Why Financial Education is Key to Capital Markets DevelopmentOne year after the “memestock” phenomenon, efforts in Europe to build a retail investment culture are taking place just as a wave of new digital investment platforms appears. But, as the Securities and Exchange Commission expresses concern at online gamification of investment, is the industry on a collision course with regulators over an inadequately informed investment public?

The European Commission is hailing the publication earlier this month of the Financial Competence Framework for Adults in the European Union as a “key milestone” in its 2020 Capital Markets Union (CMU) Action Plan.

Certainly, the promotion of financial literacy – a concept that “refers to a combination of financial awareness, knowledge, skills, attitudes and behaviors necessary to make sound financial decisions and ultimately achieve individual financial well-being” – must be the foundation of the EU’s cherished goal of changing a culture that until now has been slow to appreciate the virtues of participation in investment markets.

Next stop in the EU’s efforts to “build retail investors’ trust in capital markets” will be a comprehensive study to be published Q1 2022 and based on a public consultation that ended in August of last year. And while it remains to be seen just how long it will take for the citizens of the EU to engage in investment with anything like the same level of enthusiasm as their counterparts in the US, it would seem that the private sector is gambling on a new breed of European investor.

The GameStop phenomenon last year, combined with increased cryptocurrency trading, revealed a hitherto unrealized appetite on the part of the public for extreme speculation in financial markets, something facilitated by new generation online brokers. But for every wised-up speculator there are many out of their depth and last year the SEC was sufficiently alarmed to call for public input on the effect on investor behavior of new wave online brokers.

The GameStop affair and its implications were sufficiently alarming for the European Securities Markets Association (ESMA) to issue a statement warning against investment decisions based on information shared on social media. This drew even greater attention to the increasing role of digital platforms in the investment sphere – something recognized by the European Commission when it published its digital finance strategy in September 2020.

Online brokers and investor risks

The role of technology is considered by the EU as fundamental to increased retail investor participation in financial markets. The Commission cites easier access to investment products and capital markets, easier comparability and lower costs. At the same time it also recognizes that new technology “can also carry risks for consumers (e.g. easier access to potentially riskier products)” and render investment protection rules “no longer fit for purpose”.

GameStop and crypto is just the most visible evidence of the impact a new wave of digital investment platforms is having on the retail investment market, with a host of new entrants looking to bring a US-style retail investment culture to Europe.

While in principle the arrival of these new entrants would seem to be aligned with the goal to broaden and deepen EU capital markets, their offerings and delivery are likely to come under keen scrutiny at regulatory level on the grounds that very many would-be investors possess inadequate knowledge or understanding of investment principles. Such information as is common currency in the kinds of online fora identified by ESMA in their warning tends to center on speculative, short term stock tips.

Financial literacy and role of the private sector

There exists a major need for financial education around investment. From a provider perspective there are defensive reasons to counter regulatory scrutiny and but there is also a business development imperative insofar as ignorance is a barrier to business. Yet, although initiatives around financial literacy are generally more plentiful, these tend to be at national, central bank and not-for-profit level – banks and financial institutions have until now been relatively reluctant to join in.

This is in spite of recognition of what financial product providers have to offer. As far back as May 2014, the OECD and the INFE (International Network for Financial Education) issued guidelines for private and not-for-profit stakeholders in financial education. The guidelines recognized that the involvement of the private sector in financial education can bring a number of benefits, including the contribution of financial resources, specialist and up-to-date knowledge on financial issues, and efficient communication.

It also considered financial sector stakeholders as well positioned to reach a wide audience, to be in a position to exploit ‘teachable moments’ related to key financial decisions, and to combine financial education with financial inclusion efforts.

While the same report also identified potential shortcomings in the involvement of the private sector, the invitation to banks and other providers to step up seems clear. What seems to be holding the industry back is the lack of internal resources and expertise in designing and delivering material that speaks to the preferences and demands of the digital age – because any interventions in this sphere need to be designed with that audience in mind.

Financial education and literacy models

So what would such an offering look like in the context of online investment gamification? The following features seem appropriate.

  • Rich media featuring short-form video content for shortened attention spans would seem to be the most compelling gateway to engaging the attention of would-be investors.
  • Highly visual presentation featuring extensive data visualisation and simulation to emphase the bottom line effect of market conditions and investment conditions.
  • Real world relevance to illustrate investment concepts in practical and resonant terms – typically through mini-case studies.
  • Reinforcement of learned concepts through end-of-lesson questioning with feedback.
  • Contextual positioning with reference to relevant products and services.
  • Supplementary text/pdf material for reference.

The recent migration of investment to “gamified”, interactive and intelligent platforms has been impressive. It now seems obvious that integration of contextual education to expand the user base and improve the user experience still further would be appropriate on many levels.

By Peter Kinahan of Intuition