Analysis: Two-thirds of Irish adults struggle to understand the alphabet soup of financial acronyms, waffle and jargon so what can be done to help them?

Making decisions about your finances and engaging with the finance industry is an inevitable part of life. Getting a mortgage, setting up a pension, taking out an insurance policy, using an overdraft: finance is part of our daily lives and behind many of the key decisions we take in life. Recently, the importance of household finances has become even more prominent with rising interest rates, ongoing inflation, and the looming threat of a recession focusing many people's minds on their current financial situation and plans for the future.

For many people, dealing with financial information and decisions can be an uncomfortable and often negative experience. Previous research has shown that two-thirds of Irish adults struggle to understand financial terms. This can lead to people putting off important financial decisions - for example, setting up a pension for the future - or potentially even worse, making the wrong decisions due to a lack of understanding of what a financial product entails.

The language used by a lot of financial service providers can be complex and the alphabet soup of acronyms and financial jargon can frustrate and scare people in equal measure when trying to navigate the choice of financial products. The prevalence of financial "jargon busting" websites offered by financial institutions and state bodies are also an indication of the difficulties consumers face when trying to engage with the world of finance.

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From RTÉ Radio 1's Brendan O'Connor, Money Mindset coach and author Kel Galavan on tips for teaching children to have an understanding of how money works

Do you know what these financial terms mean?

ECB interest rates

The European Central Bank (ECB) sets the base interest rates for banks in the eurozone. Increases in this rate increase the cost of funding for banks who then pass this onto their customers.

Tracker mortgage

This is a mortgage that has an interest rate that tracks the interest rates set by the ECB as it moves. It is typically set at certain % above the ECB base interest rate.

Inflation

A measure of the increase in prices in the economy. Typically measured using a sample basket of goods and often referred to as CPI (Consumer Price Index). There will be different inflation rates for different items (e.g. food, rent, energy)

Those in the finance industry will point towards the role of regulation and how they are required to provide a certain level of information to consumers and to use particular standardised terminology. Financial products can be complex and regulation is necessary to protect consumers, however it is also important that regulation does not do more harm than good by excluding consumers from engaging in the first place.

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From the Financial Regulator, I Don't Know What A Tracker Mortgage Is

The Central Bank's Consumer Protection Code puts a clear emphasis on the use of "plain English" when financial service providers provide information to consumers, however the frustration of many people when dealing with financial jargon suggests that what works in theory may not always work in practice. A recent discussion paper released as part of the Central Bank’s review of this Code suggests that the future focus of regulation may need to be more holistic and focused on outcomes for consumers rather than just abiding by a set of rules.

However, regulation alone is not the only solution to this issue. Another important piece of the jigsaw is the role of education, specifically financial education. The ability for people to process financial information and make informed financial decisions is often termed financial literacy. Studies have shown worryingly low levels of financial literacy across the world.

Only one in three adults are financially literate worldwide and while that is marginally better in an Irish context at 55% of adults, it is still concerning given the significant proportion of adults that do not have an understanding of basic financial concepts. These findings are a big concern for policy makers across the world as financial literacy can improve the financial resilience of households to deal with financial shocks (such as COVID-19 and the current cost of living crisis), improve financial well-being, and also contribute towards the stability of the financial sector.

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From RTÉ Radio 1's Today with Claire Byrne, what are the impacts when interest rates go up?

In an EU context, this has led to a recent policy focus on financial literacy, driven by Ireland’s own EU Commissioner Mairead McGuinness, promoting member states to develop their own national strategies for financial education. Similarly, the OECD 2020 Recommendation on Financial Literacy recommends that countries develop national financial literacy strategies to ensure a coordinated approach to financial education.

Calls from a variety of stakeholders in an Irish context, including the Central Bank, Social Justice Ireland, and the Competition and Consumer Protection Commission, for a more coordinated approach to financial education highlight the importance a comprehensive national financial literacy strategy to embed financial education and a culture of financial discussions from an early age in our society. Despite this, Ireland currently does not have a national strategy for financial literacy. However, there are plenty of countries that have led the way in such initiatives that we can learn from and given the policy momentum at both an EU & OECD level, it will likely be something that we will see being launched here sooner rather than later.

In current environment of reduced competition in the banking market, increasing complexity of financial products on offer and the backdrop of a challenging economic landscape, it is vital that people can have the confidence and ability to access the appropriate financial products and services they need without being overwhelmed by financial jargon. Regulation plays an important role in this to protect consumers and improve accessibility but without a focus on financial education as well, its effectiveness will be limited.


The views expressed here are those of the author and do not represent or reflect the views of RTÉ