November 5, 2014
Toronto, Ontario
Check against delivery
Good morning and thank you for the opportunity to participate in the Advocis Symposium.
I view the relationship between the Financial Consumer Agency of Canada, or often referred to as F-C-A-C, and the Canadian financial advisors’ community as a collaborative one where both organizations share many of the same objectives regarding Canadians as financial consumers.
Today, I would like to outline my perspective on this collaboration, and on FCAC’s role – as the Government of Canada leader in building consumer knowledge in financial matters, as a regulator, and as a promoter of fairness in financial transactions.
But before I do that allow me to introduce the FCAC.
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That beats a long-winded list of all the things we’re doing to meet our consumer protection and consumer education mandates doesn’t it? What it all comes down to is ensuring people get the right information and opportunities to develop the skills and confidence to make wise financial decisions.
The financial universe continues to grow in complexity. And that is the reality. We see a constant flow of new financial products and services emerge into the Canadian marketplace and continue to be dazzled by the technology behind these products – who could ever have imagined the current volumes of mobile payments only ten years ago?
Another reality is that today’s consumers are getting bombarded with a vocabulary that perhaps 25 years ago didn’t exist. Think of e-deposits, e-transfers, TFSA, HELOC, RDSP, RESP. Even the most commonly used financial terms like credit, budgeting, savings can be very abstract to some. I, myself, find it perplexing to hear the bond prices on the nightly business report. I wonder how many listeners understand the bond market.
And we won’t even go into the emerging cryptocurrency business – currencies created by often unknown persons, with transactions involving no financial institution, no regulations, and where there is no need to provide your real name to complete a transaction. The truth is that more and more merchants are accepting digital currencies like Bitcoin. It is, therefore, becoming a consumer issue.
All this may present some challenges to you - the industry professionals. But the consumer’s challenge, making sense of this complex financial world, may be much greater and this is where we can all make a big difference.
I find it amazing that so many people focus on saving a few dollars on household purchases or clothing, but have little awareness or understanding of the performance of their RRSP account, or the actual interest rate of their credit card. And I’m convinced that, as financial advisors, you see this every day.
I don’t want to get into a behavioural economics lecture here this morning, but I do want to underline the premise for our action on financial literacy – that people often make financial decisions based on very little knowledge.
The Government of Canada has recognized the vital importance of financial literacy, not only to individuals, but to the country’s economy as a whole. Understanding the basic workings of money is an essential life skill today.
And this was certainly not lost on one of the greatest champions of financial literacy in Canada, the late Finance Minister, Jim Flaherty.
In 2007, recognizing the need to improve the financial knowledge and decision-making of consumers, the Government of Canada expanded FCAC’s mandate from consumer protection and consumer education to officially include financial literacy and provided resources to the Agency to develop a financial literacy program for youth.
Then, in its 2008 budget, the government provided ongoing funding to FCAC to support efforts to improve financial literacy in Canada, not only among youth, but Canadians at large.
Now let’s be clear. Our ambition is not to make people understand the bond market. But financial consumers should be aware of the returns on their savings, the actual cost of their debt, or the composition of their RRSP portfolio.
Our conversation about financial literacy today is timely because November is Financial Literacy Month. This year’s theme is Strengthening Financial Literacy Through Collaboration. I am particularly pleased to meet individuals such as yourselves, who can make a difference in raising the level of knowledge about financial matters.
The baseline for our financial literacy initiatives is the Canadian Financial Capabilities Survey, which was fielded in 2009.
This gathered information from 15,000 Canadian adults, and tested them in five areas:
- Keeping track of expenses;
- Planning ahead;
- Staying informed;
- Choosing products such as mutual funds and insurance policies; and
- Making ends meet.
The survey results revealed that 40 percent of Canadians were weak in at least three of the five areas I mentioned.
One of the questions asked where respondents got their financial advice. The answer may not surprise you: the two key sources of financial advice in Canada were banks (41%) and financial advisors and planners (39%). And the sources of advice that most influenced their decisions about financial investments were knowledgeable friends (43%) and financial advisors (54%) Hence, your counsel and guidance is hugely influential for Canadian consumers. The fact that you enjoy this level of credibility with Canadians is very much to your credit.
The 2009 survey raised concerns on the issue of financial preparedness and overall, only 25 percent of Canadians scored at a high confidence level in all five areas tested.
- The survey results also showed that nearly half of Canadians have not taken that first step towards personal financial management: making a household budget.
- And more than half of Canadians between the ages of 18 and 29 – and the majority of those over 70 - do not have a budget.
- Nearly a third of Canadians struggle to keep up with bills and financial commitments.
- Of those Canadians planning to purchase a home, 48 percent have saved less than 5 percent of the cost while 67 percent have saved less than 10 percent of the cost.
The survey found evidence that Canadians lack financial knowledge.
- 52 percent of Canadians planning to purchase a home were not expecting to incur any costs other than the down payment.
- Only 40 percent of Canadians had a good idea of how much money they needed to save to maintain their desired standard of living in retirement.
We aren’t the only organization to uncover these trends.
About the same time, the Canadian Institute of Chartered Accountants also found that:
- nearly half of all Canadians carry credit card balances from month to month – up from one third only a few years ago;
- fewer than half of Canadians are saving enough money from their paycheques to have enough for retirement; and
- nearly half of Canadians would find it hard to make the monthly payments on their mortgages and other debts if interest rates were to rise significantly — which they are bound to do, eventually.
That last point is serious cause for concern. It reflects two weaknesses:
- The personal savings rate in Canada, which has been falling since 1982; and
- The high level of debt many Canadians are carrying.
A record high, in fact.
Between April and June of this year, Statistics Canada says the average level of household debt compared to disposable income sat at 163.6 percent. That means Canadians owe something like 1.64 dollar for every dollar they make.
That debt comes from sources such as lines of credit, car loans, and credit cards.
What’s going to happen when interest rates start to climb?
Will Canadians be able to carry their debt loads then?
The journey ahead could be bumpy for many, which makes it more important than ever to strengthen financial literacy skills.
The data from the Capabilities Survey was our point of departure. Let’s remember that in 2009, we were still in the midst of the 2008 economic crisis. So in response to this, the federal government launched its “Economic Action Plan” with the purpose of investing in businesses and individuals to foster growth and prosperity.
In the spirit of the Economic Action Plan, the federal government announced the creation of Canada’s Task Force on Financial Literacy. The Task Force was given the mandate to provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians.
The Task Force report, tabled in 2011, concluded that financial literacy is essential to the prosperity and financial well-being of Canadians. I know that one does not have to split the atom to arrive at that conclusion, but it does need to be spelled out. And here is how the report formulates it:
"Financial literacy is having the knowledge, skills and confidence to make responsible financial decisions.
Knowledge refers to an understanding of personal and broader financial matters.
Skills refer to the ability to apply that financial knowledge in everyday life.
Confidence means having the self-assurance to make important decisions.
And responsible financial decisions refer to the ability of individuals to use the knowledge, skills and confidence they have gained to make choices appropriate to their own circumstances.”
The report made a total of 30 recommendations, which we are now acting upon. In April of this year, the Government appointed Jane Rooney as Canada’s first Financial Literacy Leader.
The focus of her mandate is coordinating and collaborating activities with stakeholders across the country to strengthen the financial literacy of Canadians. This involves close collaboration with individuals and organizations that have an interest in financial literacy, such as yourselves.
The development of Canada’s “National Strategy for Financial Literacy” is the first order of business for the Financial Literacy Leader.
She has now established a National Steering Committee on Financial Literacy. Members of that Committee will play an important role by providing input and advice on implementing the National Strategy and ensuring effective coordination across the public, private and non-profit sectors in order to advance the strategy within the sector each member represents. One of these members is Mr. Cary List, President and CEO of the Financial Planning Standards Council.
Work on the national strategy is being carried out in phases, because as individuals, we all have different financial literacy needs at different stages of our lives. It also addresses the particular needs of priority groups within Canada’s population. For each phase, public consultations have been or will be held across the country.
The first phase focused on seniors and those approaching this stage of their lives. As financial advisors, you are no doubt faced with the realities of people who are not financially ready for retirement. Everything about retirement has changed in the last few decades – including life expectancy and the benefits available.
The challenge is to provide Canadians with the financial information and guidance early enough to adequately prepare for retirement, and to live in retirement.
We recently conducted consultations across the country and have received input from a large number of people and organizations. The first set of findings – those related to seniors – was published in October.
The findings are very telling about seniors, and provide some insight into challenges faced by seniors.
We received valuable insight from the public and stakeholders on how to help seniors improves in these areas. Here are few comments we heard:
- Seniors are a diverse population. This suggests that we need to communicate differently with different groups of seniors.
- There is a need for clear and simple communications.
- Decisions and behaviours earlier in life have a significant impact on seniors and their financial well-being. This highlights the need for the strategy to emphasize a lifelong learning approach to financial literacy.
- Potential health care costs for seniors are not well understood, and this issue needs to be addressed.
- And finally, a number of submissions mentioned that financial products and services available to low and moderate income are more limited than one would hope, especially in the area of financial planning.
The senior’s financial literacy strategy is now available on FCAC’s website at itpaystoknow.gc.ca.
We’ve launched our consultation process for the next phase of the strategy, which focused on priority groups such as low-income Canadians, Aboriginal peoples, newcomers, women and persons living with a disability.
One of our priorities is to engage key stakeholders from the sectors related to personal finances – including people in banking, insurance, real estate, and of course financial advisors.
The overarching national strategy will identify specific areas where professionals can contribute most effectively to the financial education of Canadians. We will be seeking their commitment for concrete actions to advance our common goals. The intention is to publish a broad-based strategy in 2015.
Financial Literacy is a national issue – and one that can only be addressed by working together. You meet people with the objective of ensuring they understand their financial goals and risk tolerance, and you match them to products and services that are appropriate. But beyond advising on financial products, you can help them become more informed and more knowledgeable.
You, therefore, allow them to manage their money more wisely, reduce their debt load and increase their long-term savings. Providing financial insight and sharing your understanding of the financial world not only helps people achieve their long-term goals, but adds to the value to your service.
The 2010 Task Force recommended that the Government of Canada provide Canadians with a single source website for financial literacy with the objective of increasing public awareness.
In response to this recommendation, the FCAC has developed a Financial Literacy Resource Database, a central gateway for all information related to financial literacy. I invite you to visit the “Financial Literacy” section of the FCAC website at itpaystoknow.gc.ca. This resource comprises, among other elements, links to resources, a tool for the owners of those resources to list them in FCAC’s website, and an interface which the general public can use to search financial literacy information.
We continue to monitor the evolution of financial literacy in Canada. Building on the 2009 results - and using those results as our benchmark - we have re-fielded the Canadian Financial Capabilities Survey and we are releasing our findings as part of our National Conference on Financial Literacy that starts tomorrow in Vancouver.
The 2014 iteration is testing the same five areas as the 2009 survey. Those are used as our benchmark. In each area, financial services providers can help their clients achieve their goals by conveying the following messages:
Live within your means: While you can’t ensure your clients spend less than they earn, you can make money-saving suggestions and inform them of the importance of paying down debt every month.
Budget wisely: Though this may sound quite basic, it is important to explain the money-saving benefits of careful budgeting and to point your clients in the direction of online or printed budget sheets and other budgeting resources.
Plan ahead: help your clients take full advantage of possible employer pension plans, match retirement savings, and learn about and use RRSPs, tax-free savings plans and other long-term saving vehicles available to all Canadians.
Choose products carefully: This is about helping clients choose products that have appropriate costs and benefits for their lifestyle and income level.
Stay informed: Encourage your clients to seek out additional sources of information such as FCAC’s website and its financial literacy resource database where they will find a wealth of resources to help strengthen their financial acumen.
Increasingly, financial literacy is looked upon as a pillar of consumer protection that permits a smooth and functioning market and stable economy. Since FCAC was created in 2001, financial education and strong supervision of federally regulated financial institutions have formed the basis of our consumer protection efforts.
As you all know, the FCAC does not regulate financial advisors. But that does not mean that we are not interested in the relationship you have with your clients. In fact, we are interested in the protection and well-being of all Canadian financial consumers, regardless of whether they are dealing with a bank, an insurance company or a brokerage firm.
Part of our role in protecting consumers involves overseeing legislation, voluntary commitments and codes of conduct that apply to federally regulated financial institutions. Many of the rules and commitments we oversee are based on clear disclosure principles.
Consumers need to understand when shopping around for financial products, the options available to them, their features and benefits, any limitations or risks associated with them, and the costs, both up-front and ongoing. They need to be able to compare the products or services they are considering, and understand the charges and fees associated with them, to make decisions that are best suited to their circumstances.
At FCAC, we hear about the issues that consumers encounter while navigating the complexities of the financial market down to the difficulties they experience when conducting day-to-day financial transactions.
- Whether it’s a homeowner who doesn’t have the information they need to make the choice that’s right for their own situation between a conventional and a collateral charge mortgage,
- Or a young adult with his first credit card who doesn’t understand how the interest rate is calculated on cash advances or the penalty that is charged for late payments or unpaid balances.
- Or still the parent who loaded funds onto a prepaid card to give their child spending money, without knowing about the existence of maintenance fees that are likely to chip away at the amount on the card.
As a regulator, it’s important to remain responsive to these consumer issues. The Government of Canada has undertaken numerous initiatives to enhance product disclosure and consumer awareness, for example:
- Budget 2014 called on banks to better inform consumers of the costs and risks of collateral charge mortgages in comparison to conventional mortgages, and to equip borrowers with information that will facilitate their understanding of the product.
- As of September, eight major banks and the Canadian Bankers Association have committed to providing consumers with enhanced information on mortgage security so that consumers have enough information while they are shopping around for a mortgage, to make informed decisions.
- Last May, new Prepaid Payment Products Regulations came into force and these apply to network-branded prepaid cards. Now, financial institutions must provide consumers with information about fees on an information box on exterior packaging, before they purchase the product.
FCAC works with financial institutions to ensure their products, policies and practices comply with these rules and commitments, so that consumers can increase their financial knowledge and ultimately make financial choices that are right for them.
One of the emerging trends I see is consumers’ growing comfort with using the services of payday lenders. Payday lenders whose rates tend to be quite a bit higher than a conventional lender.
We all have a role to play in informing consumers that other options are available to them.
As a starting point, they need to know that all Government of Canada cheques under 1500 dollars – whether it be a pension cheque or a social assistance cheque - can be cashed free of charge at any bank in the country. This is an obligation by the banks. There is therefore, no reason consumers should have to pay for that service.
I am fully aware that this issue has other dimensions to it – including social integration and mental health. All those matters need to be addressed as a whole. Financial literacy and sound advice are important parts of the solution.
I could go on with this subject but I want to summarize by saying that we need to assist people in precarious situations to manage their affairs, so that they are not stuck in the event of financial emergencies.
I’ve had the chance to look at your public information, and I can only conclude that we share the same basic objectives when it comes to the consumer. I was reading on your website: “Advocis is at the forefront of consumer protection and promotes a model for the delivery of financial services and products that places the consumer interest as the primary objective.” It comforts me to know that we are working toward the same end.
So my message to you is the following: consumer education and financial literacy are key elements of financial well-being.
I look forward to a productive and successful collaboration with the financial advisors of Canada. This is to everyone’s benefit!
Thank You!
