The hidden side of consumption

‘Money is a taboo. We want everyone to admire our new home, but we prefer not to say how we financed it. This is the hidden side of consumption.’

Bernard ter Haar is Financial Markets director at the Ministry of Finance. He’s also chairman of the CentiQ steering group, the platform of government bodies, consumer organisations and industry associations that works to raise financial awareness among Dutch consumers. CentiQ was founded at the initiative of the Ministry of Finance.

The Ministry is responsible for the proper functioning of the financial markets. Over time, the increasingly complex nature of the financial markets has outstripped consumers’ knowledge of - and interest in - financial products. As a result, they are no longer able to see the wood for the trees and are getting into difficulties. We have tried to redress this imbalance by requiring providers of financial products to be transparent in their communications. However, as this is a society-wide phenomenon, it’s also necessary to take action on the consumer-side of the equation.

The problems are too complex for any single party to resolve in isolation. You need a pan-societal support base for this. This is why we set about looking for partners: the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten / AFM), the Dutch central bank (De Nederlandsche Bank / DNB), the Dutch Consumers’ Association and the National Institute for Family Finance Information (NIBUD) as well as financial services providers such as banks and insurers, including Delta Lloyd.

With great enthusiasm. Banks and insurers have also been struggling with the question of how to increase financial awareness among consumers. The incidents that have taken place in recent years – unit-linked insurance, share leasing and usurious policies – have clearly shown that service providers too suffer if consumers purchase products that they don’t really understand, that fail to meet their needs or simply do not live up to their expectations. This tarnishes their reputation. Our partners too benefit from dealing with consumers who know what they want.

They’ve learnt their lesson. Although it’s possible in the short term to earn money on opaque products, in the long term (and a long-term approach aimed at long-term relationships are key to the financial sector as a whole) you can only build trust and confidence with quality products that meet consumer needs. Some companies cotton on to this faster than others, but in principle this view is supported throughout the financial sector.

It is well-known that consumers have been less debt averse in recent years. It has also transpired that many consumers don’t really know what type of pension they have, and how much they’re paying for it, even though this is of crucial importance to them.

This stereotype is no longer true. It’s far easier for people to borrow money these days. Consumers are increasingly inclined to take out one of the many different mortgage types on offer, including various investment variants that are attractive for tax reasons. Unlike 20 or 30 years ago, mortgages are hardly ever redeemed. At the same time, the life span of families has become shorter while labour market flexibility has increased. In the past 20 years, we have also had periods of high unemployment. So things occasionally go wrong. The Dutch are ill-prepared for this. A survey by CentiQ shows that 41% of the population is not prepared for a financial shock.

It has become easier to borrow. At the same time, the diversity and complexity of products has increased. So much so that people often feel they’re no longer able to understanding them, even if they immerse themselves in the subject. What’s more, people seldom talk about this among themselves. It is almost a taboo: disclosing information about your income is ‘not done’. We're perfectly willing for everyone to admire our new car or our new house, but we’re coy about revealing how we’ve financed them. This is the hidden side of consumption.

Education has clearly been lagging. This is to some extent understandable: after all, the complexities of the financial world are just as challenging for teachers as for everyone else. Nor have they been trained for this. Indeed, arithmetic has been a weak spot in the Dutch educational system for a long time. Here at CentiQ we recommend trying to kill two birds with one stone: by using examples from the financial world in arithmetic lessons. Research shows that the old saying about not forgetting in later life what you learn when you’re young is indeed true. Children who learn to handle money at an early age really do have an advantage. But we also found that 40% of respondents did not get pocket money at home when they were children. Pocket money is something we want to encourage.

We have formulated a number of themes. I’ve already mentioned the theme of ‘Who learns young, forgets not when he’s old’. We’re going to encourage schools to provide more and better education in financial matters. But outside school too we wish to work with service providers to develop products that improve comprehension, including games and Internet tools.

A second theme concerns the notion that saving is better than borrowing. It also emphasises the importance of arranging household finances better. People in general have too few reservations about being overdrawn, and a growing number of Dutch consumers are accumulating debts they have difficulties paying off. With sound financial management the situation could be much improved.

Third, we wish to encourage providers to develop PC and internet-based tools that enable consumers to arrange their finances better. If you log on to arrange your banking business, why shouldn’t you check your financial status at the same time? In the form of graphs, for example, which show the state of your household finances, mortgage and pension at a glance. Such applications could be of tremendous help to consumers in gauging their financial position.

Making provision for the future is another important theme. Helping consumers to gain a better understanding of their pension. To achieve this, we’re working with Pensioenkijker.nl. It would be a good thing for consumers to see the impact of their investments or savings, allowing them to assess what’s suitable for them. Such a decision depends very much on what we call ‘lifetime events’. For example, getting married, changing jobs, having children, buying a house, divorcing and so forth. The decisions people take at these crucial moments have far-reaching consequences, and should not be taken lightly. So it’s best to consult an adviser. This can avoid a lot of trouble at a later stage.

We also encourage the CentiQ partners to think about these lifetime events and to include them in their advice. This too is one of the lessons of the past. Although some products last for thirty years, personal circumstances can change greatly during this time. At times, they are far less stable than the assumption on which the product was based.

Delta Lloyd Group is an active partner that has chosen to focus on this field. It concentrates on the theme of ‘making provisions for the future’. From this perspective, the organisation would be well advised to examine whether its product range meets consumer needs. Is it comprehensible? Isn't there any 'small print'? Take account of the changes that can take place in the life of the average Dutch consumer, and offer relevant and useful information. This would seem to be an admirable task for the next few years!

I’m afraid our work will never be over. There are always new generations of consumers who have to learn the ins and outs of the financial world. Financial services too are constantly changing, and consumers’ needs are becoming increasingly diverse. However, the themes will change. For example, the ageing population will create a new market for products that combine health care, accommodation and pension benefits. These may be attractive, but will require heightened awareness on the part of consumers.

I’m also hopeful. If we succeed in bringing money out of the taboo sphere and getting people to talk more readily about their personal finances, the problem may become less urgent than it now is. Perhaps we’re currently in a dip and taking our first steps on an upward path. One benefit of the present financial crisis is that it has put money firmly back on the agenda.