The Change Curve

To help a friend, I was searching for a better image of the 'change curve' than the one I first used here in 2009.  Back then they were surprisingly tough to find online. Now there are tons of them, adapted to countless different scenarios. This would seem to suggest that a vast number of people have got beyond the 'depression' phase since then ;-)

At any rate, here's a useful overview of various models that help make sense of change, based on Elisabeth Kubler-Ross's five stages of grief, care of Warwick University.

I've posted a few of the better images from the pile that turned up.

Want Virtuous Banking? Start By Splitting Banks Into More Than Two Pieces

Yesterday I was engaged in a discussion about 'virtuous banking' which seemed to stick on the definition of 'banks' and 'banking'.

No one does 'banking' - not even 'banks'. What we call 'banks' are actually giant corporate groups that carry out a vast range of quite distinct activities. Some are listed here, for example, and some were discussed by John Kay in his report on "Narrow Banking". These group activities tend to be broadly classified as either retail (utility) banking or wholesale (proprietary trading). But some of their activities arguably span this distinction, including the banking groups' role in creating money (by making loans with a central bank as lender of last resort) and money transmission (by co-operating in various payment systems). And of course wholesale business units often provide one or more services to retail business units within the same group. 

Those group activities also face into different national and international markets, with differing levels of profitability, growth, customer needs etc., and require management and staff with wildly different skills and levels of remuneration. But working capital will be allocated to the business units where it will generate the most return for the group as a whole, not according to the needs of, say, small business customers in the UK. And outdated IT systems in areas of low profitability, for instance, might only be replaced or upgraded if they actually fall over rather than to keep pace with the technological innovation. What might appear virtuous to one set of customers may not appear so to others. Taxpayers may not be materially impacted either way, or the impact may be so long term as to avoid detection. But banks are ultimately motivated by solving the problem of group profitabilty at their customers' expense (which makes them 'institutions' rather than 'facilitators', in my view).

Accordingly, figuring out what is 'good' and 'bad' behaviour on a day-to-day basis across a banking group is not only an extremely complex task, but also an archaelogical one. Regulation and internal policy only catches up with bad outcomes once they and their causes are identified. That process is painfully slow. A decade will have passed before any real regulatory changes related to the global financial crisis take effect in the UK, for example. Enforcement lag also means that fines and compensation bills come far too late to be factored into the main board's assessment of the likely return on capital across business units. They just end up as the the group's general 'cost of doing business'.

At any rate, regulation is a poor basis for assessing virtue. In the current framework, direct regulation only addresses some of a banking group's existing bank products and activities, not all of them; and is based on how banks do things, rather than on the activities and needs of customers. Some indirect regulations, like capital adequacy controls and accounting rules, are aimed more generally at how a banking group operates for the public good, but these are open to very broad interpretation in terms of how they impact specific products and activities. Market forces were previously thought to act as a control on behaviour. But the banks' conduct both before and during the global financial crisis has disproved that hypothesis. And they have few genuine competitors because complex regulation, the state guarantee of their liabilities and other subsidies intended to make the banking system safer have merely protected the banks from competition and innovation.

So it seems we can't even begin to be assured of 'virtuous banking' unless we are able to make and enforce that assessment for each business unit within a banking group independently. On that basis, splitting the banks in two is just a start.

Will You Share Your NHS Records?

You may have received a letter from your local NHS trust, giving you the chance to opt out of the NHS plan to share your health records with Big Pharma and others. 

I've found the process incredibly light on detail about how your data will actually be used, and I don't see how it can be said that any consent you give this way is fully-informed. You can't be expected to give a single 'yes' or 'no' for all your records in such a wide variety of circumstances. 

The issue of consent is not only a question of privacy, but also a question of the value that Big Data derives by exploiting your data without recompense, as explained here. The NHS scheme is just another Big Data play that takes a free ride on your data, and nowhere near the kind of mutually beneficial and trustworthy ecosystem that it's possible to construct today.

For instance, with your own data account you would be able to receive a request to use some of your health records for each specific project. You might choose to 'donate' some of your anonymised data to help find a cure that will be available to everyone at cost price. But you might put a high price on your data if it is to be mined by Big Pharma to create a premium branded drug. 

Hell, for enough dough you might even add your name and a nice photo!

Such a system would not need to be created specifically for your health records, nor paid for by the NHS. In fact, given the NHS record on technology projects it would be best developed by others.

At any rate, I plan to opt out of sharing my health records until the NHS cooperates with a more flexible, user-centric system.

P2P Goes Cloud-to-Cloud

In Part 2 of my response to Google's 'computers vs people' meme, I explained that humans can win the war for economic control of their data by transacting on peer-to-peer marketplaces. That's because the P2P platforms don't derive their revenue primarily by using their users' data as bait to attract advertising revenue. Instead, they enable many participants to transact directly with each other in return for relatively small payments towards the platforms' direct operational costs, leaving the lion's share of each transaction with the parties on either side. This post covers some technological developments which move the P2P front line deep into Big Data territory.

Perhaps the ultimate way to avoid Big Data's free ride on the ad revenue derived from your data is to cut your reliance on the World Wide Web itself. After all, the Web is just the 'human-readable' network of visible data that sits on the Internet - just one of many other uses. As I've mentioned previously, having your own pet 'open data spider' that gathers information based on your data without disclosing it would transform the advertiser's challenge from using Big Data tools to target you with their advertising, to enabling their product data to be found by your spider as and when you need it.

But that would not necessarily solve the problems that arise where your data has to be shared.

Fortunately, all but the most hardcore privacy lobbyists have finally moved beyond debating the meaning of "privacy" and "identity" to realise two important things. First, 'personal data' (data that identifies you, either on its own or in combination with other data) is just one type of user-related data we should be concerned about controlling in a Big Data world. Second, it's critical to our very survival that we share as much data about ourselves as possible to the right recipient in the right context. The focus is now firmly on the root cause of all the noise: lack of personal control over our own data. 

Perhaps the leading exponents of this turnaround have been those involved in the Privacy by Design initiative. As explained in their latest report, they've become convinced by a range of pragmatic commercial and technological developments which together produce a 'personal data ecosystem' with you at the centre. You are now able to store your data in various 'personal cloud' services. 'Semantic data interchange' enables your privacy preferences to be attached to your data in machine-readable form so that machines can process it accordingly. Contractually binding 'trust frameworks' ensure data portability between personal clouds, and enable you to quickly grant others restricted access to a subset of your data for a set time and revoke permission at will. The advent of multiple 'persistent accountable pseudonyms' supports your different identities and expectations of privacy in different contexts, allowing for a lawful degree of anonymity yet making your identity ascertainable for contractual purposes. You can also anonymise your own data before sharing it, or stipulate anonymity in the privacy preferences attached to it, so your data can be processed in the aggregate for your own benefit and/or that of society.

All that's missing is a focus on determining the right value in each context. I mean, it should be a simple matter to attach a condition to your data that you are to be paid a certain amount of value whenever Big Data processes it. But 'how much'? And are you to be 'paid' in hard currency, loyalty points or cost savings?   

The ability to put a value on your data in any scenario is not as far away as you might think. The Privacy by Design report notes that the personal data ecosystem (PDE) is "explicitly architected as a network of peer-to-peer connectivity over private personal channels that avoid both information silos and unnecessary “middlemen” between interactions."

Sound familiar?

As explained in the previous post, P2P marketplaces already enable you to balance your privacy and commercial interests by setting a value on your data that is appropriate to the specific context. Your account on each platform - whether it's eBay or Zopa or one of many others - is effectively a 'personal cloud' through which you interact with other users' personal clouds to sell/buy stuff or lend/borrow money on service terms that leave most of the transaction value with you and the other participants.

The wider developments in semantic data interchange, trust frameworks etc., that are noted in the Privacy by Design report enable these clouds or marketplaces to be linked with other personal clouds, either directly or through the 'personal information managers',  as envisaged in the Midata programme. 

Ultimately, we could use one or two personal information managers to host and control access to our data and derive income from the use of that data by transacting on different P2P platforms dedicated to discrete activities. Not only would this make it simpler to understand and verify whether the use of our data is appropriate in each context, but it would also enable us to diversify our sources of value - a concept that is just as important in the data world as it is in financial services. You don't want all your data and income streams (eggs) in the one cloud (basket).

The Privacy by Design report claims that "all these advancements mean that Big Privacy will produce a paradigm shift in privacy from an "organisation-centric" to a balanced model which is far more user-centric".

I agree, but would add a cautionary note.

In the context of the 'computers vs people' meme, I'm concerned by references in the report to "cloud-based autonomous agents that can cooperate to help people make even more effective data sharing decisions". Has Privacy by Design been unwittingly captured by the Singularity folk?

I don't think so. Such 'cloud-based agents' are ultimately a product of human design and control. Whether the technologists at the Singularity University choose to believe it or not, humans are in fact dictating each successive wave of automation. 

At any rate, we should take advantage of technology to keep things personal rather than submit to the Big Data machines.

Humans Win In The P2P Economy

There's been a lot of heat rising from Google CEO Eric Schmidt's recent assertions about a "race between computers and people" that obliges people to avoid jobs that machines can do. Initially, I suggested this was somewhat disingenuous, given the belief amongst the Silicon Valley elite that machines will achieve the 'Singularity', a state of autonomous superintelligence in which point they will outcompete humans to the point of extinction. Merely pushing people into a narrower and narrower range of 'creative' jobs only furthers that cause, since their creative output attracts the vast advertising revenues Big Data needs to build ever smarter machines.

But I also suggested there's an antidote, and today I want to focus more on that.

Not all Internet platforms finance themselves primarily by using free content as bait for advertising revenue. Since eBay enabled the first person-to-person auction in 1995, the 'P2P' model has spread to music and file sharing, voice and data communications, payments, donations, savings, loans, investments and so on. There are now too many such platforms to list. Even political campaigning has become a person-to-person proposition. In Japan a person can offer to care for another person's elderly parents in his city, if someone else will care for his own parents in another.

Like their meat-space counterparts - the 'mutual society' and the 'co-operative' - online P2P platforms enable people to transact and communicate directly with each other in return for relatively small payments towards the platforms' direct operational costs of facilitating the connection. The P2P model vastly limits the need for advertising, since the platform either enables participants to find each other or automatically matches and connects them using the data the participants enter. Through central service terms, each participant agrees with the others how the platform works and how their data is to be used. Typically, every participant has their own data account in which they can view their transaction history. Some platforms will allow that data to be downloaded, along with all the transaction data on the platform, and this is to be encouraged. Low charges make this a high volume business, like Big Data, but platform operators are able to achieve profitability without commanding the lion's share of the margin in each transaction. This helps explain why eBay is solidly profitable but has a lower market capitalisation than, say, Facebook or Google. It's a leaner intermediary - a facilitator rather than institution. That Wall Street attaches a lower value to a comparatively democratic and sustainable business model tells you all you need to know about Wall Street.

Google and Facebook might argue they are a kind of P2P platform. But aside from a few services, like App sales, they don't directly facilitate the negotiation and conclusion of transactions, so they cannot justify a transaction fee. Perhaps they might say they own the web pages and the servers or virtual 'land' on which their advertising is displayed. But that doesn't ring true. They provide the tools for users to create web pages, but if users did not build them there would be no facade on which to display ads, and no one to look at them. Besides, the supply of creative tools is a one-off, while users supply limitless amounts of data in return. Meanwhile, the advertising revenue that was once merely enough to sustain the Big Data ecosystem now dwarfs the value derived by all participants except the platform operators themselves. Any essence of mutuality - and humanity - has been lost in exactly the same way that banks grew from their mutual origins to capture more and more of the 'spread' between savings and loans. And just as banks now allocate most of the money they create to add financial assets to their balance sheets, rather than financing the productive economy, the Big Data platforms are investing in more ways to capitalise on free user data to lure advertising spend, rather than figuring out new ways to leave most of the value with their users.

Dealing with people and businesses over P2P platforms is a good way to use your own data to claw some of that value back.

Google Declares War On The Human Race

Google's CEO, Eric Schmidt finally admitted yesterday something that the likes of Jaron Lanier have been warning us about for some years now: he believes there's actually a race between computers and people. In fact, many among the Silicon Valley elite fervently believe in something called The Singularity. They even have a university dedicated to achieving it.

The Singularity refers to an alleged moment when machines develop their own, independent 'superintelligence' and outcompete humans to the point of extinction. Basically, humans create machines and robots, harvest the worlds data until a vast proportion of it is in the machines, and those machines start making their own machines  and so on until they become autonomous. Stuart Armstrong reckons "there's an 80% probability that the singularity will occur between 2017 and 2112".  

If you follow the logic, we humans will never know if the Singularity actually happened. So belief in it is an act of faith. In other words, Singularity is a religion.

Lots of horrific things have been done in the name of one religion or another. But what sets this one apart is that the believers are, by definition, actively working to eliminate the human race.

So Schmidt is being a little disingenous when he says "It's a race between computers and people - and people need to win," since he works with a bunch of people who believe the computers will definitely win, and maybe quite soon. The longer quote on FT.com suggests he added:

“I am clearly on that side [without saying which side, exactly]. In this fight, it is very important that we find the things that humans are really good at.”

Well, until extinction, anyway.

Of course, the Singularity idea breaks down on a number of levels. For example, it's only a human belief that machines will achieve superintelligence. If machines were to get so smart, how would we know what they might think or do? They'd have their own ideas (one of which might be to look after their pet data sources, but more on that shortly). And there's no accounting for 'soul' or 'free will' or any of the things we regard as human, though perhaps the zealots believe those things are superfluous and the machines won't need them to evolve beyond us. Finally, this is all in the heads of the Silicon Valley elite...

Anyhow, Schmidt suggests we have to find alternatives to what machines can do and only humans are really good at. He says:

"As more routine tasks are automated, this will lead to much more part-time work in caring and creative industries. The classic 9-5 job will be redefined." 

Which is intended to focus our attention away from the trick that Google and others in the Big Data world are relying on to power up their beloved machines and stuff them full of enough data to go rogue. 

By offering some stupid humans 'free' services that suck in lots of data, Big Data can charge other stupid humans for advertising to them. That way, the machines hoover up all the humans' money and data at the same time.

This works just fine until the humans start insisting on receiving genuine value for their data.

Which is happening right now in so many ways that I'm in the process of writing a book about it. 

Because it turns out humans aren't that dumb after all. We are perfectly happy to let the Silicon Valley elite build cool stuff and charge users nothing for it. Up to a point. And in the case of the Big Data platforms, we've reached that point. Now its payback time.

So don't panic. The human race is not about to go out of fashion - at least not the way Big Data is planning. Just start demanding real value for the use of your data, wherever it's being collected, stored or used. And look out for the many services that are evolving to help you do that.

You never know, but if you get a royalty of some kind every time Google touches your data, you may not need that 9 to 5 job after all... And, no, the irony is not lost on me that I am writing this into the Google machine ;-)

Image from Wikipedia

2013: Levelling The Financial Playing Field

Six years of financial crisis have finally produced some of the legal changes that will expose the cosy world of regulated financial services to innovation and competition. But there is plenty more to do.

During 2013 we've seen consumer credit move to the FCA, the regulation of peer-to-peer lending, and the FCA's proposed rules for how the 'crowd' can lend and invest. And this week the Banking Reform Act implemented the recommendations of the Independent Commission on Banking and key recommendations of the Parliamentary Commission on Banking Standards.

Some may see these changes as a magnificent display in closing the stable door. But I prefer to see it as an opening of the floodgates. 

After all, the European Commission is consulting on its own approach to regulating online financial marketplaces; and the US states are competing with the Securities Exchange Commission on the regulation of crowd-investing.

So 2014 will see a lot of focus on enabling the growth of alternative financial services, at the same time as the banks become even more preoccupied with solving their own problems at their customers expense.

That bodes well for a market that grew 91% in 2013.

But, like I said, there's still a lot of work to do.

 

Failure Is Key To The Success Of Equity CrowdInvesting

An odd article on page 20 of today's FT suggests that the failure of some ventures to raise money somehow puts 'crowdfunding' in doubt, while page 4 cites Nesta research to show that this alternative finance market is growing rapidly. 

What's going on?

Well, traditional financiers have been forced to take crowdfunding seriously now that the FCA is consulting on specific rules to govern certain types (peer-to-peer lending and crowdinvesting in equities and debt securities). Some see this as an opportunity, and want to help these alternative marketplaces grow, while others perceive a threat that must be contained.

Those who feel threatened typically overplay the benefits of 'traditional' investment models, and mistake the strengths of the crowd-based models for weaknesses. 

For instance, venture capitalists often claim that theirs is 'smart money' compared to equity-based crowdinvesting. In fact, one is quoted in today's FT article as saying that VC investment brings "partners, skills and support that will nurture the business through growth over the medium to long term." This is rubbish. Venture capitalists spend most of their time looking for deals, not managing the businesses in which they have invested - and most of those businesses will fail anyway. They are not looking to build a portfolio of steady performers, they are hoping a few stars from their stable will return 20 to 30 times their investment. Board meetings are infrequent events at which VCs study the numbers. The occasional insightful comment may emerge, but these pale to insignificance compared to the 360 degree, 24/7 feedback any business experiences in today's social media world. Ironically, most of the time is actually taken up by management explaining the business to the VC directors - and quite properly so. But any responsible director can fullfil this role, and a business that can raise VC money or other funding is equally likely to attract directors with real subject matter expertise (and/or genuine independence) in any event. VCs don't have a monopoly on introducing good directors.

Related to this is the issue of discretion. Few people may be aware a business is seeking VC investment, but nor could they be expected to care since they are excluded from the process. So the search for venture capital generates zero interest among potential customers or other supporters of the business. Nor is the venture process likely to be very efficient, let alone successful. Start-ups and early stage companies typically approach many VC firms in the hope of getting a commitment from 2 or 3. It's a gruelling 3 to 6 month process involving lengthy, repetitive due diligence sessions that come as a huge distraction from the day-to-day management of the business.

Crowdinvesting, on the other hand, enables the business to engage in a single process that tests the appetite of both investors and customers. Flaws may be visible to the world, but this transparency provides consumer and investor protection while giving the business a chance to adapt on both fronts at an early stage. This may not guarantee long term success any more than traditional venture funding does, but it helps everyone avoid wasting a whole lot of time and money.

It's a process that venture capitalists might grow to like.

UK Government: Gamble All You Like, But Don't Invest

You've got to wonder about priorities at the Department of Culture Media and Sport. They allowed UK bookmakers to harvest £46 billion through betting machines last year - not to mention the bingo and lotteries freely advertised on TV - while computer games companies complained they can't offer shares to fans who crowdfund games development. 

Consider this from today's Telegraph:

• Britons gambled £46 billion on betting terminals last year, an increase of almost 50% in four years.

• Gamblers lose up to £100 every 20 seconds on the fixed odds machines.

• 588,000 under-18s were stopped when they tried to enter a betting shop last year, six times as many as 2009, and 27,000 people were challenged once they had placed a bet.

• Bookmakers made profits of £1.55 billion from the terminals between April 2012 and March 2013.

Meanwhile, even though the FCA has said that ordinary folk will be able to invest to fund the development of a computer game, for example, they must first certify that they will not invest more than 10% of their 'net investible portfolio' and either seek financial advice or satisfy an "appropriateness test". That's because they say investing is risky for consumers... 

Compared to what?!

Image from RoehamptonStudent.com. 

Dirty Data

Westiminster recently feigned shock and horror that the UK's coppers cook the crime figures. But Simon Jenkins says we've known for years that the numbers are meaningless and they should be banned as "they spread confusion and fear".

But 'plod' is not alone in mis-classifying, mis-recording, ignoring or otherwise presenting data in a way that suits himself. We've had many financial trading scandals where banks apparently had no idea of the exposures they faced, either because transactions were concealed or perhaps no one was looking hard enough - the global financial crisis was a function of poor due diligence.

A possible root cause of the problem is that humans are involved too early in the data collection and reporting processes. Rarely are we responding to the 'raw' data, as opposed to figures that have been 'gathered' and 'rolled up' through a series of other people's filters, manipulations and interpretations (which are often taken out of context). It's puzzling why regulators' systems don't receive a feed of the actual trades straight from bank trading desks - or from peer-to-peer lending or crowdfunding platforms - rather than relying on periodic reporting of summary data.

Maybe GCHQ can help...

At any rate, we should focus more on 'clean' mechanisms for capturing and presenting raw data rather than someone else's interpretation of it.

Image from TraceyNolte.
 

Do TV Advertising Rules Limit Economic Growth?

There has been plenty of research into the alleged effect of TV sex and violence on human behaviour, but how does TV adversely impact our economic behaviour? 

This issue was recently highlighted by the FCA's proposed new rules on crowdfunding. Left in isolation, the current restrictions on financial promotions suggest the State would prefer us to play bingo or buy lottery tickets than invest the same small amounts in funding the growth of each other's businesses. 

The FCA is right to point out the risks of investing in start-ups, but it should compare those risks to the risks consumers face when putting their money into other products that are more freely advertised.

We rely on small businesses for over half of all new jobs and a third of private sector turnover. Yet, those small businesses struggle for funding while over half of the UK's adults engage in regulated gambling that is designed to cost consumers far more than they 'win'.

It may be true that over half of business start-ups fail within 3 years, but they still employ at least one person in the meantime. And maybe more of those businesses would survive if we lent them some of our bingo money, or bought their shares with at least some of the money we chuck away on the ponies. Better that the money goes in wages, and the goods and services that small businesses typically buy, rather than simply to line the pockets of the bookies - and you have the chance of getting a decent return on small business loans, or if you happen to invest in the businesses that succeed in the longer term. 

No doubt someone will raise the moral panic about 'good causes' being starved of lottery money if we don't allow the promotion of that form of gambling. But I'm not talking about any ban on advertising lottery or bingo etc., just a relaxation of rules on the promotion of productive financial instruments (though it would be more efficient to simply donate a third of your lottery money directly to good causes on a crowdfunding platform than to wait for it to filter through the books of a lottery operator).

Ads for apparently 'safe' bank savings products are not helpful here, since savings rates are low and banks are not focused on lending to small businesses. We have over £200bn sitting passively in low interest bank deposits, yet banks' savings rates are below the rate of inflation, and banks only lend £1 in very £10 to SMEs. The Financial Services Compensation Scheme might protect your deposit if the bank goes under, but that's another cost that consumers end up paying for, and it won't protect the value of those deposits against inflation. Stocks and shares ISAs and pensions are similarly 'passive' investments in financial assets, rather than productive ones.

The highly restrictive approach to financial promotions has neither prevented financial scandals nor created a sound financial system - two of many reasons why people have resorted to lending directly to each other, or investing directly in each others' projects and businesses. So why not allow these new alternatives to be promoted more openly - at least to the same extent as riskier, non-productive activities like playing bingo or buying lottery tickets?

We need to move away from rules that dictate what we can do with our money, to rules that enable a fully informed choice from amongst all the options. 

At any rate, the State should certainly not create a situation where the money-related messages which the average TV viewer receives do not include investing directly in the productive economy.

Image from RoehamptonStudent.com.

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

Matched Funding For UK SME Lending Platforms

At a ‘FinTech’ Cabinet Office workshop on Monday, we were informed/reminded that the "Business Bank" created by the Department of Business Innovation and Skills has at least £300m to invest in any platform or business that will provide debt funding to SMEs.

Apparently few applications have been received so far.

The process starts with just a 3-pager to establish whether its worth proceeding to a more detailed pitch. If the process is to proceed, it should be no more intensive than a typical VC/angel investment process (see section 2 of the doc).

Related investment funding programmes include:

• £50m to expand the Business Angel Co-Investment Fund to a £100m fund; 

• £25m to extend the Enterprise Capital Fund programme to include a VC Catalyst Fund, which will invest in venture capital funds that specialise in early stage venture capital and are near to close, enabling them to commenc e investment in small and medium sized enterprises.

• Plans to expand the Enterprise Finance Guarantee (“EFG”), aimed at using guarantees to help bridge the “affordability gap” by providing a guarantee to lenders of up to 25% of the overall cost of repaying a loan; and separately, extending EFG to support businesses lacking track record, who are seeking loans of under £25k.

Several other programmes (like the Business Finance Partnership) are also being consolidated under the umbrella of the “Business Bank”, boosting the overall amount available to about £1.5bn. New senior management with private equity experience have been appointed in order to speed the programme along.

Here's an explanation of the strategy and timing for the Business Bank to become fully operational. 

Crowdfunding Regulatory Arbitrage - Updated

October is 'crowdfunding month' out there in the regulatory world. The European Commission is consulting. The SEC is consulting. Some US states are consulting. The French are consulting. And today, the FCA is consulting.

The European Commission is still in fact-finding mode, so should have the luxury of plucking all the good bits out of the US and UK approaches.

Ironically, the SEC's approach looks too much like small beer to enable fund-raisers to take on the entire US market, but enabling them to raise $1m every 12 months could be really helpful on an intra-state basis (and, indeed, possibly for many EU-based start-ups). On the other hand, it would probably be tough to market anywhere the investor limit of $2,000 or 5 percent of annual income or net worth, for those with annual income/net worth of less than $100,000.

On some ground the FCA's approach might look somewhat better, but in my view, the FCA has not struck the right balance in its proposals to regulated peer-to-peer lending and crowd-investment. 

Loan-based crowdfunding platforms should be regulated more like payment platforms rather than like investment firms, as the FCA proposes. As a result, it will be substantially more expensive to establish and operate a platform with no real change in how operational risks are managed. Businesses and institutions may also be put off, both by the need to be authorised just to invest in the loans, as well as uncertainty as to their compliance obligations given that their own systems aren't even involved. The good news here is that the FCA advocates 'secondary market' for loans. 

The good news for investment-based crowdfunding is that the FCA supports wider 'retail' participation than it has to date. But people will still be asked to certify that they will not invest more than 10% of their 'net investible portfolio' and face an 'appropriateness test' if they do not get advice. In other words, it will still be much easier to stick a tenner on a pony, where the bookmaker wins, rather than to back a local business in support of the economy. No one seems to take responsibility for these strange inconsistencies in the way we are allowed to use our money...

The French proposals have the benefit of adopting the approach, called for by the industry last December, of effectively regulating loan-based platforms as payment service providers. However, as Aurélie Daniel has pointed out the proposals also contain controversial "upper limits for loan-based crowdfunding... a maximum loan amount around €250 per individual per project and a global maximum loan amount around €300,000 per project." While this might not trouble consumer loan-based platforms, it would negatively impact platforms that facilitate loans to businesses and for the purchase or development of larger assets such as commercial property. Ironically, the French appear to have reserved such loans for banks, and in this respect the FCA's proposals are of course more helpful. The limits apparently do not apply in relation to investment-based crowdfunding.

At any rate, I guess entrepreneurs may be able to take their pick as to the most suitable fundraising regime.

EU Red Tape - We Make EU Rods For Our Own Backs

The UK government has been running its own Red Tape Challenge for some years and at last the EU is getting in on the act (though it thinks member states are in worse shape!). 

Listed below are some cuts to EU red tape that the UK government has suggested, according to the activity that is being restricted. See if you agree.

The first of two big concerns I have is how these suggestions appear to citizens and businesses in the EU's civil law countries (i.e. virtually all of them). Generally, they want the state to tell them how to act by setting out rules in a civil code. As a result, commerce in those countries tends to follow the law. But in common law countries (e.g. the US, UK and the Commonwealth), we consider ourselves free to act unless a law restricts that activity in some way - our laws tend to follow commerce. 

So what we see as red tape that doesn't properly reflect how we do business, a continental European might see as his only right to act in a certain way. 

This distinction is blurring a little, both as a result of the UK's membership of the EU and the need for businesses in the US and Commonwealth countries to do business in the EEA. But it remains an important driver of what each of us considers to be 'red tape', and it needs to be considered when making or supporting a cut. Where necessary, a compromise might be to remove some of the more restrictive detail but leave a general permission in place, with some means of passing more detailed rules later if necessary. 

The other major concern I have is that UK officials have a silly tendency to interpret an EU law literally (as we do with UK laws) rather than taking a 'purposive' view of their intended effect as the European Court of Justice does. So UK officials present laws to Parliament for approval which 'gold plate' EU requirements, rather than just deliver the spirit of what is intended. A European would say we are stupidly making a rod for our own backs, and I completely agree. This has to stop immediately.

Competitiveness of EU businesses:

• Ensure the full implementation of the Services Directive across the EU
• Ensure data protection rules don't place unreasonable costs on business
• Refrain from bringing forward legislative proposals on shale gas 
• Drop proposals to extend reporting requirements to non-listed companies.

Starting a company and employing people:

• EU Governments should be allowed flexibility to decide:
• When low-risk companies need to keep written health and safety risk assessments
• How traineeships and work placements should be provided.
• Micro-enterprises (employing fewer than 10 people and have an annual turnover and/or annual balance sheet total that does not exceed €2m) should be exempt from new employment laws unless they are sensible and proportionate.
• Pregnant Workers proposals should be withdrawn 
• Posting of Workers Directive should not introduce mandatory new complex rules on subcontracting  Existing legislation on Information and Consultation should not be extended to micros, and no new proposals or changes to existing legislation should be made
• Working Time Directive should keep the opt out; give more flexibility on on-call time/compensatory rest; clarify there is no right to keep leave affected by sickness 
• Agency Workers Directive should give greater flexibility for individual employers and workers to reach their own arrangements that suit local circumstances and give clarity to companies that they only need to keep limited records 
• Acquired Rights Directive should allow an employer and employee more flexibility to change contracts following a transfer.

Expanding a business

• Drop costly new proposals on environmental impact assessments 
• Press for an urgent increase of the current public procurement thresholds
• Exempt more SMEs from current rules on the sale of shares
• Minimise new reporting requirements for emissions from fuels 
• Drop plans for excessively strict rules on food labelling
• Remove proposals to make charging for official controls on food mandatory 
• Remove unnecessary rules on SMEs transporting small amounts of waste 
• Withdraw proposals on access to justice in environmental matters 
• Withdraw proposals on soil protection.

Trading across borders

• Take action to create a fully functioning digital single market
• Rapidly agree measures to cap card payment fees
• Remove international regulatory barriers which inhibit trade
• Reduce the burden of VAT returns, and stamp out refund delays
• Drop proposals on origin marking for consumer goods.

Innovation

• Improve guidance on REACH to make it more SME-friendly
• Rapidly agree the new proposed Regulation on clinical trials 
• Improve access to flexible EU licensing for new medicines 
• Introduce a risk-based process for the evaluation of plant protection products.

There is also a huge list of Directives in Annex 1 that businesses have said need attention.

Why Consumer Terms Aren't "Silly"

A strange article in the FT yesterday from the usually reliable John Kay, explaining why he 'ignored' the consumer terms related to his smart TV and Apple's new operating system. Of course, we're all free to decline a reasonable opportunity to read and agree consumer terms. But it's wrong to suggest they're 'silly', as the Carbolic Smoke Ball Company discovered long ago. While consumers rarely read them, certainty as to what consumer terms apply is fundamental to the efficient operation of retail markets. Allow me to take each of John's pronouncements in turn:

"Samsung and Apple are plainly in business for the long term, and their continued success depends on maintaining their reputation with their customers. It is unlikely that these agreements contain anything seriously damaging to my interests, and if they did I am reasonably confident that the combined forces of judges, legislators, regulators and the press would protect me."

Putting aside the misplaced trust that a major corporation's long term aspirations are aligned with their customers' interests (think retail banks), this misses the point of consumer agreements - particularly in the context of supplying a 'smart' device that operates in multiple jurisdictions. Apple's end-user agreement helps set the rules of the Apple ecosystem, just as Facebook's privacy policy does. Such services would rapidly break down if suppliers, customers, regulators and other 'stakeholders' did not understand the detailed rules that underpin them. How does John think that Apple gets paid for selling other people's Apps? Ironically, numerous regulations insist on very prescribed sets of consumer terms, which often provide the basis for the very action by the 'combined forces' on whom John relies for protection (although they can also be hijacked, as we saw when the US government effectively deputised PayPal and others as private sheriffs, relying on violations of their terms of service to 'shut down' Wikileaks).

"On the odd occasion when I have troubled to read similar agreements, I have found they are generally riddled with ambiguities and with conditions that are unenforceable in practice and probably unenforceable in law. The attorneys who draft these documents are mostly unimaginative hacks rather than hotshots of the profession. And complex contract specifications do not so much define the obligations of the parties as identify the point at which legal argument will start. Ask the people who thought they knew where they stood with Lehman Brothers."

Let's unpack this. John rarely reads consumer terms, so his experience here is unreliable. He's not a lawyer, so he's no guide to the enforceability of contractual terms. He clearly has no friends in this area, which is a shame, but he's unwise to underestimate the scale or calibre of the legal resources Apple devotes to the customer terms that underpin its position as one of Earth's most valuable corporations. And Lehman Brothers? Being an investment bank it simply never dealt with 'consumers' at all, however, (ironically, John) the banks had no idea of who owned which assets after trading with Lehman Brothers because they ignored the small print.

"...To the extent that the user agreement has relevance at all, that relevance is to the battles these large technology companies conduct with one another and with their various regulators."

As explained, this ignores the role of end user agreements in determining how the entire retail ecosystem works - in this case, the rules that make John's TV 'smart'.

"...If there is a problem, it is not the laziness of consumers but the use of inappropriate models in the formulation of public policy. These too often espouse a legal and economic view of human behaviour in which agreements are negotiated between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts. The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business."

I agree that 'laziness of consumers' is not an issue - again, we are all free to decline the reasonable opportunity to read consumer terms upon which the law insists. But if by 'inappropriate models' John is referring to the common law system, then he should compare it to the joys of the civil law system. In common law countries, we are free to act unless the law restricts us - the law follows commerce. In the absence of Parliamentary edicts, contracts provide the rails on which commerce runs. Meanwhile the citizens of civil law countries wait for their lawmakers to define how they may act, so European commerce, for example, follows the law. Thus, our EU colleagues regard entrepreneurship as rather dodgy, and believe that contracts should rarely be needed to supplement civil law codes.

I know which system I prefer.

But, critically, John is also choosing to gloss over the need to record what he calls the 'terms of exchange' so that people have enough certainty 'to go on doing business'. That is the role of the contract in a common law country. And the enforceability of such terms - the 'rule of law' - is what distinguishes a (reasonably) efficient market economy from, say, corrupt dictatorships or centrally planned economies.

In other words, Apple's lengthy terms - and John's freedom to decline the opportunity to read them - not only facilitates the collaborative ecosystem that creates John's 'smart' TV, but they also help everyone keep Apple and its suppliers honest.


Image from CloudPro.

Help To Bubble

I just don't get it. The UK is awash with debt it can't shift, yet the UK government thinks it's a great idea to ensure that people get £130bn of mortgages they can't otherwise afford. 

A Treasury spokesperson is quoted in today's FT as saying that "there are rules ensuring that people can pay the mortgage that they have taken on." But if they couldn't have got the mortgage in the first place, how is that so?

It would be fair enough if someone were able to point to specific, unreasonably restrictive bank lending practices and get them changed. Yet neither the Treasury nor the Bank of England has been able to bring the banks to heel, so putting the taxpayer on the hook for 15% of a bunch of new high loan-to-value mortgages seems a little careless to say the least.

But maybe it's too late. Maybe we're just seeing the inevitable consequence of the fact that the UK state is already standing behind £491bn of UK mortgage debt, or 42%. The state simply has to be back even more. The US introduced this nonsense as a 'temporary measure' 70 years ago and, as Gillian Tett recently pointed out, is now behind 90% of the US mortgage market. How's that working out for them? You be the judge.

Welcome to Bubbleland.

Image from LuxLifeMiami.

Labour's Rocky Horror Show

As the Labour Party took it's "jump to the left" this week, we saw firsthand how "madness takes its toll."

Things turned ugly when the faithful realised there'll be no pot of gold at the end of the 2015 campaign rainbow - brutal medicine for a party infamously free with the public purse. So the furious mob turned its sights on the private sector, just like in the bad old days.

Gordo's lieutenants did their best not to disappoint the baying crowd, smashing in a few shop windows in an effort to claw back some of the profits they'd gleefully handed out when their old boss proclaimed the end of boom and bust. But the private equity boys are a vicious crew, and they were waiting. They went after those dogmatic party geeks like a bunch of Paras on PCP, strangely trailed by Lord Mandelson waving a socket wrench.

The geeks took a hiding, but they weren't giving up, or venting their sterile rage on public sector waste. Or gnashing their teeth about the six ways 'the System' is in a worse state than in 2008. No way. Back in the safety of the Hilton Metropole they were hell-bent on re-nationalising everything this country's sold off in its vain attempt to keep kicking the economic can down the road: "railways, power, water, Royal Mail." Savagely yearning for the return of British Leyland. A time when the State could do no wrong and Jimmy Savile ruled the BBC.

As the great Gonzo once said, "when the going gets weird, the weird turn pro."

Doomed, you might think. And so too is the old Labour rort of hiring public sector employees so they can automatically join the unions and unwittingly subsidise the party's lust for power. Snubbed by these ingrates, Milibore now wants to slip his hand into the public purse to fund his dreams, and is tempting the other parties to follow suit. He might be onto something there. Party political types are united in greed, if nothing else. But the Tories know there'll be nothing left by 2015 anyway. Soon they'll be sewing patches on the elbows of their suits...

You'd think that should mean a blissfully quiet election. But based on this week's performance I reckon Labour's rocky horror show has only just begun.

We're in for a mind flip.

We'll be into a time slip.

Labour will do the Time Warp again.

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)."

Either Gillian Tett's On Fire...

Ominous bursts of smoke have been rising from Gillian Tett recently. 

On September 12, the lady who gave us Fool's Gold pointed out that six key aspects of the financial system in 2008 are far worse now. 

The banks are bigger. Shadow banking is bigger. Investor faith hinges on central banking 'wisdom' and liquidity, while the top 5% of bankers are soaking up 40% of that support in bonuses. No one has been jailed for their role in the sub-prime fiasco. And the US government agencies now account for 90% of the mortgage market...

Today's smoke is rising over the Federal Reserve's decision to keep buying smack bonds at the rate of $85bn a month. It appears to have concluded that the West simply can't handle the withdrawal symptoms. Meanwhile, the UK regulatory elite has finally started to ring the bell over the fact that only 10-15% of the money our banks create actually goes to productive firms, while the rest is stoking financial asset bubbles... And, oh look, the real estate agency, Foxtons, has soared on its return to the stock market.

Either Gillian Tett's on fire, or something else sure as Hell is.

Image from JetSetRnv8r.