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...

Short Selling Hygiene

Good to see the short sellers doing the regulators' work for them again - not that the authorities like it. 

Last week, Spain's stock market regulator called on the SEC and the FCA to provide information about short seller Gotham City at the same time as its dodgy target, Gowex, was declaring GC's fraud allegations to be "categorically false". But yesterday, Gowex's founder admitted to falsifying accounts for past four years.

It defies belief that short sellers should be able to find such golden opportunities amongst listed companies. 

Just goes to show that auditors still need to understand the nature of scepticism. And that regulators could benefit from hiring some traders of their own.

Eurocrats Need A Reality Check

The Society for Computers and Law was recently entertained on the topic of trust in Big Data and the Cloud, by Paul Nemitz, European Commission Director of Fundamental Rights and Union Citizenship (in the Directorate-General for Justice). Both immigration and data protection feature among the main responsibilities of his Directorate, so you can imagine Paul is a very busy man right now, and it was very kind of him to take the time to speak.

Right, so that's the polite bit out of the way ;-)

Paul was keen to challenge the Brits in the audience to be more pragmatic in their attitude to the European Union. He believes the UK is among those who engage with the EU irresponsibly on the basis that "everything that comes out of Brussels is shite". Instead, he says British officials, lawyers and academics should be focused pragmatically on how to engage positively to achieve better European policy and regulation.

Of course, it's an old rhetorical trick to characterise your opponent's views as overly simplistic, boorish and stupid. Paul knows that the UK's opposition to red tape is based on more serious and fundamental differences than simply declaring everthing from Brussels as 'shite', as discussed below. But as a Commission official, he's not able to enter into debates over the fundamental principles of the EU. It's his job to be a 'Believer' and get on with building the vision. He must take it on faith that the European Union is a single market, rather than a loose collection of disparate nations held together by red tape and political ambition. 

It suits some EU member states to accept that same article of faith, but not all, and the people in the streets certainly don't think that way - consumers have been worryingly slow to purchase across borders, for example. And the recent election results revealed that a huge proportion of the electorate remain to be convinced that EU governance is wholly worthwhile. 

In these circumstances, the UK's rather sceptical view of what comes out of Brussels is quite broadly representative, and the attempt to draw a line in the sand over the imposition of a fervent unionist as head of the Commission was completely understandable. It's also pragmatic. If the EUrophiles were humble enough to accept that the single market is still an ambition, they too would realise it's unwise to be seen to force the issue. People have to be brought along on the journey, and maybe the UK is a good indicator of how far they are being left behind.

To back his claim that the UK's attitude is simply boorish, Paul points to a 'typical' lack of empirical evidence for resisting provisions in the General Data Protection Regulation requring large firms to appoint a data protection officer and to facilitate fee-free 'data subject access requests'. He says these things work well in other EU member states already, and haven't driven anyone out of business. And against the UK's charge that the European Commission is needlessly committed to ever-increasing levels of privacy regulation, Paul points to surveys that show ever-increasing levels of concern amongst EU citizens about commercial and governmental intrusion into their private lives; as well as recent judgments from the European Court of Justice and the US Supreme Court curbing commercial and governmental intrusion into these areas (ironic, given that one of the ECJ's decisions was to declare Europe's own Data Retention Directive invalid).

Again, he's missing a sensible, pragmatic point. The UK's reaction is telling him is that when huge swathes of the population questionn the very existence of the EU, it's wiser to stick to the essential foundations and building blocks, rather than snowing people with confetti about day-to-day compliance issues.

However, I'm glad to say that Paul was able to explain how the European Commission is working on some important foundations, such as getting standing for foreigners to take action to protect themselves in the US courts; and preventing indiscriminate mass collection of the personal data of EU citizens by any government or corporation, inside or outside the EU. Those two things are very important to building trust in governments, as well as Big Data, and are the sort of fundamental constitutional changes that citizens would find extremely difficult to achieve solely through the democratic process - though the European Commission has climbed on the bandwagon of public opinion (or Merkel's personal outrage), rather than initiated pressure to achieve these outcomes in its own right.

I also think Paul is right to point out that businesses are wrong in the view that personal data is 'the currency of the future' or 'oil in the wheels of commerce'.  Money is fungible - we view one note as the same as another - and, similarly, oil is just a commodity. So the data related to money and oil are hardly very sensitive and can be dealt with through economic regulation. But people, and the data about them and their personal affairs, come with more fundamental rights that can't simply be dealt with in economic terms. It's important that citizens have a right of action against governments and corporations to protect their interests (though I think the Google Spain decision was wrong).

But Paul overstates the 'synergies' between EU regulation, trust and innovation. He is stretching too far when he says that vigorous regulatory protection is essential to the creation of trust between people and their governments and the corporations they deal with. As evidence for this, he claims that the UK's Financial Conduct Authority as doling out the largest fines in the EU for the abuse of people's personal data, and asserts that this has built trust in the UK financial services market. From there, Paul leaps to the conclusion that similarly vigorous regulatory attention is somehow one of the necessary pre-conditions to the creation of commercial trust generally. He then leaps again to the notion that commercial trust driven by regulation is a pre-condition for innovation because, "There is no trust in start-ups," he says.

This is all nonsense.

Here Paul seems to be looking at the world through the lens of his own area of responsibility rather than from a consumer standpoint. Very few of the FCA's fines have anything to do with abuse of customer data, and its fines are puny compared to US regulators in any event. And in survey after survey, we've also seen that the providers of retail financial services are generally among the least trusted retail organisations in the UK and Europe. Enforcement processes also tend to be slow, resulting in fines for activity that ceased years before, and depriving consumers of the opportunity to cease dealing with firms at the time of wrongdoing. So, relative to consumers' perception of other industries, complex financial regulation and allegedly vigorous enforcement action has been no help at all.

It's also strange for Paul to suggest that "there is no trust in start-ups" without the backing of regulation, given the vast number of start-ups that have achieved mass consumer adoption absent effective regulation - certainly across borders. Unless, of course, Paul still considers Google, Facebook, Twitter etc to be 'start-ups', which would be weird. This ignores the fact that, love 'em or hate 'em, such businesses have been far more responsive to consumer/citizen pressure in changing their terms and policies than the European Commission or national legislators have been in altering their own laws etc. Indeed such businesses have even been relied upon by governments to enforce their consumer agreements to shutdown activities that national governments have been powerless to stop.

Paul's view of start-ups appears to reflect the continental civil law notion that citizens cannot undertake an activity unless the law permits it; while in the common law world 'the law follows commerce' - in the UK and Ireland (and the US, Canada, Australia etc) we can act unless the law prevents it. The havoc that arises from these opposing viewpoints - and the differing approaches to interpreting legislation - cannot be underestimated. In fairness, the UK needlessly creates a rod for its own citizens by 'gold-plating' EU laws (transposing them more or less verbatim). The national version is then interpreted literally. We would be far better off adopting the purposive interpretation of EU laws and implementing them according to their intended effect. This may mean a bit more friction with the Commission on the detail of implementation, but the French don't seem to mind frequent trips to the European Court where the Commission objects, and meanwhile their citizens don't labour under unduly restrictive interpretation of EU laws.

None of this is to say that I disagree with Paul's claim that strong individual rights and regulation to protect them are not inconsistent with making money and healthy innovation. But I reach this conclusion by a different route, starting from the premise that retail goods and services must ultimately solve consumers' problems, rather than be designed to solve suppliers' problems at consumers' expense. Strong individual rights are only one feature of a consumer's legitimate day-to-day requirements, not all of which can be legislated for. Co-regulation, self-regulation and responsible, adaptable terms of service are all part of the mix.

Of course, regulation can be helpful in preserving or boosting trust where it is already present - as can be seen in the development of privacy law amidst the rise of social media services (and in the context of peer-to-peer lending and crowd-investment, for example). But regulation can't create trust from scratch, any more than Parliament can start businesses.

If only the Eurocrats would recognise these realities and limit their attention to areas where government action is essential, I'm sure they would find more favour with pragmatists everywhere.

Will This Book Stop The Dogmatists Waving Their Fallacies Around?

As one who loathes the use of party-political dogma to muddy the waters of sensible debate, I was delighted to read Tim Worstall's list of the top "20 Economics Fallacies" that political types wave around to justify some of their weirder ideas, and exactly why they're false. Maybe this book will help focus debate on the real issues.

At any rate, with the next general election less than a year away, you'd do well to keep a copy by the armchair to guide you through the evening's political interviews. So long as you can resist the urge to throw it at the screen.

The Hideous Cost Of Banking 'Standards'

I'm a great fan of trade bodies that introduce necessary self-regulation and create an efficient bridge between industry and officials. But news that UK banks will add to their enormous lobbying efforts by spending an extra £7-10m on a new "Banking Standards Review Board" definitely strikes me as overkill. 

I mean, what's the British Bankers' Association for, if not to ensure decent industry standards? Does the need for a new 'standards' board mean that the BBA has failed? If so, shouldn't it be dismantled? What about the Lending Standards Board? It's role is "to monitor and enforce the Lending Code and to ensure subscribers provide a fair deal to their personal and micro-enterprise borrowing customers." Surely it failed in that aim long ago?  Or is it that such bodies are really just lobbying outfits that merely pay lip service to effective self-regulation? In 2011 alone, The Bureau of Investigative Journalism found that the City spent £92m on lobbying regulators and politicians, which it described as an "economic war of attrition." Even the Confederation of British Industry has been captured by the banks.

Lord knows how much it really costs to run these lobbying outfits and face savers. But you can bet that customers and/or taxpayers end up paying for them in the end - not to mention the 2000 extra staff that the Financial Ombudsman Service has had to hire since 2012 to deal with the million complaints about payment protection insurance, or the endless Parliamentary time, or the £20bn in PPI compensation that the banks must fund. In fact, the London School of Economics found that poor conduct among the world's top 10 banks, including 5 UK outfits, had cost nearly £150bn by the end of 2012, and there have been vast fines and compensation payments since. 

Isn't it time for the banks to stop talking their way through everyone's money and just get on with the job of supplying decent financial services?

Google Spain Case Raises More Questions Than It Answers

I'm an enthusiastic supporter of greater control over your data. But I'm really struggling with the European Court of Justice ruling that you can stop a search engine linking to something lawfully published about you in your local newspaper's online archive.

The case in question concerned the appearance of someone's name in a local Spanish newspaper announcement for a real-estate auction connected with proceedings to recover social security debts 16 years ago. The individual concerned (openly named in the judgment, ironically) claimed that the proceedings had been "fully resolved for a number of years and that reference to them was now entirely irrelevant." He failed to obtain an order banning the newspaper from carrying the item in its online archive, but succeeded in getting Google Spain to remove any links to it.

But surely if it was lawful for the local newspaper to have published the item of data - and it remains okay for it to publish the data via its website - then it should be okay to allow someone to find it?

I mean, why stop at gagging Google's local site? Why not make local libraries cut tiny holes in their microfiche records?

On this point, the ECJ cited problems where multiple jurisdictions were involved, even though this was purely Spanish scenario:

"Given the ease with which information published on a website can be replicated on other sites and the fact that the persons responsible for its publication are not always subject to European Union legislation, effective and complete protection of data users [subjects?] could not be achieved if the latter had to obtain first or in parallel the erasure of the information relating to them from the publishers of websites."

But how could removing links to an item from a national search engine achieve "effective and complete protection" of the data subject when the same items are lawfully available via a national newspaper's online archive anyway? Surely a national problem such as this has to be dealt with at source, or not at all?

Another key issue is that the ECJ didn't seem to weigh up all the possible public interests against the particular individual's rights to 'respect for private life' and 'protection of personal data'. 

Surely, for example, there was some public interest in the publication of the notices of auction complained about, such as achieving a fair price for property being sold to pay a debt to the state? Perhaps if that requirement had been abolished you could make a case for requiring the deletion of public notices relating to them. But, absent their abolition, I'm not sure you can say it's "entirely irrelevant" that someone was mentioned in such a notice, even if that were years ago.

And is there not a public interest in being able to more readily find published material via search engines? Consider the huge variety of research processes that must now rely on search engines, from journalistic research, to employment checks, to official background checks. What holes will now emerge in such research processes? Will records be kept of all the links that search engines were told to remove? If so, where will those records be kept? Who will be allowed to access them? Aren't researchers now on notice that they should check individual newspaper archives for data that search engines aren't allowed to let you find? How many won't bother when they really should?

The problems with the judgment don't end there, as is demonstrated by the tortuous path the ECJ took to reach its result (explained here). 

All of this underlines the need for careful policy thought and regulatory clarity around these issues, rather than the celebratory gunfire heard in some quarters. This judgment raises more questions than it answers.

 

Has The Initial Term Of Your #Mobile Contract Expired?

Are you a cash cow?

Today I contacted Vodafone to cancel the 3G contract I took out as part of an iPad offer a few years back. It's included as an extra number on my mobile bill, so it was easy to kind of forget it in the total. Turns out I'd diarised the wrong cancellation date, and could've cancelled last October, when I was first 'out of contract'. Okay, so I'm a bit of a mug (worse, I'd long ago switched the iPad to 'airplane' mode, so wasn't even using the 3G option), but I do tend to have a lot more important things on my mind. The decent thing would have been to remind me at the time the intial term expired to give me a chance to consider if I wanted to extend, switch or cancel. But that's not part of the service...

The first customer service person I spoke to wasn't allowed to process my cancellation request. She had to put me through to another person who could. I protested, but to no avail. Needless to say, the next person began putting me through the whole process again, presumably so I'd lose the will to cancel and consider an upgrade.

I toughed it out and insisted on cancellation. The representative agreed to put that through, but said it would only take effect in 30 days' time. Hang on, I said. If it was true that I was "out of contract", as they kept saying I was, then how could Vodafone still be entitled to 30 days of my money - not to mention the extra 6 months they'd already enjoyed through my diary error? I knew the answer, but I wanted to hear the explanation.

You see, they didn't really mean that I was 'out of contract' in the sense that the contract had somehow expired. That would be misleading. If the contract had really ended, Vodafone wouldn't have been entitled to be paid for the extra 6 months, never mind the 30 days. Instead, they only meant that the minimum term of the contract had expired. That meant the contract had actually continued subject to termination on 30 days' notice - so it could have gone on for 30 years if I hadn't called to cancel it. 

When I asked if Vodafone has a process for notifying customers when they are 'out of contract' (i.e. when their initial term has expired), the representative said they did not.

Of course, Vodafone does have a process of calling you about upgrade opportunities a long time in advance of when the initial term expires. But that's just marketing. They then go quiet around the time the initial term expires, so you bear the risk of beoming a rolling 30-day cash cow.

I wonder how many customers paid for an iPad or other device through a 3G contract and forget it's still appearing in their bill even though the initial term had ended? And how many get a new mobile and don't realise they're still paying for an old one they thought was 'out of contract'? Are they to be treated as stupid people, or people with a hell of a lot of other stuff on their mind who could do with a reminder? Would they be prepared to pay a small admin charge for a reminder at the right time, or should such a reminder be a part of any decent service?

It's worth noting that Ofcom banned "automatic rollover contracts" for consumers and businesses with no more than 10 employees in September 2011. But the ban only applied to landline voice and broadband services, and it only means the customer can't be automatically renewed into another extended 'minimum contract period'. The new rule is that the maximum duration of initial contracts can only be 2 years; and at that point users must be offered an option to contract for a further maximum duration of 12 months. That means they are prompted to extend, switch or cancel.

Should a similar rule be brought in for mobile services?

 

Twitter Gnip Shows Why Social Media Should Share Revenue With Users

Source: Financial Times

Like Google's declaration of war on the human race, the news that Twitter will buy Gnip illustrates why social media platforms should share their Big Data revenue with users. Indeed, they would seem to have no choice if they are to survive in the longer term.

Gnip's CEO claims that:

"We have delivered more than 2.3 trillion Tweets to customers in 42 countries who use those Tweets to provide insights to a multitude of industries including business intelligence, marketing, finance, professional services, and public relations."

And that's not all. Gnip also has "complete access" to data from many other social media platforms, including WordPress, the blogging platform, and more restricted access to data from other platforms, such as Facebook, YouTube and Google+. 

Quite whether users consent to all that is an issue we'll return to in another post shortly. 

Meanwhile, Twitter suggests that Gnip's current activities have "only begun to scratch the surface" of what it could offer its Big Data customers in the future. Yet, from a user's perspective, Twitter has barely changed since Gnip began its data-mining activities. So are users receiving enough 'value' for their participation to keep them interested?

The social media operators would argue that their platforms would never have been built were it not for the opportunity to one day make a profit from users' activity on those platforms. And it may look like the features have not changed much since launch, but part of the value to users is the popularity with other users and it costs a lot to keep each social media platform working as the number of users grows. Each platform also has to keep up with changes to other platforms so users can continue to share links, photos and so on. That means platforms tend to lose a lot of money for quite a long time, as the FT's comparison chart shows. 

But analysing the value to users gets mirky when you consider that the social media are already paid to target ads and other information at users based on their behaviour, and that the cost of that type of Big Data activity is reflected in the prices of the goods and services being advertised. 

And it doesn't seem right to include the cost of buying and operating a separate Big Data analytics business, like Gnip, in the user's value equation if the user doesn't directly experience any benefit. After all, that analytics business will charge corporate customers good money for the information it supplies, and the cost of that will also be reflected in the price of goods and services to consumers. 

In other words, social media's reliance on revenue from targeted advertising and other types of Big Data activity means that social media services aren't really 'free' at all. Their costs are baked into the price of consumer goods and services, just like the cost of advertising in the traditional commercial media.

And if it's true that the likes of Gnip are only just scratching the surface of the Big Data opportunities, then the revenues available to social media platforms from crunching their users' data seem likely to far exceed the value of the platform features to users. 

Yet user participation is what drives the social media revenues in the first place (not to mention users' consent to the use of their personal data). The social media platforms aren't publishing their own content like the traditional media, just facilitating interaction, so there's also far less justification for keeping all the revenue on that score. And it seems easier to switch social media platforms than, say, subscription TV providers. 

So the social media platforms would seem to have no choice but to offer users a share of their Big Data revenue streams if their ecosystems are to be sustainable.

Bischoff's Understated Record Speaks For Itself

The departure of Lloyds Banking Group chairman, Sir Win Bischoff, provides another reminder that nothing much has changed in UK banking. 

The so-called 'City grandee' has spent the past five years as chairman of a banking group that's been fined at least £40m so far, and owes customers £10bn in compensation for mis-sold PPI. The fines have included £28m for mis-selling individual savings accounts and income protection insurance products between 2010 and 2012. Yet Win still talks of banking with his 'stomach' (as did the Lehman's gang) and trots out the languid understatement that "all of us have to be very much more mindful of whether the product or service we provide actually meets the needs of the customer." 

Win doesn't need to say that he hates all this new-fangled regulation - we get that from the career stats - but he reminds us anyway, in typically understated fashion: "I still hark back to the days when I would have tea with the governor of the Bank of England and he wouldn't be sitting there with the rule book. He would say '"Win... is this the right way of going about it or should you be in this kind of business'." 

History doesn't record how often the governor actually said this to Win, or what Win said or did in response (if anything). But it's pretty clear that tea consumed in this manner was spectacularly harmful for the UK economy. Unless, of course, you count steadily declining bank competition, mortgage endowment mis-selling, consistent underinvestment in payment systems and a century of under-funding small businesses as wondrous achievements... (and, you know, I think Win just might!).

Anyhow, Win will have plenty of opportunities for cosy chats over a nice cup of tea in future, as he's off to head up the Financial Reporting Council, the accountancy 'watchdog'. They'll relish his capacity for understatement over there, too. You see the FRC has been having a little difficulty in defining the nature of scepticism in the audit context...  biscuit?

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.

At Last: ISAs Go To Work

Finally, the last lines of resistance have fallen and the Chancellor has announced that ISAs will go to work: 

"To further increase the choice that ISA savers have about how they invest, ISA eligibility will be extended to peer-to-peer loans, and all restrictions around the maturity dates of securities held within ISAs will be removed. The government will also explore extending the ISA regime to include debt securities offered by crowdfunding platforms."

In addition, from 1 July 2014 ISAs will be reformed into a simpler product, the ‘New ISA’ (NISA), with an overall limit of £15,000 per year. You will be able to hold cash tax-free within your Stocks and Shares NISA (if your provider allows it). And you'll be able to ask NISA providers to switch your money between cash-NISAs and Stocks and Shares NISAs.

As has been pointed out repeatedly, these changes offer a huge boost to the real economy, because savers will be able to lend their 'dead' savings directly to each other and to small firms to help fill the funding gap left by the banks. At the same time, savers will improve the value of their investments, not only by diversifying into a new asset class, but also one that provides a decent return.

In 2012, the Treasury estimated that about 45% of UK adults have an ISA, with a total of £400bn split equally between cash and stocks/shares.  But others had found that cash-ISAs were only earning an average of 0.41% interest (after initial ‘teaser’ rates expire), and 60% of savers never withdraw money from their account. That amounts to £120bn worth of 'dead money', because only £1 in every £10 of bank loans goes to small firms, and we rely on those firms for 60% of new jobs.

Hats off to the government and the Treasury for putting in the work to turn this situation around.

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...

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