Government Support For P2P

The authorities tend to view people sharing content as 'piracy', but fortunately when it comes to money the UK government thinks sharing is a great idea.

I've covered the Breedon Taskforce report, and the Government's response over on The Fine Print. But the most significant points for ordinary people with surplus cash and those who need it are:

• the government's support for self-regulation of peer-to-peer finance; and

• the ISA scheme remains closed to new assets, despite recommendations that it be extended.

Bank Off Scotfree

See Chapter 5.

Numerous questions tumble out of the cracks of the FSA's report on the destruction of Bank of Scotland: where is the review of the FSA's ARROW visits (as for Northern Wreck)? who were the key participants and their highly paid flunkies? Were any of them also responsible for the bank's £20m worth of bad attitude to complaints, by any chance?

For the tuppence it's worth, the report says that from 2006 to 2008:

"(1)  there were serious deficiencies in the control framework, which meant that it failed to provide robust oversight and challenge to the business;
(2) there were serious deficiencies with the framework for the management of credit risk across the portfolio which meant that there was a lack of focus on the need to manage risk across the portfolio as a whole;
(3) there were serious deficiencies in the distribution framework which meant that it did not operate effectively to reduce the risk in the portfolio; and
(4) there were serious deficiencies in the process for the identification and management of transactions which showed signs of stress which meant that they were neither identified promptly nor managed effectively."

And there were:

"targets which incentivised ...:
(1) prioritising the development of relationships with and the facilitation of customers;
(2) increasing the appetite to lend;
(3) increasing the appetite to take on greater credit risk;
(4) fostering an attitude of optimism at the expense of prudence; and
(5) regarding risk management as a constraint on the business rather than integral to it."

Furthermore, there were:

"significant issues as to the quality, reliability and utility of the available management information which directly affected the effectiveness with which the risks of the business could be assessed, managed and mitigated."

And, finally:

"(1) Group Risk failed to conduct effective oversight and control of Corporate; and
(2) there were issues with the quality and scope of assurance work undertaken by Group Internal Audit."

The FSA's solution?

"In these exceptional circumstances, the most effective way in which to balance the need for deterrence and act in the wider public interest is to issue a public censure."

Desperate times call for desperate measures!

Regions Unleashed...Eventually

Scrapping national public sector pay rates is great news at last for regional growth.  As mentioned previously, government spending is crowding out private businesses in the regions, and strangling their ability to compete nationally and globally.  Labour costs are a big component of this, and businessses should be allowed to base themselves in regions where lower local living costs mean workers don't need to charge as much for their services. 

This means the unions will need to be more flexible and do more work locally if they are to represent their members effectively. Instead, the likes of Brendan Barber, the Trade Union Council general secretary, would rather play on middle class fear and greed, suggesting this will “suck demand out of local economies, increase joblessness and worsen the North-South divide”. This is a bizarre claim. More civil servants will keep their jobs if the government can reduce its wage bill. Similarly, with local wages lower, businesses can afford to employ people who they otherwise could not. So this move means more jobs, not fewer.

But when? The gap between public and private sector pay in many regions is huge:

"In Wales, public sector workers are paid on average 18 per cent more than private sector workers doing the equivalent job. In Yorkshire and the Humber and the East of England the difference is 13 per cent, while in the North East the pay gap is 11 per cent." 

It could take many years for this difference to be removed.

Who's Greg Smith and WTF is a "Structured Product"?

Another mysterious product warning

Yesterday came the 'news' that sales of "structured products" by investment banks to retail and small business customers have soared, in spite of FSA warnings about them. Today, in perhaps unrelated news, came Greg Smith's resignation letter from Goldman Sachs, where he was executive director and head of the firm’s US equity derivatives business in Europe, the Middle East and Africa:

"I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact." 

Which begs the question what a "structured product" actually is, and whether small business customers and their advisers had any idea what they were buying - or that they weren't supposed to be buying them.

The explanation of "structured products" at the official MoneyAdviceService is not terribly helpful (a general comment on the site that I've made before). We're told these products involve a 'note' and a 'derivative'. But under the bold heading "How Your Capital is Protected" it says rather ironically that:

"Even if a product offers ‘capital protection’ it can sometimes fail, causing you to lose some or all of your original money."

Oh come on, you say, the Money Advice Service?! Surely the global investment banks aren't going to be selling to 'Moms and Pops'!

But that's exactly the concern. I'm sorry, but just how sophisticated do you believe the average owner/director of an unlisted business really is when it comes to finance deals involving derivatives? One chap said his firm was sold "a £601,000 amortising, enhanced collar swap" and thought it had the same effect as a household mortgage. Yet businesses are being told to go to court against investment banks if they think they've been ripped off, rather than look to the regulator.

But does the regulator really understand these products well enough to be of any help? It seems to be speaking another language altogether. The first footnote to the FSA's industry consultation paper on the subject purports to explain structured products, but somehow I doubt the average banker would understand exactly what qualifies and what doesn't, let alone its customers:

"This publication deals with structured investment products (capital-at risk and non-capital-at-risk) and structured deposits.

We define a structured capital-at-risk product (SCARP) as in our Handbook i.e. as a product, other than a derivative, which provides an agreed level of income or growth over a specified investment period and displays the following characteristics:
(a) the customer is exposed to a range of outcomes in respect of the return of initial capital invested;
(b) the return of initial capital invested at the end of the investment period is linked by a pre-set formula to the performance of an index, a combination of indices, a 'basket' of selected stocks (typically from an index or indices), or other factor or combination of factors; and
(c) if the performance in (b) is within specified limits, repayment of initial capital invested occurs but if not, the customer could lose some or all of the initial capital invested.

A non-SCARP structured investment product is one that promises to provide a minimum return of 100% of the initial capital invested so long as the issuer(s) of the financial instrument(s) underlying the product remain(s) solvent. This repayment of initial capital is not affected by the market risk factors in (b) above.

We define a structured deposit as in our Handbook i.e. as a deposit paid on terms under which any interest or premium will be paid, or is at risk, according to a formula which involves the performance of:
(a) an index (or combination of indices) (other than money market indices);
(b) a stock (or combination of stocks); or
(c) a commodity (or combination of commodities)."

All clear then?
 
Image from HappyPlace.

No More Undue Deference

By now we've witnessed the disasters that resulted from a lack of critical thought amongst auditors, ratings agencies, the Federal Reserve, the IMF, the UK Parliamentary Fees Office, the HBOS audit committee, and Gordon Brown's cabinet. So you would've thought a few lesssons had been learned. Yet I was peeved to hear last week that the protocol for meetings within the Bank of England demands complete deference to its officials - even an expert from another regulator must not speak unless asked to, and their unsolicited questions or observations are pointedly ignored.

Now, I'd like to think that somehow overstates the position - especially in light of Mervyn King's increasingly vociferous assaults on the banks he oversees - and I'm very happy to be put right in a comment. But I also fear someone will laugh and point out that every wing of the civil service works the same way and probably many other large organisations to boot. 

But if this is true, it does not bode well for the levels of co-operation and cohesion that will be required amongst the UK's new financial authorities.

I'm not advocating a culture of disrespect, impoliteness or disobedience - the opposite of deference. I'm against undue deference - the kind that amounts to acquiescence, capitulation, complaisance, condescension, docility and submission. If organisations are going to adapt to facilitate solutions to our problems rather than their own, they should welcome thoughtful contributions from every angle, not allow their management to hide behind phoney rules. 

In short, like Australian troops during the 'Great War', we should only salute officers who earn our respect.

Image from The Philosopher's Magazine.

Greed, Fear And The Child Benefit

The UK's Child Benefit spending programme is too broad. It was conceived amidst the devastation of 1945 - a far cry from where we are today - and it benefits people who don't need it... except to compensate them for paying higher taxes. 

In other words, higher income earners are fussing over the withdrawal of the Child Benefit because they don't trust the government to reduce their taxes if the Child Benefit is removed. Their focus is on being 'no worse off'. Officials know this, because this phenomenon is relied upon to 'sell' new spending programmes.

So, like the plan to raise the personal tax allowance, narrowing the Child Benefit provides a golden opportunity for the government to restore faith with those who pay taxes, rather than to continue the proud tradition of cynically preying on their greed and fear. 

That means the government has to be really clear about how a more efficient benefits system is going to mean lower taxes.

Does Ownership Structure Matter In The Long Term?

Thanks to The Foundation for another entertaining Forum last night - this time on whether ownership structure is the only thing that matters for long term growth.

The discussion opened with some insights on ownership from Michael Green of Philanthrocapitalism fame, Luke Mayhew, former managing director of John Lewis (who also chairs the remuneration committees of some large corporations), and the inimitable Anthony Hilton, Financial Editor of the Evening Standard. 

And there was plenty of vibrant discussion about the merits of competing forms of business ownership, whether by employees, shareholders, customers, partners, joint venturers and even benevolent dictators. 

But it was clear that how a business is owned has little to do with long term growth.

Anthony Hilton said it all in his answer to my question whether solving the problems of customers or potential customers mattered more in the long term than ownership structure. He said that customers don't matter at all, as the City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.

To the extent that you believe that this demonstrates long term success, then I would only observe that City firms characterise every form of ownership. So ownership structures themselves have played no particular role in the City's exploitation of its customers.

But of course you might share my view that it would be wrong to judge the City has having done 'very well' with this strategy, as it is hardly in the best of health.

So ownership is just one of many dynamics that a business has to manage. 

If you are looking for the most important dynamic, then I believe it is whether a business is focused on solving its customers' problems, rather than solving its own problems at its customers' expense.

In other words, the key to long term growth is to be a facilitator, rather than an institution.

Image from The Philosopher's Magazine.