Back to school for financial illiterates

New Zealanders lack financial literacy and that is a major factor driving them deeper into debt, finance industry figures say.

And they believe the only way forward is for better education.

Reserve Bank Governor Alan Bollard last week hammered banks for promoting loans to people who could ill afford them, saying that of about a third of households with mortgages, one in 10 were quite deeply in debt. They would be particularly vulnerable to interest rate rises, falling property prices or a softer job market. However, banks responded, saying they were merely meeting demand from borrowers.

John Erkkila, of mortgage company NZ Home Loans, said yesterday that the banks' recent price war on fixed-rate mortgages was just one part of the problem. More of an issue was "the education that has or hasn't gone on with people regarding their financial wellbeing".

"When the population is spending 112 per cent of its income and Bollard's saying all the figures are pointing towards a dramatic rise in debt, a stark reality comes into play that basically people are making decisions about where they spend their money in a total vacuum."

He said banks were accommodating in lending money but not forthcoming with advice on how to manage money and debt efficiently. They were, in effect, happy for most people to remain financially ignorant so as to maintain and grow profitability.

Erkkila said information about managing money was largely absent from the education system. "The schools never do it because teachers can't manage their money either and chances are the parents don't do it." Financial planners were of little use, largely just catering to those who had money, not those with debt problems. Budget advisory services, meanwhile, were largely "the ambulance at the the bottom of the cliff".

Financial Planners and Insurance Advisers Association chief executive George Elkington said he was concerned with rising debt levels and that people would "learn the hard way" in coming years of the risks associated with borrowing too much.

"I do have some fears that we might, I hope they are unfounded, but we are robustly over-indebted. We've had good times. It's been so easy to get it (debt), interest rates have been so low. Have we lulled ourselves into a false sense of security?

"Financial literacy should be a more robust part of our schooling system. I think debt education would be on the top end of my list of priorities," he said.

Improved education was among the key proposals the Taskforce on the Regulation of Financial Intermediaries earlier this year proposed in a bid to boost consumers' confidence in financial product and service providers.