2013: Levelling The Financial Playing Field

Six years of financial crisis have finally produced some of the legal changes that will expose the cosy world of regulated financial services to innovation and competition. But there is plenty more to do.

During 2013 we've seen consumer credit move to the FCA, the regulation of peer-to-peer lending, and the FCA's proposed rules for how the 'crowd' can lend and invest. And this week the Banking Reform Act implemented the recommendations of the Independent Commission on Banking and key recommendations of the Parliamentary Commission on Banking Standards.

Some may see these changes as a magnificent display in closing the stable door. But I prefer to see it as an opening of the floodgates. 

After all, the European Commission is consulting on its own approach to regulating online financial marketplaces; and the US states are competing with the Securities Exchange Commission on the regulation of crowd-investing.

So 2014 will see a lot of focus on enabling the growth of alternative financial services, at the same time as the banks become even more preoccupied with solving their own problems at their customers expense.

That bodes well for a market that grew 91% in 2013.

But, like I said, there's still a lot of work to do.

 

Failure Is Key To The Success Of Equity CrowdInvesting

An odd article on page 20 of today's FT suggests that the failure of some ventures to raise money somehow puts 'crowdfunding' in doubt, while page 4 cites Nesta research to show that this alternative finance market is growing rapidly. 

What's going on?

Well, traditional financiers have been forced to take crowdfunding seriously now that the FCA is consulting on specific rules to govern certain types (peer-to-peer lending and crowdinvesting in equities and debt securities). Some see this as an opportunity, and want to help these alternative marketplaces grow, while others perceive a threat that must be contained.

Those who feel threatened typically overplay the benefits of 'traditional' investment models, and mistake the strengths of the crowd-based models for weaknesses. 

For instance, venture capitalists often claim that theirs is 'smart money' compared to equity-based crowdinvesting. In fact, one is quoted in today's FT article as saying that VC investment brings "partners, skills and support that will nurture the business through growth over the medium to long term." This is rubbish. Venture capitalists spend most of their time looking for deals, not managing the businesses in which they have invested - and most of those businesses will fail anyway. They are not looking to build a portfolio of steady performers, they are hoping a few stars from their stable will return 20 to 30 times their investment. Board meetings are infrequent events at which VCs study the numbers. The occasional insightful comment may emerge, but these pale to insignificance compared to the 360 degree, 24/7 feedback any business experiences in today's social media world. Ironically, most of the time is actually taken up by management explaining the business to the VC directors - and quite properly so. But any responsible director can fullfil this role, and a business that can raise VC money or other funding is equally likely to attract directors with real subject matter expertise (and/or genuine independence) in any event. VCs don't have a monopoly on introducing good directors.

Related to this is the issue of discretion. Few people may be aware a business is seeking VC investment, but nor could they be expected to care since they are excluded from the process. So the search for venture capital generates zero interest among potential customers or other supporters of the business. Nor is the venture process likely to be very efficient, let alone successful. Start-ups and early stage companies typically approach many VC firms in the hope of getting a commitment from 2 or 3. It's a gruelling 3 to 6 month process involving lengthy, repetitive due diligence sessions that come as a huge distraction from the day-to-day management of the business.

Crowdinvesting, on the other hand, enables the business to engage in a single process that tests the appetite of both investors and customers. Flaws may be visible to the world, but this transparency provides consumer and investor protection while giving the business a chance to adapt on both fronts at an early stage. This may not guarantee long term success any more than traditional venture funding does, but it helps everyone avoid wasting a whole lot of time and money.

It's a process that venture capitalists might grow to like.

UK Government: Gamble All You Like, But Don't Invest

You've got to wonder about priorities at the Department of Culture Media and Sport. They allowed UK bookmakers to harvest £46 billion through betting machines last year - not to mention the bingo and lotteries freely advertised on TV - while computer games companies complained they can't offer shares to fans who crowdfund games development. 

Consider this from today's Telegraph:

• Britons gambled £46 billion on betting terminals last year, an increase of almost 50% in four years.

• Gamblers lose up to £100 every 20 seconds on the fixed odds machines.

• 588,000 under-18s were stopped when they tried to enter a betting shop last year, six times as many as 2009, and 27,000 people were challenged once they had placed a bet.

• Bookmakers made profits of £1.55 billion from the terminals between April 2012 and March 2013.

Meanwhile, even though the FCA has said that ordinary folk will be able to invest to fund the development of a computer game, for example, they must first certify that they will not invest more than 10% of their 'net investible portfolio' and either seek financial advice or satisfy an "appropriateness test". That's because they say investing is risky for consumers... 

Compared to what?!

Image from RoehamptonStudent.com. 

Dirty Data

Westiminster recently feigned shock and horror that the UK's coppers cook the crime figures. But Simon Jenkins says we've known for years that the numbers are meaningless and they should be banned as "they spread confusion and fear".

But 'plod' is not alone in mis-classifying, mis-recording, ignoring or otherwise presenting data in a way that suits himself. We've had many financial trading scandals where banks apparently had no idea of the exposures they faced, either because transactions were concealed or perhaps no one was looking hard enough - the global financial crisis was a function of poor due diligence.

A possible root cause of the problem is that humans are involved too early in the data collection and reporting processes. Rarely are we responding to the 'raw' data, as opposed to figures that have been 'gathered' and 'rolled up' through a series of other people's filters, manipulations and interpretations (which are often taken out of context). It's puzzling why regulators' systems don't receive a feed of the actual trades straight from bank trading desks - or from peer-to-peer lending or crowdfunding platforms - rather than relying on periodic reporting of summary data.

Maybe GCHQ can help...

At any rate, we should focus more on 'clean' mechanisms for capturing and presenting raw data rather than someone else's interpretation of it.

Image from TraceyNolte.
 

Do TV Advertising Rules Limit Economic Growth?

There has been plenty of research into the alleged effect of TV sex and violence on human behaviour, but how does TV adversely impact our economic behaviour? 

This issue was recently highlighted by the FCA's proposed new rules on crowdfunding. Left in isolation, the current restrictions on financial promotions suggest the State would prefer us to play bingo or buy lottery tickets than invest the same small amounts in funding the growth of each other's businesses. 

The FCA is right to point out the risks of investing in start-ups, but it should compare those risks to the risks consumers face when putting their money into other products that are more freely advertised.

We rely on small businesses for over half of all new jobs and a third of private sector turnover. Yet, those small businesses struggle for funding while over half of the UK's adults engage in regulated gambling that is designed to cost consumers far more than they 'win'.

It may be true that over half of business start-ups fail within 3 years, but they still employ at least one person in the meantime. And maybe more of those businesses would survive if we lent them some of our bingo money, or bought their shares with at least some of the money we chuck away on the ponies. Better that the money goes in wages, and the goods and services that small businesses typically buy, rather than simply to line the pockets of the bookies - and you have the chance of getting a decent return on small business loans, or if you happen to invest in the businesses that succeed in the longer term. 

No doubt someone will raise the moral panic about 'good causes' being starved of lottery money if we don't allow the promotion of that form of gambling. But I'm not talking about any ban on advertising lottery or bingo etc., just a relaxation of rules on the promotion of productive financial instruments (though it would be more efficient to simply donate a third of your lottery money directly to good causes on a crowdfunding platform than to wait for it to filter through the books of a lottery operator).

Ads for apparently 'safe' bank savings products are not helpful here, since savings rates are low and banks are not focused on lending to small businesses. We have over £200bn sitting passively in low interest bank deposits, yet banks' savings rates are below the rate of inflation, and banks only lend £1 in very £10 to SMEs. The Financial Services Compensation Scheme might protect your deposit if the bank goes under, but that's another cost that consumers end up paying for, and it won't protect the value of those deposits against inflation. Stocks and shares ISAs and pensions are similarly 'passive' investments in financial assets, rather than productive ones.

The highly restrictive approach to financial promotions has neither prevented financial scandals nor created a sound financial system - two of many reasons why people have resorted to lending directly to each other, or investing directly in each others' projects and businesses. So why not allow these new alternatives to be promoted more openly - at least to the same extent as riskier, non-productive activities like playing bingo or buying lottery tickets?

We need to move away from rules that dictate what we can do with our money, to rules that enable a fully informed choice from amongst all the options. 

At any rate, the State should certainly not create a situation where the money-related messages which the average TV viewer receives do not include investing directly in the productive economy.

Image from RoehamptonStudent.com.

Six Years On And Pragmatism Has A New Frontier

I see this blog has reached the ripe old age of six, so I felt compelled to squeeze in at least one post to celebrate.  

It's fitting that the reason for my absence has been the need to get to grips with the FCA's proposals to regulate P2P lending and investment-based crowdfunding - not to mention the revelations concerning the Chairman of the Co-op Bank. After all, this blog set out to chart the rise of facilitators who help us wrest personal control of our day-to-day lives from the one-size-fits-all experience imposed on us by our institutions. Rumbling the 'Crystal Methodist' marks the continuing plunge of faith in those same institutions, while the decision to finally let the 'crowd' into the regulated financial markets shows that even Parliament recognises you and I are better off dealing with each other directly than simply entrusting our life's savings to the banks and investment funds.

Of course, these are just a few examples of the punishment being doled out to our financial institutions. And they aren't the only ones under pressure from the trends sweeping society, as we struggle to figure out a more sustainable form of capitalism. All our institutions, from the BBC to the Police to the Church, unions, political parties, government departments and so on, face the choice of becoming facilitators or withering away. 

So is there anything 'new' to write about? 

Six years on we are still seeing the dawn of where these trends will take us. But to get a sense of the future, I've been following the rise of 'open data' - or open access to data in machine-readable form. This marks a new frontline between institutions and facilitators. Big Data vs You. Not only has it already created new facilitators, in the form of "personal data stores" or "personal information managers", but it may also redefine some of today's facilitators as the institutions of tomorrow... 

As a taste of things to come, last week a senior advertising executive insisted to me that "Big Data can accurately predict human behaviour." To be fair I made him repeat the assertion in case it had slipped out by accident. No one else at the table seemed to find that truly weird, and it wasn't until the end of the week, when I met up with some people working at the sharp end of data gathering, that I was able to fully enjoy the hilarity of that statement.

This is going to be fun.

Image from Data.gov.uk

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. 

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 Aurélie 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.

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.

Innovation

• 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.

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.

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.

Labour's Rocky Horror Show

As the Labour Party took it's "jump to the left" this week, we saw firsthand how "madness takes its toll."

Things turned ugly when the faithful realised there'll be no pot of gold at the end of the 2015 campaign rainbow - brutal medicine for a party infamously free with the public purse. So the furious mob turned its sights on the private sector, just like in the bad old days.

Gordo's lieutenants did their best not to disappoint the baying crowd, smashing in a few shop windows in an effort to claw back some of the profits they'd gleefully handed out when their old boss proclaimed the end of boom and bust. But the private equity boys are a vicious crew, and they were waiting. They went after those dogmatic party geeks like a bunch of Paras on PCP, strangely trailed by Lord Mandelson waving a socket wrench.

The geeks took a hiding, but they weren't giving up, or venting their sterile rage on public sector waste. Or gnashing their teeth about the six ways 'the System' is in a worse state than in 2008. No way. Back in the safety of the Hilton Metropole they were hell-bent on re-nationalising everything this country's sold off in its vain attempt to keep kicking the economic can down the road: "railways, power, water, Royal Mail." Savagely yearning for the return of British Leyland. A time when the State could do no wrong and Jimmy Savile ruled the BBC.

As the great Gonzo once said, "when the going gets weird, the weird turn pro."

Doomed, you might think. And so too is the old Labour rort of hiring public sector employees so they can automatically join the unions and unwittingly subsidise the party's lust for power. Snubbed by these ingrates, Milibore now wants to slip his hand into the public purse to fund his dreams, and is tempting the other parties to follow suit. He might be onto something there. Party political types are united in greed, if nothing else. But the Tories know there'll be nothing left by 2015 anyway. Soon they'll be sewing patches on the elbows of their suits...

You'd think that should mean a blissfully quiet election. But based on this week's performance I reckon Labour's rocky horror show has only just begun.

We're in for a mind flip.

We'll be into a time slip.

Labour will do the Time Warp again.

We Need Let The Crowd into Financial Services

What a difference a year makes. At an industry event yesterday none other than Nicola Horlick, a well-known fund manager, confirmed her faith in crowdfunding as way of people putting money directly into the lifeblood of the economy, at a time when bank finance for small businesses is limited. Her own film finance vehicle raised £150,000 by issuing shares within weeks of an initial discussion with Seedrs CEO, Jeff Lynn, about how the crowd might help. A year ago, she wouldn't have given it a moment's thought. 

Of course, Nicola was referring to equity crowd-investing, which is the latest type of crowdfunding to burst into life. People have been donating to each other's projects via online marketplaces for nearly a decade and lending to each other online since 2005. Even the UK government is lending along side savers on peer-to-peer lending platforms. 

But these 'direct finance' marketplaces are no longer simply challenging a dozy bunch of retail banks. The addition of crowd-investing in shares and bonds is a direct assault on the sophisticated world of venture capital, private equity and boutique investment banking. 

Silicon Roundabout has launched a rocket attack on Mayfair.

This trend has raised a few bushy eyebrows down at Canary Wharf, where the paint is still wet on the signage at the hastily re-named Financial Services Conduct Authority. Not everyone at the FCA is excited by the prospect of just anyone being able to put a tenner into a business run by Nicola Horlick. In fact, the 'hawks' down there seem to believe that ordinary folk should content themselves with a low interest savings account, a lottery ticket and a flutter on the nags between visits to the nearest pub. If you can't afford to lose a grand, say the hawks, then you've hit the economic buffers. The banks can enjoy the use of your savings for free, while the government enjoys the betting taxes and the excise on your beer and cigarettes.

And we wonder why the poor get poorer.

You might also wonder, as I did yesterday, how 'the government' might explain to the same person who is banned from buying a share in the local bakery why he is still be free to blow £10 on a drug-fuelled quadruped at a racetrack, or donate it to a band that might go triple platinum and never have to share a penny of the upside with those who backed them.

But that's where you're reminded that the government never puts itself in the citizen's shoes; and there's really no such thing as 'the government' anyway. Just individual civil servants at separate desks in separate buildings, each looking at his or her own policy patch and waiting to be told what to do. Collaboration is not a creature common to Whitehall. In that world, no one at, say, the Treasury snatches up the phone to share a bold new vision for driving economic growth from the bottom-up with the folks over at Culture Media and Sport, or Business Innovation and Skills or Communities and Local Government. 

Or do they...?

At least those in Parliament, bless them, did collaborate in response to the ongoing financial shambles. Julia Groves of the UK Crowd Funding Association quoted some choice words on alternative finance from the report of the Parliamentary Commission on Banking Standards, and I've set out the full quote below (as I have previously). Julia also put it very nicely in her own words: "Wealth is not a skillset." We need to let the crowd into financial services, and we need to keep the 'crowd' in crowdfunding. Let's hope this time the following message permeates all the way to the remaining hawks at Canary Wharf.

"57. Peer-to-peer and crowdfunding platforms have the potential to improve the UK retail banking market as both a source of competition to mainstream banks as well as an alternative to them. Furthermore, it could bring important consumer benefits by increasing the range of asset classes to which consumers have access. This access should not be restricted to high net worth individuals but, subject to consumer protections, should be available to all. The emergence of such firms could increase competition and choice for lenders, borrowers, consumers and investors. (Paragraph 350)

58. Alternative providers such as peer-to-peer lenders are soon to come under FCA regulation, as could crowdfunding platforms. The industry has asked for such regulation and believes that it will increase confidence and trust in their products and services. The FCA has little expertise in this area and the FSA's track record towards unorthodox business models was a cause for concern. Regulation of alternative providers must be appropriate and proportionate and must not create regulatory barriers to entry or growth. The industry recognises that regulation can be of benefit to it, arguing for consumer protection based on transparency. This is a lower threshold than many other parts of the industry and should be accompanied by a clear statement of the risks to consumers and their responsibilities. (Paragraph 356)

59. The Commission recommends that the Treasury examine the tax arrangements and incentives in place for peer-to-peer lenders and crowdfunding firms compared with their competitors. A level playing field between mainstream banks and investment firms and alternative providers is required. (Paragraph 359)."

Either Gillian Tett's On Fire...

Ominous bursts of smoke have been rising from Gillian Tett recently. 

On September 12, the lady who gave us Fool's Gold pointed out that six key aspects of the financial system in 2008 are far worse now. 

The banks are bigger. Shadow banking is bigger. Investor faith hinges on central banking 'wisdom' and liquidity, while the top 5% of bankers are soaking up 40% of that support in bonuses. No one has been jailed for their role in the sub-prime fiasco. And the US government agencies now account for 90% of the mortgage market...

Today's smoke is rising over the Federal Reserve's decision to keep buying smack bonds at the rate of $85bn a month. It appears to have concluded that the West simply can't handle the withdrawal symptoms. Meanwhile, the UK regulatory elite has finally started to ring the bell over the fact that only 10-15% of the money our banks create actually goes to productive firms, while the rest is stoking financial asset bubbles... And, oh look, the real estate agency, Foxtons, has soared on its return to the stock market.

Either Gillian Tett's on fire, or something else sure as Hell is.

Image from JetSetRnv8r.

Involve The National Audit Office in Project Planning

So, two weeks have passed since the revelations of the latest (known) public sector IT disaster, and related wasted expenditure. But I'm willing to bet that nothing has changed in the way projects are planned, and we'll see many more juicy stories in future.  

Perhaps some kind of pre-emptive strategy would be in order...? 

Surely the National Audit Office is by now rammed with people who can spot the seeds of doom in just about any public sector IT project it cares to look at. So why not involve them at the start?

Forget all this talk of economic recovery, only the civil servants can save us now.

Cryptocurrencies Crest Capitol Hill

On Tuesday, I had the pleasure of joining a panel on mobile payments at Liquidity, the summit on new finance. I also caught the earlier sessions, but sadly missed the afternoon. It was definitely worthwhile, and I'll include links to the videos when they're published. Well done to Stan and Edie for pulling the summit together.

One development in particular that caught my attention was James Smith's explanation of the wider uses of Bitcoins, and other cryptographic currencies. I actually struggle with the idea that these are really 'currencies' as opposed to commodities that can be bought and sold. That would also explain the volatility in the 'exchange rate'. But the technology definitely opens up some interesting possibilities.

One of the wider uses of cryptocurrencies involves agreeing that a unique string of numbers with a nominal 'value' (say, a sixteenth of a Bitcoin), represents the record of title to a specific asset. This use-case is reflected in colored Bitcoins, for example, where different coloured 'coins' respresent different types of asset. While we already have asset registers for many types of property, such as land, ships, cars and securities, there are many other types of asset for which a similar approach would be too expensive. Some of the challenges confronted by such a project from a technological standpoint are described here.

The proliferation of cryptocurrencies and their possible uses has generated  significant interest from the venture capital community, as well as amongst central banks, monetary authorities and agencies fighting financial crime.

Far from retreating before the threat of a regulatory onslaught, however, cryptocurrency service providers have been lobbying for some time to gain acceptance, (e.g. via the Bitcoin Foundation). Recently, the leading providers and supporters also formed the Digital Assets Transfer Authority, or DATA to concentrate and focus resources more efficiently and provide a forum for resolving appropriate controls for the shared operational and regulatory risks.

The fact that the future of cryptocurrencies have reached this level of official engagement definitely makes it an area worth keeping an eye on.

BS2 and The Planning Fallacy

In his excellent book Thinking, Fast and Slow, Daniel Kahneman explains that governments tend to reward bidders who over-estimate the utility of large-scale projects, while under-estimating the cost. This is known in the trade as "The Planning Fallacy". While Kahneman cited research that demonstrates the fallacy in relation to many railway procurement exercises over many years, we also saw if firsthand recently in the West Coast railway fiasco. Now the government is trying its hand again, with BS2 HS2.

The Planning Fallacy suits all those involved, except commuters and taxpayers. At the time of the West Coast debacle, costs were about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, had reached approximately £7 billion per annum. Approximately 10% of trains didn’t arrive on time. Only 42% of rail customers were satisfied with value for money for the price of their ticket. Only 69% said there was sufficient room for all passengers. And only 80% of rail customers were satisfied with punctuality.

This spring, the figures don't look any better. In fact, only 29% of UK commuters thought they got good value for their rail fares. Adding a fancy new rail project doesn't seem likely to fix their day-to-day experience.

There are numerous hard-headed dismissals of the alleged viability of HS2, including John Kay's piece yesterday. And it wasn't reassuring to learn from a Channel 4 news interview with the Transport Secretary that he has set aside a £14bn 'contingency' in an apparent budget of £40bn. It smells like 'waste' to me.

There must be ways to spend that kind of money to improve the lot of today's commuters, rather than saddling the next generation with a whole load of BS.

Banks Can't Even Be Bothered For The Rich

Oh those poor, poor bankers. Now, we're told by Spear's, that the new 'retail distribution' rules have made their lives so complicated they even have to stop fleecing servicing wealthy customers. Bernie Madoff must be relieved to have got out before the well ran dry.

Ironically, for a magazine that bills itself as "the essential resource for high net worths", Spear's argues the bankers' case. The article seeks to persuade wealthy readers to stop being so demanding if they wish to avoid being 'managed out' by private bankers who find them too costly to serve. In particular, customers must stop expecting services aligned to their needs and behave in a way that suits the banks: 

• agree what the banker will do for you up front, then wait for the quarterly reports and limit any discussion to those times instead of pestering for more frequent advice;

• don't change your instructions (the banks already chew through 3% of your return by making 'adjustments' to your portfolio, so don't make it worse); and

• behave as if you're part of a team - cut your banker some slack when he is slow to realise gains or avert losses and, most importantly, recommend him to your friends (bankers just love the bandwagon effect).

Puzzling, until you realise where Spear's probably gets most of its advertising revenue.

Definitely a sign that yet another area of the financial services market is ripe for innovation by facilitators.

There Is Not A Great Retail Bank In The UK

Ross McEwan's appointment as CEO of RBS roundly endorsed his remark that he has been "quite surprised by how bad this industry is. There is not a great retail bank in the UK." 

This from a banker who's reported to have twice failed an accounting module, been passed over for top dog at Commonwealth Bank of Australia and to be "more comfortable with people than figures." 

It's hardly an insightful comment, given the enormous publicity surrounding the damning testimony to the Parliamentary Banking Standards Commission, but McEwan is the first senior banker to have the self-awareness to actually admit the appalling state of the industry. As such, the remark even topped today's editorial in the FT. I mean, there's only so much the pink propaganda machine can ignore.

Amidst all this, the Information Commissioner's Office finally revealed the miserable little saga of Bank of Scotland's "chronic and repeated" disclosure of sensitive customer information. Apparently it sent faxes from many different machines to wrong numbers from 2009 to 2012, despite alerts and complaints from mistaken recipients, and notification that the ICO had begun to investigate. The fine: a mere £75,000. Another speeding ticket on the road to oblivion.

Add this to the revelations of UK banks' gross misconduct and poor controls over the past few years, and you have to doubt the wisdom of handing shares in these businesses to the general public. 

Unless, of course, you want taxpayers to experience the banks' terminal decline firsthand. A sort of 'scandal to end all scandals'.  That would be nice.

Less From the Pulpit, More From the Pew

The Church of England's terrible muddle over pay day lending shows that it's out of touch with the details in the payday lending market. Just as we've seen in other markets, pontificating from the top down is no substitute from working on problems from the customer's standpoint. So, a little less output from the pulpit's point of view and more from the pew's would be no bad thing.

As mentioned previously, the challenge for borrowers who need or want to borrow short term is finding a combination of speed, convenience and affordability. In March, the OFT's own research revealed that 90% of online customers found the it "quick and convenient" to get a short term loan and 81% said such loans make it easier to manage when money is tight. Customers expressed their satisfaction in terms of decision speed (36%), convenience (35%) and customer service 27%). The majority of payday customers (72%) only borrow for a month. So, the critical issues seem to be how to ensure the other 28% are better able to understand the risks of rolling over short term loans, and how to avoid it; as well as cutting the overall costs for those who use short term financing. 

The root causes of these problems do not lie in the cost of payday loans. Short term borrowers are often working amongst the contractual fine print of late fees, cancellation notices and so on. Allocating money to debts 'just in time' is a high risk occupation. One slip can make life hell in a non-financial sense - maybe the kids won't have school shoes, there will be no heating or the landlord will finally lose patience. Credit cards, debit cards and cheques are useless from this sort of timing perspective, because they don't tell you how much you have left to spend at the time you use them. There can also be an accounting lag between when you pay and when the transaction lands on your account, so you can find yourself 'surprised' by a payment you thought had been accounted for days or even weeks previously. And the amount of interest and other charges is only known when it appears on a monthly statement. We hear a lot of noise about APRs, but not so much about the timing problems or the scale of fees payable when you get on the wrong side of bank products - these are far more relevant to short term borrowers, and why many remain 'unbanked' by choice.

In these circumstances, rather than playing money-lender, it would be better if the Church could foster the development of an application or other means of presenting to a borrower the most affordable short term finance option, based on the analysis of the borrower's own transaction data from existing creditors (including cancellation rights and late fees), and the costs of different finance products (including charges for missing a payment). This really only requires a commitment on the part of all the typical creditors and financial services providers to make their product and pricing data available in machine-readable format, which the government has been pushing them to do as part of the voluntary 'Midata' programme. That data can then be analysed and the results made available either online or physically, via mobile phone, computer or print-out. 

No doubt the Devil is in the detail underlying such a service. But surely the Church isn't bothered by that?

The Reform Of Our Institutions Won't Come From The Top

It's been a difficult month to finish this post. Every day another dollop of decrepitude is revealed amongst our rotting institutions. Systemic slaughter in the NHS. The convenient collapse of a major police corruption trial through 'missing' evidence. Police concealing the misuse of private investigators and spying on victim's families for the chance to undermine public sympathy. Sunlight on vast pay-offs to the departing management of the Savile-stricken BBC. The lengths to which the unions will go to control the Labour Party and use it to enshrine their own power. The Church of England deciding to turn money lender. And, surprise, surprise yet another massive bank fine...because, yes, any bank that relies on a public guarantee of its liabilities and massive tax subsidies through ISAs and so on should regard itself as a public institution.

It's a core theme of this blog to contrast the decline of faith in institutions that have evolved to suit themselves at our expense, with the rise of facilitators who exist to help us solve problems more effectively for ourselves.

Our institutions won't align with the interests of the those who rely on their services while they suppress evidence of their ineptitude, or while trustees and management quibble over their extent of their responsibilities, or while politicians spend their time blaming each other for the mess. These are sure signs that our institutions are stuck in denial and that the MPs and Ministers whose job it is to supervise them are stuck in their own cycle of blame.

Until our institutions understand and accept the need to align with the consumers of their services, rather than the desires of their pompous managers, they will not evolve into efficient, facilitative organisations worthy of our trust and respect.

But I don't believe that our so-called political leaders or the managers of our institutions have either the self-awareness or the skills needed to achieve this evolution. They are merely products of 'the system' that so desparately needs to evolve.

Sustainable reform will only come come from the grassroots rather than the top down. It will only come when each of us takes personal responsibility for turning things around, whether by exposing institutional failings or genuinely working to solve other people's problems rather than merely our own. 

In other words, both the problem and the solution are in our hands.

A Feast Of Anger And Blame

You have to wonder whether the UK's banking crisis will ever end. After months of wrangling, the regulators have finally decided which UK banks are still short of about £26bn in capital (for now). But yesterday's Parliamentary Banking Standards Commission report points to an endless list of more serious problems that won't be solved by simply leeching yet more billions out of the economy.

The members of the BSC must be highly commended for taking on the long overdue job of trying to bring Britain's banks to heel. Volume 2 of the epic report is an invaluable account of their painful journey, made poignant by the fact that, until quite recently, the members of the Commission actually believed in our rotten financial system. The scale of their disillusionment is almost beyond comprehension. What perhaps started as an investigation into fairly specific allegations of corporate malfeasance resulted in one proud British institution turning on another out of a sense of betrayal. 

So, apart from its entertaining descent into the gory details of British banking, the BSC report represents yet another hammer blow to our faith in society's institutions - this time delivered by one of the ringleaders, namely Parliament itself.

Yet the question remains as to just how far along the 'change curve' we have really travelled. Despite the BSC's list of recommendations, we seem to be merely inching our way through anger and blame, rather than understanding and accepting that the world has truly changed and we need to move on.

While the Commission has voiced great support for alternative finance models and eliminating perverse tax incentives, and the Treasury and FCA have made some proposals to improve the regulatory landscape, the rhetoric from the government continues to put banks at the heart of Britain's economic future, rather than a more open, diverse and innovative financial system.

How much more economic mayhem it will take for society to genuinely 'move on' is anyone's guess.

PAC Fiddles While Public Money Burns

This week saw the publication of two reports that highlight the woeful set of priorities that govern the activities of the Public Accounts Committee and the media bandwagon that follows it. 

The first was the repeat of PAC's outrage over Google's international tax affairs. It seems we really are expected to believe that (1) these MPs are unaware of the rules governing where a company is 'permanently established' under OECD/UN Conventions and other tax treaties; (2) that the amount of additional tax that Google might have otherwise paid on about £3bn a year of revenue during 2006-2011 would have saved the UK economy; and (3) the UK does not benefit from the application of these rules to its own firms in other jurisdictions.

The second report came in the form of the lastest Bumper Book of Government Waste (itself hardly 'new'), which highlights yet again the £120bn that the public sector burnt last year for absolutely no benefit whatsoever.

With priorities like these, we should add PAC's own budget to the bonfire.