Financial Update

Canadians need to know more about finances says Flaherty

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Eric Beauchesne, Canwest News Service Published: Thursday, May 08, 2008

OTTAWA -- Canadians need to know more about how to handle their personal finances, Finance Minister Jim Flaherty said Thursday in a speech in Washington, in which he linked the global financial crisis to a need for increased financial literacy among households.

Mr. Flaherty also said that he plans to introduce new regulations this spring for certain "complex" debt securities.

"There are many causes to the financial turmoil and financial literacy is certainly one aspect,"

Mr. Flaherty told an International Conference on Financial Education, the theme of which was Taking Financial Literacy to the Next Level: Important Challenges and Promising Solutions.

"Something that is an obvious benefit to society - the ability of citizens to own their own home has -- through improper disclosure and complex investments -- led to global financial turmoil," he said in a reference to the subprime crisis in the United States.

That crisis, which erupted last summer, resulted in part from households being encouraged by lenders to take on mortgages they couldn't afford, and then those lenders in turn bundling those mortgages into complex securities, billions of dollars of which were sold to financial institutions around the world, some of which in turn sold them to individual investors.

"Clearly, some of the flaws of our financial system have bubbled to the surface," Mr. Flaherty said in the text of his speech, which was closed to the media.

"We are today witnessing the consequences of a lack of disclosure and awareness," he said. "The recent volatility underscores the importance of investors understanding exactly what they are buying."

Mr. Flaherty said the new regulations would focus on debt securities called principal-protected notes that guarantee the invested principal.

"As these products grew more varied and complex, it became clear that the old disclosure rules were no longer adequate," Mr. Flaherty said.

Canada is also tightening its oversight of the financial services industry after the banks lost billions of dollars on investments in asset-backed commercial paper when the market in this country for $32-billion of the subprime tainted securities collapsed last summer.

While government regulators and financial institutions trying to deal with the crisis have focused on the failure of financial institutions -- including credit rating agencies -- to understand what they were rating, buying and selling, Mr. Flaherty said that in today's world individuals also need to have a better understanding of the array of increasingly complex financial products available to them, ranging from bank accounts to credit cards to mortgages.

And he said that includes the worker setting up a bank account, the family trying to make ends meet while saving for a first home, the senior who - in a world of Internet banking and automated bank machines - is susceptible to scams and fraud, and the investor who should be aware of the risks, returns or benefits of compounding interest rates.

"The range of financial products on the market is rapidly expanding, and the complexity of such products can make it difficult for the average investor to fully understand the risks, the fees and the potential returns," he said.

Yet, he noted that financial literacy is seldom at the core of any school curriculum even though youth have more financial dealings than ever before, using debit and credit cards and online banking, and having cell phone contracts.

"The irony should not be lost on anyone ... ," he said, adding that financial literacy is an essential skill that should be developed early in life