Australia is a prosperous country. We enjoy some of the highest living standards in the world. Yet, many Australians face major financial challenges. Australia has one of the highest levels of household indebtedness among OECD countries. The level of household debt is considered to be one of the major threats to financial stability in Australia, making Australia one of the most financially vulnerable countries in the world. It has been estimated that 95% of Australian families are currently underinsured while facing many existing and emerging financial risks, such as risks related to climate change. Australia has the highest old-age poverty rate among OECD countries, about twice as high as the OECD average. Most working Australians are considered to have inadequate retirement savings and many have inadequate savings to deal with financial shocks.Moreover, a significant proportion of Australians are fully or partially excluded from basic financial services, particularly basic forms of credit and insurance—preventing them from full participation in the economy and exposing them to exploitation and financial distress—and many are ‘under-banked’.
Financial challenges are also prominent in people’s minds. In Australia, financial concerns are the number one concern among young people, and are the second biggest concern after climate change among older Australians. A person’s financial situation is a significant determinant of overall wellbeing, including physical wellbeing, mental health, relationships and job performance. Financial stress is associated with low immunity and insomnia as well as depression, anxiety and suicide. In addition, financial stress has been named the most common reason for relationship breakdowns in Australia, and has established links with domestic violence. Overall, the influence of perceived financial wellbeing on overall wellbeing is similar in magnitude to the combined effect of other life domains.
At the same time, the Australian financial sector faces a number of institutional challenges. Notably, the sector has been plagued by widespread, systemic misconduct, as reported by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). In addition to misconduct issues, previous inquiries have also reported that the Australian financial system suffers from other inefficiencies. These include high fees for payments, high costs associated with the management of superannuation accounts and often low quality of financial advice. An even bigger concern is the allocation of certain major financial risks in the Australian economy. For example, Australian households effectively do not have access to long-term (5+ years) fixed-rate mortgages. Similarly, most Australians no longer have access to defined-benefit retirement savings products. This means that many major financial risks are being borne by individuals and households, the entities in the economy likely to be least capable of managing such risks.
A new approach is needed
This white paper argues that in order to improve outcomes for Australians, the sector needs to rediscover its purpose—serving the community. The white paper is premised on the claim that the core objective of the sector as it relates to personal finance should be the improvement of individual financial wellbeing.
In this white paper, we propose a preliminary road map with a number of propositions and key steps that are necessary to get the sector to best fulfil its purpose, given the challenges it faces and the environment in which it operates. It is outcome-focused and institution-agnostic; that is, agnostic with regards to the particular institutions that will deliver those outcomes. It was developed with a ten-year horizon in mind.
The vision was informed by stakeholder consultations with industry leaders, regulators, consumer advocates, legal and other professionals, consultants and academics. Consumer research was also conducted, which included focus groups and a nationally representative survey. We hope this white paper will generate lively debate and inspire action. Given that the sector encompasses many people and institutions, we take a whole-of-systems approach, which leads us to a whole-of-systems solution. One action or institution alone will not succeed in changing the course of the sector. Government, industry, regulators and everyday Australians will need to work together if we are to improve financial wellbeing and secure long-term prosperity for the sector and for the Australian people.
The purpose of the financial sector is to serve the community. Its core objective as it relates 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 in this regard. In order to fulfil its purpose, the financial sector needs to be effective, sustainable, inclusive, safe and ethical.
To achieve the above we have made a number of propositions, organised below into broad categories. For a fuller discussion of each proposition please download the full White Paper.
Implementing a national financial wellbeing framework
Australia needs to develop and widely adopt a National Financial Wellbeing Framework (the Framework) that defines the aspects of financial wellbeing and how they are measured.
A National Financial Wellbeing Agency (the Agency) should be established with a mandate to improve financial wellbeing in the Australian population.
A government advisory group should be established to advise the government on its financial wellbeing strategy, representing all key stakeholder groups.
Building financial capabilities of individuals and households
The financial capabilities of Australians need to be developed and fostered.
Compulsory, nation-wide, evidence-based financial literacy training should be introduced in schools. Financial literacy training should also be offered at TAFE and in universities.
Free basic financial health checks and advice should be available to all Australians at critical points in a person’s life-cycle.
Free financial counselling should be readily available to all Australians when they need it.
Research on how existing and emerging technologies can be used to improve financial capabilities should be conducted on an ongoing basis.
The ethical consequences of innovation should be considered and debated as technical solutions are developed and before they are deployed.
Technology needs to be utilised better to achieve interactive or “smarter” disclosure of information and better support financial decision-making.
Any policy measure regarding financial capability should be evidence- based and road-tested during the design stage, that is, before it is implemented.
Realigning the structure of the financial sector
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 by reference to his or her financial wellbeing. Contractual documentation should be evidence-based and road-tested to ensure that it is effective and fit for purpose.
One or more national research centres should be established to support the finance sector in service and technological innovation.
The Framework should become the basis for professional standards in financial services and regulation, including the provision of advice.
Basic financial services (transaction accounts, basic forms of credit and insurance) should be designated as essential services on a national basis and be treated as such to ensure universal access and fair pricing (e.g. on a cost-recovery basis).
Legal and regulatory requirements should ensure that similar services (e.g. services with similar risk-return profiles that serve a similar purpose) are priced on a similar basis. There should be appropriate pricing constraints on credit and financial products to avoid predatory behaviour, excessive rent seeking, extortion and inequitable outcomes.
Strengthening laws and regulation
Legislation should be simplified, and exceptions and qualifications should be eliminated to the greatest possible extent.
It is necessary to move beyond prescriptive, rules-based regulation towards principles-based, outcomes-focused regulation, which is supported by regulatory guidance.
Financial services providers should be subject to a duty to consider financial wellbeing in performing their functions and providing their services; in particular, they should be required to consider what impact a course of action would have, or would be reasonably likely to have, on the financial wellbeing of an individual.
Making technology useful and safe
Increases in data sharing must be balanced by stronger privacy protection, as has occurred in the EU. Australia should adopt similar protections offered by the GDPR, in particular a right to deletion and a more accurate definition of de-identification, one that recognises the possibility of re-identification by considering de-identified data as continuing to be personal data.
Financial institutions should be required to give access to a public Application Program Interface (API) for algorithms that determine the terms and conditions of financial services. This would allow for
a) public and regulatory evaluations of fairness;
b) commercial sensitivity (the exact algorithm would remain private);
c) customers to analyse how changes in behaviours or holdings will affect their access to financial services.
A hierarchy of customer data variables should be defined to allow comparability and reproducibility of algorithmic results.
In the absence of a chartered body for data science, financial service companies should establish an industry code of conduct that requires greater transparency in relation to the use of algorithms and an industry code of conduct that requires customer data to be used only within a consent framework and in a manner that is not detrimental to the financial wellbeing of the customer. Both companies and their employees should be signatories of the code, with independent oversight and accreditation undertaken to provide public assurance of compliance.
The FinFuture white paper proposes a stepped approach in order to deliver the desired outcomes. The approach first establishes the foundation capabilities that will be necessary to enable the deployment of the more advanced and sophisticated propositions. (Click to enlarge)
Research and Teaching Agenda
The following describes some of the key proposals emerging from the white paper that are critical for the implementation of the Framework but that require further research.
Build on existing research to create a nation-wide framework for defining and operationalising all relevant dimensions of financial wellbeing. Engage with relevant stakeholders (e.g. government, industry, consumer advocates) to ensure the framework is adopted on a national basis. Investigate the determinants of the various dimensions of financial wellbeing. Conduct research to determine clear pathways to improving financial wellbeing.
Responsibilities in financial decisions and contracts
Develop a rigorous framework to guide the allocation of responsibilities in financial decisions and contracts. This will involve determining the cognitive and other capabilities of individuals on the one hand, and the capabilities required to make good decisions on the other. Develop a legal mechanism to assess the responsibilities of contractual parties and their fairness.
Fairness of financial contracts and fitness for purpose
Define and operationalise fairness in relation to financial contracts, both at the individual and institutional level. Design a framework to enable individuals to assess the contractual terms and their fitness for purpose by reference to financial wellbeing and on the basis of key terms summaries.
Complexity of decisions and rules
Develop a framework to measure complexity of financial decisions and rules. Based on this framework, determine the cognitive and other capacities required by decision-makers to make those decisions and to follow those rules. The ability to quantify the cognitive and other resource requirements in respect of decisions and rules is essential for the allocation of responsibilities in contracts and a determination of fairness.
Financial capabilities development
Develop effective interventions to build individual financial capabilities. These interventions should be designed based on the Framework, using evidence-based methods. Capabilities development should include teaching as well as the use of technology in areas such as AI-assisted decision-making tools.
Engaging people with their finances
Investigate how Australians are currently engaging (or not engaging) with their finances. Determine how to better engage Australians with their finances to improve their financial wellbeing. Develop programmes and technology to improve Australians’ engagement with their finances.
Bridging the gap between knowledge and action
Investigate where financial behaviours diverge from financial knowledge, i.e. when, how and why do people make suboptimal financial decisions despite financial literacy. Determine how technology or other tools could be used to bridge this gap and support (with consent and without compulsion) individual decision-making.
Accounting for inequality
Leverage existing research and engage with relevant research and community partners to address inequities that are exacerbated as a result of the financial sector, e.g. the gender superannuation gap.
Investigate how technology can be used to communicate information about – and provide advice on – financial products and services more effectively and how individuals can use technology to tailor disclosure to their specific circumstances and better support their financial decision-making.
Develop AI-based tools to support financial decision-making. Test those tools using evidence-based methods and the Framework.
Ethics and data/AI
Establish and support of research into digital ethics. Promote research into both explainable AI and methods for evaluating bias and fairness in algorithms. Define appropriate consent models that can be effectively deployed without overwhelming the public. Develop better models of privacy that recognise the inherent risk of collecting and analysing longitudinal data.
Redesign the regulatory framework with financial wellbeing as the core objective
Investigate how a principles-based, outcomes-focused approach can be adopted with financial wellbeing as the core objective to revamp the regulatory framework for financial products and services. Develop rigorous protocols and processes for roadtesting and updating the regulatory framework. Integrate, and achieve an appropriate balance between, technology and human involvement and the relevant standards that should be expected of each to maintain and enhance trust in the system.
Incorporate topics such as financial literacy, financial wellbeing and financial technology (FinTech) into the teaching curricula at the relevant levels of education
Explore how – and at which level – financial literacy, financial wellbeing and financial technology can be incorporated into the teaching curricula. Design and deliver courses for these topics at the relevant level (e.g. FinTech courses at the university level).