Improving the finance sector for all Australians

Trust in our financial services has been shaken by scandals, but in a new white paper, FinFuture, researchers show how the system can be reformed to put financial wellbeing front and centre.

By Dr Chris Culnane, Associate Professor Andrew Godwin, Professor Carsten Murawski and Cynthia Sear, University of Melbourne

Dr Chris CulnaneProfessor Carsten MurawskiCynthia Sear

Published 19 August 2019

More than half of Australians have lost money as a result of misconduct and other issues with financial services providers in just the past five years. These issues have cost Australian households an estimated combined $A201 billion.

These findings were part of a nationally representative study commissioned by the University of Melbourne in the wake of the Financial Services Royal Commission.

The Commission, led by Kenneth Hayne AC QC, released its damning final report earlier this year – and it’s estimated that the banking industry could be paying compensation to Australian customers to the tune of $A10 billion.

These misconduct scandals have led to a substantial erosion of trust in Australian financial institutions.

Only about one in five Australians believe that banks in general have their customers’ interests at heart or that they behave ethically.

This lack of trust negatively affects people’s behaviour. The most common response we got when we asked what was holding people back from improving their financial situation was ‘I don’t trust financial institutions or advisers’.

In order to restore people’s trust in the personal finance sector and to improve people’s financial situations, there needs to be a new approach.

Our recently released FinFuture white paper, which brought together researchers across finance, law, technology and anthropology, aims to improve this situation for all Australians and encourage the sector to rediscover its purpose — serving the community.

The banking industry’s core objective when it comes to personal finances ought to be the improvement of individual financial wellbeing, which in turn should be the guiding principle in government policy, regulation and technology.

An in order to fulfil this purpose, the financial sector needs to be effective, sustainable, inclusive, safe and ethical.

Picture: Getty Images

To do this FinFuture proposes five key steps the industry needs to take.

FIVE STEPS TO FINANCIAL WELLBEING

First, Australia needs to develop and widely adopt a National Financial Wellbeing Framework that defines the many aspects of financial wellbeing and how they are measured.

This framework would serve a number of functions, including an agreement on the financial wellbeing outcomes that matter.

This should also include the establishment of a National Financial Wellbeing Agency, which would be responsible for whole-of-system coordination and guiding actions on financial wellbeing in Australia.

The Agency would coordinate across sectors and institutions, including regulators, financial firms, technology firms, consumer groups and universities.

Second, the financial capabilities of Australians need to be developed and fostered. According to the long-running HILDA (Household, Incomes and Labour Dynamics in Australia) Survey — which has tracked 17,000 Australians since 2001 — there are some troubling insights when it comes to our national financial literacy.

The survey found the young, the old, singles, people without a job and those without a high education all struggled with ordinary financial concepts.

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And these financial capabilities are an important determinant of financial wellbeing.

To build up these financial skills, we need to introduce compulsory, nationwide, evidence-based financial literacy training in schools, as well as at TAFE and in universities.

But there is a limit to how far individuals can be expected to develop their financial skills. So any step like this must be done in conjunction with the financial system to ensure it’s working for people, given the complexities of the decisions they have to make.

This financial education then needs to be complemented by the introduction of free basic financial health checks and advice for all Australians at critical points in a person’s life cycle.

In addition, research will need to be conducted on how existing and emerging technologies can be harnessed to improve financial capabilities on an ongoing basis.

Third, the financial sector needs to realign with its purpose and adopt a service-centric co-creation approach.

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This means customer contracts, and the rights and obligations of the parties under such contracts, should be fair, transparent and capable of being assessed by the individual so they can determine whether the contract will genuinely enhance his or her financial wellbeing.

Fourth, relevant laws and regulations need to be adapted and strengthened.

More specifically, this includes an amendment to legislation, in particular Chapter 7 of the Corporations Act. This needs to be simplified, and exceptions and qualifications should be eliminated to the greatest possible extent.

It’s necessary to move beyond prescriptive, rules-based regulation towards principles-based, outcomes-focused regulation that’s supported by regulatory guidance.

And finally, technology must be employed so that it supports rather than hinders the advancement of financial wellbeing.

Any increase in data-sharing must be balanced by stronger privacy protection, similar to action taken in the EU; and Australia should adopt similar protections offered by the EU’s General Data Protection Regulation.

Our financial institutions should also be required to give access to a public application program interface for algorithms that determine the terms and conditions of financial services.

THE CUSTOMER’S BEST INTEREST

For firms and others who provide financial advice and financial services, incorporating the concept of financial wellbeing into the performance of regulatory duties like acting in a customer’s best interests (which we define as part of the process of co-creating financial wellbeing) will give rise to mutually beneficial outcomes.

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This is because it provides a shared purpose that goes beyond a profit-driven goal, which often provides short-term gains but doesn’t lead to sustainable outcomes or the maintenance of a sustainable ecosystem.

Improving the effectiveness of the Australian finance sector, by putting it in the service of improving the financial wellbeing of Australians and helping them to address the financial challenges they face, presents an enormous opportunity.

A key goal ought to be to re-establish people’s trust in the Australian finance sector. Trust is the lifeblood of the financial system. It must be earned through positive behaviour. For the finance sector, this means aligning their behaviour with people’s financial wellbeing.

The economic benefits alone of the approach proposed in white paper would be substantial.

But there would also be wider benefits for people and the community they live in; financial wellbeing is associated with both physical and mental wellbeing.

Improving the financial wellbeing of Australians is likely to have positive effects on overall wellbeing, not only for individuals but also for their families, with follow-on effects on health, education and workplace productivity, among others.

Australia also has an opportunity to become a global leader in the finance sector.

Implementation of the Framework would involve wide-ranging innovation in the finance sector, with the potential to make Australia a global leader in personal finance.

Government, industry, regulators, everyday Australians and other stakeholders need to work together if we want to succeed in achieving lasting improvement in financial wellbeing and securing long-term prosperity both for the sector and the Australians it serves.

More information on the FinFuture White Paper is available on the FinFuture website.

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