Wednesday, 31 December 2014

Credit Where It's Due

Having spent the past seven years banging on about the changes needed to democratise the financial system, it's only fitting that my last post for 2014 should give a little credit to the authorities for making some very significant changes this year.

The FCA published its rules to specifically regulate peer-to-peer lending in February, and its rules on crowd-investment in March. At the same time, the Chancellor announced the expansion of the ISA scheme to include peer-to-peer loans. In the Autumn Statement, he announced that consumers who lend to other consumers and sole traders through P2P platforms will be able to offset any losses against interest received. And there will be a consultation on expanding the ISA scheme to encourage crowd-investing in bonds and other debt securities.

We are still at the start of a long journey. The rules could be simpler and the EU could yet muddy the waters if the UK position is not well represented. But if you'd asked me in 2007 whether so much would be achieved by 2014 - particularly on the ISA front - I'd have been optimistic (naturally) but expecting the worst. Yet in 2015 we'll have both the regulatory 'blessing' and the incentives necessary to enable people with surplus cash to get it directly to creditworthy consumers and small businesses who needed it, instead of leaving the money tied up in low yield bank deposits or having it eaten away by fees in managed investment funds. 

Perhaps this is partly why 2014 also saw the bank bosses' swagger and bravado turn to panic. The trends which are combining to democratise the financial system have not only revealed that the stuffed shirts are powerless to stem the flow of fines for corrupt practices on virtually every front, but those trends have also produced competition from the banks' very own customers. 

But let's not get carried away. While crowdfunding is growing at over 150% a year, the crowd will probably produce 'only' about £5bn of funding in 2015, based on Nesta figures and assuming a boost from the ISA changes. 

So, while we've come along way since Bobby "Dazzler" Diamond infamously suggested that the time for bankers' remorse was over if the UK was to recover, we will still have a small business funding gap next year - eight years after the financial meltdown. In fact, in many ways the financial system is in worse shape now than in 2007, with less competition and appalling inefficiency in banking, vast public sector debt, a larger 'shadow banking' sector than every before (depending on how you measure it), and many key economies around the world suffering low/no growth. Events such as those in Russia, Greece and the Eurozone are applying further pressure to a system that is still broken. In these circumstances we remain terribly vulnerable to financial shocks. 

Still, the UK government deserves plenty of credit for the changes announced to date. Whether they have come early enough to help us through the next storm remains to be seen, but at least the national funding solution now lies substantially in our own hands. 

If we don't take the opportunity to crowdfund the recovery, we will only have ourselves to blame.

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