Strength in Diversity

Following the discussion on the concept of a Social Finance Association, it was interesting to read the guest post on Zopa's blog by Rob Garcia, Senior Director of Product Strategy at Lending Club, attempting to classify types of social finance as 'crowdfunding', 'microfinance' or 'peer-to-peer lending or investing'.

Having had to spend far too long studying the distinctions between US and UK regulation in this area, I must respectfully disagree that 'crowdfunding' necessarily involves 'pooling' or a lack of nexus between 'funder' and 'fundee'. Similarly, any of these models should be capable of operation on either a for-profit or not-for-profit basis, or for any purpose, social or otherwise. The essence should be that each facilitator enables people - rather than the facilitator itself - to determine the allocation of their own funds directly to other people, businesses or projects, whether the businesses or projects are operated for-profit, social purposes or otherwise). In other words, people remain in day-to-day control of the management of their money, not the facilitator.

While precise distinctions between the various different social finance models may be important at one level, and a diverse range of business models is certainly good sign for the strength of the sector, the sector must also be ready to differentiate itself from traditional financial institutions and models - unless it wants to be regulated in the same way.

Social finance models were vital alternatives before the global financial crisis, let alone now and for the foreseeable future while traditional institutions adjust to new capital and regulatory constraints. But the existing regulatory framework makes it painfully slow and expensive to launch social finance platforms. To help foster confident innovation and competition, and enable the new sector to flourish quickly enough to provide much needed funding, financial regulators should clarify what is permissible within or outside the scope of regulation.

Image from the Trade Association Forum.

A Social Finance Association?

The past 5 years have seen the launch of many innovative business models aimed at enabling people to provide funding directly to other people and businesses via online finance platforms, rather than 'traditional' financial institutions. The terms 'crowdfunding' or 'social finance' seem to encompass most models out there.

The 'social' element is critical to the success of these models, because there are very real social and economic benefits to people - rather than financial institutions - sharing most of the margin between savings/investment rates and funding costs.

But I've witnessed firsthand how social finance platforms and their members tend to wrestle with the problem that social finance does not fit neatly into our financial regulatory framework, which is designed, ironically, to force recalcitrant 'traditional' providers to deal fairly with consumers. We are also currently victims of the delay and uncertainty caused by reforms to that regulatory framework. Because when they aren't rescuing banks or attending to 'business as usual', the key regulatory staff are understandably taken up with figuring out the new regulatory regime rather than vetting the legality of innovative business models that may remain outside the regulatory perimeter.

These problems add a huge amount of time and expense to starting and developing a social finance business, precisely at the time when banks are both lending less and paying lower savings rates.

Of course, it's common for the participants in new market segments to jointly discuss the development of the sector, including the characteristics and boundaries of regulatory 'safe harbours' and if/how they ought to be regulated. An appropriate forum for such discussion makes it easier to innovate and compete. But it also creates an efficient contact point with regulatory officials and opinion formers for discussing policy and regulatory concerns which individual participants wouldn't otherwise voice for practical reasons of time and cost, or for fear of inviting adverse attention.

There is no need for incorporation or office space. Trade associations often begin on ad hoc, unincorporated basis in response to a threat or opportunity that presents to all the participants.

Has that moment arrived for social finance?

Image from the Trade Association Forum.

You Must Switch Cards To Pay For London Olympics

I see that finally the competition authorities are looking at Visa's exclusive arrangement for the Olympic Games. I can well imagine that neither the Canadian nor Chinese authorities were as concerned as the European Commission and the UK's Office of Fair Trading. Visa is far better known to European competition authorities.

The BBC reports that:

"Visa is the dominant debit card supplier in the [UK] with 53 million customers compared with 17.5 million for Mastercard.

In credit cards, Mastercard has more customers with 36 million holders, compared with 22 million for Visa."

Of course, "dominant" has its own technical meaning under competition law, but you can see that even allowing for overlap amongst customers with both kinds of cards (poor Amex, JCB etc don't even rate a mention by the BBC), a lot of people may be frustrated at not being able to use a card to buy tickets and items at the Games themselves.

I have no trouble with the general principle that the Olympic Committee can grant exclusive deals with the aim of raising more money to help stage the Games. After all, being forced to switch soft drinks, beers or hamburgers for the day is no great hardship. But I do have a problem when that has the effect of requiring consumers to alter something as fundamental as their banking and/or credit arrangements, which may prove impossible or impracticable for many. That is similar to granting the Olympic television rights exclusively to a subscription-only television network.

A step too far.

In marketing terms, the arrangement may provoke something of a backlash (watch this space, for example). It may appear insensitive to impose an exclusive payment arrangement that obliges financially-stretched consumers to alter their banking and credit arrangements in these troubled times. And you would have thought that an event so massively undewritten by public funds should welcome payment in any of the generally accepted ways that any person can access and afford.

UK Bank Charges Assessable For Fairness

Breaking news in the bank charges saga: the Court of Appeal ruled today that certain allegedly excessive current account charges can be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations.

There'll be no further delay on that little issue, as the banks' request to drag it into the House of Lords was refused. [The House of Lords subsequently granted leave to the banks to appeal, due to be heard in June 2009]

So now, either (a) customers must endure another delay while the banks pompously trot out their evidence as to why the OFT was wrong to challenge their fees as unfair, or (b) the new significant shareholder in many of the banks can put an end to much of this nonsense by insisting they refund what was alleged to be excessive as a "fiscal stimulus".

Of course, a "fair" bank could always demonstrate real leadership on the issue, by simply issuing the refunds of its own volition. But it seems each bank believes that just wouldn't be fair on the others.

Oh, look, this post comes hard on the heels of the one where the European Commission says:

"in the banking sector switching is low and offers difficult to compare. The substantial variation in bank fees between Member States is not explained by differences in expenditure levels". In the first half of 2009, the EC will "assess the problems consumers face resulting from a lack of transparency in retail financial services."

Nasty!

The Bank That's Fair

To keep up my professional development points, I'm currently groaning under more than just the weight of the judgments in the UK overdraft charges litigation against the 7 institutions who've cornered the current account market.

Here's some context for the case:

• UK overdraft users - and particularly those who incur fees - essentially pay for everybody's personal current account service. Mr Justice Smith found in his April judgment that interest on credit balances as well as overdraft interest and fees are relied upon by banks to provide "free-if-in-credit banking" (para 53). The fees "are not set by reference to the costs of activities which give rise to them, but... to support the personal current accounts service as a whole" (para 54).
  

• Further, consumers have no real choice in the market for current accounts. So they're stuck with the current pricing situation. In July the OFT reported that:
  

"The complexity and lack of transparency of personal current accounts makes it extremely difficult for individual customers to compare their bank account with other offers. There is thus little incentive for consumers to switch - especially as people generally believe that it is complex and risky to switch accounts. Also, when the switching process does go wrong consumers can find themselves bearing a significant proportion of the resulting costs. The result is that only six per cent of customers we surveyed had switched in the last 12 months - one of the lowest switching rates in Europe."

While I'm interested in the judicial reasoning to date, you'll be aware the case is frustratingly inconclusive on whether or not the charges can even be assessed for fairness, let alone whether they are actually fair or not. In the current economic circumstances, I agree with Which? that such uncertainty is "piling on the misery" for those affected - and as Mr Justice Smith found in his April judgment (at paras 56, 57), that's roughly 20% of current account customers with an overdraft facility. The Financial Ombudsman Service is awaiting the outcome of proceedings before processing any more complaints and this has encouraged various opportunists to bury their snouts into the trough of despair.

In the midst of all this, you may recall that Barclays recently launched its "Personal Reserve" - an 'over-overdraft', as it were. It's obviously an attempt by the bank to dig its way out of the litigious mess. But as this slew of Google search results demonstrates: when you're in a hole, stop digging.

Personal Reserve is supposed to be a very "simple and transparent" "service" in itself. Trouble is it's targeted at overdraft customers on an opt-out ony basis. And surely one can infer that it is intended to address a key issue with the underlying overdraft - what happens when you exceed the limit. In that sense it could be seen as a feature of the overdraft, rather than a service in itself. Further, a trawl through the multiple web pages describing the feature alone suggests that it is some distance from being either simple or transparent. It's less than clear what happens if you opt out - I can't even find a link to an explanation of the ordinary unarranged overdraft situation, if that still applies. And the fact that there are many different circumstances which can trigger additional charges makes it just as tough to forecast the potential cost of a 'bad month' as with any overdraft - something that's never been what you'd call "simple" or "transparent". Finally, it just doesn't smell right that one could be charged £22 every 5 days that you use as little as £1 of your "Personal Reserve" (see FAQ #7).

I'll spare you further detail, save to say that the feature does rather whet one's appetite for a whole new merry-go-round of analysis as to how well it really complies with the myriad technical requirements of the law related to fees, interest rates, advertisements and consumer contracts, including the Unfair Terms in Consumer Contracts Regulations 1999 (the subject of the current litigation) and the brand new Consumer Protection from Unfair Trading Regs. Indeed, it will be interesting to see how this feature, and overdraft charges generally stack up as "treating customers fairly" etc., etc., under the FSA's reforms to the retail banking regime, whenever those might take effect.

But as the current inconclusive litigation demonstrates, the legal niceties don't transmit to the coal face very quickly, if at all.

So surely there's a golden opportunity for one of the members of the current account collective to break ranks and genuinely distinguish itself from the others. It could start by submitting to an independent assessment of the fairness of its charges. Then it might capitalise on the pleasant surprise by diverting the money it spends on TV ads claiming to have the personal touch towards actually engaging with customers to produce something that they buy into as fair.

Anyone for first-mover advantage?

Too Many Snouts in the Bank Charges Trough

Some bank customers are understandably frustrated when it comes to refunds of what they regard as excessive charges. So the last thing they need is to pay needlessly to have their complaint resolved. Yet that is precisely what some customers are at risk of doing.

The Financial Ombudsman Service offers a financial services dispute resolution service that is free of charge to consumers. Thanks to some sensible increases in its remit, FOS can handle virtually all consumer financial services complaints these days, including those related to consumer credit.

True, the banks have diverted the specific issue of excessive overdraft charges to the courts, and are now dragging the whole process to the House of Lords. That means a long wait for most of the customers affected. But the Financial Ombudsman will still deal with complaints about overdraft fees for those customers in financial difficulty, and the delay doesn't affect complaints about other types of charges - like credit card default fees - which FOS is still handling.

So it's troublesome to see certain claims managers and law firms, advertising themselves as able to recover these charges for a fee, without any reference that I could see to the free service offered by the Financial Ombudsman Service. A bit rich from claims managers in particular, considering that they are responsible for 18% of claims referred to the Financial Ombudsman! Note, too, that in February 2008 there were 427 claims managers operating in the "financial products" space, with a total turnover of £68m - all additional cost and friction that the Financial Ombudsman is designed to avoid.

And watch out for the fine print. One claims manager debits its customer's credit card for all their "Service Charges" as soon as any amount of refund is obtained. Is it possible that a customer could owe more in service charges to the claims manager than the amount of the refund?

Time, you would've thought, for some joined up activity from the Ministry of Justice (which now regulates claims managers), the Office of Fair Trading (which regulates consumer credit) and the Solicitors Regulatory Authority (does what it says on the tin). These complaints should be resolved at minimum cost to the consumer. The best escalation path for any complaint should be from the bank's own complaints process to FOS. Heaven forbid the lawyers need to get involved, but we are here as a last resort. I don't see what value "claims managers" add in this sector.

Consumer Protection from Unfair Trading Regs 2008

I've given up my attempt to independently summarise the Consumer Protection from Unfair Trading Regulations 2008 ("CPRs" in the trade), and am simply going to refer you to what the OFT and BERR seem to make of them.

Oh, alright then. To summarise briefly:

• Regulation 3 bans unfair commercial practices - basically anything unacceptable from an objective professional standpoint which is (or is likely to) change an economic decision of the "average" consumer. In other words, because of the practice the consumer buys (or sells) what they would not otherwise have bought (or sold), or fails to cancel a transaction that they would otherwise have cancelled.
• Regulations 5-7 prohibit commercial practices which are misleading (whether by action or omission) or aggressive, and which cause or are likely to cause the average consumer to take a different decision.
• There are 31 practices that are prohibited in all circumstances - regardless of whether or not they actually affect a consumer.
• Oh, and this is all backed by criminal and civil enforcement powers and remedies.
  

Of course, this is fantastic example of EU overkill. There is simply no major consumer problem in the UK that deserves a whole swathe of new regulation which is harmonised with Greece.

Okay, so there are still dodgy traders, but we have TV shows that doorstep those guys for fun.

But some lawyers are getting pretty worked up about these regulations from a compliance standpoint (did I mention the criminal and civil enforcement provisions?). But this misses the wood for the trees. Any consumer-facing business that is reliant on these sorts of practices for its bread and butter has heavy cultural issues to contend with, and these issues could go right to the top of the tree. Cultural change is tough, and it isn't driven from the compliance coal face alone.

Which is why I enjoy advising Web 2.0 businesses - as they are predicated not only on treating consumers fairly, but enabling consumers to ensure that they are treated fairly.

Interesting issues for some eBay power sellers, though, and I guess there may be some old sharks who'll find themselves with a fine or making licence plates.

Lest we forget, there are also changes to the comparative and misleading advertising regulations. Basically, the Business Protection from Misleading Marketing Regulations 2008 ("BPMMRs"):

• prohibit advertising which misleads traders (Reg 3);
• sets out the conditions under which comparative advertising is permitted (Reg 4) - including the condition that the ad must not be misleading either under Reg 3 or the CPRs (see above);
• requires traders and bodies responsible for codes of conduct or monitoring compliance with such codes not to promote misleading advertising and comparative advertising which is not permitted (Reg 5).

And, unlike the rather limp Advertising Standards Association advertising codes, these puppies have teeth - criminal and civil enforcement remedies and nasty accompanying powers.

West End ad agencies will never be the same again.

"Distance" selling - secret rules exposed

I've been involved in helping people sell at a distance secretly now since lawyers were first told it was okay in a coded document (97/7/EC) leaked by the European Commission in 1997.

Now I see that two equally shadowy entities, OFT and TSS, are trying to let the cat out of the bag so that virtually anyone could comply.

What a pair of do-gooders.

They say that 66% of people selling remotely have never found the laws that require some bumf on their web sites, which could land them in hot water with local officials.

Well, don't think the official hot tub sessions will stop there, folks. There's a lot of regulation that has been released by the European Commission in code that only lawyers can read. Allegedly, because it helps create confidence in doing business across the length and breadth of the EU.