It's OK: Banks Are Happy With Their Business Lending Standards

Readers may recall that UK banks are self-regulated when it comes to lending standards.

As a result, we were recently treated to the farce of a self-congratulatory report by the banks' own so-called Lending Standards Board entitled:

"THEMED REVIEW OF COMPLIANCE WITH THE LENDING CODE PROVISIONS FOR LENDING TO MICRO-ENTERPRISES". 

Naturally, this grand tome of fully 6 pages neatly concludes that: 

"...no breaches of the [Lending] Code or management weaknesses were identified and no action plans were requested, indicating that standards of compliance and practice with the requirements of the Code are very good as they relate to micro-enterprise customers."

Not that we would be told about any breaches, anyway, since the Board explains that "As most Code breaches are of a minor nature, public disclosure of all Code breaches with the associated reputational damage would, we believe be a disproportionate response." A puzzling explanation, since you would not think that minor breaches would inflict much reputational damage...

At any rate, the report is so loose and shot through with so many holes that it's a wonder it could all be gathered into a single pdf.

The review only focused on five of the many 'subscribers' to the Lending Code, and only looked at their approach to credit assessment, credit card guidelines and the treatment of customers in financial difficulties. However, only two of the firms reviewed even offer business credit cards.

The Board also "acknowledges that the majority of concerns raised by the SME lobby [you can hear the sniggers] relate to commercial issues, such as [complete lack of finance] cost of credit and security". But the report ignores such concerns, claiming only that customers are warned of the costs up front. Business loans and overdrafts appear not to have been covered beyond credit assessment stage, nor the critical issue of how well firms are handling complaints.

Interestingly, all the subscribers require a current account to be held where loan facilities were sought, but the report rather carefully states that there was "no evidence in the file sampling to indicate that subscribers require the purchase of insurance products as a condition of sanction." Perhaps another PPI-style scandal lurks here?

Of course, the overall point is that it's much easier to comply with lending standards when you're barely making any new loans. Staff need something to do. Indeed, the report trumpets the "close, ongoing management of micro-enterprise accounts" by relationship managers - no doubt anxious to demonstrate the need for their continued employment.

If a further nail were needed in the coffin of cosy bank self-regulation, this report provides it.

Waste: The UK Government Shopping Channel

Whatever you think about taxes, we have to put an end to wasteful public spending. This is not about making 'cuts'. There are no hard choices here, no job losses. This is about staff being intelligent in how they spend money. 

Believe it or not, the government is trying to reduce waste. Today's example is the 'mystery shopping' channel that enables suppliers to report poor public sector purchasing practices, as explained in the short video embedded below. But I've been disappointed not to see more signs that the public telecoms bill has fallen by 30-40%, as Green reckoned it could (progress on IT strategy is reported to be slow, and limited to central government). And I'm yet to see the total figure for travel expenditure (let alone any reduction), despite an announcement in 2011 on central procurement of travel.

But, hey, let's applaud progress where we can.

After 18 months of mystery shopping over 300 complaints have been received. Of all complaints made about 80% are said to relate to the buying process itself, followed by contract mis-management (7%), bureaucracy (5%) and technology/systems (5%). A more detailed breakdown of the 240 'process' complaints suggests significant problems with pre-qualifying suppliers and poor 'purchasing strategy'. Central government is responsible for a third of complaints, but most relate to the NHS and other 'wider public sector' bodies. About 80% of cases referred resulted in a "positive outcome" - a great achievement from zero. The recommendations (summarised below) provide further insights.

However, it would be helpful to know how this complaints process fits into a more comprehensive approach to improving the public sector procurement process. I suspect that 300 complaints in 18 months represents too small a sample of all procurement opportunities to be relied upon as a guide to root causes of major problems. And the fact that 20% of complaints were not resolved satisfactorily leaves a lot of room for improvement. While it's critical to seek and listen to 'customers' comments and complaints, I would prefer to see a more data-driven approach overall, with simple metrics aimed at detecting problems in each step of the end-to-end procurement process. One can then look at which steps are attracting the most complaints, from whom and the value at stake before dedicating resource to figuring out root causes and improvements. There are also plenty of internal suppliers and customers to the procurement process whose complaints will be important to capture in addition to those of SME bidders. Maybe that more comprehensive approach is inherent in the suggested lean sourcing process, but I haven't seen specific mention of it yet. 

It will be critical to understand the bigger picture and to see how this programme develops over the next few years.

Recommendations:

• Public sector buyers have been told not to use "pre-qualification questionnaires" for contracts with a value below the relevant EU procurement threshold.

• A supplier's history of dealing with the private sector must also be given the same weight as any record of selling to the public sector.

• Insurance only needs to be in place once the supplier has actually won a tender, rather than when responding to a tender.

• Buyers are encouraged to engage with suppliers before a tender to ensure the tender document makes sense from the start of the bidding process, to avoid endless changes along the way or even cancellation because the wrong product is being requested. That also enables SMEs to group together to win a tender against big suppliers.

• Dynamic marketplaces and the Contracts Finder portal are designed to avoid all SMEs having to sub-contract to a large supplier (and the inevitable fat mark-up). But more time needs to be provided to answer some advertisements.

• Specifications should also be drawn broadly enough to enable more suppliers to compete for the work.

• Faster payment of invoices is critical. The public sector buyer is responsible for ensuring that prime contractors pay sub-contractors within 30 days of the receipt of a valid invoice in goods and services contracts.

• Public sector buyers must not charge suppliers for the right to bid. Instead, the cost of promoting "framework agreements and other catalogue type arrangements should be related to the value of business a supplier derives from those arrangements, rather than an upfront charge."

Image from Malvern Hills District Council.

Does Brown's Story Improve With Age?

Plenty of things improve with hindsight, but could the image of Gordon Brown's time in government really be one of them? 

In "Saving the World"?, William Keegan does an admirably succinct job of restoring some balance to the disastrous picture that emerged after 13 years of New Labour. 

In particular, he relies on his deep knowledge of recent global economic history to emphasise the glorified status Gordo attained through ten years as Chancellor, eight years as chairman of the IMF’s political committee, and his almost sycophantic association with Alan Greenspan. It appears to have been this status that enabled Brown to affect disdain in meetings EU finance ministers, to successfully resist his party's urge for Britain to join the Euro, and which culminated in his ability to convene urgent meetings with G20 leaders during 2008.

William also manfully contends that Brown is entitled to both kudos as an outstanding member of the economic elite and shelter in the safe harbour of the “general consensus” – fostered by his idol, Alan Greenspan – “that the sophistication of modern financial markets had reduced the dangers of a crisis.” 

This I don't buy. For all his ‘listening’ and ‘taking soundings’ amongst his fellow members of the economic establishment, Brown was simply afflicted with groupthink (which we've since learned was rife at the IMF). That he appeared to wake up earlier than others was merely because Northern Wreck was the first retail domino to fall and he had to respond. It was just luck. And it was also luck that taking shares in banks was an option open to him, but not to a right wing US administration (as explained in Too Big To Fail).

Another criticism would be that William only seems to trace the financial crisis to the failure of the Bear Stearns funds in 2007. But that was merely when the financial establishment first realised or conceded there was a problem (as also explained in Too Big To Fail). Anyone who's read The Big Short or Fool's Gold will know that many significant players had been saying (and betting heavily) for years that a crisis was brewing amongst the very banks with whom Gordon was enraptured during his long years at the Treasury and in the IMF. Indeed, William hints at this when he explains how the economist Raghuram Rajan was "subjected to brutal criticism by leading colleagues and disciples of Greenspan's" when he warned "the great and the good" of the impending doom at a conference which Brown attended in 2005. 

In that far deeper context, Gordon's surprise (and outrage) at the sorry state of UK bank finances in 2007-08 merely cements his place amongst the elite groupthinkers who had dismissed explicit warnings for many years. Far from being an especially progressive thinker on the subject of banking calamity, he was actually caught flat-footed by the fundamental flaws others had pointed to in his very own financial system. 

In those circumstances it was the least Gordon could do to keep the ATMs working. On that particular front, he was (perhaps) making the best of a bad job. He should not be seen as having engaged in some kind of heroic quest worthy of an exalted place in the history books.

While William patiently contends that Gordon didn't cause the financial crisis itself, he also properly concedes that he did much to ensure it would be a very long journey out of it. He explains Brown’s avowed and deliberate ‘stealth’ approach to taxation and social welfare spending; the refusal to build any social housing; the unbridled expansion of public sector (complete with higher pay and pensions than the private sector); and the creation of many huge off-balance sheet PFI projects under the guise of ‘prudence’. These things, coupled with a feeble understanding of what the banks were up to, are what should combine to prevent Brown's tenure being seen in a positive light.

Amidst all this, Brown's brief tenure as Prime Minister is almost a footnote - which is strange given his elevation to that role coincided with the peak of his economic profile. William does a good job of highlighting the irony that Gordon really wasn't suited to the job that he'd schemed for so long to obtain. He also points out the irony that Gordon's tendency to dither, vacillate and procrastinate, which had worked to keep Britain out of the Euro, failed when it came to seizing the political initiative with an early general election. 

All in all, an important guide to the Brown years.

Buzzword Bingo!

PR supremo Julia Streets has finally 'opened her kimono' to reveal 'key learnings' from her years as both fan and critic of corporate 'buzzwords'.

Her serious message - very humorously delivered - is that we should avoid creating confusion in the workplace by writing and speaking as simply as possible, especially with people from other countries, communities or industries. For instance, I love her story of the chap who was concerned at the request for staff to 'push the envelope' because he thought they were being asked to offer bribes. And I recall that a London-based colleague I called from New York couldn't understand why I was mildly annoyed at having been 'blown off' for lunch. 

I agree with Julia - as a general rule. We should certainly commuicate clearly. That includes explaining the meaning of words or expressions our target audience might otherwise have to look up. One also has to be careful not to torture metaphors, as Julia points out, or to mix them into a metaphorical stew. And I share her distaste for acronyms. I nearly drowned in them while working at Reuters, until someone told me to look them up in "RAD" on the company intranet. Yes, the "Reuters Acronym Dictionary" had its very own acronym.

But (being a lawyer) I feel obliged to at least make a plea in mitigation for the humble buzzword, if not to defend it altogether.
 

There is a certain richness - and at least mild entertainment - in speaking graphically about an otherwise tedious topic, like law or finance. At a recent conference about regulation, for example, I'll admit to referring to perverse tax incentives as the "elephant in the room", which we were all obliged to politely ignore. I even pointed to the imaginary beast in the corner. It seemed a suitably mild, yet evocative image for a group that included senior policy-makers, and I think people got it... The point of such metaphors is to conjure a reasonably entertaining yet informative picture in the minds of the audience. Preferrably an image that speaks a thousand words which you won't have to.

So I think Julia attacks the metaphorical-buzzword-as-boredom-relief a little unfairly. Although, rather tellingly, she concludes with a helpful guide on how to play 'buzzword bingo', complete with word-grid. 

Overall, this is a very useful book that should be used as the basis of an online resource to which we can all contribute - rather like Roger's Profanosaurus (which even has an app). Follow-up dictionaries in this space could include a guide to words that have been misused to the point they are meaningless (apparently there are 15 you shouldn't use on LinkedIn), and a 'devil's dictionary' of words that contain toxic levels of irony. 

No doubt they too would make a great Xmas present.

The Personal State

This decade is not going well for Britain’s institutions. The 2010 election did not magically restore our faith in a scandal-ridden Parliament. Bail-outs failed to improve the conduct of UK banks. Our public sector finances are in an appalling state. And as more sunlight has revealed the self-serving conduct of our mountainous bureaucracies, the gradual melting of our trust in them has become an avalanche. We want to know how rotten our institutions really are. More importantly, however, we want new models that work. 

As explained in “Lipstick On a Pig”, this plunge in faith in our institutions coincides with trends that are democratising the means of producing goods and services. Using digital technology we are personalising the one-size-fits-all experience traditionally offered by the likes of record labels, publishers, retailers, banks and political parties, and manufacturing our own physical products using desktop industrial machines. Rather than merely accepting what is ordained from the top down, both individually and as members of the ‘crowd’ we are shaping products, markets and political policies to solve the problems we encounter in our day-to-day activities. 

This process of ‘democratisation’ is being facilitated by organisations that are intently focused on helping us solve those problems. I call these organisations ‘facilitators’ to distinguish them from ‘institutions’, which exist to solve their own problems at our expense. The characteristics that I believe mark an organisation as being either a facilitator or an institution fall within broader themes of alignment, openness, flexibility, transparency and responsibility. In other words, a 'facilitator' solves its customers’ problems openly, flexibly and transparently, and takes responsibility for the impact of its activities on the wider community and society. 

Why are these features so critical? You might argue, for example, that focusing on ‘creating shareholder value’ or maximising management and staff compensation have proved to be more successful for some organisations than focusing on customers. As Anthony Hilton, Financial Editor of the Evening Standard, once said, “The City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.” 

But if that’s such a successful strategy, why are those City firms suddenly the subject of scandal after scandal and fine after fine for mis-selling and other misconduct? Why aren’t they able to recover quickly from their mistakes and move on? Why is Parliament labouring over new banking and financial services legislation? Why are people taking to the streets in protest? 

Because these firms are not 'facilitators'. 

In “Lipstick on a Pig” I explored the distinction between facilitators and institutions in the context of financial services, which then marked the latest consumer frontier. That sector also provides a great illustration of how organisations that produce complex products with hidden fees that their own staff can neither explain nor justify to customers become hooked on revenue and profits that disappear when the regulators finally wake up. How clubbing together with competitors leaves the whole club vulnerable to the same event or the consequences of the same mistake. How ignoring complaints and covering up problems leaves an organisation unable to understand the causes of issues it needs to fix. And how, when it finally emerges that the institution is not managed in the interests of the wider community, that community will no longer support it.

Since then, however, the frontier has expanded to confront the public sector and how society works – or doesn’t - as a whole. So I've been focused on the extent to which the public sector shares the same institutional characteristics that afflict our banks, and how facilitators are emerging in that wider context to help people solve their day-to-day problems that are being ignored. 

Whether an organisation is a facilitator or an institution is ultimately a matter of personal judgement for each of its customers. You might consider that a supplier is on the cusp of either category. Some will shift categories over time - although the drift from facilitator to institution appears to be easier than reform the other way. Some may never be reformed. Instead, they will gradually wither away while alternative models grow around them. 

Ultimately, however, the success or failure of our institutions and the facilitators that replace them is down to each of us. We are obsessed with ‘our rights’, but we must also realise that each of us bears responsibility for the wellbeing of everyone else. With our rights come duties and obligations that each of us must perform personally. The state cannot perform these obligations for us. The state can only act as a facilitator for our own endeavour. This is “the Personal State”. 

The Personal State is a simple concept. But it is of course a hugely complex dynamic, fraught with deeply-rooted life and death problems. For it to operate effectively, each of us must act pragmatically - in an informed way, rather than by adopting “uninformed, stupid practice”. That means no longer describing problems in terms of political dogma and propaganda. It means thinking critically and practically to identify and solve real problems. It means praising what works and explaining what doesn’t. It means spending, saving and investing our money in productive ways, and declining state benefits we don’t need. It means finding ways to improve the efficiency and productivity of the public sector to reduce public spending. Of course we must punish the gross mismanagement of our institutions and other violations of public trust. Yet we must also encourage entrepreneurs to engage in survivable trial and error, in order to promote innovation, competition and growth. In short, we must help each other wherever we can. 

Now a state like that would be worthy of some lipstick.

Image from Makeup Artist.