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Empirical Analysis on Understanding of Financial Products

Author

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  • Hiroshi Fujiki

    (Professor, Faculty of Commerce, Chuo University)

Abstract

The Principles for Customer-Oriented Business Conduct, which was published by the Financial Services Agency of Japan in 2017, requires financial institutions to provide important information in an easy-to-understand manner and provide services suited to customers. Under the Principles, financial institutions have to take two steps to provide services suited to customers. First, they have to distinguish the customers who purchase financial products without sufficient understanding of the financial products and/or who are unable to make an appropriate decision when purchasing financial products with a complex structure from the rest of the customers. Second, they have to provide these groups of customers with financial services that help their understanding of the financial products and well-informed decision-making. However, how exactly financial institutions should proceed to the first step remains an open question. To fill this gap, this paper conducts an empirical study on how financial institutions could proceed to the first step by distinguishing the abovementioned groups of customers from the rest of the customers by asking the following two questions. First, what are the typical demographic characteristics of the customers who purchase stocks, investment trusts, foreign currency-denominated deposits and money market funds (MMF) without sufficient understanding of these products? Second, what are the typical demographic characteristics of the customers who are unable to make an appropriate decision when purchasing financial products with a complex structure? According to an empirical analysis based on household data from the Financial Literacy Survey conducted in 2016, to distinguish between customers, it is useful to examine information on customers’ financial literacy that evaluates their capability to make informed decisions on savings and investment from three viewpoints—(1) understanding of compound interest rates, (2) understanding of changes in the real value of financial assets due to inflation, and (3) understanding of the effect of diversified investments—in addition to looking at traditional demographic variables such as the financial asset holdings, annual income, age, and gender. That is because customers with high financial literacy from the three viewpoints are likely to engage in desirable investment behaviour in the following sense: they have a certain degree of understanding of the characteristics of financial products with a complex structure, and they purchase such financial products only if they understand the investment risks related to the financial products.

Suggested Citation

  • Hiroshi Fujiki, 2020. "Empirical Analysis on Understanding of Financial Products," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 16(7), pages 1-25, October.
    • Handle: RePEc:mof:journl:ppr16_07_03
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    File URL: https://www.mof.go.jp/english/pri/publication/pp_review/ppr16_07_03.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial literacy; customer-oriented business conduct; provision of services suited to customers;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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