Tuesday, 26 February 2013

Banks To Repay Cash-ISAs When Teaser Rates Expire?

The government's ISA programme has become a victim of its own success. The Treasury estimates that "around 45%” of UK adults have one or more Individual Savings Accounts. The total amount held is estimated at £400bn, half of which is in either regulated bonds or shares while the other half is held in cash deposits that are being eaten by inflation. 

In 2010, Consumer Focus found that the £158bn which was then held in cash-ISAs was earning an average of only 0.41% interest after initial ‘teaser’ rates expire. They also found that 60 per cent of savers never withdraw money from their account. 

Since then, there has been a campaign to get banks to tell customers when teaser rates expire. But what has been the banks' response?

Meanwhile, the Treasury has also resisted calls to expand the range of assets included in ISAs, which would enable savers to diversify and boost innovation and competition in the retail finance markets, as explained here

The implicit message from the government is that consumers only have themselves to blame if they don't move their savings to get the best deal. But the government can't have it both ways. It can't introduce an artificial tax incentive and then ignore the systemic issues that incentive creates. The government should either take responsibility for the behaviour that is driven by its incentives, and re-design them accordingly. Or it should withdraw the incentives.

So, short of opening up the cash-ISA market to real competition, what more can be done to remind people to switch their ISA cash?

The last straw would be for all cash-ISAs to be term deposits which can only last for the duration of the 'teaser' rate. When that rate expires, the cash would have to be paid into the customer's nominated 'ISA holding account', from which it can be re-allocated as the customer sees fit. 

Maybe this will lead to 60% of ISA cash deposits earning no interest at all. But only then could the government really claim that consumers who don't seek out the best return only have themselves to blame.

Wednesday, 20 February 2013

What's The Beef?

Isn't it fascinating how quickly the FSA reacted to the faintest whiff of horsemeat, yet it's namesake was prepared to leave dodgy banking products lying around the shelves for years? 

And what a remarkable difference in crisis management there is between the average high street food retailer and the finance shop next door!

Seems to me the Treasury's hoping most Brits will prefer the taste of a beaten favourite. 

Saturday, 2 February 2013

Towards A Diverse, Sustainable Financial System

It's not every day you get to brainstorm ways to bring diversity and sustainability to Britain's ailing financial system amidst a broad cross-section of officials, economists, entrepreneurs, think-tanks, technology suppliers and advisers. And yesterday's Finance Innovation Lab workshop was a golden opportunity to do just that.

While the Lab will report the output in due course, I thought I'd share a summary of my notes from the breakout sessions in which I participated. These looked at regulatory barriers and lack of financial awareness. Others explored the unfair advantages enjoyed by estalished providers and ways to encourage innovation. We operated under the Chatham House Rule, hence the absence of names or affiliations.

The UK financial system is neither diverse nor sustainable. 

There is plenty of evidence that the UK's financial system is suffering from a lack of innovation and competition, and is unsustainable in its current form. Rates of market entry and exit are low, relative to other industries. Few customers switch and customer trust is lowest for financial services on several leading surveys. The unit cost of intermediation remains high in financial services compared to other retail markets, while management and staff have reaped the benefits of any increased operational efficiencies (even while legacy systems remain prevalent). Banks rely on a huge back-book of deposits on which they pay little or no interest to finance loans to fund trading in financial assets rather than loans to productive businesses. After all, a single giant property loan does more to grow the bank's numbers than lending the same amount of money to thousands of small firms. 

Regulatory barriers
Against this background, we concluded that the current regulatory framework, including subsidies and incentives, is essentially designed to both protect the 'financial system' and 'customers' - i.e. to minimise the risk that consumers and small businesses, in particular, will be mis-sold 'products' by unscrupulous suppliers. 

In effect, however, that framework obliges policy officials (Treasury) and regulators (FSA) protect the system as it is, rather than to ensure that it evolves to encourage and accommodate innovation in line with customer requirements. That's because the framework and those who police it are organised in silos according to existing product types and types of suppliers, and not according to types of customers' and their day-to-day activities. 

The customer protection regime mirrors this approach, being organised according to limited sets of product types and types of suppliers, as well as types of promotional and business activities in which suppliers are engaged (not their customers). As a result, the impact of regulation, complaints and potential for changes are all viewed through the lens of existing products and firms, and any actual changes reinforce those lines of distinction. 

The perverse nature of this can be seen in the fact that, if I want to allocate £100 to a project that I'd like to support, it's easiest for me to donate the money, a bit more complex if I want the money repaid with interest (as a loan), very complex if I want to be able to freely trade that right to be repaid with interest (a bond) and the most complex thing of all is to receive an equity share in the project. This discourages diversification and the search for opportunities to get a decent return on surplus cash; and limits the availability of funding to new businesses, on which most new jobs depend.

Hard-wiring the markets according to types of products, suppliers and ways of dealing with them also artificially limits the number and range of suppliers, product types, and the corresponding markets. In addition, taxpayer guarantees and subsidies in the form of savings and pension incentives are aligned with existing regulated suppliers and product types. Therefore, the regulations and incentives work together to enable the suppliers in the regulated markets to charge higher fees, make higher margins, reward staff more generously and pay more for marketing - resulting in less innovation and competition.

The overall result is a financial system that is not designed to evolve in line with the requirements of consumers, small businesses or even big business. It is designed to suit incumbent suppliers - those who play well with the system, regulators and policy officials. Yet there is no single set of policy officals or regulators tasked with understanding how the regulations, subsidies and incentives actually work together as a whole or whether they distort any aspects of the financial system within or outside the regulated areas.

A broad range of solutions were suggested, as you can imagine, and the Lab will report on these shortly, and include them in a submission to the Parliamentary Commission on Banking Standards. However, suggestions included: 
  • creating a Parliamentary Select Committee to focus on encouraging financial innovation;
  • limits on market share by product type;
  • controls on gross leverage; 
  •  separate banks' credit creation process from financial intermediation (the process of allocating that credit);
  • central bank guidance to banks on how much to lend productive firms;
  • levelling the playing field on subsidies and tax incentives/allowances;
  • a target of 200 new local banks by 2016;
  • publishing details of national banks' regional/local banking activity;
  • making it easier to get low risk financial businesses authorised;
  • publishing the amount of the subsidies to major banks and oblige them to set aside a proportion of their subsidy for future crises;
  • treating payments systems and credit reference data as utilities (i.e. public goods).
Lack of financial awareness

The scale of financial mis-selling across many different types of products and lack of diversification by investors suggests a widespread lack of understanding of financial services. This was seen to be caused by a lack of financial education, on the one hand; and by product complexity on the other. In turn, product complexity is driven by both regulatory complexity and an unwillingness to invest the extra effort required to simplify products and better align them with customer requirements.

The lack of financial education is essentially a failing of our education system. Yet there is little faith that the Department for Education accepts any responsibility for delivering a sound financial education. It's also clear that no other government department sees this as part of its mission. Rather, financial education seems to be a specialist area confined to universities and business schools or professional bodies. It was felt that this will only change with a determined effort by the Department for Education to measure financial 'literacy', collect best practice for teaching it and including those measures in the national curriculum. Measures of success would include improvements in financial literacy exam results, fewer complaints to the Financial Omudsman Service and improved diversification amongst savers and investors.

Removing product complexity requires a commitment to reducing regulatory complexity, the removal of the regulatory barriers to innovation and competition discussed above, as well as incentives that drive both simpler products and diversification, rather than the concentration of funds into a few regulated asset classes.

In short, more pragmatism and less politics should go a long way.

Friday, 1 February 2013

Open Data Spiders?

Since 2009 I've hoped that the semantic web - that is my computer dealing with suppliers' computers - would replace the need for price comparison sites. Following a discussion last night at the CtrlShift Explorers' Club, I'm confident that we don't have much longer to wait.

If suppliers publish their product data in computer-readable format, I could then programme an application or 'spider' to search the provders' open systems to find the product that's right for me - ideally a bespoke product assembled from a menu of optional components. This spider would use my personal data to conduct its search without disclosing that data to any product providers, at least until the time of purchase (and disclosure might not even be necessary then). It could also collect, say, public sector Open Data related to my desired activity, and analyse it in the context of my relevant personal transaction history. This could vastly improve my choice of car, holiday or home improvement and how it's financed. Or it could save me money by keeping me on the right energy or mobile phone tariff.

This is not about 'intent-casting' or 'demand-casting' in order to encourage suppliers to send me thousands of offers. My spider would not announce to the world that it's looking for anything. It would simply run around the web looking at openly available product codes and report its findings to me. Ideally, the product provider will have no idea that it's actually me who's looking until I make a purchase, if ever.

And I would not need to read any screens or physically enter any data until my spider reported its findings - or it could save me the trouble by calling my mobile.

In a machine-to-machine world, the marketing challenge is to ensure that anyone's 'spider' can always find your product data, and that data is accurate and up to date. Perhaps it could be somehow 'spider optimised', but it seems to me it's the job of the spider developers to make sure the spiders are good at finding product data, even when it's in a sorry state.

My sense is that an Open Data approach to the market takes such a different corporate mindset that it is unlikely to sit comfortably within traditional suppliers, where "Big Data" is the latest buzzphrase. In the Open Data world the challenge is to enable your products to be directly embedded in the ecosystem, helping to solve problems as customers encounter them and their machines or 'spiders' look for an answer. The traditional product approach is not 'connected' in that way, or at all. And, as I suggested recently, "Big Data" approach to behavioural targeting of advertisting seems fundamentally hamstrung by the fact that personal behavioural data is highly contextual and not really 'predictive' from one scenario to the next. Why spend all that money on what is ultimately a shot in the dark?

Those who ignore the Open Data option could well be spending their way rapidly into oblivion. 

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