Financial literacy and its role in promoting a sound financial system

This article discusses the importance of financial literacy. Financial literacy – the ability to make informed judgements and decisions regarding the use and management of money – is important for individual consumers of financial services, the financial system and the wider economy. It influences how people save, borrow, invest and manage their financial affairs. It therefore affects their capacity to grow their wealth and income, and has significant implications for people’s lifestyle choices. Financial literacy also has a significant part to play in influencing how financial institutions – such as banks, non-bank deposit takers and insurers – manage their affairs and what products they provide. Because financial literacy influences people’s investment decisions, including risk/return tradeoffs, it also affects how resources in the economy are allocated. In turn, this has implications for the potential growth rate and stability of the economy. Accordingly, the main theme of this article is that financial literacy matters – at many different levels. The focus of this article is on financial literacy at the household and individual level. Research raises some concerns regarding financial literacy in New Zealand. The evidence suggests that many New Zealanders have limited financial literacy. The Retirement Commission and other government agencies are working to improve financial literacy levels. The private sector has also taken initiatives in this area. Work is under way to strengthen the regulation of financial advisers and to improve financial disclosure by issuers of securities to the public. However, there appears to be a need for further initiatives to raise the level of financial literacy in New Zealand. These initiatives should be accompanied by others to improve the delivery of user-friendly financial information to investors and consumers. This article explores the potential for further work in these areas.