Shuffling The Deckchairs On HMS Status Quo

I've kept a beady eye on the 'progress' of the Commission on Banking, while holding out little hope that it will result in more than a shuffle of the proverbial deckchairs, rather than any wider solution to our general funding woes.

UK banking, as we know it, would be finished without ongoing taxpayer support of at least £512bn, according to the latest National Audit Office report. And that's assuming the economic headwind doesn't get any stronger.

But this figure doesn't include the subsidy banks get to help gather deposits cheaply, especially in the form of the Individual Savings Account tax-free savings programme. Banks are accused of abusing this privilege by offering a mere 0.41% average interest rate on the £158bn they attract with higher teaser rates. Of course, you can add to that practice the many £millions in fines incurred to date for such things as mishandling customer complaints, reporting failures, lapses in anti-money laundering controls and poor investment advice (keep up with the latest fines here).

So, if it weren't for the uncertainty about the extent to which the government will continue to bend the theory of evolution in their favour, the only way for us to really make money out of UK banks would be to bet against them.

Instead, the taxpayer safety net allows the Commission the luxury of merely wondering whether good old British banking might be delivered more safely (if still more expensively) via independently funded, ring-fenced subsidiaries.

What difference could this possibly make?

Testament to this bizarre preoccupation with maintaining status quo is the government's determination to ignore alternative models. For instance, the government has just meekly referred to Zopa, the UK's own world-first in person-to-person finance, as a form of "giving" (see page 15). That's weird, because with absolutely no government assistance Zopa has so far enabled over £100 million in person-to-person loans, representing 1% of the UK personal loans market. Lenders are seeing annual returns of 7.9% and a default rate of under 1%, while delivering market leading rates for creditworthy borrowers. Banks aren't offering anything like this service, even with the added government subsidy of tax-free ISA status. Imagine how much of the personal loan market would shift to the Zopa platform if people's lending returns were also tax-free? FundingCircle has already launched a similar model for small business funding. Could the greater liquidity enable mortgage funding in the same way? Such horizontal funding processes also offer a more transparent, low cost and efficient solution than the vertical intermediation model that operates in the 'shadow banking system'.

It's one thing to avert overnight systemic failure, but quite another to prop up exploitative, inefficient business models over the longer term in preference to more efficient alternatives. We should expect a more holistic approach to the UK's financing woes than the Commission on Banking is attempting to provide.

The Story of Zopa

Giles Andrews, Zopa's Managing Director, explains how the social lending marketplace evolved. Hat-tip to P2P-Banking.

Giles Andrews from Zopa from The IPA on Vimeo.

Beware Pleas Based on Moral Panic

William Patry made this excellent point in tonight's SCL Annual Lecture, specifically in connection with proposals to extend further the term of copyright: political appeals based on  moral panic are most often made where there is asymmetry in the information available: criminal law and copyright law being key examples. There is no evidence from the other side - the alleged perpetrator - unlike in cases where two sets of industry players are pitted against one another, which usually produces hard evidence pointing in each direction (e.g. competition law disputes). So the way is clear for, say, the security agencies or copyright owners to appeal for protection merely because it is "right and just" rather than to protect against any proven harm.

Such pleas may ultimately be futile, of course. Attempts by the music industry to deny access to music downloads neither prevented the rise of Napster and iTunes, nor prevented the steady demise of EMI. As I've also mentioned before, the root cause of music industry disruption is consumer dissatisfaction, not copyright violation.

William Patry's suggestion is to insist on an empirical approach to the issue of whether or not the copyright regime works, rather than a continued assumption that it's a property right that deserves protection at any cost. Only then will a proportionate response emerge. I share the view that in all regulatory matters - like business process issues - one must first define the problem and ascertain its scale before deciding whether or not to devote precious state resources to resolving it. At that point, legislators should insist on finding the root causes and implementing the best solutions to tackle them.

Attempts at providing empirical evidence on these issues in the file-sharing context, for example, have been pathetic. Claims that music providers will lose £1bn in CD sales over the next 5 years are disingenuous when their digital sales are increasing at the rate of 28% a year. And where is the evidence that extending the term of copyright will result in more copyright works that will yield satisfactory incomes for creators? Is it not possible that shortening the copyright term would result in a far greater volume of sales for more artists at lower prices to consumers?

The people should be told before any further extension to copyright is granted.

Your own personal economy

The red wine was flowing last night, thanks to Simon, Bill and the other fine folk at CVL, and some of the chat turned to how much of the goods and services that we buy and sell will be person-to-person in 5 or 10 years.

While I doubt that I was terribly informative last night, I'm now able to recall that, personally and professionally, I'm aware that people are already connecting economically speaking in education, complementary healthcare, event organising, lending (as a proxy for investing or saving) and borrowing, music, financing music production, stuff, accommodation, jobs and more stuff, legal services and home improvement. There must be loads more, but I'd have to start actively searching and my emails are piling up...

Could you get through the day, week, month, year only dealing with individuals?