Financial literacy vital to achieve high income status

COMMENT By CAROL YIP

THE first report on the New Economic Model (NEM) for Malaysia presents a clear message for radical change in our approach to economic development. The stated goal is to enable Malaysia to reach high income status by 2020.

The National Economic Advisory Council, which came up with the report, recommends that businesses must heighten their appreciation of people as valuable assets that they must collaborate actively with to make Malaysia a sustainable and vibrant nation.

However, the recent announcement of likely subsidy reductions on essential items has raised the spectre of many Malaysians experiencing an increase in inflationary pressure. While there is much commentary in the media focusing on how to help the poor, the aged and middle-income wage earners, we need to collectively and individually solve the problem so that we can speed up the process and reach these goals as a society. The year 2020 may seem a long way off, but nine years is not a long time to achieve these lofty NEM goals.

The Government cannot expect Malaysians to continue showing excellent work performance to contribute to economic growth when we experience personal financial stress in our day-to-day lives. Unless we have salary increases that align with living costs and the Government heightens its efforts to work with the business community, things may stall.

Without the financial security and benefits as envisioned in the NEM goals of “inclusiveness” and “sustainability” to improve the rakyat’s quality of life, the majority of our society will continue to experience a bleak financial future, culminating with an unsustainable retirement.

Stuck in the middle income trap

While the Government is trying to put things in order to help us get out of the middle income trap to reach a high level income society, there is still a missing link. We need to start looking into a national strategy to help Malaysians improve their personal financial literacy and develop the necessary skills to keep their personal financial matters in the proper perspective.

There are several transitions that Malaysians must navigate through as they grow from children, through wage-earner, on to retirement. Each stage requires an understanding of personal financial matters that are sorely lacking in most of us.

Financial literacy is important to everyone. Financial stress is not biased based on race, age, gender, marital status or different income groups. Just because a person might be below the middle-income group doesn’t mean he or she may need financial education more than others. Just as likely, the children of wealthy parents need to be educated to maintain family wealth. Similar to reading and writing literacy, financial literacy is necessary to all. When a nation has a high level of financial literacy, it is easy to promote healthy financial ethics and values across different generations, from young to the old.

What other countries are doing

In 2008, the Organisation for Economic Co-operation and Development (OECD) launched the International Gateway for Financial Education to serve as the first global clearing house on financial education. It seeks to raise awareness to ensure wide dissemination of research, best practices and guidelines and build a worldwide network of government stakeholders on financial education. Several countries, most of whom are members of the OECD, have developed and implemented national strategies on financial literacy:

Australia: In 2005, the government established the Financial Literacy Foundation (FLF) to implement a national literacy strategy. The FLF worked to integrate financial literacy into the educational system, to develop resources and support for teachers and to provide financial literacy materials for the workplace. In July of 2008, all of FLF’s functions were transferred to the Australian Securities and Investments Commission, in order to consolidate the Australian government’s financial literacy response under the Commission and to strengthen its role in safeguarding Australia’s economic reputation and well-being.

New Zealand: A crown agency, the Retirement Commission, led the development of New Zealand’s National Strategy for Financial Literacy, in 2008. The New Zealand Retirement Commission also created “Sorted”, an independent government-funded organisation dedicated to helping New Zealanders manage their personal finances, throughout their lives. In 2009 the Ministry of Education also took over all responsibilities for financial education in schools.

Singapore: The national financial education programme MoneySENSE was launched in October 2003 to bring together industry and public sector initiatives in financial education, to create a long-term sustainable programme to enhance the basic financial literacy of Singaporeans. Through its national MoneySENSE programme, the Singapore government continues to support initiatives that enhance the basic financial literacy of consumers.

The Netherlands: Under the working title CentiQ (Sensible with Money), around 40 partners from the financial sector, the government, information and consumer organisations and science centre signed an agreement in 2006 to work together on financial education. Together, the partners carry out a strategic agenda that includes programmes and projects aimed at improving the financial knowledge and skills of consumers and stimulating an active attitude, so that consumers can make conscious financial choices and become financially competent.

Getting our house in order

Malaysia shouldn’t be left behind. We need a concerted effort to create a national financial education blueprint. Let’s start transforming the nation with a new attitude and mindset by emphasising building a “made-in-Malaysia” financial education programme in schools, tertiary institutions, workplaces, community centres and NGOs.

There are some stakeholders who are already educating different parts of our society according to their core business objectives. A central regulatory body is required to consolidate existing financial education programmes and be the centre of influence to create a national strategy to improve the nation’s financial literacy level based on sound ethics and core values, and in line with the NEM goals.

·Yip is a personal financial coach and also founder and CEO of Abacus for Money

Systemic risk a puzzle or mystery?

THINK ASIAN By ANDREW SHENG

MALCOLM Gladwell deserves his reputation as one of the most brilliant and popular writers today. His books – The Tipping Point: How Little Things Make a Big Difference, Blink: The Power of Thinking Without Thinking, Outliers: The Story of Success – all became No. 1 bestsellers.

I just read his latest book, What the Dog Saw, actually a compilation of his New Yorker magazine articles. He is brilliant because he looks from an angle that most of us miss. He did not think what you and I think when talking about a dog; he looked at what the dog thinks.

In the chapter titled Enron: Open Secrets, Gladwell posed the right question: Was the failure of Enron a puzzle or mystery?

A puzzle is something that can be solved with extra information. A mystery is a question that may not have simple answers, requiring judgment and the assessment of uncertainty. “The hard part is not that we have too little information, but that we have too much,” he wrote.

He concluded that Enron was not a puzzle, but a mystery, since Enron disclosed most of the information according to the (then) accounting rules. Exactly like the current crisis, Enron had the best professionals working for the company, but no one stopped the company producing misleading accounts until it was too late.

In this age of high transparency, crises happen openly. Why? In Enron, Gladwell posed the issue: “It’s almost as if they were saying, ‘We’re doing some really sleazy stuff in footnote 42, and if you want to know more about it, ask us.’ And that’s the thing. Nobody did.”

Gladwell asked, “Had we taken the lessons of Enron more seriously, would we have had the financial crisis of 2008?”

Right question. But why did nobody, especially policymakers and regulators, ask the right questions? Is the current global crisis a puzzle or mystery?

There is general acceptance by financial regulators (in hindsight) that what we all missed during the current crisis is systemic risk, which is defined in Wikipedia as “the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system”.

It can also be defined as the serious destabilisation of the financial system, caused or exacerbated by failures in parts of the system that spreads through the financial system and the real sector.

Systemic risks are risks passed through common interlinkages and interdependencies in a system or market, through contagion that leads to a system-wide cascading failure.

Most regulators would agree that systemic risks are not usually measured by micro-prudential regulators, who focus mostly on institutions or processes. It is now fashionable to talk about “macro-prudential regulation”.

The current reforms in the United States and European Union vigorously debate how to measure, monitor and control systemic risks. These range from creating an independent “financial stability council” specifically to comment on systemic risks, the use of a tax to reduce systemic risks, and more regulations and reporting requirements.

Everyone seems to agree that we need to control the “too big to fail” banks and the “too interconnected to fail” smaller institutions, such as hedge funds. There is general agreement that all scope of regulation should cover all institutions that generate systemic risks.

The trouble with controlling systemic risks is that they are not easily identified. We know that systemic risks are generated by behaviour, that they are inherent in eco-systems and that they have macro as well as micro origins. But we do not know the trigger when these risks begin to cause real problems.

We now face the Gladwell question: Is systemic risk a puzzle or mystery?

If it is a puzzle, then if we find the right information, we can have the right solution. But if it is a mystery, then we may have to think about the problem completely differently.

Gladwell thinks that puzzles are “transmitter-dependent”, depending on what we are told. Mysteries are “receiver-dependent”; they depend on the skills of the listener. If the public does not understand the risks, then the risks will happen.

Systemic risks are related to the system as a whole and also the behaviour within the system and also the commonalities within the system that create the contagion.

Understanding this means that we need to understand not just the dynamics of the financial system itself (what is endogenous to the financial sector), but also the complex exogenous inter-relationships within the financial sector and the real sector.

It means that we have to understand the reflexive actions between parts of the real and financial sectors.

This is an epistemological question, the science of the limits of knowledge. Suppose we have a super computer that is able to digest every bit of information, can we accurately estimate systemic risks? What if systemic risk stems from the fact that the externality of what we do (everyone in the financial system) generate enough spillover effects that create a massive disaster?

In other words, are we dealing with the unknown unknown? These are sometimes called acts of God.
Perhaps the recent preoccupation with risk management models and information systems that assume that we can calculate all the risks is wrong.

We now know that the current generation of risk models cannot cope with Black Swan or extreme event risks.

Risks can be reduced in four main ways: avoidance, diversification, hedging and insurance by transferring risks. The current generation of regulators thinks that diversification, hedging and insurance is a science that can be measured. This crisis proved that they are wrong. There is much about systemic risks that we do not understand.

Hence, it is better to have ample capital and simple “avoidance behaviour” or prudence in whatever we do. Regulators have the unpleasant task of saying no when no one understands what the risks are.

Risk prevention or avoidance is still an art, not a science. We need to be humble that we do not yet fully understand how our systems work or fail, hence the need to be “balanced” or finding the golden mean. When everyone thinks something is right, it could very well be wrong.

·Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council.

U.K. Scraps FSA in Biggest Bank Overhaul Since 1997

U.K. Chancellor of the Exchequer George Osborne speaks at Mansion House in London. Photographer: Chris Ratcliffe/Bloomberg 

Chancellor of the Exchequer George Osborne said he will abolish the Financial Services Authority and give most of its power to the Bank of England, undoing the regulatory system set up by Gordon Brown in 1997.

In the most sweeping changes to financial regulation since then, the watchdog will be wound down and replaced by three bodies over the next two years, the chancellor said. A Prudential Regulatory Authority will be created as a subsidiary of the central bank. Osborne will also set up a Financial Policy Committee at the bank and establish a consumer protection and markets agency.

Osborne, whose Conservative Party took power after the May 6 election, is delivering on a promise made almost a year ago to shake up the way the U.K.’s banks and markets are policed. He’s blamed the system established by former Labour Prime Minister Brown for failing to prevent a financial crisis that saddled taxpayers with liabilities of as much as 1.4 trillion pounds ($2.1 trillion) and plunged the economy into the worst recession since World War II.

“At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent,” Osborne told bankers at his first Mansion House dinner in London’s financial district last night.

Northern Rock

Brown’s government had to nationalize Northern Rock Plc, the first U.K. casualty of the credit crunch, in February 2008. The lender nearly collapsed in 2007 after it had to seek emergency funding from the central bank and then suffered a run on its deposits. The government also had to take controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

With the economy emerging from recession, Britain now faces the deepest spending cuts since the 1970s to tackle the record budget deficit, overshadowing prospects for recovery.

“Many in the City had felt that giving the Bank of England responsibility for macro-prudential regulation would be a positive step, but there will be disappointment that the government has decided to launch such a radical overhaul of the regulatory system at this particularly difficult time in the economic cycle,” said Nathan Willmott, a lawyer at Berwin Leighton Paisner in London.

Tripartite System 

Osborne’s plan scraps Brown’s tripartite system of regulation -- in which the central bank, FSA and Treasury shared responsibilities -- and places most of the onus on Bank of England Governor Mervyn King. Legislation to replace the FSA will be in place by 2012, Osborne said.

Osborne’s predecessor, Alistair Darling, defended the tripartite system and blamed the crisis partly on the “quality, skills and judgment” of individual regulators that failed to examine “the connections between institutions.”

“Can every country, every regulator, hand on heart, say they have sorted out the problems of their individual banks, and are regulators in different countries aware of any residual problems,” Darling said in an interview on Bloomberg Television today. “These problems don’t go away. It’s rather like having a bad smell in the house. There’s no point in ignoring it. You need to get the floorboards up.”

The FSA’s chief executive, Hector Sants, 54, will stay on at the authority while it is wound down and will take up new roles on the bodies that replace it, becoming a deputy governor of the central bank.
‘Macro Issues’

Executive power over financial supervision will go to the Financial Policy Committee at the central bank, which will operate in a similar way to its rate-setting monetary policy panel. The new committee “will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and the tools to take effective action in response,” Osborne said.

The committee will be chaired by King and will include Sants among its members. The panel’s work will be scrutinized by Parliament’s Treasury Committee, the chancellor said.

The Prudential Regulatory Authority “will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies,” Osborne said. Sants will be its chief executive and King its chairman. Andrew Bailey, the head of the central bank unit that deals with failed banks, will be Sants’s deputy.

‘Authority, Knowledge’ 

“Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future,” Osborne said. “They must also be responsible for day-to-day micro-prudential regulation as well.”

Angela Knight, the chief executive of the British Bankers’ Association, a lobby group, said she welcomed steps to make the system “clearer and more effective” and pledged to support the government during the transition.

The third pillar of Osborne’s regulatory overhaul will come with the creation of a Consumer Protection and Markets Authority. Osborne said the agency will regulate financial firms “providing services to consumers” and maintain the “integrity of the U.K.’s financial markets.”

King told the Mansion House dinner that the new framework will assure the stability of the financial system.
‘Credible Regime’

“A credible macro-prudential regime could help forestall both excessive exuberance and unnecessary caution,” King said. “By altering the pressure on the financial brakes according to circumstances, regulation, far from being an inflexible foe, would become a flexible friend.”

FSA Chairman Adair Turner said he welcomed Osborne’s plans.

“The overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA’s achievements over the last few years of major change,” Turner said in an e-mailed statement.

“It is ironic that while in opposition the Tories identified the tripartite system as the root of all regulatory evil, yet here they are as government inventing multiple front- line agencies and creating distracting confusion in the process,” said Ash Saluja, a lawyer at CMS Cameron McKenna in London.

Osborne also said he will bring under one roof the handling of “serious economic crime,” which is currently dealt with by a number of organizations.

The chancellor also gave the names last night of the people who will work alongside former Bank of England Chief Economist John Vickers when he leads a panel on the future of banking.

Martin Wolf of the Financial Times, Bill Winters, the former co-chief executive of JP Morgan’s investment bank, Martin Taylor, formerly of Barclays Plc, and Clare Spottiswoode, the former head of the gas regulator Ofgas, will work with Vickers on the Independent Banking Commission, Osborne said.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net.