Rethinking Personal Data

As part of its 'midata' initiative to empower consumers, the department of Business Innovation and Skills has been consulting on a proposal to give the Secretary of State a general power that "might be exercised broadly or in a more targeted way" to compel suppliers to supply transaction data at a consumer’s request. In the interests of transparency, I've summarised my response to the consultation over on The Fine Print. As previously explained, I should disclose that I've been involved in the midata Interoperability Board from its inception in 2011.

The ECB Won't Really Do "Whatever It Takes"

I can't understand why 'stock markets soared' 2% on yesterday's announcement by the European Central Bank (if there really was a causal link). 

Mario Draghi's threat/promise in late July that the European Central Bank would to do 'whatever it takes' to save the Euro always rang hollow. And yesterday's long-promised follow-up announcement on (some) of the detail only confirmed the lack of substance.

Doing 'whatever it takes' would involve the ECB buying the bonds of troubled Eurozone Zerozone countries unconditionally - regardless of whether those countries operate their economies responsibly. Of course that's a crazy notion, and a long way from what the ECB is really offering to do. Draghi added yesterday that troubled countries would actually have to formally request such purchases and accept "strict and effective conditionality", which roughly translates into all European languages as "austerity". 

Of course that's something Greece and Spain have shown a marked reluctance to accept - understandably. And there seems no real way to force them to do so without sending the boys around, which would shatter the single European fantasy ideal. As Graham Bishop has explained, this has always been the flaw in Zerozone monetary 'union'. There's no credible plan to discipline profligate states. Those who negotiated the Maastricht Treaty believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would ultimately refrain from driving their firm into a wall in the interests of shareholders and taxpayers...

So it seems the giant EU foot is intent on kicking this particular urn down the road until it breaks. In the meantime, hopefully Greece and anyone else who is genuinely unable to cope will grasp the opportunity for an amicable parting to recover on their own terms.

Image from JMK Advisors.

CrowdPosts

If you have a passion for the regulatory intricacies of alternative finance, you might check out my recent posts over on The Fine Print. The first involves 'unpacking' the term "crowdfunding", while the other is my take on the FSA's recent note on crowd investing.

The rest of you can stay put and stay tuned - it's time to write about some fun stuff ;-)

Image from Lattice Capital.

Utility Accounts In Credit

This is an age old complaint, but worth repeating in these troubled times.

My gas and electricity supplier does not allow payment of its bills by variable direct debit, like the telecoms providers do. Instead, it insists on a direct debit of the same amount throughout the year, regardless of my creditworthiness. In this way, the supplier ensures that it builds up a nice credit ahead of the main winter bills in October, January and April. In my case, that's a credit of over £500 in June, and over £1,000 by the end of August. 

That credit arrangement has nothing to do with supplying energy to me directly, because it hasn't supplied me with the energy yet - hence my 'account' is in credit. In fact, if I was paying by credit card or debit card, they wouldn't be able to charge me because they haven't yet performed the service. But they would sure find a way to recoup the 'lost' value of the credit arrangement in the prices they charged me for paying as the energy is used.

Meanwhile, the need to provide 0% up-front finance for energy companies operates as a steady drag on consumers' cashflow - particularly for those in the 'squeezed middle', who can afford the bills when they come around, but need to minimise interest on credit cards etc in the meantime.

So why should the supplier be allowed to build up so much credit? 

Why can't they be obliged to use variable direct debits, except perhaps where missed payments have occurred?

And if it is allowed to build up credit, why shouldn't the supplier be obliged to segregate the funds it is holding against my future bills from its own money, and account to me for interest received? 

Of course, the same can be said for the funds taken on direct debit by the TV licensing authority.

The government needs to start thinking like a citizen rather than a supplier.

More Early Warnings - Now!

Last year I cheekily suggested we should allow financial regulators to short-sell the stocks of companies that are subject to the slow grind of enforcement action. Refreshingly, the Treasury seemed to acknowledge such concerns and the Financial Services Bill includes a power for the Financial Conduct Authority to disclose that a warning of enforcement has been issued to a firm - a so-called 'early warning notice'. The Standard Chartered 'wire stripping' saga provides an excellent illustration of the issues.

Radio silence on enforcement actions is explained as investor protection. Yet it leaves innocent investors to continue piling into stocks they might have avoided had they known of the alleged misconduct. Instead, enforcement action should merely be about regulatory penalties, and the fact an action has been commenced should be disclosed as a material fact about which investors (and customers) can draw their own conclusions. Short-selling has a similar effect. Generally speaking, short-sellers go looking for mismanagement and/or misconduct and back their suspicions with a market price. I gave the example of Greenlight's campaign against Allied Capital (and later Lehman Brothers), and noted that DE Shaw had a £100m short position in Barclays in February 2011. That at least acts as timely opportunity for long-only shareholders to consider selling, and would-be investors to steer clear.

Our banks, in particular, continue to present examples of long term operational misconduct that show why early warning is a good idea, the latest being the saga of Standard Chartered Bank's alleged 'wire stripping' activities. A key issue is whether $250bn or $14m in US dollar transactions were rendered invisible to the US authorities, preventing scrutiny to establish whether they breached sanctions against Iran. SCB claims that it's been working with various US federal authorities to settle allegations about its practices for some time - precisely the sort of cosy arrangement that leaves everyone else in the dark. But the New York State Department of Financial Services has decided to go it alone. In April it notified the federal authorities in April that it would pursue SCB more widely than the $14m in transactions that SCB say are in issue. The resulting allegations were published on Monday - perhaps not exactly an 'early warning' to the market, but it will do for argument's sake. SCB's share price dropped significantly on the news, later recovering somewhat, so these are clearly matters of concern to investors.

SCB has naturally reacted defensively in the face of the NY State regulator's broader allegations. It's running the traditional defence of cosy enforcement activity, saying its reputation with investors has been harmed before all the facts are out, and people have lost money 'unfairly'. It claims the NY State regulator is wrong on the merits of the case, and should thrash it out in a settlement quietly like the Feds. But the fact that the share price recovered somewhat from the initial fall might suggest that investors are still making up their minds. In other words, the 'early warning' has not been the unmitigated disaster some might claim. Similarly, short-sellers often need to incur the cost of holding their positions for many months - even years - before they're ultimately proved right or wrong.

Personally, I think the merits of whether or not the relevant transactions were affected by sanctions and should have been subject to scrutiny pales into insignificance beside SCB's apparent approach to that issue. It's one thing for the bank to take the view that the transactions are out of scope and argue the toss with the authorities while complying with scrutiny procedures in the meantime. There are also instances where regulation is clearly outdated, flawed or unduly awkward and a pragmatic 'fix' is acknowledged by the authorities as acceptable. But would be quite another thing to apparently make a judgement call privately and then deliberately alter transaction data - or require it to be altered - to shield the transactions from scrutiny. That sort of attitude to compliance risk makes you wonder what other risks are being run and at what scale. And the initial impact on the share price shows that at least some investors are just as interested to know that such risks are being run as the regulators. Neither investors nor regulators like surprises.

Interestingly, the City's propaganda machine has chosen the SCB saga as a point from which to launch a counter-attack on behalf of banks generally. The Financial Times, 'reports' a "backlash against naming and shaming of banks" - a kind of backlash against a backlash, if you will. The FT cites a proposal by Lord Flight to amend the Financial Services Bill to prevent the Financial Conduct Authority being allowed to give early warning notices. Interestingly, Lord Flight has introduced an extra note of moral panic that pension funds have lost money as a result of the NY regulator's disclosure of its allegations against SCB. Any time you see a gratuitous populist reference like that you should smell effluent. 

Let's be clear: investors have lost money because they didn't realise that SCB was running a risk of enforcement activity on a grand scale. That kind of problem seems to be particularly rife in banking. We need more early warnings - now!