Anyone For 8% Market Share?

Barclays' withdrawal from the asset-based small business lending market is a real shot in the arm for peer-to-peer finance.

The head of the Barclays Business unit is quoted as saying, “It’s the leasing and hire purchase side [where] we found our proposition was not that compelling, comprehensive and competitive. Our market share was small, about 8pc.”

Those are my gob-smacked italics.

According to the same article, the Finance and Leasing Association "said asset finance represents the majority of debt-financed business, and that its members provided £1.7bn of funding to support business investment in December, 5pc higher than the same month in 2009."

Barclays says it can target this £21bn market segment with unsecured loans. But of course it's talking through its hat. The Basel III head-wind blows strongest in the unsecured lending space. So even if Barclays can magic the £1.7bn asset-based portfolio into unsecured loans, it doesn't seem a great alternative use of capital.

But it's an interesting strategy if you're lending some of your own cash on a peer-to-peer platform, instead of leaving it in a savings account.

Barclays stands to lose out on both fronts.

Image from Gogherty.com.

Hanging Ten With The Momentum Surfers

I've not read "The Big Mo" yet, but I've put it on my list following a review I read in the FT. It's said to preach the evils of “herd behaviour whereby people blindly and irrationally follow those around them and work themselves up to a frenzied panic” or "momentum surfing".

I hope I have to eat my words, but I'm not expecting much more than some insight into exactly why it is that the leaders of our institutions don't get this, rather than how they might be induced to think critically and take a contrarian view when the evidence suggests that's appropriate.

The author, Mark Roeder, may have some direct experience of the former problems, having been "head of global advertising" at ill-fated UBS between 2004 and 2009. But for a real guide to the value of critical thought and adopting a contrarian stance "The Big Short" and "Fooling Some of the People All of the Time" will take some beating.

A Sustained Series of One-Offs, Or Generally Poor Banking?

Today, Lloyds Banking Group announced a provision of £500m in payments to 600,000 Halifax mortgage borrowers who may have been confused over the interest rate that applied to them, with some "missing out on lower mortgage payments." And Barclays Bank confirmed it's withdrawal from asset-based small business lending, explaining that its "proposition was not that compelling, comprehensive [or] competitive" (despite the market segment growing as a whole) and that it wasn't commercially worthwhile to spend money on compliance and other improvements.

In fact there's been a steady stream of poor retail banking stories since August:

1. RBS and NatWest have been fined £5.6m for not screening customers against sanctions lists;

2. There's been a spat between the FSA and the British Bankers' Association over the handling of over a million complaints related to payment protection insurance;

3. HSBC has been caught up in "the magic of Madoff" (not to forget the fallout from its aggressive foray into the US mortgage market);

4. RBS has been fined £2.8m for poor complaints handling; and

5. Barclays has been fined £7.7m for investment advice failings - and has subsequently withdrawn investment advisory services from its branches.

So it's worth noting DE Shaw's £100m short position in Barclays.

One certainly wonders what else might be lurking in the woodpile. It's just a pity it takes so long for the FSA to investigate and announce it's fines. Wouldn't it be better if the data were in the market promptly, rather than leaving everyone to guess?

Or perhaps the FSA should announce when it isn't undertaking enforcement activity against a bank... ;-)

Regulatory Creep And Overkill For Closed Loop Payments

The Treasury reports that it received no support for its proposal for voluntary consumer protection codes for ‘closed loop’ or limited network stored value, which are exempt from European E-money regulation. These include store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems - nothing like the collapsed retail pre-payment schemes that have previously lost their customers' money Farepak (Christmas hampers) and WrapIt (wedding gifts).

However, the rejection of the need for voluntary codes arguably opens the way for formal regulation, as the Treasury had seemed to be firmly of the view that more protection is necessary for the reasons summarized below. As a next step:

“The Treasury has asked the Office of Fair Trading (OFT) to provide some advice on the prepaid market, the effectiveness of current self regulatory solutions for protecting consumers, and the interaction between the regulated and unregulated sectors. This advice will be fully considered before the Government decides what, if any, action to take.”

Ominous? Well, it depends on what they mean by "prepaid". If the Treasury means retailers who require people to pay for products weeks or months prior to shipment, then I wonder why it's taken them so long to address a really obvious problem. But if they mean gift vouchers to make sure your nephew spends his birthday money on something educational instead of 5kgs of sweets, then this is over-kill.

I’ve extracted the summary of responses on this aspect below:

"3.10 There was little or no support for voluntary codes as a solution to improving the safeguards for consumers in the unregulated sector.

3.11 Responses fell into two broad categories: those that argued that tougher regulation and enforcement than voluntary codes is necessary to address perceived shortcomings in the unregulated sector; and those that felt that there was no justification for action due to the low risk of consumer detriment. The main reason for the general dissatisfaction with voluntary codes was that, although models vary, supervising and enforcing a voluntary code is often thought to be difficult. There are usually no limits to the number of violations a company might have, no financial incentive to abide by a code, and weak rights of recourse for consumers.

3.12 Some respondents argued that no action was necessary because the perceived risks are low. It was also argued that voluntary codes would be unworkable in practice because the average amounts outstanding on unregulated products (mainly gift cards) are less than £30. These responses concluded that the risk of loss per customer did not warrant a new protection mechanism."

Greed And Stupidity Are Winning

So Iceland's President has twice vetoed a Bill to pay for the compensation given to those who were suckered by the lure of premium savings rates. Neither Iceland nor its banks could even cover savers' principal, let alone pay interest at premium rates. But that's okay, UK and Dutch taxpayers have picked up the tab.

Similarly, bearing in mind the Irish financial crisis, it comes as a shock that Allied Irish Bank sold Californian towns letters of credit to guarantee their municipal bond issues. It's a sad fact that two thirds of investors in US municipal bonds are individuals unwittingly taking advantage of tax breaks.

Meanwhile, the tide is also going out on sub-prime student bonds and the scale of mortgage debt misselling continues to grow. So it's little wonder the the US public borrowing ceiling keeps on rising as all these woes drag on the nation's finances.

But at least the global investment banks are profitable again, right? And no one's going to jail. It seems that even the banks downunder are mixing their own special debt cocktail, and the next round is on the Aussie taxpayer.

Greed and stupidity are winning, hands down.

Image from Financial Sense.

Use It Or Lose It #2

I've previously posted in praise of the "Greasy Spoon" in case they close down or become chain shops. This time, I'm suggesting we use our libraries or they'll just close down.

Here's a map of threatened library closures. It's of course important to campaign to keep your local library open, but actually using it is what really counts.

Perhaps going to the library already feels like something you need to force yourself to do. Like going to the gym. If you do feel like it's a bit of an effort, try this 5-step programme ;-):

1. Go to the library. Just go in, and walk out.

2. A week later, visit again and apply for a library card.

3. A week later, visit the library and borrow one item.

4. Return the item on time.

5. Once each week/month thereafter, visit the library and use one aspect of the library's facilities (yes, even that facility).

Following demonstrations earlier this month, authorities are re-considering some planned closures.

But, again, using your library is what really counts.

No Fly Tipping

Sorry.

Image from EcoPro.

Sunlight On Pensions

Good to see Michael O'Higgins, the new Chair of the UK Pensions Regulator making a splash in his first interview. He's quoted in Tuesday's FT as saying providers should be obliged to compare their returns against their fees and other charges, including brokerage and dealing costs.

He admits transparency is key to building public trust in pensions, implying there isn't much.

Add that level of transparency to the focus on improving administration and record-keeping, and we should see some more pension scandals come to light in 2011.

What fun!

Next job: fill the black hole.

Cleese, Fry, Lumley & Izzard v Beckett, Blunkett & Prescott

Perhaps the most telling aspect of the battle for electoral reform is that the leading 'Yes' campaigners share great comic wit and timing, while the leading 'No' campaigners merely have surnames that end in 'tt'.

The result should be a triumph of pragmatism over the petty self-interest of has-been Labour politicians.

But the Double-T's will try to make it a vote on t' economy, t' spending cuts, t' cost and t' complexity or some other basis for moral panic.

Personally, I plan to have a lot of fun at their expense.

Big Society: The Trend Continues

I must say I'm enjoying all this "Big Society" malarkey. The debate about what in the hell it means, the irony of Liverpool City Council complaining it doesn't have to fund its involvement (which is the point, after all), the claims that volunteering is in decline, the claims that volunteering is doing just fine.

Wavy Dave must be pleased that it's all travelling in the right direction.

Because the big idea in the "Big Society", if there is one, is really for the Tories to make political capital out of a number of trends that have been building and converging throughout the past decade. They know that faith in our institutions has been in decline, that various facilitators are enabling us to personalise retailing, entertainment, travel, finance, politics and now public services. They know that everyone (except investment bank executives) is focused on sustainability and how to achieve more with less. They know these trends are not going to ebb away any time soon.

But who cares if the Tories try to claim the credit? That's politics. I'm all for having more Big Society debates. The more we focus on the problems of how to deliver public services more cost-effectively and efficiently, the better.

Office Of The Devil's Advocate

I fancy that the perceived utility of Devil's advocacy has largely suffered from a having bad name. Which is hardly fair, given both its effectiveness and its holy origins. Although the Catholic church saw the value in appointing a canon lawyer to argue against an allegedly saintly person's canonization, other institutions were too timid to follow suit. And when the Catholic church itself replaced the 400 year old role with a lighter weight "Promoter of Justice" in 1983 it 'opened the floodgates' to 500 new saints, when only 98 had been canonised in the preceding 83 years. The role of Devil's advocate might well have been overdone from time to time, but the watered-down replacement clearly didn't cut it as force for critical thought.

Of course, the advent of the lighter weight Promoter of Justice coincided with the secular trend of appointing 'independent' commissions, internal auditors and other functionaries to review, audit or otherwise evaluate our institutions. Yet, just as we have more saints, we also seem to have corruption and fraud on a grander scale than ever before, and the world teeters on the brink of financial meltdown [cue thunder].

The most recent example of such lightweight independent review is the IMF's Independent Evaluation Office assessment of the IMF's response to the financial crisis. The IEO has waited until 2011 to announce that the IMF was guilty of "groupthink" and a lack of critical thought between 2004 and 2008 and so failed to recognise and respond adequately to the sub-prime crisis. Which means the IEO hasn't been terribly effective either for most of the decade.

So it occurs to me that we need to reintroduce a force for unadulterated critical thought - for Devil's advocacy - in all our institutions. We could put a Devil's Advocate on each of our Boards, in Parliament, in the Cabinet and at the top of each of our regulatory authorities. Each DA's office would act as a lightning rod for critical thought about each institution. And as the DA's figured out how to destroy our institutions, we'd be able to respond to the threats and opportunities they'd identified (in the same way Jack Welch once challenged GE's business units to simultaneously destroy and adapt their own businesses).

Which is all fine in principle.

The Devil's in the detail.

Image from Ask Sister Mary Martha.

SNAFU at IMF's IEO?

Well, it's official. The International Monetary Fund suffers from "groupthink" and a lack of critical thinking... or at least it did between 2004 and 2008, according to its own "Independent" Evaluation Office (IEO).

The IEO defines "groupthink" (at para 42) as "the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises (Janis, 1982)." In this context, the IMF's macroeconomists agreed with those in the UK and US that advanced economies were sound, resilient, could allocate resources efficiently and redistributed risks to those able to bear them.

Street: our finances are as good as gold.

In this belief, "the IMF was overly influenced by (and sometimes in awe of) [their counterparts at the central banks]... perhaps a case of intellectual capture."

So what's happened since 2008?

Well, in between visits to the PIGS, I guess the IMF has been waiting patiently on the IEO's report. After all, "the IEO’s mission is to:

* enhance the learning culture within the Fund,
* strengthen the Fund's external credibility,
* promote greater understanding of the work of the Fund, and
* support institutional governance and oversight."

Which raises the obvious question: has the IEO fulfilled its mission in the period 2003 to date?

Or, in pukka, quis custodiet ipsos custodes?

Gordon's Crash

Knowing of my attitude towards this country's most recent former Prime Minister, someone cheekily gave me "Gordon Brown Beyond The Crash" for Christmas. By this morning, I'd only managed to wade through to page 50, as I tend not to dwell terribly long in the only place I could bring myself to store and read this particular opus. So I felt it was time to celebrate with some of my early reflections on the tome.

The cover is perhaps the most insightful aspect of this book so far. It is appropriate that Gordo's name appears in red, since this reflects his political bias, his obvious fondness for that side of the accounting ledger, and the state in which he left the country's finances. The grey background connotes Brown-blighted Britain's economic gloom. And the running together of author and title clarifies that it's more autobiography than observations on economic or political theory.

The contents itself draws a very thin veil indeed around the revolutionary idea that globalisation requires international governance (I know, I'm just amazed the idea never occurred to me before reading this book either). Key features of this 'veil' are the liberal use of the word "I" and saccharin praise for dozens and dozens of staff members, advisers and others who drank the Kool-Aid - so many, in fact, and so saccharin as to be patronizing. Which I guess is the point. Ultimately, these people lost Gordo the war, not him - an attitude we saw exemplified in his handling of the infamous exchange with a certain resident of Rochdale: "Who put me in front of that woman?"

Anyhow, having deftly skirted the reasons why the UK's banks were permitted to become under-capitalised in the first place, I'm up to the part where "As I arrived back in London on Saturday morning I went straight into the office to meet Alistair, who was planning to announce the nationalisation of Bradford and Bingley..."

I can't wait for another bowel movement.

Open-Loop Time Banks?

I spent Monday partly examining the practicalities of treating time as a currency at BarCampBank4.

In essence, 'time banks' for social care are no different to other closed-loop 'alternative' currencies ranging from loyalty schemes to gift card and store card programmes. Hureai Kippu, the Japanese system for earning the right to senior care by caring for senior citizens yourself, is often cited in this context. That specific model, which involves a nationwide clearing system for care credits, is being considered by various local authorities in the UK, though Age UK is among those who question its utility.

But we've had UK time-banking schemes since the '90s, e.g. TimeBank, TimebankingUK and Local Exchange Trading Systems or Schemes (LETS), the mutual aid barter network. The difference is explained here. So I it's clear there is something worthwhile that can be achieved by trading units of time to solve underfunded problems like personalised social care in its many forms.

However, we need to be cautious about 'open loop' time banks, even though this may bring welcome liquidity and funding to support an aging population with a giant pension deficit. There's a range of practicalities that stand in the way of time - or loyalty points, for that matter - becoming a 'real' or open-loop, freely negotiable currency or E-money. I'll cover these briefly below. But a more fundamental point is that I'm not even sure that opening up such currencies would add any utility to what's already feasible with any real currency, unless the underlying E-money system is somehow cheaper and more cost effective in moving money or other resources to where they are needed. And there are of course plenty of E-money systems that did not need to go to the trouble of creating a new currency to get going.

Other than funding the business itself, perhaps the main practical challenges to time banks becoming open-loop are achieving 'critical mass', enabling immediate redemption in cash, and tax. Issues of trust, privacy, data protection and so on seem secondary and surmountable so long as the upside to participating and disclosing information outweighs any perceived downside.

Achieving a 'critical mass' of people that will ensure adequate supply and demand for the type of time in question is an awesome challenge that deserves a post in itself.

The requirement for users to be able to redeem the time they have 'earned' or 'acquired' in cash at any time would go hand-in-hand with the need to be authorised as an E-money issuer, and to comply with various capital and prudential requirements, including safeguarding the cash corresponding to the outstanding time. Redemption in cash and safeguarding would seem to defeat the purpose of a time bank, founded as it is on the notion that participants deal only in time.

Finally, we are obliged to pay income tax on our earnings, as well as indirect taxes on sales of goods and services. And governments tend not to accept payment in anything other than their own national currency. While in a closed-loop UK time-bank for charitable purposes tax is not an issue, as soon as you enable redemption for cash or goods and services, tax would come into play.

For these reasons, I think time banks are very useful in allocating resources within a specific community, network or scenario, but not as an open-loop currency - at least not without substantial changes to the regulatory and tax framework.