Thursday, 31 October 2013

Matched Funding For UK SME Lending Platforms

At a ‘FinTech’ Cabinet Office workshop on Monday, we were informed/reminded that the "Business Bank" created by the Department of Business Innovation and Skills has at least £300m to invest in any platform or business that will provide debt funding to SMEs.

Apparently few applications have been received so far.

The process starts with just a 3-pager to establish whether its worth proceeding to a more detailed pitch. If the process is to proceed, it should be no more intensive than a typical VC/angel investment process (see section 2 of the doc).

Related investment funding programmes include:
  • £50m to expand the Business Angel Co-Investment Fund to a £100m fund; 
  • £25m to extend the Enterprise Capital Fund programme to include a VC Catalyst Fund, which will invest in venture capital funds that specialise in early stage venture capital and are near to close, enabling them to commenc e investment in small and medium sized enterprises.
  • Plans to expand the Enterprise Finance Guarantee (“EFG”), aimed at using guarantees to help bridge the “affordability gap” by providing a guarantee to lenders of up to 25% of the overall cost of repaying a loan; and separately, extending EFG to support businesses lacking track record, who are seeking loans of under £25k.
Several other programmes (like the Business Finance Partnership) are also being consolidated under the umbrella of the “Business Bank”, boosting the overall amount available to about £1.5bn. New senior management with private equity experience have been appointed in order to speed the programme along.

Here's an explanation of the strategy and timing for the Business Bank to become fully operational. 

Thursday, 24 October 2013

Crowdfunding Regulatory Arbitrage - Updated

October is 'crowdfunding month' out there in the regulatory world. The European Commission is consulting. The SEC is consulting. Some US states are consulting. The French are consulting. And today, the FCA is consulting.

The European Commission is still in fact-finding mode, so should have the luxury of plucking all the good bits out of the US and UK approaches.

Ironically, the SEC's approach looks too much like small beer to enable fund-raisers to take on the entire US market, but enabling them to raise $1m every 12 months could be really helpful on an intra-state basis (and, indeed, possibly for many EU-based start-ups). On the other hand, it would probably be tough to market anywhere the investor limit of $2,000 or 5 percent of annual income or net worth, for those with annual income/net worth of less than $100,000.

On some ground the FCA's approach might look somewhat better, but in my view, the FCA has not struck the right balance in its proposals to regulated peer-to-peer lending and crowd-investment. 

Loan-based crowdfunding platforms should be regulated more like payment platforms rather than like investment firms, as the FCA proposes. As a result, it will be substantially more expensive to establish and operate a platform with no real change in how operational risks are managed. Businesses and institutions may also be put off, both by the need to be authorised just to invest in the loans, as well as uncertainty as to their compliance obligations given that their own systems aren't even involved. The good news here is that the FCA advocates 'secondary market' for loans. 

The good news for investment-based crowdfunding is that the FCA supports wider 'retail' participation than it has to date. But people will still be asked to certify that they will not invest more than 10% of their 'net investible portfolio' and face an 'appropriateness test' if they do not get advice. In other words, it will still be much easier to stick a tenner on a pony, where the bookmaker wins, rather than to back a local business in support of the economy. No one seems to take responsibility for these strange inconsistencies in the way we are allowed to use our money...

The French proposals have the benefit of adopting the approach, called for by the industry last December, of effectively regulating loan-based platforms as payment service providers. However, as AurĂ©lie Daniel has pointed out the proposals also contain controversial "upper limits for loan-based crowdfunding... a maximum loan amount around €250 per individual per project and a global maximum loan amount around €300,000 per project." While this might not trouble consumer loan-based platforms, it would negatively impact platforms that facilitate loans to businesses and for the purchase or development of larger assets such as commercial property. Ironically, the French appear to have reserved such loans for banks, and in this respect the FCA's proposals are of course more helpful. The limits apparently do not apply in relation to investment-based crowdfunding.

At any rate, I guess entrepreneurs may be able to take their pick as to the most suitable fundraising regime.

Thursday, 17 October 2013

EU Red Tape - We Make EU Rods For Our Own Backs

The UK government has been running its own Red Tape Challenge for some years and at last the EU is getting in on the act (though it thinks member states are in worse shape!). 

Listed below are some cuts to EU red tape that the UK government has suggested, according to the activity that is being restricted. See if you agree.

The first of two big concerns I have is how these suggestions appear to citizens and businesses in the EU's civil law countries (i.e. virtually all of them). Generally, they want the state to tell them how to act by setting out rules in a civil code. As a result, commerce in those countries tends to follow the law. But in common law countries (e.g. the US, UK and the Commonwealth), we consider ourselves free to act unless a law restricts that activity in some way - our laws tend to follow commerce. 

So what we see as red tape that doesn't properly reflect how we do business, a continental European might see as his only right to act in a certain way. 

This distinction is blurring a little, both as a result of the UK's membership of the EU and the need for businesses in the US and Commonwealth countries to do business in the EEA. But it remains an important driver of what each of us considers to be 'red tape', and it needs to be considered when making or supporting a cut. Where necessary, a compromise might be to remove some of the more restrictive detail but leave a general permission in place, with some means of passing more detailed rules later if necessary. 

The other major concern I have is that UK officials have a silly tendency to interpret an EU law literally (as we do with UK laws) rather than taking a 'purposive' view of their intended effect as the European Court of Justice does. So UK officials present laws to Parliament for approval which 'gold plate' EU requirements, rather than just deliver the spirit of what is intended. A European would say we are stupidly making a rod for our own backs, and I completely agree. This has to stop immediately.

Competitiveness of EU businesses:

  • Ensure the full implementation of the Services Directive across the EU
  • Ensure data protection rules don't place unreasonable costs on business
  • Refrain from bringing forward legislative proposals on shale gas 
  • Drop proposals to extend reporting requirements to non-listed companies.

Starting a company and employing people:

  • EU Governments should be allowed flexibility to decide:
  • When low-risk companies need to keep written health and safety risk assessments
  • How traineeships and work placements should be provided.
  • Micro-enterprises (employing fewer than 10 people and have an annual turnover and/or annual balance sheet total that does not exceed €2m) should be exempt from new employment laws unless they are sensible and proportionate.
  • Pregnant Workers proposals should be withdrawn 
  • Posting of Workers Directive should not introduce mandatory new complex rules on subcontracting  Existing legislation on Information and Consultation should not be extended to micros, and no new proposals or changes to existing legislation should be made
  • Working Time Directive should keep the opt out; give more flexibility on on-call time/compensatory rest; clarify there is no right to keep leave affected by sickness 
  • Agency Workers Directive should give greater flexibility for individual employers and workers to reach their own arrangements that suit local circumstances and give clarity to companies that they only need to keep limited records 
  • Acquired Rights Directive should allow an employer and employee more flexibility to change contracts following a transfer.

Expanding a business
  • Drop costly new proposals on environmental impact assessments 
  • Press for an urgent increase of the current public procurement thresholds
  • Exempt more SMEs from current rules on the sale of shares
  • Minimise new reporting requirements for emissions from fuels 
  • Drop plans for excessively strict rules on food labelling
  • Remove proposals to make charging for official controls on food mandatory 
  • Remove unnecessary rules on SMEs transporting small amounts of waste 
  • Withdraw proposals on access to justice in environmental matters 
  • Withdraw proposals on soil protection.

Trading across borders
  • Take action to create a fully functioning digital single market
  • Rapidly agree measures to cap card payment fees
  • Remove international regulatory barriers which inhibit trade
  • Reduce the burden of VAT returns, and stamp out refund delays
  • Drop proposals on origin marking for consumer goods.

  • Improve guidance on REACH to make it more SME-friendly
  • Rapidly agree the new proposed Regulation on clinical trials 
  • Improve access to flexible EU licensing for new medicines 
  • Introduce a risk-based process for the evaluation of plant protection products.

There is also a huge list of Directives in Annex 1 that businesses have said need attention.

Thursday, 10 October 2013

Why Consumer Terms Aren't "Silly"

A strange article in the FT yesterday from the usually reliable John Kay, explaining why he 'ignored' the consumer terms related to his smart TV and Apple's new operating system. Of course, we're all free to decline a reasonable opportunity to read and agree consumer terms. But it's wrong to suggest they're 'silly', as the Carbolic Smoke Ball Company discovered long ago. While consumers rarely read them, certainty as to what consumer terms apply is fundamental to the efficient operation of retail markets. Allow me to take each of John's pronouncements in turn:
"Samsung and Apple are plainly in business for the long term, and their continued success depends on maintaining their reputation with their customers. It is unlikely that these agreements contain anything seriously damaging to my interests, and if they did I am reasonably confident that the combined forces of judges, legislators, regulators and the press would protect me."
Putting aside the misplaced trust that a major corporation's long term aspirations are aligned with their customers' interests (think retail banks), this misses the point of consumer agreements - particularly in the context of supplying a 'smart' device that operates in multiple jurisdictions. Apple's end-user agreement helps set the rules of the Apple ecosystem, just as Facebook's privacy policy does. Such services would rapidly break down if suppliers, customers, regulators and other 'stakeholders' did not understand the detailed rules that underpin them. How does John think that Apple gets paid for selling other people's Apps? Ironically, numerous regulations insist on very prescribed sets of consumer terms, which often provide the basis for the very action by the 'combined forces' on whom John relies for protection (although they can also be hijacked, as we saw when the US government effectively deputised PayPal and others as private sheriffs, relying on violations of their terms of service to 'shut down' Wikileaks).
"On the odd occasion when I have troubled to read similar agreements, I have found they are generally riddled with ambiguities and with conditions that are unenforceable in practice and probably unenforceable in law. The attorneys who draft these documents are mostly unimaginative hacks rather than hotshots of the profession. And complex contract specifications do not so much define the obligations of the parties as identify the point at which legal argument will start. Ask the people who thought they knew where they stood with Lehman Brothers."
Let's unpack this. John rarely reads consumer terms, so his experience here is unreliable. He's not a lawyer, so he's no guide to the enforceability of contractual terms. He clearly has no friends in this area, which is a shame, but he's unwise to underestimate the scale or calibre of the legal resources Apple devotes to the customer terms that underpin its position as one of Earth's most valuable corporations. And Lehman Brothers? Being an investment bank it simply never dealt with 'consumers' at all, however, (ironically, John) the banks had no idea of who owned which assets after trading with Lehman Brothers because they ignored the small print.
"...To the extent that the user agreement has relevance at all, that relevance is to the battles these large technology companies conduct with one another and with their various regulators."
As explained, this ignores the role of end user agreements in determining how the entire retail ecosystem works - in this case, the rules that make John's TV 'smart'.
"...If there is a problem, it is not the laziness of consumers but the use of inappropriate models in the formulation of public policy. These too often espouse a legal and economic view of human behaviour in which agreements are negotiated between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts. The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business."
I agree that 'laziness of consumers' is not an issue - again, we are all free to decline the reasonable opportunity to read consumer terms upon which the law insists. But if by 'inappropriate models' John is referring to the common law system, then he should compare it to the joys of the civil law system. In common law countries, we are free to act unless the law restricts us - the law follows commerce. In the absence of Parliamentary edicts, contracts provide the rails on which commerce runs. Meanwhile the citizens of civil law countries wait for their lawmakers to define how they may act, so European commerce, for example, follows the law. Thus, our EU colleagues regard entrepreneurship as rather dodgy, and believe that contracts should rarely be needed to supplement civil law codes.

I know which system I prefer.

But, critically, John is also choosing to gloss over the need to record what he calls the 'terms of exchange' so that people have enough certainty 'to go on doing business'. That is the role of the contract in a common law country. And the enforceability of such terms - the 'rule of law' - is what distinguishes a (reasonably) efficient market economy from, say, corrupt dictatorships or centrally planned economies.

In other words, Apple's lengthy terms - and John's freedom to decline the opportunity to read them - not only facilitates the collaborative ecosystem that creates John's 'smart' TV, but they also help everyone keep Apple and its suppliers honest.

Image from CloudPro.

Wednesday, 2 October 2013

Help To Bubble

I just don't get it. The UK is awash with debt it can't shift, yet the UK government thinks it's a great idea to ensure that people get £130bn of mortgages they can't otherwise afford. 

A Treasury spokesperson is quoted in today's FT as saying that "there are rules ensuring that people can pay the mortgage that they have taken on." But if they couldn't have got the mortgage in the first place, how is that so?

It would be fair enough if someone were able to point to specific, unreasonably restrictive bank lending practices and get them changed. Yet neither the Treasury nor the Bank of England has been able to bring the banks to heel, so putting the taxpayer on the hook for 15% of a bunch of new high loan-to-value mortgages seems a little careless to say the least.

But maybe it's too late. Maybe we're just seeing the inevitable consequence of the fact that the UK state is already standing behind £491bn of UK mortgage debt, or 42%. The state simply has to be back even more. The US introduced this nonsense as a 'temporary measure' 70 years ago and, as Gillian Tett recently pointed out, is now behind 90% of the US mortgage market. How's that working out for them? You be the judge.

Welcome to Bubbleland.

Image from LuxLifeMiami.
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