The level of trust in financial institutions has dropped sharply as a result of the Hayne Royal Commission’s revelations of widespread misconduct in the industry. People are increasingly likely to shun advice and manage their financial affairs themselves. But financial literacy is low. It is a toxic mix.
According to the latest Financial Services Institute of Australia (FINSIA) Consumer Trust Survey, only 19 per cent of consumers trust financial institutions. The level of trust has dropped from 46 per cent in a year.
FINSIA chief executive Chris Whitehead says the survey also found that more than 50 per cent of consumers are sceptical about whether the changes that have followed the Royal Commission will last.
“Most believe banks will revert back to their old ways,” Whitehead says.
The survey also tested consumers’ financial literacy. Worryingly it found that three-quarters failed to grasp basic financial concepts in areas like tax and inflation.
More than half the respondents misunderstood the impact of progressive tax rates on income and 22 per cent misunderstood the concept of diversification.
Forty per cent were confused about the way inflation works and 30 per cent were not clear about how compound interest works.
Of the four questions asked, only 19 per cent got four right and 3 per cent got three right.
Despite this, two-thirds say they are confident about managing their financial affairs.
The poor level of financial literacy and the widespread mistrust of financial institutions has the potential to be a toxic mix. More consumers will shun advice in dealing with their finances but may not have the means to do the job themselves.
Another surprising finding was how many people think it is OK to stretch the truth or fudge the details when dealing with a bank. When asked about how they would go about making a loan application, among 18 to 24-year olds 24 per cent say you should provide “reasonably accurate information but not go to too much effort”, and 8 per cent say “you can stretch the truth to ensure you get the loan approved”.
Among 25 to 34-year olds, 19 per cent say they would be reasonably accurate and 8 per cent say it is OK to stretch the truth.
A growing number of survey respondents say they would switch banks to deal with an organisation where staff have professional standards.