How Fining Bad Banks Can Fix Our Biggest Money Problems

When the government came down hard on Big Tobacco a decade ago regulators required that a portion of any penalties go toward educating youth on the dangers of smoking. Amid the big bank Libor scandal and a stream of continuing bank fines, regulators now should require that a portion of future bank penalties fund financial education. It's a well that will never run dry.

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Individuals don’t understand as much as they should about personal finance. That’s why we have government-supported financial education initiatives throughout the world, from Australia to the U.S. The hope is that one day more financially literate populations will help avoid future financial crises.

Big questions surround the effort to teach ordinary folks about money matters like debt, bank fees and retirement accounts. Should programs focus on students? Should they reach adults in the workplace? What programs work best? It’s all under review.

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Another big question is, who pays for all this? Independent research and unbiased financial education programs aren’t cheap. John Pelletier, Director of the Center for Financial Literacy at Champlain College, believes he has the funding solution: Every time a bank crosses the line and must pay a fine, regulators should tack on a surcharge to underwrite financial literacy programs.

The model already exists. As part of a global settlement in the 1990s, Big Tobacco had to cough up $1.45 billion to fund foundations that educate youth about the health problems associated with smoking. Pelletier writes in his blog:

“This was a small sum, about 1% of the total global settlement. Since 1999, these foundations have played a major role in reducing teen smoking by 24% from 1997 to 2009.”

Banks that profit by skirting the rules and cheating customers through hidden fees and misleading advice make an attractive target. After all, the financial industry has the same moral duty to educate youth on matters of financial health as Big Tobacco has on matters of physical health. Why not ding them for the cause when they get caught?

This is a well that will never run dry. Many banks view the occasional fine as simply a cost of doing business and allow for fines in their annual budget. To some degree, breaking rules is what they do. The recent Libor scandal alone could result in bank industry liabilities of $176 billion. Pelletier believes a portion of the fines that have been and will be levied for the outrageous Libor breach should be used to set up a National Public Education Foundation for Financial Capability. He writes:

“The U.S. Government and the Federal Reserve have allocated trillions of dollars on TARP bank bailout funds, stimulus spending and quantitative easing, in large part, as a response to the consequences of banks behaving badly. Wouldn’t justice be served if these same financial institutions pay a portion of all federal fines and penalties to fund a nonprofit organization that will educate consumers on how they can protect themselves from financial harm and fraud?”

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This approach has worked for kids who might otherwise smoke. It would also work for kids who might otherwise bury themselves in debt and be on the path to bankruptcy before their first job.