Finance in Society

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Finance in Society

The importance of finance in society is driven by the economic principle of scarcity. There is only so much money available in the economy and thus individuals, businesses and governments need to use what they have (1) wisely and make decisions carefully in relation to the future acquisition and use of it (2). At the level of the economy, a key task of the financial system is to ensure this scarce resource (3) is used effectively and thus allocated to purposes that will build wealth over time for the economy, maintaining and improving our living standards. The complexity of the financial system means this (4) may not happen for every transaction, but over the longer term the system (5)  is designed to achieve this (6).

It should also be noted that the financial system evolves over time as the economy develops, regulation changes, technology advances and other factors, such as consumer trends and environmental change, shift. Examples of such changes that have affected the operation of the financial system include the complexity of products and services, technological advances, the ageing population and financial illiteracy.

In terms of the complexity of the financial system, we just have to read a product disclosure statement (PDS) for an everyday financial product or service to understand this (look up a PDS for your bank and have a read!). They (7) are typically long documents, written in legalese, that try to explain the terms and conditions of the product/service of relevance. While increased disclosure is generally a good thing, the complexity and length of these documents (8)  make them difficult for many consumers to use. This is exacerbated by the sheer range of financial products available, the heavy use of jargon and acronyms, and the general low knowledge base and lack of confidence that many consumers bring to financial decision-making. Thus, the financial system has evolved to (for example) increase disclosure, place more obligation on product providers to explain their services (9) to consumers, encourage consumers to obtain independent advice, and provide cooling-off periods. At the same time, increased regulation and oversight of the finance sector have been put in place, all with a view to protecting consumers and building their confidence in the system (10).

SOURCE:

Kidwell, D., Brimble, M., Mazzola, P., Morkel-Kingsbury, N., & James, J. (2018). Finance essentials. John Wiley & Sons Australia, Ltd.