Context

The report states that, at the time of publication, the concept of financial capability was relatively new. The research project described in the report set out to explore and define the concept of financial capability, and to create and test a questionnaire to measure financial capability according to that definition. Once the questionnaire was developed, it was then used to conduct a survey, analysis of which provided a baseline measure of financial capability in the UK at the time.

The study

The study comprised development work followed by a main survey. The development work took the form of a literature and research review, followed by qualitative research (focus groups and depth interviews) as well as semi-structured interviews (to test the questionnaire). The main survey was of a nationally representative sample of a total of 5,328 UK adults, using random location sampling; this total included a sample boost in Wales, Scotland and Northern Ireland, and of ethnic minority respondents. Age is not given, but it can be assumed from the results tables that respondents were aged 18 or above with no upper age limit. The data was analysed with two goals in mind: to create a scoring mechanism to identify strengths and weaknesses in four domains of financial capability, and to describe the types of people most likely to display higher or lower financial capability. The work was commissioned by the Financial Services Authority (FSA), and carried out by the Personal Finance Research Centre at Bristol University.

Key findings

The development work found that there is no single indicator of financial capability. Instead, the findings of this stage identified four separate areas that can be used to assess an individual’s financial capability: managing money, planning ahead, choosing products and staying informed. These areas, plus a ‘money quiz’ that assessed financial literacy and product knowledge, were used to structure the questionnaire for the main survey.

The report presents the results of the main survey, but does not draw any conclusions – this is left to a separate companion report. The analysis of the survey first used factor analysis to identify which questions to include in a financial capability score for each domain and to assign scores to respondents according to whether they were strong or weak in each of the four areas. (Money management was broken down into two separate areas). The report gives the distribution of scores within each area, and presents the relationship of scores to key demographics. The next step was to use cluster analysis to group respondents with similar patterns of financial capability score, resulting in 11 separate clusters that are described by their demographic characteristics.

The research found that people can be strong in one area of financial capability, but weak in others, which validated the approach of using four areas rather than one single measure. It also identified the behaviours and attitudes that were associated with higher financial capability scores.

Points to consider

• The method by which the interviews were conducted is not given. The authors highlight some limitations of the survey in regard to how missing data is imputed. In particular, where a respondent is part of a couple, any information about the partner is not asked, but is imputed by ‘hot-decking’, that is by duplicating the results of another respondent with similar characteristics.
• The study of financial capability has developed since the report was published, and changes in financial markets will have had an impact on consumers, however this remains a valuable insight into the components of capability.
• The research was based on a national sample of UK adults, but the findings about what makes up financial capability are likely to be transferrable to adults in other developed nations.
• This report will be of interest to anyone seeking to understand financial capability in more detail, such as those in government, support agencies, policy makers, regulators, educators and financial institutions.