Anyone For 8% Market Share?

Barclays' withdrawal from the asset-based small business lending market is a real shot in the arm for peer-to-peer finance.

The head of the Barclays Business unit is quoted as saying, “It’s the leasing and hire purchase side [where] we found our proposition was not that compelling, comprehensive and competitive. Our market share was small, about 8pc.”

Those are my gob-smacked italics.

According to the same article, the Finance and Leasing Association "said asset finance represents the majority of debt-financed business, and that its members provided £1.7bn of funding to support business investment in December, 5pc higher than the same month in 2009."

Barclays says it can target this £21bn market segment with unsecured loans. But of course it's talking through its hat. The Basel III head-wind blows strongest in the unsecured lending space. So even if Barclays can magic the £1.7bn asset-based portfolio into unsecured loans, it doesn't seem a great alternative use of capital.

But it's an interesting strategy if you're lending some of your own cash on a peer-to-peer platform, instead of leaving it in a savings account.

Barclays stands to lose out on both fronts.

Image from Gogherty.com.

Hanging Ten With The Momentum Surfers

I've not read "The Big Mo" yet, but I've put it on my list following a review I read in the FT. It's said to preach the evils of “herd behaviour whereby people blindly and irrationally follow those around them and work themselves up to a frenzied panic” or "momentum surfing".

I hope I have to eat my words, but I'm not expecting much more than some insight into exactly why it is that the leaders of our institutions don't get this, rather than how they might be induced to think critically and take a contrarian view when the evidence suggests that's appropriate.

The author, Mark Roeder, may have some direct experience of the former problems, having been "head of global advertising" at ill-fated UBS between 2004 and 2009. But for a real guide to the value of critical thought and adopting a contrarian stance "The Big Short" and "Fooling Some of the People All of the Time" will take some beating.

A Sustained Series of One-Offs, Or Generally Poor Banking?

Today, Lloyds Banking Group announced a provision of £500m in payments to 600,000 Halifax mortgage borrowers who may have been confused over the interest rate that applied to them, with some "missing out on lower mortgage payments." And Barclays Bank confirmed it's withdrawal from asset-based small business lending, explaining that its "proposition was not that compelling, comprehensive [or] competitive" (despite the market segment growing as a whole) and that it wasn't commercially worthwhile to spend money on compliance and other improvements.

In fact there's been a steady stream of poor retail banking stories since August:

1. RBS and NatWest have been fined £5.6m for not screening customers against sanctions lists;

2. There's been a spat between the FSA and the British Bankers' Association over the handling of over a million complaints related to payment protection insurance;

3. HSBC has been caught up in "the magic of Madoff" (not to forget the fallout from its aggressive foray into the US mortgage market);

4. RBS has been fined £2.8m for poor complaints handling; and

5. Barclays has been fined £7.7m for investment advice failings - and has subsequently withdrawn investment advisory services from its branches.

So it's worth noting DE Shaw's £100m short position in Barclays.

One certainly wonders what else might be lurking in the woodpile. It's just a pity it takes so long for the FSA to investigate and announce it's fines. Wouldn't it be better if the data were in the market promptly, rather than leaving everyone to guess?

Or perhaps the FSA should announce when it isn't undertaking enforcement activity against a bank... ;-)

Regulatory Creep And Overkill For Closed Loop Payments

The Treasury reports that it received no support for its proposal for voluntary consumer protection codes for ‘closed loop’ or limited network stored value, which are exempt from European E-money regulation. These include store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems - nothing like the collapsed retail pre-payment schemes that have previously lost their customers' money Farepak (Christmas hampers) and WrapIt (wedding gifts).

However, the rejection of the need for voluntary codes arguably opens the way for formal regulation, as the Treasury had seemed to be firmly of the view that more protection is necessary for the reasons summarized below. As a next step:

“The Treasury has asked the Office of Fair Trading (OFT) to provide some advice on the prepaid market, the effectiveness of current self regulatory solutions for protecting consumers, and the interaction between the regulated and unregulated sectors. This advice will be fully considered before the Government decides what, if any, action to take.”

Ominous? Well, it depends on what they mean by "prepaid". If the Treasury means retailers who require people to pay for products weeks or months prior to shipment, then I wonder why it's taken them so long to address a really obvious problem. But if they mean gift vouchers to make sure your nephew spends his birthday money on something educational instead of 5kgs of sweets, then this is over-kill.

I’ve extracted the summary of responses on this aspect below:

"3.10 There was little or no support for voluntary codes as a solution to improving the safeguards for consumers in the unregulated sector.

3.11 Responses fell into two broad categories: those that argued that tougher regulation and enforcement than voluntary codes is necessary to address perceived shortcomings in the unregulated sector; and those that felt that there was no justification for action due to the low risk of consumer detriment. The main reason for the general dissatisfaction with voluntary codes was that, although models vary, supervising and enforcing a voluntary code is often thought to be difficult. There are usually no limits to the number of violations a company might have, no financial incentive to abide by a code, and weak rights of recourse for consumers.

3.12 Some respondents argued that no action was necessary because the perceived risks are low. It was also argued that voluntary codes would be unworkable in practice because the average amounts outstanding on unregulated products (mainly gift cards) are less than £30. These responses concluded that the risk of loss per customer did not warrant a new protection mechanism."

Greed And Stupidity Are Winning

So Iceland's President has twice vetoed a Bill to pay for the compensation given to those who were suckered by the lure of premium savings rates. Neither Iceland nor its banks could even cover savers' principal, let alone pay interest at premium rates. But that's okay, UK and Dutch taxpayers have picked up the tab.

Similarly, bearing in mind the Irish financial crisis, it comes as a shock that Allied Irish Bank sold Californian towns letters of credit to guarantee their municipal bond issues. It's a sad fact that two thirds of investors in US municipal bonds are individuals unwittingly taking advantage of tax breaks.

Meanwhile, the tide is also going out on sub-prime student bonds and the scale of mortgage debt misselling continues to grow. So it's little wonder the the US public borrowing ceiling keeps on rising as all these woes drag on the nation's finances.

But at least the global investment banks are profitable again, right? And no one's going to jail. It seems that even the banks downunder are mixing their own special debt cocktail, and the next round is on the Aussie taxpayer.

Greed and stupidity are winning, hands down.

Image from Financial Sense.