’t afford myself.  I advised wealthy people how to make the best use of their money, tax relief etc.  If they could afford me (or more correctly, us, as I didn’t do it all solo), they could benefit. Such as the couple who were, if I recall, an accountant and a solicitor with two children.  They sued one another for divorce and maintenance of one child each, but still lived together. That and various other dodges meant that they paid about £1,000 tax on a combined income of about £85,000 (which was quite a bit then).  They could have eliminated the £1,000 if they could have been bothered.  

There’s always been a three tier system, the very poor don’t pay much tax because they don’t have much money anyway and you can’t get blood from a stone.  The middle income (most of us), get screwed into the ground because we get taxed but can’t afford the thousands we need to get the fancy advice to get out of the tax net (it’s like the law, if you’re not wealthy, you can’t really afford defamation actions etc.)  And the very rich can pay somebody to save them a lot more tax than they pay in fees.

And being an adviser and using the “inside track” isn’t new.  When Cameron was talking about parenting lessons, one of the providers who was going to be able to get Government supplied vouchers from parents was “Parentgym, the company run by Mr Cameron’s friend and former adviser, Octavius Black.” 

I did point out at the time that it looked as if Mr. Black had advised Mr. Cameron to adopt a policy, and then set up a company to benefit from that policy.  Maybe that wasn’t how it happened, I don’t know, but while, a year or so later, the Metro thinks it’s front page news that people take advantage of links or that big firms with big connections can benefit from policy and help the wealthy avoid tax, well, sorry, but it’s not “man bites dog”, it’s “dog bites man”; it isn’t news.

The other article was in the Evening Standard, under the headline, “Bankers face jail under regulation rethink”.  We have, apparently, disagreement over how to achieve a “robust set of rules”.  This is to try to punish “bad behaviour” and “behaving recklessly”.  

Wow, the “members of the cross party group of MPs and Peers” are against sin – fantastic!

I have said before what needs to happen in practice, rather than in theory.  I’ve described a way to think about regulating personal financial services, what we could do about the Retail Distribution Review (RDR) and how people pay for advice and how the regulations need to deal with the reality of behaviour and stop playing the blame game 

These articles also, like this one, have a lot of links to other useful items.

I also wrote an article on the subject of “honest bankers” and how the “we’re all against sin” might work in practice.  Sadly, Mindful Money, the site I wrote it for doesn’t carry my blog now, and they seem to have taken down that post (or maybe I just can’t find it).  So I’ve put it on this site, here.

It would be nice if the regulators, Government and the media would read some or all of the posts – I really think we could make things better in a practical way.

This article was written for Mindful Money in January 2012.  They seem to have taken it off their site, but I think it is still relevant.  I wrote it for them rather than putting it here originally because it’s more about “National” than personal finance. However in terms of regulation of what is sold to people, and how bankers are remunerated (from our money), it applies to the Taming the Pound idea of helping people help themselves to control their money.

There was an interesting piece of rhetoric from Martin Wheatley, the head of the new Financial Conduct Authority (FCA).  He was speaking to the British Bankers Association (http://m.ifaonline.co.uk/ifaonline/news/2141304/fca-chief-banks-advice-sales-targets).  He set out his wishes for a (utopian) situation where the banks would be the customers’ friend and not sell them inappropriate products. 

It’s nice in a way that he’s trying to do this.  It fits in with the desire for honesty etc. 

But is it realistic, does it address any real problems and does it recognise that he and his organisation (and the predecessor, the FSA) are a large part of the problem? (http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)

Realism

If we’re going to have talks about banks going back to the “bank manager in the cupboard”, the small businessman’s friend etc., lovely.  How exactly is that going to happen?  What is the reward system for banks? 

It’s based on making money – that’s what businesses are supposed to do.  If banks give “free” advice (like they used to) it isn’t free, it comes out of the bank charges for cheque books etc.  If you have free cheque books etc. the bank has to get its money from somewhere, and it can’t give “free” advice.

When we went over to the concept of the bank branch as a “sales unit” (and the model became one of paying for buying products and services, rather than everybody effectively paying a fee to have an account that got them “free” services that they could use), the set up changed.

I was actually working for the independent finance arm of a major bank in the late 1980’s.  Part of my job was training the bank staff about what was possible to do beyond the products the bank wanted to sell.  They got double commission on selling the in-house products – to encourage staff to sell the bank stuff rather than pass it to us to broker it for the best deal in the market.

Still, the bank staff wanted to call us in, because they saw their role as being to help the customer.  They didn’t really know insurance and investment etc. they knew banking.  They wanted to open accounts, do what they were good at, and then pass the other stuff on to somebody who was trained to do it.  They saw themselves as good at customer service and were leaving in droves because “I joined the bank to help customers not to be a salesman”

The model is now to sell things, not provide a “free” service (for which they charge in regular fees).

How do the banks go back to being something they haven’t been for thirty years or more?  Mr. Wheatley doesn’t say.

Real problems

The response from Independent Financial Advisors (as you can see from comments on some of the links, and I get first hand from friends still in that field) is that, naturally, the banks won’t give decent quality advice anyway (that’s also picked up in the Telegraph article http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/9044670/Has-the-outgoing-Financial-Services-Authority-scored-one-last-own-goal.html)

I’ve got a certain sympathy with that – after all, I did the IFA job for about 14 years.

The level of technical competence that IFAs have to have from this year, I got in 1992/3 (when the qualification came out).  The banks’ staff don’t even have to have that, from what I can make of the regulations.

It was the case in the 80’s through to today that you can have “specialists” who only learn one product, or family of products.  They can sell one company’s policies, meaning that it is OK if the policy is absolute rubbish as long as it is the best the company does.

It used to go even further towards lunacy, maybe it still does, and one could learn just mortgages, or just investment-linked life policies or something. 

If you target people to sell specific products, people react as they usually do.  If the only tool you have is a hammer, all problems begin to look like a nail.

So you always got people (particularly the most limited, poorly trained people) selling rubbish.

Mr. Wheatley doesn’t want people to do that.

Might it therefore be a good idea for him to stop the limited and specialist idea, and make all people qualified and responsible for selling the best product in the market?

Appealing to bankers’ better nature is OK, but as they will lose their jobs if they give in to their better nature, don’t sell as much and don’t make any money, does Mr. Wheatley think that it is going to happen? 

Part of the problem

Apart from the obsession with products and the – let’s say it, naiveté – of appealing to the bankers’ better nature, the FSA have set up another problem.

Successive heads of the FSA have been previously employed in banking (such as Lord Turner).  Given that such a person is part of the “tribe” and probably has on speed dial the number of the person who is currently playing golf with at least one Director of any bank in question, according to small group theory – what is going to happen?

If you find somebody in your social group in an ethically questionable situation, do you immediately call the police and read your former best man’s good friend his Miranda rights?  Or do you give them a bit of leeway, because you’re sure they wouldn’t be doing anything they shouldn’t?

Successive regulators seem to have been reluctant to be tough on banks, whether it is because of the “six degrees of separation” factor, fear of banks’ financial clout, the consideration that a remunerative non-executive director role will be lost if you drop them in it – I don’t know.

But I’m fairly sure that, for the reasons above, among others, giving lectures on morals to the banks is not terribly helpful.  I would think it will be as practically useful as giving lectures on the moral imperative for hygiene and customer service to an NHS practice run by Dr. Shipman.

I saw an article in the Metro the other day (18th April) about how Croydon council is considering banning new fast-food outlets.

They’ve had 246 outlets operating in the last year, so I’m not convinced that stopping the number increasing would have a huge impact!

I’ve said before that brute force “controls” like that don’t work.  But still we have people saying they want to “reduce the number near schools” and similar “I’m against sin and in favour of the blindingly obvious good” comments.

We can do bans, and orders and planning restrictions etc.  And that is the same as having orders and rule restructures to “force” people to save for pensions.  It looks like good sense, doesn’t work, wastes money and distracts time, effort and funding from policy that might work.

Eventually, it’s going to occur to somebody in Government (National and local) that flexing your muscles and trying to force people to do what you think is best for them isn’t going to work.  We need to think (in terms of finance, diet and everything else), about what motivates people.

People tend to eat fast food because it’s convenient and they like it.  They might not even be hungry, but as I explained, they will still eat it.  So perhaps we need to make healthy fast food more convenient and tasty. Maybe we need to make unhealthy fast food more inconvenient and more unpalatable.  

There are various ways to do it, and that’s what Government should look at.

You can lead a horse to water, but you can’t make it drink.  What you can do is salt its oats.

Government needs to work out how to salt the oats of people so that they will actually want to save, to eat healthier food etc. rather than being told to do those things while still wanting to spend money now on fatty, salty, sugary snack food.

Or perhaps, given the topic, Government needs to think (or ask other people to think for them, as they find thinking so difficult) about using a low-sodium salt-substitute on people’s oats!

I’m working on some projects about teaching finance in schools at the moment (which is why the posts have been a bit rare recently). I’m trying to put together a pilot programme for schools as well as some supporting material such as workbooks and a book (like Taming the Pound) but focussed around children and aimed at parents and teachers.

One thing I did was contact a journalist to see if I could get some concise questions to answer to try to get across how important this is.

Here’s the result.

-Should financial education become a compulsory part of the school curriculum?

Yes, teachers want it, parents want it, students need it. But it needs to be integrated intelligently. If it’s another “you must do this pointless subject” it risks being another Latin that dies out in schools, or like the conventional study of Shakespeare that so often puts students off rather than catching their interest.

- Are teachers well enough equipped to deliver financial education to the adults of tomorrow?

No. If “Over two thirds (70%) of UK adults* have admitted to having debt problems” it doesn’t sound as if most adults know much about how to handle their money, and as “15% of teachers also admitted that they lack expertise in the area of financial education”# it seems clear that teachers are not exceptional in having their own finances under control or really understanding how to teach it. “Do as I say, not do as I do is all very well”, but assuming that the teacher is one of the 85% who think they know how to teach it, but one of the 70% who can’t do it themselves, is that good enough?

*Research by Opinion matters, carried out online between 7/2/2012 and 10/2/2012 questioning 1,510 UK adult respondents

#Survey of 258 secondary school teachers, conducted in December 2011 and January 2012 by Opinium Research

-Should real life experiences be used in lessons so classes are more relevant to the modern world? E.g. interest rates/APR/mobile phone contracts/mortgages.

Yes, there’s plenty of evidence from Occupational Psychology and business generally that the greater the “fidelity” of the simulation (i.e. the closer to real life) the greater the learning, and that applies to children just as much as to adults learning a new role. With thought, and cooperation between teachers, finance professionals and psychologists, it also makes it easier to integrate the learning. For example, areas such as maths or ICT etc. easy to integrate , but with thought, history, geography or any other area can incorporate principles that are important for personal finance.

Can teaching children to think logically about why they want something have more influence on their money management skills in future?

Yes. Any good teacher, coach or psychologist can tell you that why is a more powerful question than how.

How to understand the theoretical background to the money supply and the national debt are important if you want a career in economics, but they have very little relevance for most people and where is the motivation to learn them? They are like Latin, it’s a subject that seems abstract and pointless. And assuming current adults know, that knowledge has not been helpful in terms of avoiding national or more important, personal, debt.

How to get the best mobile phone deal, how to understand APR etc. have more relevance to the individual, but again, did that knowledge help this generation of adults – not if 70% are in debt and the economy in a double-dip recession. It might be useful, but like Shakespeare, if it is taught the wrong way, it bores most people.

If the focus is on “why”, we get a different result. Questions such as, why do you want your own house or why do you want to download music, open up different areas. They allow discussions of the value of experiences against possessions, the necessity of choice (you can’t buy everything), the desirability of credit in certain circumstances, the issues of balancing the repayment of debt in future with having pleasure now.

So the “why” questions force people to face issues such as their priorities in life and the role of welfare and charity (which might integrate well into citizenship and religious education, areas that teachers feel students see as not relevant) and provide a motivation to learn important skills such as how (and why, and when) to use a comparison website, why it is important to know the APR on a loan and what the consequences of different rates are. If people in general (not just students), reflected on why they wanted what they wanted, and why aspects such as credit and debt were important to them, they would have a motivation to learn how to handle them. Without that motivation, it is just more boring stuff to learn, like pensions – everybody says they’ll check it up “another time”, because it is complicated, but actually it is because it is boring. But everybody, particularly children, learns interesting material that allows them to do things they want, like how to use a smart phone or social media – those are just as complicated, but if you want them,( so you have a strong “why”), you easily learn how.

The way to get decent financial education to everybody, starting with schools, is to ask “why” questions, to invite personal answers to those questions which makes for personal involvement and interest in learning about them.