The 'social' element is critical to the success of these models, because there are very real social and economic benefits to people - rather than financial institutions - sharing most of the margin between savings/investment rates and funding costs.
But I've witnessed firsthand how social finance platforms and their members tend to wrestle with the problem that social finance does not fit neatly into our financial regulatory framework, which is designed, ironically, to force recalcitrant 'traditional' providers to deal fairly with consumers. We are also currently victims of the delay and uncertainty caused by reforms to that regulatory framework. Because when they aren't rescuing banks or attending to 'business as usual', the key regulatory staff are understandably taken up with figuring out the new regulatory regime rather than vetting the legality of innovative business models that may remain outside the regulatory perimeter.
These problems add a huge amount of time and expense to starting and developing a social finance business, precisely at the time when banks are both lending less and paying lower savings rates.
Of course, it's common for the participants in new market segments to jointly discuss the development of the sector, including the characteristics and boundaries of regulatory 'safe harbours' and if/how they ought to be regulated. An appropriate forum for such discussion makes it easier to innovate and compete. But it also creates an efficient contact point with regulatory officials and opinion formers for discussing policy and regulatory concerns which individual participants wouldn't otherwise voice for practical reasons of time and cost, or for fear of inviting adverse attention.
There is no need for incorporation or office space. Trade associations often begin on ad hoc, unincorporated basis in response to a threat or opportunity that presents to all the participants.
Has that moment arrived for social finance?
Image from the Trade Association Forum.
7 comments:
Couldn't agree more. I prefer democratic finance personally, as social ties in with some slightly "profit lite" business models in the third sector!
In fact I liked it so much I registered the .org domain : )
Cheeky ;-)
I have a list of names and emails from BarCampBank...
Hi Thomas
Thank you. I've received a few emails directly. I don't want to spam people, but maybe if you share this post with anyone you feel you'd have permission to and may be interested?
Best
SDJ
Sure. Btw, I wasn't suggesting putting a 100 emails into MailChimp :-D
In the gold markets, we have a well-respected trade organisation, the London Bullion Market Association, adhere to the Bank of England NIPS code and the government is happy for us to operate without a state regulator.
Obviously with credit things will always be more complicated than with heavy metal bars - but it does show that a little self-organisation can potentially go a long way.
Thanks, Thomas :-)
The London Bullion Market Association is a nice example. It's always interesting to see in what circumstances these associations start. The LBMA site says "in close consultation with the Bank of England", which is a little cryptic.
The E-money Association is more forthcoming (at http://www.e-ma.org/pages/about.php): "The EMA was founded in October 2001 by a group of electronic money issuers and prospective issuers to represent the interests of industry. The group participated in a regulatory working group set up in response to UK Government consultation on the implementation of the E-Money Directive. The group was then formalised into the EMA and its remit extended to issues of general interest to industry. The FSA proposed that the association develop a voluntary Code of Best Practice for industry addressing operational and non-operational risks and creating a minimum standard which could be adopted by issuers, irrespective of technology or market proposition."
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