6th October 2016
How many of you have read a financial document only to find the information confusing? Not only is it written in its own special language, but it also uses more advanced vocabulary and sentence structure. This can make it a challenging read for many.
A recent report showed that many financial reports require a grade 12 to 14 reading level. This is well above the estimated national average, which lands closer to grade 8 or 9. So, what does this mean? It means that a large portion of the population would have trouble understanding these documents.
The recent banking crisis has made many leery of banking institutions and their activities. To some degree, the difficulty of understanding financial documents is partially responsible for the crash. Many borrowers didn’t fully understand the implications of their mortgages. This caused many to accept less favourable terms, allowing them to get in over their heads when adjustable rate mortgages experienced interest rate changes. To fight against situations like these, many have campaigned for change.
The Campaign for Plain English has worked since 1979 to try and make public communications clearer. By simplifying the language in key documents, people will have a better chance of understanding exactly what is happening.
Many banks and lenders are subject to new rules and regulations regarding transparency, especially in financial dealings with the public. For example, new requirements require the full disclosure of interest rates to borrowers. The goal is to help the public make more responsible lending decisions through a higher level of understanding.
However, the same standard does not apply to all information. For example, the terms and conditions associated with a credit card can be an agonizing read. The complexity of the language would have most people running for a dictionary within the first paragraph or two. Even though institutions were encouraged to make the agreements, which are functionally contracts, more accessible to the average borrower, little has changed.
And those with traditional bank accounts are not the only ones suffering. Reloadable debit cards, a favourite product for the unbanked or underbanked, are often riddled with fees. While the providers have made using the cards simple, understanding the implications of using these cards is much more difficult. Even though the disclosure of the fees is more upfront, many borrowers are not aware of the details until the assessment of a fee.
Another reported decided to take a week and not do anything without reading the associated terms first. This included those associated with his smartphone, music services, mapping apps, and much more. There is even a reference to an experiment where a company added a requirement to transfer ownership of your “first born child” in exchange for access to free WiFi.
If banks took time to make their documents easier to understand, would you read them? Would you feel better equipped to make a smart decision? Or would you just skim them and move on?
It is interesting to think how a simple change like this could improve financial literacy across the world. However, there is no telling the difference it can make until it happens.