Does Brown's Story Improve With Age?

Plenty of things improve with hindsight, but could the image of Gordon Brown's time in government really be one of them? 

In "Saving the World"?, William Keegan does an admirably succinct job of restoring some balance to the disastrous picture that emerged after 13 years of New Labour. 

In particular, he relies on his deep knowledge of recent global economic history to emphasise the glorified status Gordo attained through ten years as Chancellor, eight years as chairman of the IMF’s political committee, and his almost sycophantic association with Alan Greenspan. It appears to have been this status that enabled Brown to affect disdain in meetings EU finance ministers, to successfully resist his party's urge for Britain to join the Euro, and which culminated in his ability to convene urgent meetings with G20 leaders during 2008.

William also manfully contends that Brown is entitled to both kudos as an outstanding member of the economic elite and shelter in the safe harbour of the “general consensus” – fostered by his idol, Alan Greenspan – “that the sophistication of modern financial markets had reduced the dangers of a crisis.” 

This I don't buy. For all his ‘listening’ and ‘taking soundings’ amongst his fellow members of the economic establishment, Brown was simply afflicted with groupthink (which we've since learned was rife at the IMF). That he appeared to wake up earlier than others was merely because Northern Wreck was the first retail domino to fall and he had to respond. It was just luck. And it was also luck that taking shares in banks was an option open to him, but not to a right wing US administration (as explained in Too Big To Fail).

Another criticism would be that William only seems to trace the financial crisis to the failure of the Bear Stearns funds in 2007. But that was merely when the financial establishment first realised or conceded there was a problem (as also explained in Too Big To Fail). Anyone who's read The Big Short or Fool's Gold will know that many significant players had been saying (and betting heavily) for years that a crisis was brewing amongst the very banks with whom Gordon was enraptured during his long years at the Treasury and in the IMF. Indeed, William hints at this when he explains how the economist Raghuram Rajan was "subjected to brutal criticism by leading colleagues and disciples of Greenspan's" when he warned "the great and the good" of the impending doom at a conference which Brown attended in 2005. 

In that far deeper context, Gordon's surprise (and outrage) at the sorry state of UK bank finances in 2007-08 merely cements his place amongst the elite groupthinkers who had dismissed explicit warnings for many years. Far from being an especially progressive thinker on the subject of banking calamity, he was actually caught flat-footed by the fundamental flaws others had pointed to in his very own financial system. 

In those circumstances it was the least Gordon could do to keep the ATMs working. On that particular front, he was (perhaps) making the best of a bad job. He should not be seen as having engaged in some kind of heroic quest worthy of an exalted place in the history books.

While William patiently contends that Gordon didn't cause the financial crisis itself, he also properly concedes that he did much to ensure it would be a very long journey out of it. He explains Brown’s avowed and deliberate ‘stealth’ approach to taxation and social welfare spending; the refusal to build any social housing; the unbridled expansion of public sector (complete with higher pay and pensions than the private sector); and the creation of many huge off-balance sheet PFI projects under the guise of ‘prudence’. These things, coupled with a feeble understanding of what the banks were up to, are what should combine to prevent Brown's tenure being seen in a positive light.

Amidst all this, Brown's brief tenure as Prime Minister is almost a footnote - which is strange given his elevation to that role coincided with the peak of his economic profile. William does a good job of highlighting the irony that Gordon really wasn't suited to the job that he'd schemed for so long to obtain. He also points out the irony that Gordon's tendency to dither, vacillate and procrastinate, which had worked to keep Britain out of the Euro, failed when it came to seizing the political initiative with an early general election. 

All in all, an important guide to the Brown years.

Buzzword Bingo!

PR supremo Julia Streets has finally 'opened her kimono' to reveal 'key learnings' from her years as both fan and critic of corporate 'buzzwords'.

Her serious message - very humorously delivered - is that we should avoid creating confusion in the workplace by writing and speaking as simply as possible, especially with people from other countries, communities or industries. For instance, I love her story of the chap who was concerned at the request for staff to 'push the envelope' because he thought they were being asked to offer bribes. And I recall that a London-based colleague I called from New York couldn't understand why I was mildly annoyed at having been 'blown off' for lunch. 

I agree with Julia - as a general rule. We should certainly commuicate clearly. That includes explaining the meaning of words or expressions our target audience might otherwise have to look up. One also has to be careful not to torture metaphors, as Julia points out, or to mix them into a metaphorical stew. And I share her distaste for acronyms. I nearly drowned in them while working at Reuters, until someone told me to look them up in "RAD" on the company intranet. Yes, the "Reuters Acronym Dictionary" had its very own acronym.

But (being a lawyer) I feel obliged to at least make a plea in mitigation for the humble buzzword, if not to defend it altogether.
 

There is a certain richness - and at least mild entertainment - in speaking graphically about an otherwise tedious topic, like law or finance. At a recent conference about regulation, for example, I'll admit to referring to perverse tax incentives as the "elephant in the room", which we were all obliged to politely ignore. I even pointed to the imaginary beast in the corner. It seemed a suitably mild, yet evocative image for a group that included senior policy-makers, and I think people got it... The point of such metaphors is to conjure a reasonably entertaining yet informative picture in the minds of the audience. Preferrably an image that speaks a thousand words which you won't have to.

So I think Julia attacks the metaphorical-buzzword-as-boredom-relief a little unfairly. Although, rather tellingly, she concludes with a helpful guide on how to play 'buzzword bingo', complete with word-grid. 

Overall, this is a very useful book that should be used as the basis of an online resource to which we can all contribute - rather like Roger's Profanosaurus (which even has an app). Follow-up dictionaries in this space could include a guide to words that have been misused to the point they are meaningless (apparently there are 15 you shouldn't use on LinkedIn), and a 'devil's dictionary' of words that contain toxic levels of irony. 

No doubt they too would make a great Xmas present.

The Personal State

This decade is not going well for Britain’s institutions. The 2010 election did not magically restore our faith in a scandal-ridden Parliament. Bail-outs failed to improve the conduct of UK banks. Our public sector finances are in an appalling state. And as more sunlight has revealed the self-serving conduct of our mountainous bureaucracies, the gradual melting of our trust in them has become an avalanche. We want to know how rotten our institutions really are. More importantly, however, we want new models that work. 

As explained in “Lipstick On a Pig”, this plunge in faith in our institutions coincides with trends that are democratising the means of producing goods and services. Using digital technology we are personalising the one-size-fits-all experience traditionally offered by the likes of record labels, publishers, retailers, banks and political parties, and manufacturing our own physical products using desktop industrial machines. Rather than merely accepting what is ordained from the top down, both individually and as members of the ‘crowd’ we are shaping products, markets and political policies to solve the problems we encounter in our day-to-day activities. 

This process of ‘democratisation’ is being facilitated by organisations that are intently focused on helping us solve those problems. I call these organisations ‘facilitators’ to distinguish them from ‘institutions’, which exist to solve their own problems at our expense. The characteristics that I believe mark an organisation as being either a facilitator or an institution fall within broader themes of alignment, openness, flexibility, transparency and responsibility. In other words, a 'facilitator' solves its customers’ problems openly, flexibly and transparently, and takes responsibility for the impact of its activities on the wider community and society. 

Why are these features so critical? You might argue, for example, that focusing on ‘creating shareholder value’ or maximising management and staff compensation have proved to be more successful for some organisations than focusing on customers. As Anthony Hilton, Financial Editor of the Evening Standard, once said, “The City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.” 

But if that’s such a successful strategy, why are those City firms suddenly the subject of scandal after scandal and fine after fine for mis-selling and other misconduct? Why aren’t they able to recover quickly from their mistakes and move on? Why is Parliament labouring over new banking and financial services legislation? Why are people taking to the streets in protest? 

Because these firms are not 'facilitators'. 

In “Lipstick on a Pig” I explored the distinction between facilitators and institutions in the context of financial services, which then marked the latest consumer frontier. That sector also provides a great illustration of how organisations that produce complex products with hidden fees that their own staff can neither explain nor justify to customers become hooked on revenue and profits that disappear when the regulators finally wake up. How clubbing together with competitors leaves the whole club vulnerable to the same event or the consequences of the same mistake. How ignoring complaints and covering up problems leaves an organisation unable to understand the causes of issues it needs to fix. And how, when it finally emerges that the institution is not managed in the interests of the wider community, that community will no longer support it.

Since then, however, the frontier has expanded to confront the public sector and how society works – or doesn’t - as a whole. So I've been focused on the extent to which the public sector shares the same institutional characteristics that afflict our banks, and how facilitators are emerging in that wider context to help people solve their day-to-day problems that are being ignored. 

Whether an organisation is a facilitator or an institution is ultimately a matter of personal judgement for each of its customers. You might consider that a supplier is on the cusp of either category. Some will shift categories over time - although the drift from facilitator to institution appears to be easier than reform the other way. Some may never be reformed. Instead, they will gradually wither away while alternative models grow around them. 

Ultimately, however, the success or failure of our institutions and the facilitators that replace them is down to each of us. We are obsessed with ‘our rights’, but we must also realise that each of us bears responsibility for the wellbeing of everyone else. With our rights come duties and obligations that each of us must perform personally. The state cannot perform these obligations for us. The state can only act as a facilitator for our own endeavour. This is “the Personal State”. 

The Personal State is a simple concept. But it is of course a hugely complex dynamic, fraught with deeply-rooted life and death problems. For it to operate effectively, each of us must act pragmatically - in an informed way, rather than by adopting “uninformed, stupid practice”. That means no longer describing problems in terms of political dogma and propaganda. It means thinking critically and practically to identify and solve real problems. It means praising what works and explaining what doesn’t. It means spending, saving and investing our money in productive ways, and declining state benefits we don’t need. It means finding ways to improve the efficiency and productivity of the public sector to reduce public spending. Of course we must punish the gross mismanagement of our institutions and other violations of public trust. Yet we must also encourage entrepreneurs to engage in survivable trial and error, in order to promote innovation, competition and growth. In short, we must help each other wherever we can. 

Now a state like that would be worthy of some lipstick.

Image from Makeup Artist.

Bailout Fund Ratings And Snake Oil Don't Mix

The response to the downgrade of the Eurozone bailout funds from Aaa has yielded a fascinating political response from the head of the fund. 

Moody's, the ratings agency, says the €700bn European Stability Mechanism (and the the EFSF it replaces) is now a riskier proposition since France lost its Aaa rating earlier this month. It considers that, if the full fund were needed, France would have to stump up 20%. The whole purpose of the fund is to invest in the debt of weaker Eurozone member states whose creditworthiness is highly correlated. So, if one runs into economic trouble, they all do. That also makes for a "highly concentrated credit portfolio." And if push came to shove, Moody's doesn't think France would prioritise it's ESM contributions above its own debt payments. Similarly, in that event it would be unlikely that other member states would make up France's shortfall.

Both the chairman and managing director of the ESM were keen to claim political support for the fund. The ESM's chairman said:

"The 17 euro area Member States are fully committed to ESM [and EFSF] in political and financial terms and stand firmly behind both institutions."

And the ESM's managing director said:

“Moody's rating decision is difficult to understand. We disagree with the rating agency's approach which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure."

Of course, the political reality is actually the flaw in the single market and Euro fantasy: there's no credible plan to discipline profligate states, as the continuing Greek tragedy demonstrates. Those who negotiated the Maastricht Treaty foolishly believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would refrain from driving their firms into a wall out of concern for the interests of shareholders and taxpayers... snake oil. 

The only real disciplinary option is for creditor states to 'send the boys around' to the debtor states. In that event all political solutions will have been exhausted, and the 'European Union' long gone. 

So Moody's is right to discount the politics - and the ESM's credit rating.

If the politics is not to further undermine the ESM, politicians have to demonstrate that the disintegration of the Euro zone is survivable. 

Waste: A Panic Closer To Home Than Foreign Taxes

It never stops

As the moral panic over taxing foreign companies continues, MPs and other politicians must be increasingly relieved not to be focusing on far bigger problems closer to home.

For a start, the UK government has a lot of trouble keeping track of its own finances, which must suit those on the inside very nicely. While France, the U.S. and Australia can produce a comprehensive set of government accounts in less than nine months, it took 20 months to produce the UK’s first set of “Whole Government Accounts”, covering 2009-2010. Worse, the Public Accounts Committee was “surprised to find that Treasury did not have a grip on trends in some key areas of risk or plans for managing them.” 

Now you might be worried that the government wrote off £10.9bn in unpaid taxes, and perhaps a bit personally alarmed that it expected to pay out £15.7bn for clinical negligence claims. 

But let's get this into perspective. According to the Institute of Fiscal Studies, the government spent just under £700bn in 2010-211, up £30bn on the year before. At about 50% of GDP, that alone explains why our economy has ground to a halt. Of the total, 60% went in just 3 areas: social welfare (30% or £200bn), health (18% or £120bn) and education (13%). After that came defence (6%), public order and safety (5%), personal social services (4%), transport (3%) and housing (2%). Spending on trade, industry, energy, employment and the environment together only add up to 3% of total spending.

The UK government has never received tax revenues above 40% of GDP, and by far the majority of what it does receive comes from individuals. In 2008/09, the UK government collected £41.8bn in corporation tax and £149.6bn in income tax. Together, we and the corporations paid about another £180bn in National Insurance and VAT.

So we need to forget about taxes if we're to have any chance of turning around the public accounts. 

Public infrastructure projects and government consumption are great places to start. And they provide plenty of big corporate scalps to go after.

The Private Finance Initiative (“PFI”) was invented in 1992 as a way of funding the construction and operation of public infrastructure using private funds, so that the cost could be kept neatly off the public balance sheet. While initially attacked by the Labour government, the programme was massively expanded once they came to power in 1997, after the Health Secretary now infamously remarked, "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust." 

As a result, there are 717 PFI contracts in the UK with a total capital value of £54.7bn. The woolly "Whole Government Accounts" put the present value of payments due to private financiers at £131.5bn. However, the true cost to taxpayers has since been discovered to be about £300bn, including running costs and interest payments at rates well above what the government could command directly. Yet the Treasury have trumpeted savings of only £1.5bn so far.

Government also tends to reward bidders who over-estimate the utility of large scale procurement projects, and under-estimate their cost. This "Planning Fallacy" is explained in Daniel Kahneman's book Thinking, Fast and Slow, and the recent West Coast railway fiasco is a case in point. Such a tendency can only suit the public and private institutions involved. It certainly isn’t benefiting commuters or taxpayers. Costs are about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, have reached approximately £7 billion per annum. Approximately 10% of trains don’t arrive on time. Only 42% of rail customers are satisfied with value for money for the price of their ticket. Only 69% say there is sufficient room for all passengers. And only 80% of rail customers are satisfied with punctuality. 

But if you really want to indulge yourself in a good panic, you need go no further than the government's own expense accounts and the suppliers who benefit. 

In his review of government financial efficiency in October 2010, Sir Phillip Green found that “the government is failing to leverage both its credit rating and its scale” in its expenditure of £166bn on goods and services. He attributed the inefficiency to poor data, fragmented procurement activity, the lack of motivation to save money, the absence of budgeting processes and inconsistent commercial skills across departments. 

The Green review estimated that the government could save up to 40% on its telecommunications bills by acquiring its own telecoms capacity. Travel savings were harder to get at. Two widely varying estimates were put on central government travel, before the real figure of £551m emerged. No figures could be discovered for the wider government travel bill (I'll bet it's those pesky railways again). There were also 71,000 central Government buyers with payment cards that had a monthly spending limit of up to £1,000, none of which was monitored. Railways again?

Phillip Green declined to estimate the total waste or the corresponding savings opportunity, but said rather ominously: 

“There is a huge opportunity that has been clearly identified both in central Government and beyond, but without a clear mandate, energy, focus and commitment, this cannot be delivered.”

Sadly, however, notwithstanding this "huge opportunity", it seems our MPs would rather focus on the amount of tax paid by foreign corporations. Even where those corporations are abiding by UK tax law and the sums to be gained (if any) are paltry by comparison to wasted expenditure that might be saved. 

What a waste.

The Bumper Book of Government Waste is available here.

Feel The Fear And Forego Child Benefit Anyway

The Inland Revenue is busy cleaning up part of Gordon Brown's poisonous legacy by clawing back Child Benefit payments made to households earning more than £50,000. Either you decline it, or you'll pay the equivalent in tax as a "Child Benefit Charge".

Given that you paid the government to pay you Child Benefit in the first place, you would be insane (or extremely passive aggressive), not to simply decline it. 

But if you do decide to hold onto the benefit undeservedly, the Child Benefit Charge means you know exactly which tax is being used to repay any Child Benefit you receive. Screwy, but it should teach you a lesson.

This also exposes Gordo's trick.

In paying child benefit to higher earners, Brown was trading on their greed, as well as their fear. He knew higher earners would feel justified in receiving the benefit because they already paid so much in tax and felt they should get something back. The stupidity of paying the government to receive a needless benefit would not dawn on them because it was all done indirectly, by stealth. There was no tax labelled "Child Benefit Charge", as there will be going forward (at least for undeserving recipients). As a result, he knew higher earners would struggle to believe that taxes would ever be reduced if they voted to restrict Child Benefit only to deserving families. The government would always find another sneaky use for the tax money.

The current government has had no alternative but to lift the lid on this nonsense. Public spending must be narrower and more targeted if the government is to spend less, get rid of the structural deficit, and release the tax drag on the economy.

Ideally we would seeer clear links between taxes and what they're used for - like crowdfunding public services.

Clearly income tax cuts are a long way off. But rather than shoot the current government as the messenger, we should blame Gordo and his Nude Labour cronies, including Balls and Milliband, for this predicament. None of those people must ever be allowed anywhere near the nation's coffers ever again.

Does Ana Botín Have Any Clothes?

In a fawning interview in Monday's Telegraph, Ana Botin, CEO of Santander UK and billionaire's daughter, is lauded for having run a start-up and quoted as saying she will be “accelerating” the expansion of the bank’s small business lending. But does this really justify such fawning tributes, or does the emperor have no clothes?

According to BIS, the stock of lending to UK non-financial corporate businesses was £506bn in December 2011.  The department estimates a potential credit gap over the next five years of between £84bn and £191bn for the business sector as a whole, of which between £26bn and £59bn is estimated to relate to smaller businesses. BIS says bank lending may grow, but the ability of bank lending to increase may be constrained by the ability to raise capital and meet higher funding costs. The big four banks control over 90% of the business finance market, leaving the likes of Santander with very little indeed.

At any rate, the important factor here is not the amount that Santander actually dedicates to small business lending. It's the proportion that its small business lending activity represents of its overeall credit creation. Richard Werner, the economist, estimates that UK banks generally dedicate only 10% of their credit creation activity to productive firms. He says that it's critical to grow that proportion because credit aimed at productive firms is the only signficant driver of economic growth as measured by GDP - which is flat. Credit that goes to consumption only fuels inflation, and credit for the purchase of non-GDP assets simply drives up the prices of those assets. In Germany, by contrast, 70% of banks (about 2000 of them) only lend locally and supply about 40% of SME finance.

Against this backdrop, Santander's claims don't merit much attention at all. To achieve it's proposed 'acceleration' of lending to small businesses, Santander UK suggests it will use some of the £2bn capital allocated to its failed acquisition of 316 RBS branches and some of the £1bn it has drawn down as part of the public subsidy given to banks in the form of the Funding for Lending Scheme. The bank announced £500m additional asset financing last Thursday. Yet its gross business lending only stands at £10bn, even having grown 20% year on year since 2009. “This is net new lending,” claims, the CEO, but then says this represents switching from other banks. So it may not be net new lending to SMEs generally, i.e. funding that is going to SMEs who can't otherwise get it.

So, while she talks a good game, Ana Botin and the bank she runs have no clothes. 

Image from ElaineByrne. 

Will Midata Turn Institutions Into Facilitators?

The government's warning shot over Midata presents an interesting challenge for some of the UK's institutions. But will it make them focus on solving consumers' problems - transforming them into 'facilitators'? Or will they merely continue to solve their own problems at consumers' expense?

The government wants the suppliers of energy, mobile phones, current accounts and credit cards to provide each of their consumer and small business customers with the records of what they bought, where and for how much. That transaction data must be released in computer-readable format to enable it to be analysed, either by the customer or the customer's authorised service provider. This would help prevent those suppliers from gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider in deciding whether to expand the programme to other sectors include: 

• the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;

• there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;

• consumer engagement is limited, e.g. low levels of switching or competition; and

• suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.

Yet these factors merely hint at the characteristics that an organisation should display if it is to succeed in the future economic environment. In broad terms, the targeted institutions will need to be organised to solve their customers’ problems, operate openly, adapt well to changing circumstances, remain committed to transparency and take responsibility for the impact of their activities on the wider community and society. I've explained these themes in more detail here.

 

The current targets of this programme have a long way to go!

 

I should add that I am involved in the Midata programme, as a member of the Interoperability Board and on the working groups considering issues related to data transmission and law/regulation.

Unload The "Digital Wallet" Before Someone Gets Hurt

And that's not all...

The term "e-wallet" or "digital wallet" has always caused a physical reaction. But what started as a small twitch over my left eye in November 1999 now involves diving under a table. The term has become so loaded with giant concepts like 'identity', 'privacy', 'authentication', 'security', 'payment' and 'funds' that it's simply too dangerous to wave around in meetings.

We need to focus on more of the detail if business presentations are to have any meaning and projects are to deliver anything.

The term 'digital wallet' is impossible to define, anyway. The Oxford English Dictionary has no home for it, and it's wise to ignore suppliers' self-serving, product-specific definitions. Th'internet merely yields a confusing mish-mash: [my emphasis] "a system that securely stores users' payment information and passwords..." (investopedia) and "encryption software that works like a physical wallet during electronic commerce transactions." (webopedia). Unhelpfully, the Free dictionary explains "the wallet data may reside in the user's machine or on the servers of the wallet service. When stored in the client machine, the wallet may use a digital certificate that identifies the authorized card holder." 

Such definitions are confusing because they keep jumping the rails from party to party, feature to feature and function to function, each of which has different implications for transaction flows, data flows and funds flows (to the extent payment is even involved). 

Perhaps the only consistent aspect in the use of the term 'digital wallet' is the sense that it refers to a specific individual, or at least it should be capable of doing so. Otherwise, the term means so many different things that it's useless. FinVentures defined it to mean, "A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc." Indeed, a 'digital wallet' could be a feature within an application or service, or an entire application or service, a database, a set of permissions and so on. It could reside on virtually any digital device, including a smart card or just a microchip. It could enable a specific person to initiate or conclude any kind of transaction, or merely be used in the course of intiating or concluding such a transaction.

So when you next hear the term 'digital wallet', seek cover behind a large, heavy object and try to defuse the situation by asking: 

• which parties are involved;

• which party is agreeing to do what, how do they agree, what actions are taken as a result and by whom;

• where the related data is stored and where it flows; and

• where any related funds are and where they flow.

It could save a lot of time and money.

Image from Tenets in DM.

Stop The Moral Panic Over Corporation Tax

MPs and the media have a responsibility to put the corporation tax issue into proper perspective.

The outrage is not how 'little' corporations pay. It's how much tax the rest of us pay, and how much the public sector wastes while failing to improve services. The media, MPs and campaigners should be focusing on how to make domestic spending programmes narrower and better targeted, rather than second-guessing international tax treaties over which the UK has little control.

Similarly, we can't lose sight of the need to incentivise foreign private sector corporations to operate in the UK. They employ people, generate income for local UK suppliers and compete with UK-based businesses to keep them from charging us whatever they like for goods and services.

But this is not 'the big story' either. 

The real story on the growth and employment front is that the government must do more to foster an environment in which entrepreneurs can thrive and expand their businesses. According to the Institute of Economic Affairs, just 6% of new firms create over half of all new jobs in the UK. Compliance costs, product market regulation and employment protection have remained a constant drag on the ability to grow businesses, despite efforts to eliminate red tape.

Attacking a few foreign corporations over their tax affairs won't help the government spend tax revenues more effectively or enable UK entrepreneurs to thrive. Especially when, ironically, those same foreign companies happen to provide British start-ups with plenty of meeting space, low cost server capacity, online marketplaces, software and customers...

Old Lady Suffers From Undue Deference And Group Think

In March I related a story about the unduly deferential meeting protocol at the Old Lady of Threadneedle Street, and hoped it was more welcoming of critical thought than the rule suggested. However, three recent reports have confirmed the worst.

Not only were the terms of reference for those reports criticised for being too narrow and avoiding contentious issues. But, according to the FT, Bill Winters also found a "tendency [among less senior staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable." And David Stockton "criticised the bank for its opacity and a culture that discourages independent thought."

Naturally, I detect a certain lack of enthusiasm in the Governors' response:

“We welcome these three Reviews. The Reviewers have given us an independent perspective on some of the key challenges the Bank has faced in responding to the financial crisis and have given us a great many ideas to consider that could improve the Bank’s performance. We are starting programmes of work to evaluate the recommendations and to plan changes.  We will report regularly to Court." 

At least they aren't alone. The IMF suffered from 'groupthink' for years, and auditors have been struggling to understand the meaning of 'scepticism'.

Come to think of it, Auntie seems to suffer from the same maladies, along with most of Britain's institutions.

In fact "maladies" is strangely apt to describe two ailing institutions called 'Auntie' and the 'Old Lady'. It also sheds new light on the reason for the apostrophe in m'lady…

Auntie's Fall From Grace: Death Of Another UK Institution

The resignation letter of the BBC's latest director-general reveals deep flaws in yet another of the UK's self-serving institutions.

One assumes the document was the product of some discussion, and that the "unacceptable journalistic standards of the Newsnight film that was broadcast on Friday 2 November" was carefully chosen as the narrowest possible reason for the top bureaucrat to go. Some care was taken not to mention the mishandling of the Jimmy Savile revelations, for example, or the seismic cultural implications of the BBC choosing to spike a story about his criminality in favour of a series of fawning tributes. But isn't it simply the case that a cosy insider is incapable of cleaning the place up? After all, Lord Patten said he only hired Entwistle to make the BBC "10 or 20% better" and it's now a vastly bigger job than that.

This tendency to cover up, to obfuscate, defend and deflect is the stuff of mere politics. It should not feature in the management of a public organisation in the public interest. 

Yet it's what we've come to expect from the British establishment. It permeated the Parliamentary expenses scandal and the conduct that led to the bank bailouts. It resurfaced in the failure of UK banks to honour Project Merlin, their Libor-fixing activities and attitude to international money laundering. It was present in the activities of GlaxoSmithKline that yielded a $3bn criminal settlement. It's there in the evidence to the Leveson Inquiry, the handling of the Hillsborough disaster by South Yorkshire Police and the systemic cover-up of child abuse.

And you can be sure we have not seen the last example. It seems that Britons are fascinated to learn just how rotten the country's institutions really are.

Rise Of The Facilitators: Big Society Capital

Last night, at a ResPublica event, I heard Nick O'Donohoe, CEO of Big Society Capital, outline a pragmatic vision for a social investment market in the UK. Critically, BSC's role is not to hand out £600m in cash to well-intentioned social entrepreneurs. Instead, it's focused on creating the capability for deprived communities to identify, manage and finance projects that will have a mainly social impact, but with the expectation of some financial return. 

Let's say you want to introduce 'makerspaces' for local people with expertise in operating machinery to invent stuff and make individual items to order. It seems reasonable to believe this could help regenerate some industrial towns. Consider the adventures of Chris Anderson, who recently announced his departure as editor of Wired to run a drone manufacturing business he built as a hobby, as described in his latest book. 

How would you make it happen? How would you establish the feasibility of such a project, identify the right equipment, locate an appropriate building, obtain any necessary planning permission and so on? 

This takes time and expertise, not to mention seed money. Numerous intermediaries must be available to help entrepreneurs co-ordinate and finance their project locally. It can't be done by Big Society Capital from its offices in Fleet Street. It can't be done by civil servants from Westminster, or even by the local council. This has to be a distributed effort all around the country, leveraging online resources where that makes sense. Such intermediaries - or facilitators - will include social banks, active social investors, professional and other support businesses, as well as platforms that enable funds to flow directly from people with cash to social entrepreneurs. The role of Big Society Capital is to invest in the development of a strong network of these social investment intermediaries.

But maybe we shouldn't be too definitive about what is 'social'. I think this approach will be truly successful when facilitators and entrepreneurs aren't necessarily conscious of the fact that the positive social impact of their activities is far greater than the scale of their financial results. To this end, we should factor into all our corporate and project objectives an obligation to take responsibility for somehow improving the community to which the corporation or project relates. In this way, all businesses would have an overlapping social purpose as well as a financial one. 

Similarly, financial services need to support this broader responsibility. Of course it's critical that investors know exactly whether they are donating money, receiving interest payments or getting a share in a company. But if I'm putting £20 directly into any project, my customer experience shouldn't be different depending on whether I'm offered a ticket to a concert, interest at 3% per annum or 2 shares in the project operating company - in fact the same project should be able to offer me all three, seamlessly. That's the sentiment behind efforts to proportionately regulate peer-to-peer finance. All types of enterprise should be able to offer all kinds of instruments over a proportionately regulated digital platform, within an ISA.

Now that would generate some serious big society capital.

Kickstarter's Kick In The Butt For UK Banks

The news that Kickstarter, a US rewards-based crowdfunding operator, has opened a dedicated UK platform is hugely encouraging for anyone concerned about our banking problems.

No doubt Kickstarter is responding to demand from the UK-based entrepreneurs and their supporters who were already using the US platform. But it's also a big bet on the future of alternative finance in the UK, and Kickstarter's expansion will mean a lot of focus on the different ways that people can directly fund other people's personal finances, projects and businesses.

The term 'crowdfunding' first gained currency to describe US 'rewards-based' peer-to-peer platforms like ArtistShare and Kickstarter, and similar platforms already operate in the UK (e.g. Peoplefund.it, Crowdfunder and those mentioned here). These platforms are designed to raise money for small budget projects via the internet without infringing laws that control the offer of 'securities' to the public. Entrepreneurs can post 'pitches' seeking donations, and may offer a 'reward' of some kind in return.

Other peer-to-peer finance platforms enable markets for personal loans and small business loans - called 'person-to-person lending' or 'peer-to-peer lending'. Examples include Zopa, Ratesetter and Funding Circle in the UK, Comunitae in Spain and IsePankur in Estonia which just announced that anyone from the EEA and Switzerland can lend to Estonian borrowers.

The peer-to-peer model has also been adapted to fund charities or not-for-profit projects, which is known as 'social finance' (e.g. Buzzbnk); and to enable many people to fund tiny local businesses in developing countries - referred to as 'micro-finance' (e.g. Kiva, MyC4).

Finally, the peer-to-peer model is being developed to enable direct investments in return for shares and more complex loan arrangements (debentures). This has proved impossible to date in the US, where even Lending Club and Prosper have had to register their peer-to-peer lending platforms with the Securities Exchange Commission. But in the UK, Crowdcube and, more recently, Seedrs and BankToTheFuture appear to have found ways through the regulatory maze to enable the crowd to invest in the shares of start-up companies. Abundance Generation enables funding for alternative energy. Kantox enables people to switch foreign currency and Platform Black enables the sale of trade invoices. CrowdBnk, Trillion Fund and CrowdMission say they're coming soon.

There are signs that the regulatory maze will become much easier to navigate. Both the US and UK governments have recognised that more needs to be done to encourage the growth of these alternative forms of finance. 

The US passed the JOBS Act to provide ways to enable crowd investment in securities. And against a backdrop of proposed legislative changes in the UK, the government has praised self-regulation by the industry and set up a working group to assess the need for changes to the legal framework. That working group includes representatives from the Office of Fair Trading, the Department of Business Innovation and Skills, HM Treasury, the Financial Services Authority and the Cabinet Office. The Department for Culture Media and Sport is also interested in the potential for peer-to-peer finance to fund the development of arts and entertainment. 

The European Commission is also taking an interest in this field, and a regulatory summit is being planned in early December to introduce industry leaders and EU/UK policy-makers and regulatory officials to discuss proportionate regulation to encourage the responsible growth of peer-to-peer finance.

Kickstarter has made a pretty solid bet.

Roundheads v Cavaliers

Dog eat dog

Last night I found myself in front of "Roundhead or Cavalier: Which One Are You?", a sort of 'Dummies Guide' to the English Civil War which, needless to say, I found quite informative.

Perhaps the key difference between the Roundheads (puritan Parliamentarians) and Cavalier (flambuoyant Royalists) was the Roundhead preference for rigorous discipline over their opponents' dedication to partying and lining their own pockets. Tellingly, the ripely named Prince Rupert of the Rhine (of hunting poodle fame) was unable to prevent his Cavalier cavalry from looting the Parliamentarian baggage while the battle raged. This wasn't so much of a problem early on, at the Battle of Edgehill, but had tragic consequences at the Battle of Naseby which spelled the end for the Royalist cause. 

In the show's closing stages, we were treated to various pundits views on whether modern Britons are more Roundhead or Cavalier in their attitude. And while the comparison wasn't made, it occurred to me that recent events have revealed a certain preoccupation with looting in the heat of battle, resulting in the rolling of heads... 

But beware the Restoration.

  

Banks Tell Customers Last

Bailing out (of) the UK

Two days ago it was all over the national media that ING Direct UK's savings and mortgage business had been sold to Barclays, with the actual transfer to occur in Q2 2013. Yesterday, the media were telling us what it means for customers. Yet only this morning do I receive the self-centred email from ING Direct UK (extract below). I'm not suggesting that we customers should get the information ahead of the stock market (if it's price sensitive). But I think we should've been among the first to know directly, rather than being told by the national media. 

Of course, the note also reveals that the bank views its customers as just a bunch of financial assets, and that the deal is a huge blow to competition and innovation in the retail banking market. The first three paragraphs blather on about the wisdom of ING slimming down and how the business "is a good fit" with Barclays millions of other customers. This makes us feel so special. Then, as an afterthought, they add the weazily statement that "there will be no immediate effect on the services you currently receive." Weazle word: "immediate". As in, "get your money out immediately." If I'd wanted to save with Barclays, I'd have followed the 15 million other sheep long ago. My old Egg credit card got bought by Barclays and that experience hasn't been warmly personal either. Time to switch.

"We wanted to let you know directly that it has been announced that ING Direct N.V has entered into an agreement with Barclays to acquire ING Direct UK’s savings and mortgage business.

This decision is a result of ING Group’s continued evaluation of its portfolio of businesses, in line with its stated objectives of sharpening its focus and streamlining the group. It is expected that the actual transfer of ING Direct UK’s savings and mortgage business will take place during the second quarter of 2013.

ING Direct UK is a good fit with Barclays existing UK Retail Banking Business that looks after more than 15 million personal and 700,000 business customers in the UK. With a network of around 1600 branches in the UK, customers can bank in person, over the phone, online and through mobile applications. Barclays look forward to continuing to provide a secure home for your savings and/or mortgage in the future.

There will be no immediate effect on the services you currently receive."

Google, Amazon and The Shape of SME Finance

In November 2007 it seemed clear that facilitators like Google and Amazon would capitalise on their alignment with their customers' day-to-day activities to disrupt banking. Both of these giants already have e-money licences in Europe (I helped Amazon apply for its own), and the latest foray is into trade finance. Google will offer a line of credit for AdWords advertising spend, while it appears Amazon will lend to selected small businesses against their projected sales over the Christmas season. 

While these services may be offered initially in the US, where there are lots of small business funding options, bear in mind that only four UK banks control 90% of the small business finance market and are lending less and less to them. And while some UK banks enable some merchants to obtain cash advances against their card receivables, it's not exactly a core activity.

The competition alone must prove welcome, yet the critical feature of both the Google and Amazon services is that they are seamlessly intertwined with customer behaviour. Both businesses could have decided to launch free-standing, me-too banking services (like the UK supermarkets), but they have not done so. No doubt they also intend to attract new customers with the latest services, but only by showing that they support what small businesses want to do - namely, sell their own goods and services across a staggering array of markets and demographies.

And by patiently facilitating their customer's activities, neither Google nor Amazon needs to incentivise staff to sell services to people who don't need them, as banks have done.

Nude Labour and The Hung Parliament

Hung Parliament

Three Labour Party conferences after the sun set on New Labour, and it must be obvious to everyone that the party's eon in power gave it no insight at all into what might fix the root causes of this country's economic and social problems. So I must henceforth refer to the latest evolution as "Nude Labour".

Not that I'm any great fan of the other parties. As I said in May 2010, a hung Parliament means we have MPs where we want them: "They are not in control. They have little alternative but to listen and respond to our issues bottom-up."

I said "little alternative" because they are very persistent in manufacturing policies designed merely to get themselves elected rather than to actually solve the country's problems. This manufacturing process seems to consist of endless polls amongst 'swinging' voters (the confused but willing) and 'deserters' from the last election, littered with leading questions designed to persuade the victims that the party has the answer to problems created to fit pet policies. At the same time the 'party leadership' must battle the zealots and extremists to avoid appearing like complete lunatics to the rest of us. Oh, and of course they must find ways to disagree with everything the other parties say. And blame other politicians for every error, to encourage the myth that politicians make a difference. 

The recent West Coast railway fiasco is a case in point. The opposition politicians seem obsessed with blaming other politicians, rather than focusing on the deep problems in the way government departments have handled such bidding processes for many years. For instance, Daniel Kahneman refers to a "Planning Fallacy" in his book Thinking, Fast and Slow. He points to a 2005 study of worldwide rail projects between 1969 and 1998, in which it was found that 90% over-estimated passenger numbers by an average of 106%, and costs overran by an average of 45%, regardless of the publicity associated with each debacle. Gee, I wonder if it's possible that government tendering processes somehow reward bidders who over-estimate utility, and under-estimate cost?

It would be glorifying political parties to say they are themselves a root cause of problems in the UK. As I said in the context of the Red Book, their internal activities are more or less irrelevant to how any problems actually get solved by the more pragmatic amongst us. Witness the Labour Left's dogmatic approach to the reform of the NHS or social housing. And Ed Ball's astonishing rabbit-out-of-a-hat idea to blow the revenue from a 4G licence licence auction on affordable homes merely served to distract conference delegates from Labour's terrible record on actually building them. For the rest of us, his proposed magic trick eerily echoed Gordon Brown's ultimate destruction of the enormous 3G windfall. Hey, let's never forget that Balls was an economic adviser to Brown and staunch ally to the bitter end, and Ed Milliband was Brown's special advisor from 1997 to 2002. None of those people must ever be allowed anywhere  near the nation's coffers ever again.

Alas, not content with showering us with raw waste from two political non-events so far, we must now endure big media's coverage of the Conservative Party's attempt to thrill the faithful with its own recipe for clinging to power. A poor lens through which to view the world, but good fodder for the writers of vitriol. 

Meanwhile, it's down to each of us to find real solutions to the root causes of real problems, charting a pragmatic path through the party-political dogma-doo-doo.

Careful What You Incentivise

Two things seem to be choking the flow of money to people and small businesses in the UK: broken regulation and perverse incentives. Yet there's a tendency to focus more on regulation, and to only see the obvious incentives - like bankers bonuses. Some innovative self-regulation in retail finance has been welcomed by the UK government, and banking reform creeps ahead. But all this could prove futile if problems with incentives are not also addressed. To fix those, we need to look below the surface at the more fundamental incentives at play in the financial system. In particular, we need to understand the extent to which the likes of ISA schemes and pension investment rules are limiting competition and innovation in financial services and inhibiting economic growth. I've summarised some recent debate on this below, and added some comments on the government's latest defence of the ISA scheme. I'd welcome your thoughts.

Some of the perverse incentives have been outlined to government by tax colleagues previously (in Annex 3 to this document). In essence, the contention has been that certain tax relief selectively favours banks and the suppliers of regulated investments to the detriment of innovation and competition. In particular, the tax free ISA system funnels ordinary people's savings into UK bank deposits on a vast scale, which the banks then fail to lend. This effectively discourages and inhibits those same people from diversifying, one alternative being to extend finance directly to other creditworthy people and businesses through peer-to-peer platforms. As a result, it's been suggested that the ISA system should be extended to cover such direct finance. Indeed, in his response to the Red Tape Challenge, Mark Littlewood, Director-General of the Institute of Economic Affairs and a 'Sector Champion' said:

"...it is surely worth noting that the present format and definition of the ISA wrap may have raised “barrier to entry” problems for new financial products and it may be beneficial to review these to stimulate innovation in the sector."

But the impact on innovation is merely the tip of the iceberg. It's the impact on the wider economy that must be understood.

There is overwhelming evidence that the UK's small businesses are cash-starved. They represent 99.9% of all UK enterprises and are responsible for 60% of private sector employment. Their output is critical to the UK's economic growth, which has stalled. Yet they face a funding gap of £26bn - £52bn over the next 5 years. Critically, the four banks which control 90% of the small business finance market are lending less and less to them. This is a red flag. You might think from their enormous market share that these banks would consider small business lending to be very important and a retreat from that market unwise. But, as the economist Richard Werner has pointed out, the reality is that only about 10% of the overall credit issued by our banks goes to productive firms. The other 90% goes to fund deals involving financial assets which don't count towards economic growth figures. So for these banks small business lending is actually a sideshow. They clearly make their money elsewhere.

Yet the ISA scheme had lured savings and investments of £391bn from UK adults by the April 2012, half of which is in cash deposits in these same banks. And they pay nothing for it - a paltry 0.41% in interest after 'teaser rates' expire, according to a 'super complaint' by Consumer Focus in 2010. 

In other words, the government appears to be incentivising workers to plough their savings into banks which virtually ignore the sector on which most of those same workers depend for their income. 

Contrast this with the position in Germany, where 70% of the banking sector comprises hundreds of small, locally-controlled banks who provide 40% of all loans to SMEs.  In an ironic twist, the UK government now sees peer-to-peer platforms as a similar conduit for a new German-style government-directed lending programme. But it appears never to have openly considered that the limited scope of the ISA scheme is part of the problem. 

In March, the goverment defended the narrow scope of the ISA scheme for the reasons extracted here. In September, the government gave a different response (see p. 13 here). In the hope of sparking wider debate on the issues, I've set out the current defence of the status quo below (my additions/comments in square brackets). I welcome any comments.

"HM Treasury believes that there is not a strong enough case for [making bad debt relief available to P2P lenders], as creating an exception would add complexity to the tax system and is difficult to justify when other [unspecified] forms of investment do not qualify for bad debt relief. Moreover, the current tax treatment of P2P investors is not necessarily a barrier to further expansion, as witnessed by the impressive growth in the industry in recent years.

...HM Treasury does not believe that P2P loans are suitable for inclusion in ISAs. The risk profile of P2P lending is too high [compared to what? cash ISAs? stocks and shares ISAs?], and it is unlikely that the platform can satisfy some of the [unspecified] features essential to the operation of ISAs.

Consumers tend to view ISAs as a relatively safe and simple investment vehicle [this fails to distinguish between cash ISAs and stocks/shares ISAs. And are they safe?]. ISA investments are thought of as relatively low-risk, and consumers should be able to get access to their funds whenever they wish. This is less likely to be the case with P2P lending than with existing ISA Qualifying Investments [this could be cured by permitting secondary markets in P2P loans]. 

Similarly, existing Regulations require ISAs to be operated through an ISA Manager [regulations could include P2P platforms], who invests through persons or firms who are authorised by the FSA, and thus have access to the FSCS [this does not mean you can't lose the principal in your stocks/shares ISAs, or stop banks paying 0.41% interest on cash ISAs]. As far as we are aware, current P2P lending platforms are not conducive to the ISA Manager role, are not regulated by the FSA, and do not offer Financial Services Compensation Scheme (FSCS) protection [any or all of which could be changed by regulation].

Finally, in order to be included in an ISA, P2P loans will require to be listed as a Qualifying Investment. Qualifying Investments are identified generically. It would be extremely difficult to restrict a generic description such as “loan” only to loans made via P2P lending platforms [but none of the qualifying investments are so generic, being limited by reference to 'banks', 'building societies', 'recognised stock exchanges' etc., so why not by reference to 'P2P platforms'?]. Exclusion from the ISA wrapper does not make this type of lending exceptional; rather, it puts it on the same footing as investment in stocks and shares issued by unlisted companies [how are these activities equivalent?]."