Open Agentic AI And True Personalisation

Sixteen years on from my own initial posts on the subject of a personal assistant that can privately find and buy stuff for you on the web, and we have 'open agentic AI'. But are you really any closer to the automated selection and purchase of your own personalised products without needlessly surrendering your privacy or otherwise becoming the victim? Should this latest iteration of open generative AI be autonomously making and executing decisions on your behalf? 

What is Agentic AI?

An 'agentic' AI is an evolution of generative AI beyond a chatbot. It receives your data and relies on pattern matching to generate, select and execute one of a number of potential pre-programmed actions without human guidance, then 'learns' from the result (as NVIDIA, the leading AI chip maker, explains). 

A 'virtual assistant' that can find, buy and play music, for example, is a form of agentic AI (since it uses AI in its processes), but the ambition involves a wider range of tasks and more process automation and autonomy (if not end-to-end). 

You'll see a sleight-of-hand in the marketing language (like NVIDA's) as developers start projecting 'perception', 'understanding' and 'reasoning' on their agentic AIs, but computers don't actually do any of those human things. 

It's certainly a compelling idea to apply this to automating various highly complex, tedious consumer 'workflows' that have lots of different parameters - like buying a car, perhaps (or booking a bloody rail ticket in the UK!). 

Wearing my legal hat, I also see myriad interesting challenges (which I'd be delighted to discuss, of course!), some of which are mentioned here, but not all...

Some challenges

The main problem with using an 'agentic AI' in a consumer context is the involvement of a large language model and generative AI where there is a significant (e.g. economic, medical and/or legal) consequence for the user (as opposed to a chatbot or information-only scenario (though that can also be problematic). Currently, the household or device based virtual assistants are carrying out fairly mundane tasks, and you could probably get a refund if it bought you the wrong song, for example, if that really bothered you. Buying the wrong car would likely be a different matter.

There may also be confusion about the concept of 'agency' here. The word 'agentic' is used to mean that the AI has 'agency' in the sense it can operate without human guidance. That AI is not necessarily anyone's legal 'agent' (more below) and is trained on generic training data (subject to privacy, copyright consents/licensing), which these days is itself synthetic - generated by an AI. So, agentic AIs are not hosted exclusively by or on behalf of the specific consumer and do not specifically cater to a single end-customer's personalised needs in terms of the data it holds/processes and how it deals with suppliers. It does not 'know' you or 'understand' anyone, let alone you.  

Of course, that is consistent with how consumer markets work: products have generally been developed to suit the supplier's requirements in terms of profitability and so on, rather than any individual customer's needs. Having assembled what the supplier believes to be a profitable product by reference to an ideal customer profile in a given context, the supplier's systems and marketing/advertising arrangements seek out customers for the product who are 'scored' on the extent to which they fit that 'profile' and context. This also preserves 'information asymmetry' in favour of the supplier, who knows far more about its product and customers than you know about the supplier or the product. In an insurance context, for example, that will mean an ideal customer will pay a high premium but find it unnecessary, too hard or impossible to make a claim on the policy. For a loan, the lender will be looking for a higher risk customer who will end up paying more in additional interest and default fees than lower risk customers. But all this is only probabilistic, since human physiology may be 'normally distributed' but human behaviour is not.

So using an agentic AI in this context would not improve your position or relationship with your suppliers, particularly if the supplier is the owner/operator of the agentic AI. The fact that Open AI has offered its 'Operator' agentic AI to its pro-customers (who already pay a subscription of $200 a month!) begs the question whether Open AI really intends rocking this boat, or whether it's really a platform for suppliers like Facebook or Google search in the online advertising world. 

It's also an open question - and a matter for contract or regulation - as to whether the AI is anyone's legal 'agent' (which it could be if the AI were deployed by an actual agent or fiduciary of the customer, such as a consumer credit broker). 

Generative AI also has a set of inherent risks. Not only do they fail to 'understand' data, but to a greater or lesser degree they are also inaccurate, biased and randomly hallucinate rubbish (not to mention the enormous costs in energy/water, capital and computing; the opportunity cost of diverting such resources from other service/infrastructure requirements; and other the 'externalities' or socioeconomic consequences that are being ignored and not factored into soaring Big Tech stock prices - a bubble likely to burst soon). It may also not be possible to explain how the AI arrives at its conclusions (or, in the case of an agentic AI, why it selected a particular product, or executed a specific task, rather than another). Simply overlaying a right to human intervention by either customer or supplier would not guarantee a better outcome on theses issues (due to lack of explainability, in particular). A human should be able to explain why and how the AI's decision was reached and be able to re-take the decision. And, unfortunately, we are seeing less and less improvement in each of these inherent risk areas with each version of generative AIs.

All this means that agentic AI should not be used to fully automate decisions or choices that have any significant impact on an individual consumer (such as buying a car or obtaining a loan or a pension product).  

An Alternative... Your Own Personal Agent

What feels like a century ago, in 2009, I wondered whether the 'semantic web' would spell the end of price comparison websites. I was tired of seeing their expensive TV ads - paid for out of the intermediary's huge share of the gross price of the product. I thought: "If suppliers would only publish their product data in semantic format, a 'widget' on my own computer could scan their datafeeds and identify the product that's right for me, based on my personal profile and other parameters I specify". 

By 2013, I was calling that 'widget' an Open Data Spider and attempted to explain it further in an article for SCL on the wider tech themes of Midata, Open Data and Big Data tools (and elsewhere with the concept of 'monetising you'). I thought then - and still think now - that: 

"a combination of Midata, Open Data and Big Data tools seems likely to liberate us from the tyranny of the 'customer profile' and reputational 'scores', and allow us instead to establish direct connections with trusted products and suppliers based on much deeper knowledge of our own circumstances."

Personalised assistants are evolving to some degree, in the form of 'personal [online] data stores' (like MyDex or Solid); as well as 'digital wallets' or payment apps that sit on smartphones and other digital devices and can be used to store transaction data, tickets, boarding passes and other evidence of actual purchases. The former are being integrated in specific scenarios like recruitment and healthcare; while the latter tend to be usable only within checkout processes. None seems to be playing a more extensive role in pre-evaluating your personal requirements, then seeking, selecting and purchasing a suitable product for you from a range of potential suppliers (as opposed to a product that a supplier has created for its version of an 'ideal' customer that you seem to fit to some degree). 

Whether the providers of existing personal data stores and digital wallets will be prepared to extend their functionality to include more process automation for consumers may also depend on the willingness of suppliers to surrender some of their information advantage and adapt their systems (or AIs) to respond to and adapt products according to actual consumer requests/demand.

Equally, the digital 'gatekeepers' such as search providers and social media platforms will want to protect their own advertising revenue and other fees currently paid by suppliers who rely on them for targeting 'ideal' customers. Whether they can 'switch sides' to act for consumers and preserve/grow this revenue flow remains to be seen.

Overall, if I were a betting man, I'd wager that open agentic AI won't really change the fundamental relationship between suppliers, intermediaries and consumers, and that consumers will remain the targets (victims) for whatever suppliers and intermediaries dream up for them next...

I'd love to be corrected!

Is BigTech Still Battling The Entire Human Race, Or Just Some Of Us?

Readers will be familiar with my view that we consumers tend to be loyal to 'facilitators' who focus on solving our problems, rather than 'institutions' who solve their own problems at our expense. Previously trusted service providers can also lose their facilitator status, and I'd argue that Facebook has already done so (owing to privacy, electoral and extremist content scandals) and Google is firmly headed in that direction (through behaviour incurring massive EU fines). Yet, despite announcements designed to suggest increasing transparency, it seems BigTech is actively resisting independent human oversight and the perceived battle between computers and the human race is far from over...

Part of the problem is that 'BigTech' firms still operate as agents of retailers and other organisations who pay them vast amounts of money for exploiting our personal data targeting advertising at us, rather than as our agents for the purpose of finding what we need or want while shielding us against exploitation. In fact, this is the year when digital advertising spend will exceed spending on the old analogue 'meat space' channels. 

Combine that exploitative role with rogue artificial intelligence (AI) and you have a highly toxic reputational cocktail - particularly because AI based on machine learning is seemingly beyond human investigation and control. 

For instance, Amazon found that an AI programme used for its own recruiting purposes was terribly biased, but could not figure out what was going wrong or how to fix it, so had to simply shut the thing down.  Alarmingly, that suggests other AI programmes that are already notorious for being biased, such as those used for 'predictive policing', are also beyond fixing and should be shut down...

Many BigTech firms are appointing 'ethics boards' to try to avoid their AI programmes heading in inappropriate directions. Trouble is, not only is there doubt about what data scientists might view as inappropriate (which drove the appointment of ethics boards in the first place), but these boards are also generally toothless (only CEOs and main boards can decide the actual course of development), and tend to be populated by industry insiders who sit on each other's ethics boards. 

It is unclear, for example, whether the recommendations of the ethics committee overseeing the West Midlands police 'predictive policing' algorithm will be followed. Meanwhile, 14 other UK police forces are known to be using such AI programmes...

Another worrying trend is for AI firms to prevent investors voting on the company's plans, using "dual class" share structures that leave voting control with the founders rather than shareholders. Lyft is the latest to hit the news, but other offenders include Alphabet (Google), Blue Apron and Facebook, while Snap and Pinterest give shareholders zero control. Those firms might argue that stock prices are a check in themselves. But the stock market and investor greed are notorious for driving short-term decisions aimed at only maximising profits, and even giant regulatory fines are subject to appeal and can take a long time to be reflected in share prices. Voting power, on the other hand, is more qualitative and not simply a function of market forces - and the fact that it is being resisted tells you it's a promising tool for controlling BigTech.

Regulation will also be important, since fines for regulatory breaches are a source of revenue for the public sector that can be used to clean up the industry's mess and to send signals to management, investors, competitors and so on. I'm not suggesting that regulatory initiatives like the UK Brexidiot ToryKIP government's heavily ironic "Online Harms" initiative are right in the detail or approach, but Big Tech certainly cannot keep abdicating responsibility for the consequences and other 'externalities' associated with its services and approach. There has to be legal accountability - and grave consequences - for failing to ensure that AI and the firms themselves are subject to human control.

I guess the real question might be: which humans? 

EU Looks To CrowdInvesting To Plug Post-Brexit SME Capital Gap

The European Securities and Markets Authority (ESMA) has responded to an EU consultation on capital markets with a plea for the European Commission to focus on small businesses and investment-based crowdfunding; as well as more joined up regulatory supervision and more efficient collection of financial reporting data.

Recommendations include lighter information and reporting requirements for SMEs seeking to raise money; and EU regulation of crowd-investing to enable cross-border funding on a consistent basis.

ESMA says that only 10 of the 28 current EU member states reported the existence of regulated investment-based crowdfunding (in debt securities and equities/shares) in their territory - 99 platforms (up from 46 in 2014), of which 30 are based in the UK (up from 26 in 2014). France (23), Italy (17) and Germany (13) are fast followers. Only 12 platforms use a passport - based in either the UK or Finland (which has a total of 5 platforms). 

The various platforms are listed in the Appendix to the ESMA response. There is also a high level comparison of the various differences in terms of initial capital requirements; instruments and structures; remuneration models/levels and how these align with the interests of fundraisers/investors.

Volumes are not mentioned, but given that over half the platforms in 2014 were based in the UK, then it's likely they are still responsible for most of the volume. And the fact that ESMA bothers to push the sector at all suggests that those volumes are significant.

So this focus is not only an admission that Brexit creates a big and important capital-raising gap to fill, but it's also a big endorsement of the UK crowd-investment sector.  

Whither the UK's Implementation of #PSD2?

It's still a case of 'hurry up and wait' on the transposition of PSD2 into UK law. 

The Treasury had initially said it would issue the consultation paper on transposing PSD2 into UK law in August 2016, but nothing forthcoming as at 3pm today. In mid-October, the Treasury told a stakeholder meeting at the FCA that the paper was "being finalized" with no public explanation for the delay (though one could readily speculate that Brexit related projects might be a key distraction!). 

Officials have my deepest sympathy, but it's a little more frustrating because the European Banking Authority has moved forward with consultation on certain regulatory standards related to strong authentication and communication amongst PSPs, passporting, authorization and so on.

The EBA's proposed standards associated with authentication, in particular, have drawn a fair degree of criticism from the industry and European Parliament, partly for assumptions concerning the nature of payment initiation and account information services, as well as their inflexibility and the extent to which they perhaps give the incumbent 'account servicing' PSPs more control than PSD2 was intended to allow.  It will be interesting to see whether the concerns are reflected in the next iteration, expected in December/January (although they do not take effect until at least October 2018 to allow for development work).

#LOBOs The Wolves That Stalk The High Streets

'Lobo' is Spanish for 'wolf'

Last night Dispatches updated us on the LOBO crisis that's savaging the UK's local government budgets. 

Not only have councils lost the estimated £500 million in instant profits pocketed by the banks who lured them off long term, low rate loans to 'more flexible' terms; but they're also left with higher interest bills that have resulted in more spending cuts or higher borrowing.

Everyone still involved seems to deny there's a problem, of course, but the data speaks volumes and some of the poachers-turned-gamekeeper have been willing to spill the beans. 

It's worth noting that the banks paid commissions to 'brokers' who brought in the business. Whether those commissions were or should have been disclosed is one issue; and whether the brokers also paid a cut to others is another. You'd think that Clive Betts MP (Lab), Chair of the Commons' Select Committee on Communities and Local Government, might include those items on his agenda - assuming he can get past the sad fact that allowing local governments to deal with the banking wolves in the first place was a Labour initiative.

It's also important to note that all of this only came to light through the tenacity of researchers armed with Freedom of Information requests, the results of which were handed to Dispatches. While hunting down any miscreants is an important step, requiring greater transparency on the sources and terms of local government borrowing in future might also help avoid another mauling. 

The P2P Jobs Market

The UK has an army of 4.6 million self-employed people, according to the Office of National Statistics - the largest it's been since we began recording such figures 40 years ago. That's 15% of the UK workforce. Even more significant is that 732,000 of the 1.1m people who have found work since early 2008 are self-employed. Fewer people have been leaving self-employment for employee roles over the past five years than used to be the case. Perhaps that's because of the recession. But over that period numerous services have emerged to support self-employment, and it seems possible that we'll see an even greater shift towards that way of working in the future.

So, who are the self-employed, and how do they find work?

The largest increase in self-employment since 2008 has been among 'managers, directors and senior officials'. But, hey, every self-employed person might claim to be a manager. So it's more noteworthy that the top 3 self-employed roles of 2014 have been building trades, cab drivers/chauffeurs and carpenters. The figures also show that professional and technical occupations are heavily represented.

How do these people find work?

No doubt word of mouth has a lot to do with it. But we've also seen a rise in the number of online marketplaces that match self-employed people with those who need work done. Indeed, TaskRabbit, a leading US marketplace, chose London as testing ground for a more automated model that it later rolled out in the US to replace its initial manual auction service. While TaskRabbit currently seems to cover the broadest range of services, there are many other such marketplaces in the UK, such as RatedPeople, Trustatrader, MyHammer, MyBuilder, TradeAdvisor, Checkatrade and so on. Note that Amazon has launched a 'local services' offering in the US, which suggests it may one day do so here.

The prevalence of cab drivers amongst the self-employed may help explain the growing number of taxi apps and car-share services.

Meanwhile, SchoolofEverything (a client of mine from 2007, on the back of my experience of P2P lending), enables anyone to make money from giving lessons in almost anything you could think of (...no, not that).

At any rate, the growth in both the number of self-employed people and the services that help them find work, suggests that self-employment could be an even more popular model in the future. The rise of the P2P economy?

FCA #Innovation Hub

The FCA has launched an Innovation Hub as part of its plans to support innovation in financial services.

Innovators can submit a request for support from the Innovation Hub, which the FCA will assess against certain criteria and then decide on the type of support it might be able to offer. The assessment criteria are:

• whether the innovation is genuine - ground-breaking or significantly different;


• whether the innovation offers a good prospect of identifiable benefit to consumers (either directly or through greater competition);


• whether the business has invested appropriate resources in understanding the regulations in relation to its own position;


• whether the business have a genuine need for support through the Innovation Hub?

In addition, the FCA has published a Feedback Statement, responding to input received as part of Project Innovate.

A Developer's Guide to Privacy and Fairness?

Over the past few months I've noticed a range of different articles expressing privacy concerns about mobile apps, wearable devices and internet-enabled things, like smart TVs and bathroom scales ("the Internet of Things") on the one hand; and initiatives like 'Midata' to help you create your own 'personal data ecosystem', on the other. But regulation aimed at unfair trading is also relevant in this context, as are the various security requirements being proposed at EU level in relation to payments and 'cybersecurity' more generally. Official guidance in these areas is often broad but not comprehensive, as in the summary of privacy rules given in the context of Midata. It would be great to see a more concerted effort to draw all the guidance together. I have suggested this to the SCL. In the meantime, this overview explains briefly where to find guidance on meeting privacy and fairness requirements when using apps and other devices for consumer marketing purposes.

Note: as a developer, it's worth reading such guidance as if you were a consumer, to understand the regulatory intent. As a consumer it's worth reading guidance aimed at firms, since that gives you a better insight into how things actually work 'behind the scenes'.

The Information Commissioner has plenty of practical guidance on privacy in the context of cookies, mobile applications and data sharing (and a other guidance by sector or activity).

The Advertising Codes are important sources of information on how systems are supposed to behave in a marketing context.

PhonepayPlus has issued guidance on the use of premium rate numbers.

The Office of Fair Trading had plenty of guidance on how to comply with consumer protection regulation, which is now hosted by the Competition and Markets Authority, including principles for online and app-based games.

The OFT's guidance on what's appropriate in a consumer credit context, such as debt collection, is now in the FCA's consumer credit rules, and the FCA also recently consulted on updates to its guidance on financial promotions in the social media.

Firms seeking FCA authorisation often have to provide a lot of detail on their IT systems and governance in the process. The proposed new EU directive on payment services will broaden the range of regulated services and go into considerable detail on data security. In fact, security standards will be produced by the European Banking Authority, just to add to the confusion.

Knowing where consumers can complain is a guide to other regulators who may be interested in how your application works. There is an overview of UK consumer complaints channels here. There are specific complaints bodies for sectors, such as energy, financial services and telecoms, as well as for activities, like advertising and processing personal data.

However, it's you should be aware that the Data Protection Act gives businesses separate rights to process your personal data in the following circumstances:

• for the performance of a contract to which you are a party, or for taking of steps at your request with a view to entering into a contract;
• for compliance with any legal obligation, other than an obligation imposed by contract;
• in order to protect your vital interests;
• either for the exercise of a function conferred on a business by law or for the exercise of any other functions of a public nature exercised in the public interest;
• for the purposes of legitimate interests pursued by a business or by someone else to whom the data are disclosed, except where that processing is unwarranted by reason of prejudice to your rights and freedoms or legitimate interests.

Public sector bodies also have certain rights to use your data which I haven't covered here. However, it's important to mention the ID Assurance Programme run by the Government Digital Service team, which has issued useful guidance on ID assurance. And the Connected Digital Economy Catapult that builds platforms for SMEs is due to develop a code of practice on consumer protection.

The Beginning of The End of Consumer "Banking"

Funny to see a story from John Gapper in the FT this morning, saying technology will hurt retail banks but not kill them, only a few pages before First Direct admits it mis-sold complex investment products to consumers.  While I agree that innovation doesn't 'kill' anything, and must co-exist with what it is replacing, John seems to have a misplaced faith in retail banks' ability to maintain their direct relationships with consumers.  Banks are steadily being relegated to the back-office of retail finance.

 

John may be right to point out that banks lose money on the limited activity of offering current accounts, and possibly even savings account functionality, so that these are not attractive areas in themselves for technology businesses to enter. But of course you can't view those 'products' in isolation. They are just part of the 'bait and switch' routine that banks operate to persuade people to part with their money so the banks can earn far more from using those funds for their own ends.

To understand what the tech companies are doing, you have to consider how much money the banks make out of the end-to-end activity of robbing investors/depositors of yield while fleecing borrowers with expensive loans - and making everyone pay a lot for slow-cycle payment processing. 

 

It is wrong to say that technology companies are merely playing at the edges of 'banking' by offering payment services and person-to-person loans. This is all part of the strategy for disrupting the 'banking' sleight of hand.

 

Tech companies know that if they can provide a decent, transparent consumer experience to savers/investors on the one hand, and those who need the funds on the other, then they are in a position to cut the cost of moving money between the two. In fact, the money may not even have to move at all: the important issue is who is entitled to it, and whether it is available. 

 

You don't need a bank to keep the data and transaction records that tells you who owns the funds. It's all just data, as Marc Andreessen is quoted as saying. 

 

And it's far safer to separate the transaction processing and record-keeping function from the cash, which should be held separately from the processor's own funds. That's how e-money institutions, payment institutions, P2P lending and crowd-investment firms are set up...  They may rely on segregated commercial bank accounts for holding that cash, but the banks who provide those accounts have no control at all over which consumers own the money in them, or what those consumers choose to do with it amongst themselves.

 

In the EU, the regulatory support for such new business models began in earnest in Europe in 2000, with the advent of the first E-money Directive, and has snowballed with the Payment Services Directive in 2007, a new EMD in 2009 and the proposed revamp of the PSD. There are now hundreds of these payment institutions in the UK alone. And it's no coincidence that the UK has led the way in both creating and regulating P2P lending and crowd-investment platforms.

 

All of this spells the beginning of the end for consumer 'banking'.

 

 

The FCA and Mobile Financial Services

The Financial Conduct Authority is going to great lengths to deepen its understanding of the retail financial services market. Project Innovate is a case in point, as is the recent (interim) report on how consumers use mobile devices. However, both initiatives underscore the need for non-banks to engage with the FCA far more than they have to date, and to provide a lot more information about how, why and when consumers need or want to use financial services.

It's a bit unfortunate that the FCA has used 'mobile banking' to describe consumers' mobile activities in the financial services context. We need to get away from such bank-centric language. After all, the FCA points out that consumers don't just use mobile devices to check the balance of a bank account, a bank statement or access internet banking web pages. There are many mobile services offered by payment institutions and electronic money institutions, not to mention the providers of credit, investment and insurance services. Each type of service provider is bound by different FCA-supervised rules and regulations when dealing with us, so it's also a little ironic that the FCA is concerned that "consumers may be unclear about their rights and obligations when using mobile banking products and services".

But terminology is a red herring. The starting should be to consider what activities consumers are engaged in when they need to rely on financial services - and whether the required services are sufficiently accessible or useful.

Here the banks' mobile offerings provide a helpful illustration of how financial services can be misaligned with consumer behaviour. The FCA found that consumers are using mobile devices to access major banks' systems far more frequently than the banks estimated they would (50 times more often than visiting a branch and 20 times more often than a web site). This has caused capacity issues and outages in bank IT systems, which the FCA is not happy with. But the FCA doesn't seem to have considered that this over-reliance on mobile channels might also demonstrate how awkward it is for consumers to use bank services through other channels. 

In fact I doubt whether we really need or want to contact our financial service providers' mobile sites at all, other than in an emergency. Nobody, except banks, engages in "banking". We may use a bank's services, but only in the context of a much wider activity, such as buying a house or a birthday present on the way to a party. "Banking" is what banks think consumers are doing, because banks only view the world through the lens of their own products and not consumers' day-to-day activities.

The FCA needs to avoid falling into the same trap. I mean, there are plenty of great examples of seamless online customer experiences out there which the FCA could use as a benchmark.

Indeed, what this report emphasises most is the need for non-banks to engage far more with the FCA, particularly in the context of Project Innovate.

Alas, it may be too late for them to help shape the second Payment Services Directive...

Virtual Currencies Get Real

The Establishment has finally woken up to the reality of virtual currencies, but official responses are all over the place. Let's hope the industry can help forge some international consensus on how to proceed towards a supportive mix of proportionate regulation and self-regulation in the months ahead.

So far, UK officials seem to be the most openly supportive of innovation in this space. The Cabinet Office included virtual currencies in an open workshop in October 2013 (video here) and the Revenue issued a statement clarifying their tax treatment earlier this year.

In the meantime, the industry formed its own body in November 2013 - the Digital Asset Transfer Authority - to participate in the policy making process. Over 30 firms worldwide are represented, and many US Federal and State regulators attened the AGM in April 2014.

That wasn't enough for the Canadians, however. In late June they drew a line in the sand with specific regulatory measures aimed at "dealing in virtual currencies" (undefined), including restricting banking services to registered dealers.

Uncertainty as to what is meant by "virtual currencies" and "dealing" may explain why most other authorities have been careful not to rush. For instance, the Financial Action Taskforce (FATF) released a report at the end of June that was designed to “stimulate a discussion” on appropriate definitions and how best to introduce risk-based controls. That seems to be an initiative that it would be worthwhile for the industry to engage with.

Last Friday, however, the EBA steered a strange path between the Canadians and FATF, requesting the EU's national financial regulators to 'discourage' their financial institutions from buying, holding or selling virtual currencies.  I've reviewed the shortcomings of that approach in an article for Society for Computers and Law. Let's hope wiser heads prevail - it can't be help anyone's cause for the regulated financial sector to completely lose touch with such an important area of innovation.

What the industry makes of all this sudden activity is not yet clear, but I'm sure it's all been much discussed at CoinSummit over the past few days and no doubt we'll hear something from DATA soon. Perhaps from a new Brussels office...

Optional Annuities Could Mean Working Pensions

Odd that Will Hutton should claim in The Observer, of all places, that making the purchase of pension annuities optional will end in long term social disaster. UK pensions are already a long term social disaster. Hutton himself points out that "400,000 people buy £11bn of annuities every year", yet "the annuity market [has become] overstretched, offering indifferent and often wildly different rates." 

This is because consumers have no choice. There's no competitive pressure at all on the insurance companies or their agents to remove unnecessary middlemen, reduce fees to customers or simplify products. In fact, the Financial Services Consumer Panel recently found that the annuities industry continued to focus on increasing its revenues through product complexity, even when consumers were given the option to shop around. No one in the industry seized the opportunity to make annuities more transparent and better value for the consumer. [Update on 26 March: Legal & General has suggested the market for individual annuities will shrink by 75% - rather endorsing the government decision to make them optional!].

Will Hutton argues that rather than make annuities optional "the response should have been to redesign [the market] and figure out ways it could have offered better rates with smarter investment vehicles". But that seems naive, given the FSCP findings. The industry had that opportunity and declined it. 

It's equally naive to suggest that less demand for annuities will mean losing a valuable opportunity for insurance companies to 'pool the risk' of funding pensions. The industry merely sees risk pooling as a chance to exploit asymmetries of information to line its own pockets. 

The only way for the government to shake up the cosy annuities cartel was to remove the implicit guarantee that everyone would have to buy an annuity. 

Mr Hutton then seeks to set up some kind of moral panic that the 'freedom to buy a Lamborghini' instead of an annuity will result in people simply frittering away their life savings. Not only does this suggest that he'd rather your life savings were placed in the grubby mitts of the annuities industry so they can buy the Lamborghinis, but it also insults the consumers who face the abyss of the annuities market. Their concern clearly arises from the lack of decent returns, not because they're eager to spend the cash on exotic cars.

Finally, Will suggests that the State is entitled to control how you invest your pension money because it allowed you to avoid paying income tax on your pension contributions in the first place. If you agree with that, then presumably you would say the State is entitled to control how you spend every penny of your income that it has allowed you to keep. This of course places a great deal of trust in the State's financial management capabilities that we know from bitter experience is ill-deserved. As a result, it's more likely that citizens will gain greater control over the allocation of 'their' tax contributions, not less (as I've joked about previously). But regardless of whether it's the State or the taxpayer who is in control, neither party wants the State to be saddled with the consequences of an uncompetitive and opaque annuities market. That would only suit the annuities spivs. Again, the only alternative is to expose the market to competition from all manner of transparent savings and investment opportunities. 

Importantly for economic growth, the freedom to avoid annuities opens up the potential for £11bn a year to be invested directly into the productive economy at better returns in much the same way that the new ISA rules will liberate 'dead money' from low yield bank deposits. Not only could we see some pension capital crowd-invested into long term business and infrastructure projects in a way that won't be interrupted by the need to purchase an annuity, but those in draw-down might also consider some 3 to 5 year loans to creditworthy borrowers as a way to generate some additional monthly income.

Wolf Attacks On Local Authorities

It's a vicious coincidence that 'lobo' means wolf in Spanish and a 'Lender Option Borrower Option' in derivatives sales jargon (not to mention parallels with the infamous Timberwolf deal and even The Wolf of Wall Street).   

As explained to me by a researcher from MoveYourMoney in December, LOBOs were sold to UK local authorities to provide (very little) additional funding and to replace the authorities' long term, fixed rate loan contracts with terms that give the lender the option to increase interest rates every 5 years, while the borrower's only 'option' is to repay the loan. This introduces huge uncertainty over local authority funding costs that did not exist before.

How big a problem is this? 

Well, this post suggests that in 2009 at least 30 housing associations may have mistakenly replaced stable long term loans with high cost LOBO facilities in return for only small increases in net funding. But responses to recent Freedom of Information requests suggest that the problem goes further back in time. A response from Brent Council, for instance, shows that in the eight years to April 2010, the council agreed nearly £100m worth of LOBOs, with £21m of funding at risk of being 'called' this year, another £20m in 2015 and £35m in 2016.

Brent's last LOBO was agreed in 2010 and the lender has the option to raise rates in 2015. That was a deal for £10m at an interest rate of 6.75%, even though 'Liebor' rates were at rock bottom. The previous LOBO, agreed in 2008, had a rate of 3.95%. There's no telling what the lender might charge next year...

Now why would local authorities agree to LOBOs? Did they understand the value of the long term deals they were giving up? 

There should be yet another inquiry, but I suspect it will reveal the same old problems amongst the usual suspects that were highlighted by the Banking Standards Commission. Banks are only in the market to make money for themselves.

Thoughts On The Potential For P2P Insurance

Some interesting discussions these past few weeks about the potential for innovation and 'disruption' in the insurance markets. As ever, there are stark differences between areas that industry players see as ripe for innovation/disruption and the opportunities outsiders see...

A signficant source of this disconnect - and a great source of opportunity for outsiders - is the tendency for established institutions to view the market through the narrow lens of their own existing products and activities, rather than from the customer's standpoint. To really solve a customer's problem, a supplier has to understand the end-to-end activity in which that customer is engaged; and has to consider that it might need to collaborate with other suppliers in the process.

For instance, as a consumer of car insurance, it's important to understand that you don't simply drive you car. You drive it from A to B in the course of some other activity. Is it a one-off journey, or a commute? Does it involve both city streets, motorways and/or rural roads? What time of day is it? Are the road conditions always the same, often wet or sometimes extreme? Why couldn't I switch insurers, policies and/or premiums as these variables change? Could my car be covered by household insurance while parked at home? The answer hardly requires advanced telematics.

Another problem for insurers is their preoccupation with managing short term financial performance within regulatory capital requirements. This favours cost-reduction at the expense of more strategic, long term business development. In fact some insurers may be better off admitting they are simply running-off their existing book. [Update on 26 March: FT coverage of RSA's rights issue underlines this point - it's all about cost-cutting and disposals, to which CEOs have tied some nice incentives].

At any rate, this tells me that insurers will end up reacting to changing demand, rather than reinventing insurance in any substantial way.

The same goes for the insurance industry's attitude to Big Data. While large insurers are quite sophisticated exponents of Big Data, the industry is merely dedicating itself to persuading customers to disclose more and more personal data about themselves for use in marketing extra products, reducing fraud or improving claims-handling.

This ignores the evolution of personal information management services that go in search of products that are right for you personally. Insurers argue that's what happens on price comparison sites already, and the Cheap Energy Club takes that a step further. But we have not yet seen the truly personal 'open data spider' that some of us have been dreaming about. In that machine-readable future, the challenge for insurers won't be to find customers, but to be able to instantly formulate policies in response to customer devices directly peppering their systems with requests for tailored cover.

To be fair, there are also plenty of mistaken assumptions by outsiders about how insurance actually works (or doesn't) today, and which elements of the value/supply chain that are ripe for improvement or disintermediation. For instance, people forget the key role of reinsurers and reinsurance brokers in diffusing the risk of loss across many sources of capital.

So before disrupting today's insurance markets, it's worth pausing briefly to understand the nature of insurance and how the markets operate.

In layman's terms, insurance is a way for you (the 'insured') to transfer to someone else (an 'insurer') the risk of loss, in return for payment (a 'premium'). 

But it's not quite that simple. In legal terms, that 'risk of loss' translates into 'a defined event, the occurrence of which is uncertain and adverse to the interests of the recipient'. The practice of pooling risks also lies at the heart of modern insurance, such that premiums paid for insuring lower risks are used to fund payouts on higher risks. This of course presents a significant moral hazard, and the scandals involving payment protection insurance and so-called 'identity theft' insurance illustrate how the industry has tended to seek out customers who don't actually face a genuine risk that is adverse to their interests and/or would never be able to make a claim (even if they were aware they'd bought the insurance).

Which brings us to the main problem with insurance markets today - they are highly complex and heavily intermediated, often by players who have little or no interest in seeing a genuine risk is insured appropriately.

Modern insurance can be traced to the need to insure property against the risk of fire after the Great Fire of London (and some might say little has changed since then in the way non-retail insurance business is transacted!). The need to spread the exposure to other risks of loss has created markets around certain types of other events, businesses and property. Reinsurance markets have developed to enable insurers to insure themselves against the risks they underwrite. In each of these markets, the distribution, marketing and sale of insurance is heavily intermediated by brokers and others who take their own cut from the gross premium that you pay (the net premium being what the insurer receives in return for underwriting the risk). Insurers also must invest their premiums in order to help fund payouts and ensure they have enough capital to cover their exposures. So there are strong links between global markets for insurance and other financial products, which brings with it hidden costs and fees, the risk of re-concentrating risk in suprising places and exposure to global financial crises...

Rolling all of these issues together, it seems to me that the real purpose of an insurance business is to find people who genuinely face adverse consequences from specific events, the occurrence of which are uncertain, and then to diffuse that risk across as many different sources of capital as possible, as efficiently as possible. 

Some would say that this amounts to concentrating the risk of loss, since those who don't genuinely need insurance would be excluded (but allowed to buy it if they genuinely do just want it for 'peace of mind').  But that only means we should cease pooling risk and find another way to spread it, such as the peer-to-peer marketplace model that is at work in many other industries.

Peer-to-peer insurance would involve the operator of an electronic platform enabling direct insurance contracts between each insured and many investors (whether traditional insurers or not), each of whom would receive a small portion of the overall premium yet only have to pay out small sums in the event of loss. In this way, the risk of loss could be diffused amongst many investors who would only provide insurance as part of a widely diversified portfolio.  In common with the impact of the P2P model in other industries, removing all the middlemen would cut the margin between net and gross premium to a transparent fee for running the platform, leaving the lion's share of the difference with the market participants.

There are some interesting examples that are headed in this direction. Friendsurance, for example, goes part of the way by enabling a crowd of people to fund the excess on each of their insurance policies. I'm also aware of jFloat (yet to launch), which some have suggested is an application of the P2P model. But I understand that it will still involve pooling risk on a kind of mutual basis, whereas I'm talking more about a 'pure' P2P model.

Presumably, this is not what today's insurers, brokers, reinsurers, reinsurance brokers and other established industry participants want to hear. But they too could benefit in the longer term (if they can afford to think that far ahead) by setting up their own platforms or contributing their own capital and expertise.

It's okay, everyone, I'm not holding my breath...

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

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)."

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.

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?