E-invoicing Integrated With SME Finance Platform

Alternative trade finance for small businesses is beginning to snowball - at least in the US. Early this month, the Receivables Exchange announced its integration with the Ariba Network, a leading provider of spend management services.

The press release says the integration will enable SMEs "to seamlessly transfer their invoices from the Ariba Network to the Exchange’s proprietary trading platform for auction. Leveraging a cash optimizer tool embedded in the latest release of the Ariba Network, suppliers can calculate their cash needs as compared to their eligible outstanding invoices and select the invoices they want to sell to help them optimize their working capital management and improve their cash flow."

This is virtually the same model Zopa and various collaborators took to potential UK clients and partners in 2008. Marketing was the only (major!) hurdle, and we were in talks with someone very big and friendly to support it. But, as is often the way with these types of services, there were simply too many interim integration steps competing against higher core priorities for the service to go into development.

Full credit to the Receivables Exchange for getting this launched - although I still think they need a bigger brand name that is already well-known to all SME's if they are going to get real traction against the established sources of trade finance. I wish them luck.

Maybe it's a signal that Zopa and its partners should dust off their plans...

Simple, Low Cost Financial Services

It's been helter skelter this month, so no time to post. But a recent financial regulatory conversation has prompted me to draw together the threads from a number of earlier posts this year.

The current "problems" in the financial services markets - excessive fees and bonuses, lack of transparency, poorly understood products, the credit and pension crises - are, ironically, the result of existing regulation. To solve them, the clear objective of the regulatory regime should be to deliver simple, low cost financial products that are accessible to us all.

Excessive banking/investment fees, and related compensation ("fat banking"), are the result of funnelling investment opportunities and funding into a zone in which relatively few firms are permitted to operate. Of course, even within that small group of firms, there are a dominant few who get to charge even more for their services. Products become increasingly complex, less transparent and less well understood as these few firms struggle to get an edge on the 'competition' and quote 'stellar' returns, until risk becomes highly concentrated and there is actually very little effective competition at all. In this scenario, fee caps and taxes will be ineffective - the huge flows of investment funds and opportunities will always incentivise ways of getting round the curbs, or the practicalities of getting anything funded at all will sweep them away. As a result, funding costs will continue to rise, as will the incomes of the staff working for the annointed few.

One way to challenge this trend is to open up the investment 'funnel', and make the financial markets accessible to us all. That in turn means vastly simplifying the process for the average individual to invest/save in a fully diversified way. To meet that challenge, successful investment firms would have to race each other to demystify and simplify the funding/investment experience. Today, even 'thin' intermediaries, like discount brokers, still leave too much work to be done for the average person to engage with the financial markets. We speak of 'fund supermarkets', but these are Bond Street boutiques, not Sainsbury's.

Diversification is critical yet remains a black art. The list of asset classes is long, yet most assets cannot be invested in by the average person, even by putting money in the hands of managers who can invest more widely. All sorts of rules, policies and other restrictions limit the extent to which individuals as well as pension and other fund managers can diversify, and this must necessarily affect (and correlate) their performance. So our regulatory regime actually prohibits diversification, and creates a scenario where too many investors effectively adopt the same or very similar investment strategies. Instead, we need to make it very cheap and easy for each of us to 'buy' non-correlated assets from all asset classes so we don't blow our long-term savings on the same bunch of poorly-informed investments.

Individuals have spent the past decade using the internet to gain control of many consumer experiences, from holidays to entertainment. Low cost 'facilitators' have allowed us to unbundle flights and hotels, music tracks and other one-size-fits-all products to create our own personalised, lower cost alternatives. Similarly, we should be striving to produce a financial services market in which any person can add individual stocks and shares to a shopping cart that tells them the extent to which the selection is high risk and poorly diversified, either on its own or when compared to the buyer's existing portfolio.

Effectively pegging firms' reputations to their ability to estimate risk in this way, rather than generate 'stellar' short term returns on complex products, would in turn act as a further constraint on complexity and poor risk management.

Mezzanine CoCo Means Even Fatter Banking

Two recent funding initiatives not only fail to introduce openness and transparency in the credit markets, but also add complexity, shroud risk and perpetuate the enormous fees and bonuses inherent in the 'fat banking' model that many are complaining about.

Of course, I'm referring to the new form of 'contingent convertibles' or "CoCos" issued by Lloyds Banking Group and the 'mezzanine' product to be offered by the "Growth Capital Fund".

The £7bn worth of new "CoCos" issued by Lloyds Banking Group pay interest, but convert into equity if the bank's core tier one capital ratio falls below 5%. The tier one capital ratio is itself under a cloud, given its lack of predictive value in 2007 and recent analysis by Standard & Poors that "every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio." Furthermore, the ABI says it doesn't like these CoCos being included in bond indexes, because this would "effectively require some bond investors to buy these instruments and subsequently to become forced sellers if and when they convert into equity." It's worth noting that the UK government has had to invest £5.7bn (net of underwriting fees) just to avoid dilution of its 43% shareholding amidst the wopping £13.5bn in new shares. That underwriting fee must be enormous, no doubt made more so by the complexity of the new instrument.

CoCos are a type of convertible bond and are not really new. They started life as bonds that paid interest, but converted into equity if the issuer's share price hit a certain number. Apparently they were first issued by Tyco in 2000. They were popular because CoCos were not included in the diluted earnings per share calculation. However, their favourable treatment was removed and they more or less died out. Some also expressed concern about adequate disclosure of the risk that the contingency would occur, and the future impact of the conversion into equity... seems nothing has changed.

Meanwhile, Messrs Brown and Mandelson have also welcomed the recommendation for new "Growth Capital Fund" to allow medium sized businesses to publicly offer "mezzanine" debt - lending that is often unsecured, and ranks behind bank debt but ahead of equity on insolvency. Apparently, this product "would help address demand side aversion to pure equity, and provide a return above regular bank lending to reward investors". You can guess the reason for the premium to regular bank lending, and why it ranks behind banks. The Growth Capital Fund is designed to plug a "permanent gap" existed for up to "5,000 businesses" looking to raise between £2m and £10m in growth capital." It is noted that "neither banks nor equity investors were likely to fill this gap in the near future." They know that where you rank in an insolvency without security is largely academic, and there remains the very real issue as to how to effectively monitor the ongoing creditworthiness of a mid-tier company. Perhaps the proposed 'single fund manager' might find a solution. But I'll bet it will just sit there gathering money and sending statements to forlorn investors confirming the steady deduction of its fee as a percentage of gross funds under management. Already, Lloyds bankers say they are interested, no doubt hoping to recover some of their recent underwriting fees.

So it's clear that neither of these relatively complex instruments do anything to promote openness and transparency in the financial markets, but instead continue to funnel investment opportunities to intermediaries who can rely on their privileged regulatory position to charge enormous fees.

There are alternatives. At Zopa, for example, we helped figure out an invoice discounting process that is an easily understood, low margin alternative for SME trade finance, open to all - as is the Receivables Exchange. The challenge is marketing such low cost alternatives to busy SMEs amidst all the noise of the usual banking and investment marketing. Low margin financial services providers can't afford fancy advertising campaigns or to arrange open endorsement by Messrs Brown or Mandelson. Yet, to put an end to 'fat banking' and concentrated, poorly understood risk, we need to promote such open investment marketplaces, using instruments that are more easily understood and widely accessible.

Surely that's a challenge the government could help address, rather than lining bankers' pockets.

Internet Regulation Won't Stop Black Swans

I enjoyed Professor Michael Froomkin's recent "Golden Eggs" lecture on internet regulation. He foresees the future regulation of the internet being shaped by the tension between the 'Cypherpunk' vision for a distributed, democratic , libertarian environment - and 'Data's Empire' - where established institutions respond to the perceived threat of the internet by trying to create a centrally controlled environment. He cautions us not to be complacent or 'technologically deterministic'. There are opportunities for us to make real choices to avoid "killing the goose that is giving us golden eggs of innovation, decentralization, and personal empowerment".

This model does not only describe the two broad forces at work in the online regulatory environment. Generally, our individual desire to control our own experience tends to be opposed by institutions' desire to retain control of how they deal with us. Indeed, it might be said that explosive Internet adoption occurred because individuals pragmatically recognised and seized an opportunity for individual empowerment in the face of comparatively rigid institutional control in the offline world.

Yet institutions try to catch up, and the cycle continues. Michael hints at this when he notes "to a surprising extent both sets of trends have manifested themselves simultaneously. The question is whether those two trends can continue, or if instead we are witnessing the start of a collision between them." Of course, we are seeing collisions everywhere, all the time, between individuals and institutions each trying to control their relationships. Just consider all the markets, services and activities impacted by the Web 2.0 phenomenon, and the realisation that brands must become facilitators rather than institutions.

But we should also consider that 'control' is illusory. Human behaviour is not predictable and, while it may appear that people are acting in a controlled way in certain scenarios or under certain regimes, radical change is never far away. The fall of the Berlin wall and the credit crunch are two of many situations or activities which appear to be under fairly strict, central control but are in fact not - or at least not in any sustainable way. This is not a technologically deterministic view. It simply acknowledges the nature of the world. We are constantly exposed to the risk of "Black Swans" - surprise events that have a major impact which we rationalise by hindsight, as if they had been expected. Andy any inquiry into the why's and how's of such events is largely academic, albeit tantalizingly so.

So, while real regulatory choices of the kind Michael mentions may remain to be made, we should not count on those choices as having the intended effect of delivering 'control' for any sustained period of time. Regulation cannot possibly cover every eventuality, and is too slow to create, too blunt and too easily circumvented by anyone sophisticated and determined. Cryptography and the sheer volume of users and data make a mockery out of online access and content controls, centralised 'mining' and monitoring. We do rely increasingly on facilitators to find desired data and/or edit/adapt it in some way to make it more manageable for us or our devices - and these represent natural 'chokepoints' for regulators and commercial institutions, as Michael Froomkin points out. However, these chokepoints are also easily circumvented, either as described or by the rapid rise of the next facilitator or competitor, and related technological innovation.

This is not to say that those who purport to edit more actively what people see should not be subject to democratic controls over their exercise of editorial discretion. There seems to be (a somewhat surprising) acknowledgement of this in Google's decision to fund the Advertising Standards Association's efforts to regulate online marketing activity. The point is that new standards won't protect us from calamity.

The ultimate challenge, as Nicholas Taleb warns, is to minimise or avoid exposure to the potential downsides posed by Black Swans, while maximising one's exposure to the potential upside. To illustrate this in financial terms, it would be a mistake to borrow money to 'short' stocks, but worthwhile to invest a small proportion of your savings in Hollywood films. In the online world, Black Swans would seem to loom most obviously in the content arena - or perhaps fraud. Regulation is heavily focused in this area, but that is merely a signpost. We must take responsibility for our own practical choices. These include whether to share thoughtful or sordid content, to engage in copyright violation or to openly publish key personal financial data or photographs of your family. It's worth considering that the internet hasn't changed our propensity to behave well or badly, but may have amplified the outcomes.

To bring it down to a personal level, I maintain my anti-virus protection and avoid or minimise sharing what I'd regard as 'key' personal or financial data, even though there are comparatively fewer people out there who would use it to my disadvantage, since the impact their activity is so personally disruptive. However, I do acknowledge that the benefit to sharing certain limited personal transaction data - with credit reference agencies, for example, and some retail or social networks - can outweigh the downside of misuse. In these circumstances, you might think that more regulatory and commercial resource should be dedicated to quickly and efficiently restoring a person's control of their own identity once control is lost, rather than drastically limiting the availability of personal data or intervening too much in the exchange of information in social or retail networks.

Similarly, I post my thoughts and share others' because I hope they are better shared than consumed by me alone - and the (small) chance that millions might find such a thought worthwhile represents a very positive potential experience ;-). Conversely, I would not (even if I wanted to) create or share sordid content because it represents exposure to an extremely negative outcome. That said, I acknowledge a middle ground where (within reason) the assessment of what's merely in good or bad taste is hugely subjective and may change. For example, I recall being struck by the fact that 'topless bathing' was deeply frowned upon in Sydney one summer yet utterly commonplace on Bondi Beach the next. Similarly, we'll hear the last 'cautionary tales' of people losing their jobs over embarrassing photos of university hi-jinks once the 'Facebook generation' become middle managers.

The point remains, however, that we must take responsibility for our own personal vigilence, even if employers come to tolerate the odd embarrassing photo, or the government succeeds in tightening internet content controls. Those Black Swans will still be out there.

Ethical Funding: The Death of 'Fat' Banking

It's just cost Yell Group £80 million in fees to secure £660 million in funding. Apparently this is because there are over 300 lenders involved. So I guess you could say it cost about £284,000 per lender.

At the other end of the spectrum, over at Zopa, borrowers pay £118.50 to borrow directly from hundreds of people at the same time, with no bank in the middle.

Somewhere in there is the real cost of enabling people and businesses to obtain funding. And the longer the banks continue to insist on such enormous rewards for their role, the harder others will try to remove them from the process, or otherwise curb their perceived excesses.

Since steering Zopa through the maze of financial regulation, I've become aware of many others who are also implementing alternative funding strategies that take banks out of the process. It's complex and time-consuming, but less so now that starving advisers are starkly aware of their own need to provide a faster, more cost-effective service in this area. Recent figures reveal that Ireland and Luxembourg are reaping the rewards.

The fact that I can't really discuss these alternative funding sources without interfering with their marketing obligations underscores why the banks are able to charge such high fees.

Intensive regulation - ironically designed to protect the financial system and taxpayers from the kind of events we've seen occur regardless - has funneled the world's investment funds and opportunities into a cloistered environment in which only a privileged few are trusted to connect them. Enormous rewards for those few are simply a bi-product of that regulatory framework. It is unsurprising that those rewards should remain high as the flow of investment capital runs dry in the face of intensifying demand from cash-strapped banks and corporations.

So there is further irony in the European Commission's plans to regulate the alternative investment markets. This should simply concentrate the number of intermediaries who can arrange funding, allowing them to increase their fees, yet fail to deliver any incremental protection from the risk of financial failure.

The attack on 'excessive' fees and bonuses actually challenges the notion that matching investment capital and investment opportunities should be reserved for an anointed few. To remove the fat, you need to turn the situation on its head. The authorities should be fostering (not necessarily regulating) the growth of simplified, transparent marketplaces that are substantially open to all, linking investors and issuers of stocks and bonds in a direct sense, albeit still facilitated by skilled, lean operators.

Such a process of simplification, with increased openness and transparency, is entirely consistent with the rise of directly accessible consumer marketplaces for consumer goods, travel, betting, entertainment, personal finance and trade finance during the past decade. In those marketplaces, the role of the facilitator has been to enable consumers to seize control of their own experience and keep much more of the value that was previously retained by 'traditional' product providers.

In this sense, the "democratisation" of the financial markets may be seen as very much a logical step, rather than anything terribly radical. It will be important to get the rules right - just as that has been critical to the success of many other consumer platforms already out there. But openness, fairness, transparency, and both governments' and taxpayers' determination to get out of this mess, ought to be reliable guides.

Big Media Must Make Itself Useful

Rupert Murdoch thinks search engines are getting a 'free ride' on News Corp's content. He also sees little value in 'occasional' visitors who are attracted by a headline they see on a search engine and click through. He says so much content is freely available online because the traditional media 'have been asleep'. Clearly, he wants people to use - and pay for - each of News Corp's media properties as an activity in itself, as in "I want to read the Sun," or "I'm going to watch Fox News now" rather than as an adjunct to their every day activities. To achieve this, he proposes withholding content from the search engines.

He's not alone. Lots of newspapers seem to be planning to reintroduce subscription services online, and there's plenty of discussion about what content might attract a premium.

Of course, many businesses look at the world through their own products, rather than what people are actually doing, or would like to do. Banks, for example, offer 'personal loans' and 'mortgages' quite independently of the use of the processes involved in actually using the money they lend. As a result, people have come to see their bank as just a very basic utility, rather than an integrated part of their lives. 'News' already seems to have gone the same way.

What the media and the banks of this world don't seem to 'get' is why search engines have become so central to people's behaviour.

People don't 'read' search engines. They don't even spend much time there, compared to their destination sites. So why do search engines dominate the advertising world? Because they are key enablers or facilitators of what people are actually doing or want to do. Even if some links are sponsored, a search engine doesn't try to determine what you see or do. Unlike the 'traditional media' or banks. A search engine enables you to efficiently answer the vast number of often quite mundane questions that confront you every day - 'Where are their offices?' 'How do I get there?' 'Can I get this cheaper anywhere else?' 'How many goals has Blogs scored this season?' 'Why are Australian animals so weird?'

No matter how much different content any one provider offers, it will never answer all of everyone's critical questions. And the more it tries to corral people and dictate what they see, the less they'll trust it to give them the information they want.

So the challenge for traditional media is not whether or not they charge for their content. Instead, opportunity lies in becoming more integrated with people's actual or desired every day activities. The more integrated the media are, the greater share of the consumer value chain they might command.

Flight of Funds, FSA Registrations Down

When I asked Vince Cable recently what he thought of the alleged flight of hedge funds from the UK in fear of EU regulation, he said he wasn't aware of any such flight, but it would be "irrational". First, he said, the UK has not - and should not - pander to those in search of a tax haven. Second, he thought it likely the UK will be successful in removing certain protectionist elements from the EC's plans to regulate the alternative investment sector.

I thought this sounded very thin at the time. But I also thought it interesting that Vince went out of his way to mention the tax point.

So no surprise, then, that Lord Myners has just 'spoken in favour' of tax-effective regime for alternative investments on the back of a recent report "that £300bn of UK-managed funds have gravitated to Luxembourg and Ireland, at a cost to the UK of about £300m a year in lost revenues."

The fact that funds choose to remain in the EU suggests the regulatory fears are overdone. Either managers are resigned to regulation, or bullish about watering down the EC proposals.

It's also worth noting FT reports that "only 247 new banks, brokers and insurance firms sought authorisation from the Financial Services Authority in the three months to September 30, while 643 firms cancelled their registration, according to data compiled by IMAS Corporate Advisors."

Do Price Comparison Sites Increase Premiums?

Hypothesis: the rising cost of car insurance is actually driven by marketing costs.

Gross premiums have increased 14% in the past year, and the car insurance industry would have us believe this is driven by the 'rising cost of personal injury claims and fraud'. But that would suggest net premiums (the proportion of the gross premium that actually covers the insured event) are being priced wrongly, which I find difficult to believe. Actuaries must be fairly good at predicting accident rates, deaths and injuries and so on by now. And these actually appear to be in decline, according to the Office of National Statistics research published in April 2009:

"The total number of deaths in road accidents fell by 7 per cent to 2,946 in 2007 from 3,172 in 2006. However, the number of fatalities has remained fairly constant over the last ten years...

The total number of road casualties of all severities fell by 4 per cent between 2006 and 2007 to approximately 248,000 in Great Britain. This compares with an annual average of approximately 320,000 for the years 1994-98.

The decline in the casualty rate, which takes into account the volume of traffic on the roads, has been much steeper. In 1967 there were 199 casualties per 100 million vehicle kilometres. By 2007 this had declined to 48 per 100 million vehicle kilometres."

So I wonder if there's a variable cost in there that's proving difficult to control. A chief culprit might be marketing. We're certainly being inundated with TV advertisements for insurance price comparison sites, so I wonder if that is in turn being paid for by higher 'costs per click' associated with advertising on those sites? While some insurers are refusing to list their products on the price comparison sites, they may still face competition for key search terms, for example.

Needless to say, I haven't yet been able to find much public analysis on this, but there is a helpful post on analysing the efficiency of cost per click by The Catalsyst. It's easy to over-spend, and the competition may force you to.

If my hypothesis is right, the case is building for semantic web applications to enable people's computers to find deals simply by interrogating insurers' computers - without all the expensive advertising noise.

Extra Data From Us is Key To Financial Health

Just for fun, I've been wading through the FSA's discussion paper on reforming the mortgage market.

The FSA's aims are to ensure the mortgage market is sustainable for all participants, and works better for consumers - and taxpayers.

The credit crunch has shown that consumer lending and related securitisation programmes have become a high risk, low/no data process. That has to change.

So, the immediate challenge to the FSA's approach is the decision (thinly explained on page 67) to focus only on the 'mortgage market', rather than the role of mortgages in the 'credit market' or indeed the overall investment market of which the credit market is an integral part. Of course, the FSA's remit and resources don't even extend to unsecured credit, let alone the entire investment market. This silo mentality renders the investment markets a fool's paradise.

Secondly, lenders and their investors (including the Treasury) will only get better at risk management if all the data systems in the lending/investment process are up to the job of collecting and processing enough credit data. That includes using the data gleaned in the underwriting process to help inform the loan collections/enforcement process, then 'closing the loop' by feeding the lessons learned back into the underwriting and investment processes. It would be interesting to see how much work the FSA has done to understand and encourage the level of investment in systems used for underwriting, collections and investment decisions.

Thirdly, the FSA is right to avoid 'blunt' caps on loan-to-value and debt-to-income ratios. Adding a more detailed calculation of 'free disposable income' is a good way to introduce more data that might help lenders and investors predict the likelihood of default. But that will only work if borrowers are willing to contribute accurate data, rather than try to 'game' the system - which lenders/investors will end up tolerating. So far, the FSA seems to be generating consumer resistance to providing extra information to lenders (making it harder for lenders to ask) by not explaining that extra data is critical to lenders improving their credit risk management systems, which ultimately protects the entire financial system.

The discussion period ends on 30 January 2010.

Will The Eye Tweet?

As the Trafigura saga demonstrated, Private Eye is a good source of news items that resonate with the Twittersphere. I'm an occasional reader of the Eye, but begin to lose the will to live after consuming exposé after exposé of profligacy, greed, corruption, stupidity and otherwise shameful behaviour - albeit leavened by excellent cartoons and some very funny columns.

But if the Eye would only drip-feed choice pieces into Twitter, I fancy it would attract a lot of new online subscribers and achieve plenty of productive change at the same time.

No doubt, I am committing some howling error in the minds of the Eye's intelligentsia, but I don't care. Perhaps the Eye's cynicism prevents it from recognising a real opportunity? It would be interesting to know the rationale for why the Eye won't tweet.

PS: 20 Oct. Private Eye now tweets! twitter.com/privateeyenews

Britain: No Pain, No Gain

Here are my takeaways from the Spectator Business breakfast debate, sponsored by DLA Piper in the City this morning. The issue was whether political paralysis is the major obstacle to economic recovery. The speakers were MPs Vince Cable, Frank Field and Philip Hammond, along with Fraser Nelson, editor of the Spectator, and financial columnist Neil Collins. Martin Vander Weyer, editor of Spectator Business, was in the chair.

The politicians concede there is a £90bn structural deficit, that is currently driving unsustainably high public borrowing. They agree a clear mandate is required at the next election if the new government is to be able to administer the 'tough medicine' required to reduce or eliminate that deficit. Technically, they disagree on the detail of how and when to disconnect the economic life support systems currently in place (quantitative easing etc). However, they say little of this is actually 'discretionary stimulus', so their debate doesn't really amount to much. Most of the stimulus is the result of monetary policy that is out of their control and is being well-handled by the experts, even if no one is sure how beneficial it will turn out to have been. However, concern remains that not enough of the stimulus is resulting in finance for solvent borrowers.

Households are in no position to absorb much pain in the short term, due to the £1.4 trillion consumer debt mountain. That would seem to rule out a return to the 'bleak and blunt' Thatcher budgets of the early '80s. So it appears we're in for a long period of monetary and fiscal responsibility. In fact, there will be an 'Office of Fiscal Responsibility', to put an end to the farcical gamesmanship around growth and other fiscal estimates at budget time.

Politically, shrinking the structural deficit will require policies that demonstrate everyone is 'sharing the pain'. Realistically, even the Tories have only found £3bn in potential cuts, so higher taxes are a certainty. The Tories say the 50p top tax rate will be a temporary measure that may not raise enough taxes to make a difference, but will show the 'rich' are sharing the pain - in the same way MPs are being told to repay whatever the Legg inquiry finds they owe, even if they disagree with the reasoning. All agreed that the electorate will not accept much pain while there's a perception that big bonuses are being awarded in the City (or the pubic sector retains generous pension entitlements).

The financial regulatory framework will be restructured, probably to ensure that riskier wholesale banking activities require so much reserve capital as to make them either prohibitive or at least sufficiently low risk for the taxpayer. It's suggested that the protectionist elements of the current EC attempts to regulate hedge funds etc will be successfully resisted by UK MEPs, making it 'irrational', or at least premature, for any funds to leave the UK/EU... good luck with that.

Public sector pensions are going to be cut. Heathrow won't be expanded, and there's a big issue about how the delivery of Britain's energy needs can/will be funded.

While the election provides an opportunity for change, its timing is delaying political focus and agreement on the detail of how to reduce the structural deficit and balance the competing economic and social interests. However, the paralysis goes well beyond the politicians to financial and economic experts and the media.

Against this backdrop, there is concern that confidence in the British economy amongst the investment community may evaporate.

Without real agitation by individual voters, I doubt we will see any real economic detail from the politicians until some time after the general election. Even then, any detail we're given prior to the election will be subject to change after it.

I created the word-cloud of this post at Wordle.

The Human Development Index is Personal

The British media moan that the UK is sliding inexorably down the Human Development Index. It's ranked 21st.

This parochial view of course ignores the plight of nations nowhere near the top 20, whom measures like the HDI are really intended to help. The top 20 are pretty irrelevant, actually, as may be the HDI itself, according to its critics. To them, you could add Hans Rosling, whose TED presentation brilliantly illuminates how misleading and unhelpful it is to refer to the development of 'countries' rather than areas and demographics within them:



This may sound terrifically defensive to those in higher-ranked countries, but ultimately, what is an acceptable standard of living is also highly personal. People's social, political and cultural satisfaction are tough to measure and compare. I regard myself as living in London, rather than the UK, for example. And I reckon it's the right choice for now, even having lived in Sydney and New York City.

Mind you, a huge, lingering structural deficit, higher taxes and the continuing failure to fix a broken parliament might change my view.

Here's that HDI top 20 if you're still interested:

1. Norway

2. Australia

3. Iceland

4. Canada

5. Ireland

6. Netherlands

7. Sweden

8. France

9. Switzerland

10. Japan

11. Luxembourg

12. Finland

13. United States

14. Austria

15. Spain

16. Denmark

17. Belgium

18. Italy

19. Liechtenstein

20. New Zealand

Those Squealing MPs Are Back!

Isn't it reassuring to see the piggies back from yet more holiday, fighting every effort to have their snouts hauled out of the trough?

My personal favourite is the one squealing about 'subjective judgements' in the legal review of her own expense claims, but not the subjective judgements made in how she actually filed them. As a chief architect of the Nanny State she should've known better. Experience how subjectively angry this makes you feel, by staring at the defiant face below for 30 seconds. Then exercise your own subjective judgement at Power 2010.

John Thain's 10 Lessons of the Credit Crunch

I would summarise the recent remarks of former Merrill Lynch CEO, John Thain, at Wharton Business School in the 10 points below (my adds in italics). But two general observations. First, John says he doesn't believe there could be another bubble as damaging as this particular one, whereas we can't possible know that. It seems a lot safer to assume there will be a more damaging bubble, so we can at least consider what it might be and have some chance of acting to minimise or avoid the consequences. And, second, John is pessimistic that we'll heed these lessons of the credit crunch. So, logically, he would have to concede we're in for a repeat.

1. Loan/mortgage brokers should be incentivised based on loan performance, not just volume;


2. Loan owners who securitise must retain a significant proportion of the equity;


3. Government sponsored entities should be not-for-profit (i.e. they can run at a profit, but can't distribute profits, with an exception here in favour of the Treasury, surely);


4. The issuers of securities need to explain not just the risk in the security, but also what residual risk remains with the issuer and how it plans to cover those risks (this would demonstrate more clearly the inter-relationship between markets for credit and insurance, the use of shadow banks, and related assumptions);


5. Banks must reserve more capital as a proportion of total assets in a rising market, so they can afford to reserve less in a falling market;


6. Private equity firms should not be free of leverage controls (which suggests they need to make the same risk explanation in 4 above to their investors as issuers of other securities, regardless of whether those investors are 'sophisticated' or market counterparties);


7. Financial regulatory structures need to be more logical, less duplicative, less expensive, with no gaps;


8. Compensation should be variable, reflect how earnings are generated, tied to longer-term performance, aligned with shareholders' interests and ultimate financial results;


9. Credit risk management needs to be improved - but the crisis has demonstrated that once toxic assets are on the balance sheet it's tough to get rid of them, so there has to be some recognition that a government guarantee is ultimately necessary to remove them;


10. Financial institutions must pay for their implicit government guarantee, over and above existing FDIC or other financial compensation schemes.

Never Retire

The pensions crisis has dragged on for years now. The hole is £200bn deep, and recent stock market rises have not helped to fill it, because bond yields fell at the same time. In fact some households are now missing 5 years worth of living expenses.

Listening to the experts, there is no plan for getting individuals out of this mess. Meanwhile corporations are busy minimising their exposure as best they can, and the UK courts have (grudgingly) upheld the law allowing employers to require us to 'retire' at 65.

Tempted as I am to campaign to raise the 'retirement age', I think we should forget it. It's only there for our employers' benefit, and they may not last long enough for it to matter anyway. For us, there is no retirement, only age. We have no pension 'entitlements'. The welfare state is dead. Investing for the future is like trying to beat the casino.

Like it or not we're in charge of our own welfare, and we need to take control. Some are calling this process "rewirement", which is nice. 'Work' is not a chore that can ever be dispensed with, simple as that. And we can't rely on a single employer. We need multiple revenue streams in case any one of them dries up. We have to remain alert to opportunities, and be flexible enough to take each one. And so on. Until we drop.

Rower's Revenge 2009

Well, that's a wrap for 2009.

An average of 4.84 training sessions a week for the past 50 weeks and a time of 1:39:59 in the Rower's Revenge - 58th overall, 11th in M40-49 group - just pipping Oikonomics, who smoked me on the bike. I was 49th and 9th respectively last year, so I'm going to have to do something radical next season...

In the meantime, I've raised 60% of my target for Prostate UK - you can help beat that by donating at: http://www.justgiving.com/simondeanejohns/.

Join us next year!

Thanks to SussexSportPhotography.com for the pic.

Market Research and Social Media

Today I presented again on 'Behavioural Targeting of Online Advertising', this time at the 5th Annual Online Research Conference in London. Not that I advise any clients in the area, but I've tried to keep up to date in light of the whole Phorm controversy.

Unfortunately I couldn't stay for the day, but I did catch the morning.

I enjoyed Mark Earls' presentation on the changing relationships between people and organisations, and the role of market researchers as mediators who can help everyone adjust to the new reality. It was also interesting that he picked up on the useful role that the tons of publicly available data can play, and that reminded me of Hans Rosling's excellent presentation on that subject at TED:



Mike Hall of Verve tried to define a new medium called the 'online brand community'. There was no time for questions but this seems to assume the brand is at the centre of things, and I wonder what Mike would say about the research value of comments people publish in the complete absence of the brand? In distilling the essence of community in 6 'rules', Mike also said that 'participation is the oxygen of the community'. But surely the 'oxygen' is whatever induces participation. And it's too simplistic to state as another rule that people participate online to obtain information. Some want to broadcast, others to listen. As the guys from InSites Consulting reported, people tweet to chat socially, 'show off' a rare URL, upload photos, or because they're curious, want a laugh or to be made to wonder. I guess that information is at the heart of all those things, but there's far more to it.

I'm sure the afternoon was just as thought-provoking. Definitely an event to keep an eye out for next year.

Never Say Don't... Without Saying Do...

Hat-tip to the Financial Services Club for highlighting Newsweek's quotes of the credit crunch. The last one in particular caught my eye. It was taken from a speech by President Obama in New York on 14 September:

“I want everybody here to hear my words. We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street can not resume taking risks without regard for consequences and expect that next time, American taxpayers will be there to break their fall.”

Wise words, but beware the power of suggestion when quoting them. The word 'not' only appears twice amidst 67 other words describing how to bring the economy to its knees. Cue vague public agreement from Wall Street, but no real sense of understanding that would help generate change. That's because, despite the context, bankers hear this:

“....go back to the days of reckless behaviour and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street can resume taking risks without regard for consequences and expect that next time, American taxpayers will be there to break the fall.”

Now I don't mean to suggest that the President is missing a trick when it comes to great orations or political rhetoric. The problem lies in Newsweek's choice of sound bite.

By contrast, I prefer a quote from Lord Turner's recent attacks on the same evils. And the strong adverse reaction of bankers illustrates why it is better to speak in positive terms about change. Not only does the reaction signal that the bankers realise Lord Turner is not suggesting a return to past practices, but also their real anger at the vision of what's expected of them in the new world - they've been launched along the 'change curve':

"...the top management of banks... need to operate within limits. They need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them. They need to ask searching questions about whether the complex structured products they sold to corporate and institutional customers, truly did deliver real hedging value or simply encouraged those institutions into speculative and risky exposures which they did not understand: and, if the latter, they should not sell them even if they are profitable. They need to be willing to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable."

Another way to explain is to imagine what activity we would see more of, if we were filming a world where the proposed change had occurred, versus what we would see less of. This was a useful tool for change management we used at GE, designed to harnessing the power of suggestion in a positive way. Never say 'Don't...', without saying 'Do...'.

Why She Buys

Interesting tips from a book Why She Buys, by Bridget Brennan, posted on the Amazon Payments blog:

• don't hide your customer service number


• simple checkout process


• use trusted payment methods, confirm orders/shipment immediately by email


• have a decent returns policy


• recommend complementary items


• show examples of gifts


• allow zoom on product shots


• keep your site clutter-free


• be transparent about shipping costs

Reminds me of some research that challenged the idea that women aren't comfortable with technology. As others have pointed out that, sure it should be stylish, but it also has to work simply. That means minimising the need for instructions and cables like spaghetti.

Intel also found that women are very influential when it comes to the gadgets guys buy, and even spend more time online gaming than young men.

Oh, and check out GeekSugar, 'where geek is chic'. Hat-tip to AllWomensWeekend.

FSA Chairman Shocks City Along Change Curve

Lord Turner has reiterated his assertion that much activity in the City is ‘socially useless' and 'of no real use to humanity’. Why? Because he knows it draws blood:

'Quite honestly I am appalled, disgusted, ashamed and hugely embarrassed that I should have lived to see someone supposed to be held in high esteem and who already commands a senior and crucially important position as effective head of the UK regulatory regime making such damaging and damning remarks.' Howard Wheeldon, senior strategist, BGC Partners, 27 August 2009.

And so it's clear that such remarks from the City's regulator are just the sort of shock the City needs to begin its journey along the curve towards the cultural change the taxpayer wants to see. The anger exhibited by Mr Wheeldon, a 30 year City veteran, is merely a step in that journey. The chart says 'Depression' is next, which may be right in more ways than one...

Gordo Got You Down? Try Power 2010!

If you aren't thoroughly disillusioned with UK politics and hell-bent on doing something about it, I don't know how much more mayhem it will take.

The good news is that even Gordon Brown admits he has to unwind his vast public sector binge of the past twelve years. The chips are really down.

But as the great HST himself said, "when the going gets tough, the weird turn pro".

So now is the time to ensure we get to keep and invest in what's important.

Enter Power 2010, a campaign chaired by Helena Kennedy and funded by the Joseph Rowntree Charitable Trust and the Joseph Rowntree Reform Trust.

Like MySociety, Power 2010 uses the internet to enable you to share your thoughts in a way that politicians cannot ignore without being called to public account. It doesn't matter whether Parliament is sitting or not. The internet is always on, 24-hours of disinfecting sunlight shining into the Westminster pit.

So please share your ideas now, at http://www.power2010.org.uk/page/s/yourideas.

Diversification Challenge

Some of us have been discussing the need to diversify more.

There are numerous tips on how to make sure that not all your eggs are in one basket. But they all assume that you have a great deal of time and a pretty sophisticated understanding of finance and financial services.

Like it or not, even with plenty of time on his/her hands, the 'man on the Clapham omnibus' is no financial giant.

So most people need diversification explained as simply as possible, and in a way that enables them to achieve it easily and conveniently.

What is diversification? The eggs in one basket idea is pretty simple, but needs some numbers: you are less likely to have all your eggs broken if you have 10 eggs in each of 10 baskets, rather than 100 eggs in one basket. Following this principle, you become automatically better off every time you add another basket for the same number of eggs. So you’d be much better protected against egg breakage if you had 5 eggs in each of 20 different baskets.

An interesting challenge would be to start with what a truly diversified portfolio of assets looks like, based on using a small amount of money. For argument's sake, one could start with a figure of £10,680 - the most the government allows you to salt away without locking it up til you're 98 years old, or paying tax on the returns.

But such government policy actually prohibits diversification, yet heavily subsidises regulated investments at the expense of alternatives.

That’s because most people with surplus cash should use up their tax-free allowances first, and few will have anything left over. Research cited by the Guardian in June 2011 suggests the average UK person can afford to save £97.10 per month.

The list of asset classes is long, yet the money allocated to those tax-free allowances can't be invested in the full range of potential assets, even by putting their money in the hands of managers who can invest more widely. Generally, you may only invest your tax-free allowances in regulated investments. And all sorts of rules, policies and other restrictions limit the types of assets in which regulated fund managers can invest. So even regulated fund managers are unable to adequately diversify the investment pots they manage. This must necessarily affect the value and performance of the funds they manage. Such effects may be market-driven and/or behavioural.

Then there's the tricky subject of asset correlations: if all the assets you've invested in behave the same way at the same time, then you aren't diversified. Apparently the correlation in the performance of assets has been increasing of late, but may be about to unwind in some cases.

First step along the way to meeting the diversification challenge should be to figure out a reasonably detailed list of asset classes. Then we should modify the regulatory framework to enable people to invest at least their tax free allowance in each of them. The list of assets can divide and divide, but I don't think we start out with a sufficiently granular picture. In reality, I think such a list might look like the following - note that I include different types of 'funds', and separate regulated from unregulated, because their performance can be affected by the differing levels of regulation and permitted classes of investments they can make. However, I'm not including instruments like spread bets, contracts for differences or futures, since these are merely contracts that get you exposure to the various assets. Am I right or wrong?

1. cash
2. savings accounts
3. fixed interest savings/bonds - government, corporate
4. person-to-person loans
5. shares listed on a regulated or 'recognised' exchange
6. shares not listed on a regulated exchange
7. exchange traded funds (ETFs) listed on a regulated exchange
8. ETFs not listed on a regulated exchange
9. regulated managed funds
10. unregulated managed funds
11. regulated hedge funds
12. unregulated hedge funds
13. venture capital funds
14. venture capital trusts
15. regulated funds of funds
16. unregulated funds of funds
17. commercial property
18. rural property
19. residential property (owner occupied)
20. residential property (buy-to-let)
21. perishable commodities (e.g. cocoa, wheat)
22. non-perishable commodities (e.g. oil, gold and other precious metals)
23. art
24. classic cars
25. fine wine
26. currencies

At Last A Bank That's Fair?

At long last one bank has broken ranks with the gang that's trying to avoid having their overdraft fees assessed for fairness by the OFT.

RBS has announced it will halve its fee for paying an item when overdrawn to £15 per day(!), and slash the fee for returning a cheque, direct debit or standing order to £5 (from £38!).

Why it's taken so long to at least make this concession, and why other UK banks with substantial state ownership continue to delay, is anyone's guess. But it's a great start.

Will RBS now refund to affected customers the difference between the revised fees and what it has been charging them to date?

New Firms Best At Leveraging Social Media?

A hat tip to Mark Nepstad for pointing out Chris Perry's article on the challenge for any established business trying to leverage the social media. Just as the military potential of the aeroplane was not fully realised until the challenge was eventually handed over by the Army to a newly created Air Force, Chris suggests that marketing teams need to be re-engineered in order for businesses to realise the potential afforded by a phenomenon as 'revolutinary' as the social media.

But this misses the wood for the trees.

The rise of the Air Force and the success of Google, eBay, Amazon etc. illustrate that leveraging horizontal technological innovations is not achieved by shuffling the deckchairs in the marketing department of established organisations, but by forging new and separate businesses.

That leaves the challenge for the old guard to engage with the upstarts in order to leverage their greater success with the new technology. Time Warner (AOL), NewsCorp (MySpace) and even eBay (Skype) have famously demonstrated that acquiring one of these new firms doesn't necessarily result in successful engagement. So it seems that established businesses should both encourage new businesses to flourish around significant new horizontal innovations, and focus on co-operating with them to serve their customers, rather than outright ownership. Some, including the Wharton Business School, have called this 'coopetition'.

Figuring out how to compete by co-operating shouldn't necessarily entail wholesale reorganisation, especially when deep knowledge of the capabilities and shortcomings of your own business is key to knowing what's needed from the other party. Indeed it might be more beneficial to give managers and staff 'permission' to admit their organisation's shortcomings and figure out where they need help to adequately serve their customers, rather than to drive the organisation through complex wholesale change programmes.

At any rate, the scale of the challenge posed by horizontal technological shifts may at least partly explain why the average lifespan of a major western corporation is 40-50 years...

Madoff Victims Should Not Blame The SEC

Something caught my eye in the FT's coverage of the SEC's inspector-general's report into the SEC's handling of the Madoff saga:

"Jacob Frenkel, an attorney with Shulman Rogers, said the report indicated that some SEC staff, “failed to recognise a blazing fire because they were too focused on the smoldering match in their fingertips.... Madoff investors would have been better off and far more skeptical had the SEC never investigated or conducted examinations.”"

While the SEC has a lot of improvements to make, Mr Frenkel's claim just doesn't stack up. Worse, blaming the SEC will mean that Madoff's victims will continue to behave in the way that got them into trouble in the first place.

In my book, victims really only have themselves and Madoff himself to blame, on three counts.

Firstly, the complaints to the SEC only reflect what was being published by the likes of Michael Ocrant in 2001. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds ten years ago, while "a raft of blue-chip financial institutions have suspected something was wrong for years." So there's no reason that Madoff's victims and their advisors should not have detected these concerns with even a little due diligence.

Secondly, from my own observation of the SEC's approach to potentially wrongful activity (e.g. in relation to Prosper.com) it's obvious that it can take several years for the SEC's enforcement machine to engage and eventually produce a settlement or prosecution. And, of course, such proceedings are subject to the usual vagaries of the appeals process (sustaining the doubt about whether viatical settlements are a security, for example, which has in turn left the status of other instruments unclear). While this is hugely frustrating for investors and competitors alike, it is clearly impossible to draw any conclusion from the fact that the SEC may have investigated something, unless and until the SEC issues a 'no action' letter (which can take a year, no joke), or ensuing proceedings are settled or otherwise concluded. So those who bet on the outcome of existing or potential SEC activity do so at their own risk. And clearly many people do make those bets.

Finally, what really seemed to cause Madoff's victims to invest was the bandwagon effect created by Madoff's skilful recruitment of socialites and other high profile names as key investors. This meant that investing with Madoff was more of a social badge than a financial decision. And that is hardly something that the SEC can be expected to do much about.

Social Networks No Playground For Bullies

Interesting post by Yasmin Joomraty on 'cyber-bullying', arising from the Keely Houghton case.

It seems clear from this case and other instances I've heard about that if someone resorts to cyber-bullying it's just the tip of the iceberg. So 'cyber-bullying' doesn't really exist as some kind of distinct evil in itself. Moreover, the bully's use of a social networking site is self-defeating, in that it arms the victim with the evidence needed to successfully fight back.

So cases like this are actually good PR for social networking services, just as, say, Betfair's standing was helped by the utility of its audit trail for those trying to clean up corruption in sport.

However, such illustrations of how evidence from online services actually helps with the detection and prosecution of crime also suggest we need to remain vigilant against the potential for the abuse of civil liberties, privacy, personal data and so on when it comes to the access and use of online data by the authorities and others.

Diversify More

Great to see a broader debate about where social lending sits in the banking and investment world (most recently summarised on Bankwatch).

It would indeed be very helpful if people could deduct their social lending fees/losses against their income tax, and lend money to each other via their ISAs. Some day common sense will prevail.

Of course, you can already lend money to people (who aren't related to you) via your Self-invested Personal Pension plan with the trustee's consent. I explored that in some detail in 2007 while General Counsel of Zopa, and even obtained FSA authorisation for Zopa to introduce people to a dedicated 'mini-SIPP' that was to be issued by a SIPP-provider exclusively for lending money via Zopa.

On that basis, there's no reason you shouldn't be able to lend money to others through a 'DIY' ISA or stocks/shares component of your normal ISA, especially where the administration and audit-trail is outsourced to a social lending platform such as Zopa (currently the only one in the UK).

But let's go further.

The artificial distinctions between the various investment 'channels' merely confuse the issue of how diversified you really are, and create a needless multiplicity of intermediaries who all have to take their cut from our money. We know what it means not to put “all your eggs in one basket”, but struggle to see or understand the “eggs” and the “basket”, and unwittingly hemorrhage returns in fees and commission.

Consider that you can invest your money in exactly the same managed investment funds directly, as well as via a tax-free 'wrapper' such as an ISA, pension and/or child trust fund. And if your corporate pension is managed as opaquely as mine are, then you have no idea whether your corporate pension trustee has your pension money invested in the same funds you hold via other 'channels'.

As I've pointed out previously, figuring out whether your 10, 20 or 30 different funds actually represent a diversified portfolio, or ultimately all track each other, is no easy task. The existing product providers and IFAs can't really be expected to take a huge interest in your mish-mash of pension and non-pension, taxable and non-taxable investments (and let's not forget the mortgage albatross or any other liabilities you thought were assets). They tend to earn fees simply based on how much of your money they have 'under management'. So if your investments are scattered to the four winds, the revenue they earn from you is disproportionate to the work required to pull all the information together. In fact, it may not even be cost effective to pay the fees for an adviser to do a proper job.

While the FSA has reviewed retail distribution to try to resolve this issue, that review ignored any asset offered by a provider that the FSA doesn't regulate, including all consumer credit (and hence social lending via Zopa). The limited nature of the FSA's remit and resources prevent it from seeing the financial world holistically. Consider, too, that the FSA's own "MoneyMadeClear" website has different tabs for pensions, as opposed to savings and investments - when in both cases you're simply 'investing', and your money could end up in the same place through either channel.

As I've said before, we need a one-stop, low-cost service that allows you to track all your savings and investments, whether in or outside pensions, taxable or non-taxable; understand whether they're up, down or sideways; benchmark them against competing options; assess whether you are really diversified; avoid the pitfalls of transfer fees, dealing charges and other potentially hidden expenses; and cost-effectively trade your way out of any problems.

Remember, you are on your own: pay less, diversify more and be contrarian.

Plain Sailing Is Not Plain English

Just spent a windy week on Mardy Gras at Dartmouth Royal Regatta, helping a friend celebrate a 'significant birthday' with some former crewmates, under the name "X-Pistols". Through fair weather and foul we managed a creditable 10th out of 19 in the IRC 3 class, even with me scrambling around amongst the winches. Huge thanks for the extremely generous hospitality (Fingals is well worth a visit), patient child-minding and tutelage in all things nautical, including:

While I enjoyed the experience immensely, I confess that it's a bit of a challenge getting this post written with only a keyboard to steady the constant swaying of everything around me.

And it's somewhat of a relief to return to the ordinary usage of 'sheet', 'guy', 'kicker', 'winch', 'car', 'tack', 'gibe', 'kite', 'rail', 'head', 'boom', 'pole', 'header', 'knock', 'tail' and, last but by no means least, 'grind'.

Fortunately, I did not have to learn first hand the alternate meaning of either 'broach' or the dreaded 'Chinese gibe', which I'm assured is far worse than a taunt from a gentleman of the Far East.