Finance - It's Not Clear Enough

In all walks of life there is a gap between what is said and what is understood. But it is in the world of finance that the gap is arguably greatest, and with it the potential dangers. This attitude to finance - that it is necessarily complex and hard to understand - is everywhere and it is corrosive.

Last week I was talking to a senior fund manager - one of those who decide how to invest the billions of pounds we pay into our pensions.

"Imagine I told you I made decisions about what to do based on some slightly artistic methods of thinking and some reasonably educated gambles," he said. "Would you give me a million pounds to manage your money? No. Now imagine I said that I used an investment methodology based on an optimisation model that had evolved into a highly effective tool over the past two decades. Now would you do it?"

The fact that I do not have a million pounds is beside the point. The point he was making was the way in which financial professionals use language. The more complicated the language, the more difficult to understand what it is that you are being sold. And the less you understand what you are being sold, the less you understand the risk.

In all walks of life there is a gap between what is said and what is understood. But it is in the world of finance that the gap is arguably greatest, and with it the potential dangers. Take the recent example of JP Morgan trader Bruno Iksil, nicknamed the 'London Whale' because of the size of his trades. He is held responsible for losses of around $6billion (that's equivalent to the entire gross domestic product of Rwanda). He took huge bets using derivatives - investments that basically start from a set idea and then add lots of complex theories about the potential for different outcomes, allowing you also to bet on several 'what ifs' and 'how abouts' with a dash of 'and this might happen too.' Not very many people understand derivatives. Most famously, Lehman Brothers didn't, when it took huge positions in the so-called sub-prime market, which subsequently toppled the bank and kicked off the financial crisis. Only then did the alarm bells start to ring elsewhere.

This attitude to finance - that it is necessarily complex and hard to understand - is everywhere and it is corrosive. It deters executives and board members at the top of major financial institutions from asking questions for fear of being deemed stupid. And that trickles down through everyone else in the chain - making it difficult for everyone, from retail consumers to bank bosses, to grasp the risks they are being asked to take with money.

And this increases the likelihood that poor decisions are made.

Since 2008 - the year Lehman Brothers went down - there has been much frantic scrambling to shore up our financial systems with new regulation and legislation. Talk has focused on ethics and standards, or on structural reform. These are big, important developments, which aim to deal with deliberate attempts to mislead markets and investors, and unpick structural complexity.

But none of these will fully tackle this disconnect between how we talk about finance and how we understand it.

What's needed is a twofold approach.

One is to help people feel more confident about using money and taking financial decisions. Several charities supporting women and girls in the developing world now focus almost as much on this as they do on education in the classroom. Young women are given financial literacy lessons alongside their formal curriculum, and after they leave school, to ensure they have the confidence to manage their own finances. This is crucial given that on average 90% of women who earn their own money reinvest it in their families compared to around 30-40% of men.

In Britain, countless attempts have been made to improve financial literacy among young people and soon it will be part of the national curriculum. This is a first crucial step. Public platforms like the First Women Awards, which is supported by Lloyds Banking Group and for which I was lucky enough to be shortlisted this year, also offer a way for those in the industry and outside it to recapture the language of financial services.

But these kind of programmes must be matched by a commitment from providers, regulators and legislators - the armies of bureaucrats we have now tasked with cleaning up our banking systems - to use language that is clear and simple, and which highlights risks upfront. If the fantastic interest rate on my new current account is going to drop dramatically after six months for example, I want that to be in bold, not in the small print, or in obscure language.

Convoluted language should raise alarm bells, and we should challenge it at every turn. The more people refuse to be palmed off with impenetrable language - as senior executives failed to do over the London Whale trades, or as consumers failed to do over the mortgages they were being offered on houses they could not afford - then the lower will be the costs of the next crisis. And if that sounds simple, it's because it should.

Jodie Ginsberg is shortlisted for the 2013 First Women Awards.

The awards ceremony will take place on Wednesday 12 June and is hosted by Real Business in association with Lloyds Banking Group.

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