Levels of financial capability: the results of a base-line survey

The Financial Services Authority (FSA) commissioned the Personal Finance Research Centre based at the University of Bristol to undertake a research project into financial capability in 2005.

Read the research: Levels of financial capability:results of a base-line survey (0.9 MB)

The results, published in 2006 established a baseline for the financial capability of the UK population on five dimensions - being able to manage money; keeping tract of finances, planning ahead, making choices and getting help about financial matters. At a later stage, the titles of the last two areas were changed: making choices became 'choosing financial products' and getting help was changed to 'staying informed about financial matters'.

Original development work and testing went into creating a survey that could capture behavioural and attitudinal traits indicating levels of financial capability. It was one of the most comprehensive studies of its kind comprising of face-to-face interviews with a total of 5,328 people across the UK. The study aimed :

• to create a scoring mechanism to identify people's relative strengths and weaknesses in the financial capability domains; and
• to describe the types of people most likely to display higher or low levels of financial capability.

In each area, a number of questions were developed or adapted to gather information. The statistical approach used created a new measure, or score, based on the answers to a wide range of questions. The scores also took into account some differences in personal circumstances.

The study found clear indications that individuals may be particularly capable in one or more areas, but lack skills and experience in others. There were some strong positive associations across the domains. For example, those people who scored highly for planning ahead also had high scores for making ends meet, staying informed and choosing products.

However, key findings from the research showed that people were not particularly good at planning ahead with fewer than half of the people interviewed having any provision for a drop in income or enough money to meet an unexpected expense. 18% of people admitted to signing contracts without reading them and 22% did not stay informed about any financial matters.

People who found it harder to make ends meet were young people, people who rent their homes, unemployed people, and people in households with children, particularly single parents.

The study indicated that capability is lower where people are not forward-looking or who are either socially or financially excluded. On the other hand, capability is higher if people have been educated to A level or above. In addition, it showed that inertia may also play an important role.

Authors of the report suggest that the measures of capability identified in the report could be revisited, but the study does provide a baseline that could be used to track changes in people's financial capability in the future.