Evidence From Lloyds' PPI Crew

If the clip below won't work, try here.

The Banking Standards Commission has heard that Lloyds Banking Group's payment protection insurance profits were so critical to the viability of its personal loan business that "it was not a standalone product," according to Helen Weir. Yet the bank hadn't considered that people might repay the loan early and that the insurance should therefore end at the same time. She claimed some customers asked for the product in focus groups "because it gave them peace of mind". Yet the claims ratio as share of premium was lower than comparable products (20-50% vs 60-65% for life or property insurance, and higher for motor insurance).

Carol Sergeant, then Lloyds' Chief Risk Officer, and formerly the FSA managing director who led the investigation into Lloyds' mis-selling of precipice bonds (now the Treasury's adviser on the doomed 'simple products' intiative!) said:

'I feel I bear accountability for not taking up with the FSA more clearly at the outset what principle’s based-regulation meant in the conduct area. ‘I made the wrong assumption, because it worked in other parts of the forest that we would know how it would work and as time goes on by continuing to address the various issues that were coming out of thematic reports I thought that this [mis-selling problem] could be mended.’

This from a former managing director of the FSA who, I repeat, led an investigation into Lloyds' mis-selling of precipice bonds...

Is this the kind of future that Hector Sants faces, having been knighted on his way from CEO of the FSA to leading up Barclays' compliance function?

Big Data: Is Reputation Really Portable?

At the recent London New Finance session on Big Data in Finance, Mark Hookey of Demyst.data suggested that a more accurate profile of a person is obtained by observing the breadth of the person's behaviour, rather than the depth of their history in any one area. The challenge is knowing which types of data from each area of the person's behaviour are representative (and having permission to use that data). He conceded that the profile is probabilistic rather than predictive.

Rachel Botsman has also talked about the concept of 'reputation capital', which is a product of all who have trusted you, when and why. She says it's only a matter of time before we are able to aggregate, monitor and use our ratings on the many sites on which we interact, so that we extract more value from the total of our "reputation capital". Rachel suggests this capital will be more powerful than our credit score. Rachel also suggests we'll be able to intentionally 'shape' our reputation, and so build-up our reputation capital (or reduce it). Two challenges she suggests are:

• knowing which data should be included in the data set that comprises your total reputation -  the same challenge facing Demyst.data and others Rachel mentions; and

• how to enable 'digital ghosts' to leverage their reputation capital (subject to privacy and data protection), since they don't interact online and therefore do not personally generate their own reputational data. 

But even if you do manage to identify the limited set of data that best represents a person's behaviour in a given context: 

• how relevant is that behaviour in any other context?

• what more does 'total reputation' tell you about a person in a given context than what you can see of their behaviour in that context?

As we observed in the programme on Rethinking Personal Data, the significance and value of personal data can't be captured in a single dollar amount, or a 'yes'/'no' answer to whether it can be used. Instead, the value and utility of personal data is a hugely complex dynamic that varies by: 

• the context or the activity we are engaged in;
• which persona we are using at that moment;
• the actual data being used or provided;
• the permissions given;
• the rights that flow from those permissions; and 
• the various parties involved.

It follows that a reputation derived from a specific activity is also purely contextual, and attempts to rely on a 'good' reputation in one context as suggesting good behaviour in another are flawed. At best, as Mark Hookey conceded, the total profile or reputation data might indicate probable behaviour in another context to a greater or lesser degree, but it won't be predictive. And the person relying on the reputational data still has to know or discover the reliability of making the association.

Of course, we already know how unreliable a reputation from one context can be in a different context. Brands are key reputational badges, and while sticking a trusted brand from one industry on a new product in another market or industry might work from time to time, generally it's not a sure-fire thing. If the brand is extended to enough products that fail, the brand eventually becomes diluted, or less trusted, as the failures outweigh the power derived from success in the original context.

Indeed, I believe that internet technology is liberating us from the tyranny of a single reputation, such as a credit score.

The highly contextual nature of both identity and the behavioural data generated suggests that if you want a good reputation for doing something, then you simply need to do it and do it well. Other people will only rate you highly if you do things they find helpful (assuming you can't simply buy ratings). In other words, the vast array of reputational data available on the internet is enabling us to distinguish the facilitators, who solve other people's problems in a specific context or market, from the 'institutions' who merely claim they're here to help, but actually exist to solve their own problems at other people's expense.

So, no, reputation is not really portable. And the idea that disparate reputations can be unified or expressed as a total amount of 'reputation capital' that can be reliably leveraged over time, regardless of context, is similarly flawed.

Image from MasCanc.

Will Consumer Transaction Data Drive New Online Marketplaces?

I should begin this post by explaining that I'm involved in the Interoperability aspects of the midata programme. I was invited to participate on a voluntary basis and have no client in that process. I donate my time. I'm independent of the dozens of other participants. I didn't shoot JFK. And I don't even own a pet, let alone one I believe to be a reincarnation of Elvis Presley. 

The only conspiracy in which I might be accused of involvement is the mass collaboration by consumers known as Web 2.0, which has evolved into Web 3.0 using "linked data" that computers can read (aka "the semantic web"). Lots of information - including government data and data from online bank accounts - is now available in this format because it makes analysis so much easier. Analysing the data is necessary to convert it from being merely information into useful knowledge. This is why the government is keen that banks, telecoms providers and big energy start making all your transaction details available to you in machine-readable form - if you want it. Gaining insight into your finances, communications and energy use will enable you to make better spending decisions and even negotiate new, bespoke products - if you want to do so.

In an explanatory post on the Which? website, Consumer Affairs Minister Jo Swinson sparked a number of comments by people who do not want to be empowered or have their consumer experience made more efficient. They are happy to make their own product searches and to use price comparison services. Evidently, they are not concerned at the number of problems detected by the Office of Fair Trading in its work on the price comparison sector. They also appear to believe that information security and privacy safeguards around existing transaction databases are adequate. I am not amongst them.

It's perhaps unfortunate that this debate seems to be centring on price comparison services, when it's really the mainstream product providers who are to 'blame' for the lack of consumer bargaining power in key markets. In fairness these services have evolved into a prime marketing channel through being more nimble, internet savvy and committed to transparency than the mainstream product providers themselves. This has rendered the services useful to consumers up to a point, but they are limited by their deals with the product providers as to how far they can really empower the consumer. In this sense they occupy the battleground created by consumer rebellion and institutional resistance.

I have expressed my own frustration with the current model of price comparison service for many years. That so many engage in extensive television advertising campaigns tells you that being a price comparison service provider is a really great business to be in. But consumers are paying for those big advertising campaigns in the same way they're paying for vacuous bank advertising - through the price of the products they buy, which in turn generates commission and/or ad revenue for the comparison service providers. So, while these services are intended as a tool for consumers to use, it would be naive to assume that price comparison service providers are acting on the consumers' behalf. Product providers are paying good money to ensure these marketing channel ultimately work for them, not you. As a result, these services are not so much about 'price comparison' as simply 'comparative advertising'.

Critically, however, the current crop of price comparison sites also only rely on the entry and/or display of personal and product information in human readable form. They have you by the eyeballs, at least for as long as you're able to keep your eyes on the screen. Yet the product providers are able to rely on their computers mining and analysing a wealth of yours and other customers' transaction data to work out the most profitable product to offer you. True, in some scenarios - like insurance - this 'information asymmetry' appears to favour you, but product providers have giant data sets that can overcome any advantage you think you might have. And when in doubt they simply charge you more. In The Undercover Economist, Tim Harford shows how information asymmetry works to our detriment in buying a car - when the dealer has all the information - as well as in the market for health insurance, because we have the information and not the supplier.

So while a price comparison service might enable you to buy a cheaper traditional product from one provider versus another, you are by no means able to negotiate from a position of real knowledge about the product or price that's right for you.

This makes a human-readable interface an enormous waste of your personal time for the tedious yet important task of ensuring you spend your money wisely. Instead, our own computers should be analysing our transaction data and interrogating product providers' systems directly, not only to find a product at the right price, but to create the right product for the right price. This might be as simple as relying on your rate of energy use to always ensure you're on the right tariff, even if that means switching providers daily. Or it may open up opportunities for collaborative consumption amongst consumers with whom you share similar interests or behaviours.

Of course, most of us won't have the time, skill or resources to do all this for ourselves, anymore than we can build our own cars. So new intermediaries are springing up to store and/or crunch the data for us. I'm not going to name them because I don't want this post to be perceived as some kind of advertisement. These intermediaries have been variously called 'data stores', 'personal data vaults', 'personal information managers' and, most recently for the purposes of the Midata programme, 'midata stores' and 'midata service providers'.

The services provided by these intermediaries vary according to whether they just store, display and/or transmit the data at your request without otherwise processing it; whether they receive data from you or your current supplier; and whether they analyse the data or combine it with other data to produce a result on which you might rely to purchase an alternative product or change your behaviour in some way. 

These intermediaries need contracts with consumers that permit them to access the consumer's transaction data with relevant permissions restrictions, and which agree some form of remuneration. Such contracts would need to go further than the basic service terms of price comparison sites. You might allow them to receive a disclosed commission from a product provider, but at least this would be transparent to you. This marks the line between whether the intermediary is acting for you or the product provider, and there will need to be clarity on this point.


Some people say they don't want suppliers to store any of our transaction data. They want it deleted as soon as it's no longer needed. But it should be clear by now that your transaction history could be very valuable to you, and you should have the option of downloading and storing it and giving it to another provider. Most businesses insist on such 'data portability' when moving from one outsourcing service provider to another, for example, and this can be just as important for consumers and small businesses.

Identity and authentication are also important features of a world in which transaction data is being transmitted. Perviously, I've suggested that proof of identity should be momentary, based on much wider behavioural data than just the static datasets that fraudsters can replicate, and the data used to establish your identity should be discarded straight away, rather than held for re-use. But that is not to say that transaction data itself should be deleted.

The impact of all this on mainstream product providers cannot be underestimated. I've previously drawn the distinction between 'facilitators' who exist primarily to solve customers' problems and 'institutions' who exist primarily to solve their own problems at their customers' expense.  Clearly this new environment will favour product providers who are aligned with consumers' day-to-day activities rather than those who make life awkward because it suits their own profitability. A gulf may well begin to open between product providers as they are tested by this distinction. More confident consumers should be more prepared to spend money with facilitators than those faced with institutions they distrust.

However, I believe that this trend will most likely result in a series of digital platforms on which consumers and suppliers in various markets directly negotiate products and pricing in a transparent way, based on each consumer's transaction data, wherever that is stored. Such platforms have already arrived in so many other consumer markets as part of the Web 2.0 phenomenon, that it's only a matter of time that they arrive in the markets targeted by the Midata programme in any event. And it's only natural that consumers would want to leverage their own transaction data in that context.

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.