PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Veena Hudson

Financial Stability by 2020

The noughties are nearly over and the financial outlook for the next few years is distinctly rockier than it was for the early years of this decade. To move on from recent financial difficulties, the team at ACCA have come up with some steps to achieve financial stability by 2020.
 
The recent financial woes were caused by banks that produced financial toxicity to go with bumper profits, bad behaviour by consumers and corporations, and tax systems which exacerbated this behaviour.
 
These problems need rectifying. Firstly, retail banking (deposit taking etc.) must be separated from other banking activities to protect consumers and businesses from future banking foul-ups. Secondly, pensions and benefits reforms are needed to encourage consumers to choose the piggy bank over the credit card, while corporate governance needs to be about principles rather than regulatory box-ticking. To support this, fairer, more stable, and more transparent tax systems are needed.
 
These solutions are about plugging holes, but this isn't enough for stability; pro-active measures are needed too. The problems facing the global economy are too big to be confronted by the G8, let alone individual countries. The G20 presents a forum for effective co-operation between countries and it should be formalised and given a permanent secretariat by 2020.
 
To this global governance framework, IFRS should be added. IFRS reflects better than GAAP the changing distribution of global economic activity, and makes financial information more transparent and comparable across countries, industries, and companies.
 
While the above two solutions focus on the 'big', the 'small' shouldn't be forgotten. Small businesses make up 95% of all OECD enterprises and they need more support (through appropriate legislation and regulation) from governments by 2020. Consumers need more support too; without them, economies go nowhere. As consumer activity moves online, governments and business must ensure that they are safe from criminal activity.
 
None of the plans for 2020 will matter if we're all underwater; climate change presents an even bigger threat to the global economy than the banking crisis. To avoid the doomsday scenario we need a collaborative effort from scientists, governments, and business to provide the funding and innovation to ensure a vibrant low-carbon economy by 2020.

Credit card or piggy bank?

The last decades have been marked by a combination of low savings rates and high debt levels, especially in the US and UK, which both have economies largely based on consumption, the housing market and the expansion of personal debt. This is highlighted by the 2008 UK Office for National Statistics report into the nation's economic well-being, which showed that 13 million adults have no financial savings or investments. It is difficult to divorce the current financial crisis from this short-term approach.

The time has come to rebuild the savings culture – to reject the credit card in favour of the piggy bank, and it is for governments to cultivate an environment that encourages this. This should be addressed urgently through the reform of pensions and benefit systems in order to restore the social and economic benefits of a low time preference culture.
 
In addition, savings products and financial advice need to be priced transparently, with consumers either choosing to pay for advice on a time basis or clearly stated annual commission basis. ACCA supports increasing financial knowledge for consumers. It is important that high quality financial and commercial awareness and individual responsibility are embedded in the education process; consumers must be helped to understand the importance of planning their financial affairs.

Additionally, skills and education must be looked at holistically rather than in small isolated segments. Financial institutions must reciprocate by making sure that their products are understandable and transparent for consumers and finally, the consumer must take more responsibility for what he or she is agreeing to.
 
There are many things that people do without reading the fine print – from installing new computer software to agreeing to terms and conditions when buying something small online – but taking out a large loan or tying yourself into a mortgage without understanding what you will be required to pay back should not be one of them.

Pensions - a growing problem

In many countries around the world, there are growing gaps in pension coverage and increasing numbers of people are not saving enough to maintain their standard of living when they retire. At the same time, many maturing economies are faced with rapidly ageing populations and social security systems that are both unaffordable for the government and insufficient for the recipients.

The statistics are worrying. Most company pension schemes have seen their finances suffer over the last year, and according to a recent survey by Hewitt Associates, pension plan assets on a global level plummeted by US$4 trillion between the last quarter of 2007 and the first quarter of 2009.

The world's largest pension funds were far from immune to the financial crisis and have been set back a number of years. Despite some pension funds having fared better than many other funds, they will now be focusing even more on risk management and reassessing their governance arrangements to ensure investment returns are more secure in future.

There is also a growing inequality in pensions. While the average employee's pension rights are getting worse, many company directors remain in gold-plated final salary schemes, where they take fewer working years to accrue lucrative pensions.

Transparency and education are essential. Children need to be educated at a young age to understand financial issues, and there should be full transparency both with the employee and the citizen regarding the value of their pensions. In many countries in the West, especially the US and UK, there has to be a cultural shift towards a savings economy and people need to take responsibility for providing for their old age.

However, it is currently the case that public confidence in pensions and the financial markets is at an all-time low. This is unlikely to encourage people to take out pensions or invest time in gaining a thorough understanding of them.