1 The problem

1.1 Consumers need to catch up

The world has changed a lot in the last fifty years.

We have seen a dramatic increase in the range of choice available to consumers, particularly in the area of financial products and services. This, coupled with the growing wealth of our nation, has given us more opportunity to spend and invest money than ever before.

However, the increase in choice and prosperity has also seen an increase in the complexity of products as more and more providers try to tailor their products to the varying needs of today’s consumer. The wide range of choice available has also led to more aggressive marketing practices, as companies try harder and harder to break through the ‘clutter’ of competing advertising messages.

Thus we find consumers locked into long term contracts on the basis of an attractive opening offer (for example, a ‘free’ mobile phone), consumers who are binging on credit in order to satisfy their lifestyle aspirations (often marketed to them by companies), and consumers who are investing in get-rich-quick schemes that are doomed for failure.

As a result of some of these practices, Australians have demanded tougher regulatory regimes to protect their investments, safeguard them from unscrupulous operators and promote competition. This too, has resulted in an increase in complexity as legislation has increased to keep pace with societal changes.

The last fifty years has also seen a shift from governments and businesses playing a largely paternal role in the financial affairs of consumers to the consumer being responsible for their financial decision-making.

Through all of these changes, governments and businesses have recognised the need for consumers to be informed. However, this too has not been without its problems as consumers have become confused and fatigued by the plethora of information sent to them from many different sources. Not only is it a problem of processing and understanding information but also of knowing what information to trust.

So, this is the problem we face. We have developed as an economy to offer greater access, choice and protection than ever before but, at the same time, we have not developed the capability of all consumers to take advantage of these changes, nor to avoid the risks that come with greater access to money.

Consumers need to catch up. As a nation, we need to be better skilled in negotiating transactions and in managing our money. A number of reports over recent years have also highlighted the need to improve Australian consumer and financial competencies. These include:

• The 1997 Australian Law Reform Commission’s Seen and Heard report which found that young people were ill informed about a range of consumer services.
• The May 2003, ANZ Bank Survey of Adult Financial Literacy in Australia which showed that while most Australians have basic financial literacy skills, young consumers and those from lower socio-economic backgrounds are facing particular disadvantage in making informed decisions about the management of their money.
• The June 2003, Australian Securities and Investments Commission (ASIC) Financial Literacy in Schools report which recommended the championing of financial literacy within schools and more generally.
• Australian consumers have lost a substantial amount of money to scams over the last three years.¹
• The July 2003 Senate Select Committee on Superannuation report on Planning for Retirement which recommended that the Government increase efforts to educate the general population about the importance of planning for retirement.
• The Investment and Financial Services Association 2003 policy paper on Retirement Incomes and Long-Term Savings: Living Well in an Ageing Society which noted that education, information and quality advice are critical to the achievement of Australians’ expectations of their retirement incomes.

1.2 Common consumer problems

The following common life events illustrate the sort of problems facing Australians today:

• Superannuation: Most consumers of working age contribute to superannuation schemes and possibly make other investment decisions and despite the amount of information and advice in the general marketplace, may not know where to turn for contemporary and effective support.
• Buying a house: Consumers make major life purchasing decisions, such as buying a house, often with limited understanding of financing options and risk management.
• Debt: Household debt is accumulating at a rapid rate and is becoming more prevalent amongst young people.

Many consumers also experience difficulties in the retail market. Compulsive shopping is a well known phenomenon. Others have problems with retail-based credit and leasing arrangements which are sold by sales personnel (who are not trained in financial areas and are not subject to the same checks and balances as financial advisors).

However, purchasing financial products is particularly problematic due to the characteristics of this product category (compared with say, consumer goods). Some key differences include:

• financial products are not usually purchased frequently and so we develop limited experience in selecting products
• the value of the purchase (for example, an investment product) is often not clear at the time of purchase, products cannot be tested prior to purchase and often we cannot appreciate the value of a financial product until some time later (and sometimes, too late)
• it can be difficult to verify claims made by financial suppliers.

Regulation is part of the solution and, to some extent, part of the problem. Regulation (for example, disclosure rules), goes a long way towards addressing some of the problems facing consumers. However, regulation can only go so far. Inevitably, due to the complex nature of the financial market, regulation necessarily also becomes complex.

Also, regulation since Federation has not been successful in stamping out consumer scams. Scams can be generally characterised as offers that are not genuine or as the saying goes — ‘if it seems too good to be true, it probably is’. Scams such as advance fee fraud (for example, the Nigerian scam) have been around since the 1500’s (then known as the Spanish Prisoner scam) and do not look like disappearing any time soon.

In many cases, scammers are successfully prosecuted by consumer regulators such as the Australian Competition and Consumer Commission and ASIC. However, some scammers will always be one step ahead of the law and, even when caught, rarely have remaining assets to fully compensate victims. This is where consumers need to be able to recognise the hallmarks of a scam in order to combat the increasingly sophisticated advances of scammers.

We are also seeing Australian children falling behind in the financial and consumer skills they will need for the future. This has already manifested itself in the problems of youth debt we are currently seeing amongst 18-24 year olds.

As has been noted, the world has changed a lot. However, the teaching of children has not kept pace with these changes and, as a result, children are often poorly equipped to understand financial concepts and consumer considerations in life. Many young Australians also have negative attitudes to money management choosing to ‘live for today’ rather than plan for the future.

However, planning for the future has never been more important as the fiscal implications of changing demographics (ageing population) have led governments around the world to shift the responsibility for saving to the individual. Australia is at the forefront of these changes with the introduction of compulsory superannuation.

Thus, as consumers, we need to accept increasing responsibility for our financial outcomes. We need to be able to manage our own way around complex consumer and financial markets while avoiding scams and other pitfalls. We need the right skills and attitudes to do this.

In summary, despite the amount of information and advice in the market place, there is substantial evidence that appreciable numbers of consumers experience difficulties managing money matters in both the financial and retail markets.

The question facing us is: How can we ensure that Australian consumers avoid money traps and get the most from their money in an increasingly complex market?

¹ ASIC, Financial Literacy in Schools Discussion Paper, June 2003.

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