Do TV Advertising Rules Limit Economic Growth?

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

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

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

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

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

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

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

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

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

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

Image from RoehamptonStudent.com.

Six Years On And Pragmatism Has A New Frontier

I see this blog has reached the ripe old age of six, so I felt compelled to squeeze in at least one post to celebrate.  

It's fitting that the reason for my absence has been the need to get to grips with the FCA's proposals to regulate P2P lending and investment-based crowdfunding - not to mention the revelations concerning the Chairman of the Co-op Bank. After all, this blog set out to chart the rise of facilitators who help us wrest personal control of our day-to-day lives from the one-size-fits-all experience imposed on us by our institutions. Rumbling the 'Crystal Methodist' marks the continuing plunge of faith in those same institutions, while the decision to finally let the 'crowd' into the regulated financial markets shows that even Parliament recognises you and I are better off dealing with each other directly than simply entrusting our life's savings to the banks and investment funds.

Of course, these are just a few examples of the punishment being doled out to our financial institutions. And they aren't the only ones under pressure from the trends sweeping society, as we struggle to figure out a more sustainable form of capitalism. All our institutions, from the BBC to the Police to the Church, unions, political parties, government departments and so on, face the choice of becoming facilitators or withering away. 

So is there anything 'new' to write about? 

Six years on we are still seeing the dawn of where these trends will take us. But to get a sense of the future, I've been following the rise of 'open data' - or open access to data in machine-readable form. This marks a new frontline between institutions and facilitators. Big Data vs You. Not only has it already created new facilitators, in the form of "personal data stores" or "personal information managers", but it may also redefine some of today's facilitators as the institutions of tomorrow... 

As a taste of things to come, last week a senior advertising executive insisted to me that "Big Data can accurately predict human behaviour." To be fair I made him repeat the assertion in case it had slipped out by accident. No one else at the table seemed to find that truly weird, and it wasn't until the end of the week, when I met up with some people working at the sharp end of data gathering, that I was able to fully enjoy the hilarity of that statement.

This is going to be fun.

Image from Data.gov.uk

Matched Funding For UK SME Lending Platforms

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

Apparently few applications have been received so far.

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

Related investment funding programmes include:

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

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

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

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

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

Crowdfunding Regulatory Arbitrage - Updated

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competitiveness of EU businesses:

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

Starting a company and employing people:

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

Expanding a business

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

Trading across borders

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

Innovation

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

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