Financial capability: evidence review

Abstract

Introduction -what is financial capability?This report provides a brief overview of current evidence on financial capability as it relates to disadvantage in Scotland.It was commissioned by the Scottish Government and carried out by the Employment Research Institute, Edinburgh Napier University in order to provide an evidence platform for stakeholders, with an interest in financial inclusion, to develop a more strategic approach in their support for financial capability.Current high levels of individual indebtedness, an increasingly complex and rapidly changing financial landscape, an increased focus on individual responsibility and the effects of the current financial crisis, indicate there is a growing need for improved financial capability.However, as demonstrated by Scottish Household Survey (SHS) data, large parts of the population such as many young or unemployed people lack full financial capability.This report does not consider the availability and regulation of financial services as these are generally reserved matters and not directly the responsibility of the Scottish Government.HM Treasury (2007: 19) consider financial capability to encompass: "people's knowledge and skills to understand their own financial circumstances, along with the motivation to take action.Financially capable consumers plan ahead, find and use information, know when to seek advice and can understand and act on this advice, leading to greater participation in the financial services market."Based on the literature reviewed, the components of financial capability focused on in this report include abilities, understanding, competence, knowledge and motivations.As such the authors conceive a financially capable consumer as being able to deal effectively and confidently with:  the day to day management of finances  planning ahead (for retirement and unexpected events)  efficiently selecting financial products and understanding these products  knowing where, and how, to seek financial advice  having the motivation to efficiently manage finances and effect change. Who is affected by a lack of financial capability?The evidence presented in this review indicates that in the UK, younger people, those on low incomes, those with children and those with poor levels of education, literacy and numeracy needs are most likely to have low levels of financial capability.Age and experience contributes to having greater financial capability (e.g.Financial Services Authority, 2006, see the report for additional references).Furthermore, the

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