Tuesday, December 31, 2013

The end of year and maybe the end of banks?

Antony Jenkins, CEO of Barclays, thinks that banks lost their way by becoming too focused on short term profit and now need to reconnect with long termism. Perhaps banks did focus on short term profits but the fundamental problem  is their misunderstanding of their purpose and the environment the operate in. Consequently, in an individually empowered world, they are in danger of being bypassed.

I am a great fan of the BBC Radio 4 Today programme. It both infuriates and entertains me, but the now annual Yuletide happening of inviting in guest editors can be doubly interesting ( I cant wait for PJ Harvey on Thursday!). Today's Today editor was Anthony Jenkins CEO of Barclays and a man who, it seemed to me, was on a mission to try to present a human, reconstructed and penitent face of banking. Getting into the detail of how well that was achieved and how much it was heartfelt or so much  flummery would take too long so I won't begin to try here. However, in the course of the programme he introduced the idea that the primary issue with banks and, by extension, the root of the collapse of 2008 was an obsession with short term profit. This, he appeared to argue, blinded the banks to risk and incentivised immoral behavior - I paraphrase of course.

It’s a convenient and not unreasonable assertion, and one that is commonly advanced post crash. I am a constant critic of shortermism but on this occasion I think he has missed his mark.

Its not that I don't believe short termism was/is present and that it is very corrosive its just that, for me, the key underlying issue with banks is the decline in there understanding of what they are there to do. Banks are a service and they asses risk and this is a complex undertaking with a mutual power relationship between the banks and those they serve.

On a personal and business level I deposit my money with them and instruct them to disperse it as I see fit, when I see fit. For that they can, and should, charge me a fee. I use their service because, in theory, it frees me from having to guard my money personally, and it is convenient. I may also borrow and I pay for that too. These are mutually beneficial and supportive relationships but it is also a complex relationship.

Banks thought this was purely transactional and a simple or complicated relationship. They commoditised the transaction to drive down cost, used money to make money to no particular end (still do), and we each became a number - not a person. In commoditising the transactions they introduced unnecessary and new risk and the lack of autonomy for local decisions meant they had no ability to make sensible logical service driven exceptions. The relationship was broken and unequal.

I have little doubt that this approach was aggressively promoted by consultants who did binary sums showing how by systematising things they could strip out cost. The banks drank freely of the koolaid and bought all the hardware that the consultants could sell.

But as Peter Drucker and others have pointed out there is a world of difference between complex and complicated and ability to truly judge risk was gone, as was the visibility of the risk. We all know the outcome.

But the problem for the banks is that changing back takes a lot of time. The reintroduction of "relationship managers" does not change it. They have neither the necessary experience nor heuristics and they are lacking in autonomy being bound by the same system let strictures that have cost billions to put in place and cannot be undone by bankrupt banks.

No doubt the banks hope our appetite debt will hold us and buy them some time. I wont get into the issue with our relationship with debt at any length here but suffice to say whilst I accept that some debt is some circumstances may be necessary debt does make us slaves and both governments and banks encourage us to have it in order to pacify and chain us.

However, times are changing. The digital revolution is founded in the notion of empowerment for the individual and alternatives are emerging and some are already well established. Alternative payment schemes like Paypal, stripe, Google wallet and Bitcoin are operational and increasingly accepted. Alternative finance options exist with the emergence of crowdfunding in its various forms and particularly P2P lending.
Of course the institutions and vested interests will close ranks to defend their pals and endeavour to reign these innovations in, no doubt on the nefarious excuse that "criminals might use them". It’s a line harder to hold when not only have criminals both robbed and used banks, but all the more hollow when we know that some banks have been/still are operated by crooks!

But the global and virtual nature of the digital and crowd empowered economy, and the trust bonds that pervade it, means that a new generation is developing a taste for a world without retail or merchant banks, so hold onto your hat Antony - you might need that shipping forecast job after all.

Thursday, October 31, 2013

Sad Mad and Bad - or why the FCA is wrong in its crowdfunding proposals

I have said for a long time now that one of the greatest problems bedeviling crowdfunding is a lack of understanding, beyond the superficial, of the fundamental principles that underpin it, and that its greatest threat is in the fact that vested interests and institutions are some of the least informed around. The FCA proposals for the regulation of crowdfunding have unquestionably proved me entirely correct and whilst in some cases it can be nice to say “I told you so” I take no pleasure in that on this occasion.

There are many pieces I would take issue with in the consultation paper and I shall be participating in the response process - although I have limited hope that it will make a whole lot of difference. But, in the interests of brevity let me just point out a couple of the really truly idiotic aspects of their proposals, those being the notion of  gating equity crowdfunding to only “sophisticated investors” and promoting the mediation of “financial advisors.”

Why is the constraint of participation wrong? Well it’s wrong on a range of counts but for a starter it kills the supply of capital. One of the guiding principles of crowdfunding, in fact its greatest offer, is the democratisation of capital and that is delivered by allowing people to participate who have previously been excluded. By constraining participation you constrain capital flow. This flow must be maintained  otherwise crowdfunding does not bring additional capital into the marketplace and without that crowdfunding is not expanding the offer to businesses and addressing a need. A need, we should remind ourselves, that was greatly increased by the failure of the traditional “sophisticated” investment market to run itself very well.  In fact it did it so badly that it needed to be saved by significant contributions from the "unsophisticated".

At the same time lowering barriers to participation is a fundamental principle that underpins the transformational nature of the online world. It by passes gatekeepers, it embraces innvoation, it is a force for equality of opportunity, and it allows people to re imagine themselves into roles that have previously been denied to them. By applying constraints you curtail that transformation and reign in freedoms.

Secondly, what constitutes a sophisticated investor?  I had an interesting chat with a financier the other day who proudly described himself as a sophisticated. However he was one that clearly had no real understanding of crowdfunding and seemed unconcerned when I pointed out that Lehman Brothers were considered pretty sophisticated in the time before they took a multi billion dollar fall from their sophisticated heights.

One of the fundamental criteria used  to define oneself as a “sophisticated investor” is individual wealth and income. It makes no distinction as to how this wealth is acquired and, I have to say, based on my experience the holding of wealth has never been a good indicator of  either sophistication, intelligence or judgment. One outcome from the proposal would, of course, be to help ensure those with wealth have the best chance of retaining and increasing it.

A key idea behind crowdfunding is that, by opening up participation, it brings in a much more broadly based set of evaluation criteria and, importantly, a breadth of different motivations to invest. This means that the traditional investors with their existing lense, often aggressive expectation of return, short termism and limited motivations can continue to turn their gaze away from investments they do not consider suitable, and this is fine. But by stopping new participant from engaging it threatens to prevent those same opportunities from being considered by investors with a different set of criteria who may find something of value in the proposition and invest in an idea that would otherwise have stalled.

The availability of this alternative assessment model  is absolutely imperative at a time when banks - the major source of business investment in the UK - have systematically deskilled themselves in this area. I would, and have, argue this is to the extent that they are largely incapable of making suitable decisions at a local level now and frankly lack the level of local autonomy to change that arrangement in the short term anyway.

Of course making retail investments of the type offered through crowdfunding brings with it risks for the investor, but so do all investments. And it’s not as if the track record of our sophisticated investors is infallible.

To suggest that people are so dumb that they don't recognise the risk to their investment is patronising in the extreme. Amazing though it may seem to the FCA but to the best of my knowledge pretty much everyone in the local branch of betfred (other betting shops are available) seem to understand that their little flutter on the 3 o’clock at Aintree is not a sure thing and they don't ask for their bet back when their chosen nag comes in last. Of course drawing such an analogy to the attention of the FCA - as I have - tends to get the lame response of “we are not responsible for regulating the horseracing industry”. My response would be THANK GOD FOR THAT! They are not responsible for house purchasing either and it seems entirely possible to make the largest investment in most people's lives without the intervention of a regulated body - estate agents famously aren't of course - and to even own that asset without insurance.

My point is that I have greater faith in people to make the sensible choices than the regulators it seems but, more importantly, the introduction of alternative evaluation criteria is key to the crowdfunding model and by gating participation to only “the usual suspects” you are removing one of its most important characteristics. I also believe this is because the FCA don't recognise the value of, or understand, this concept.

Lets consider the second point of issue - easier participation for those who take financial advice. The lunatics really have taken over the asylum on this one. These would be the financial wizards that advised so many people take out the hopeless endowment mortgages, or advise on those those ISA or pension investments that have performed so catastrophically recently.To take our horse racing analogy a little further it  seems the message is better not invest more than 10% of ones net investible protfolio down the bookie mate - unless of course you happen to have a quick chat with Arthur Dayley first of course. I have no issue with people taking advice that wish to but to actively encourage it, no lets re phrase that, to actively favour those that do is barking.

The arrogance of their stance is that what they are tacitly saying is that you should not be allowed to lose your own money, you have to give it to a “sophisticated” fool to lose it on your behalf! If the financial crisis taught us anything it was that the financial emperor really did have no clothes.

The conspiracists amongst you might think they, the FCA, have been got at by lobby groups on the part of a financial industry bruised and threatened by a new upstart. For what is worth I love a good conspiracy but this one I don't buy. I hear lots of voices from traditional finance huffing and puffing but I don't believe they feel threatened, and nor should they. No, this is a case of a body given a task to which they are either unsuited, unwilling  or unable to apply themselves effectively.

For all the ideas around secondary markets (which I heartily endorse) and other froth to squarely challenge the most fundamental principle of crowdfunding - lowering the barrier to participate - is a case of the most monstrous vandalism of a growing asset and an appalling misjudgement.

It is deeply ironic that the uniqueness of the light touch approach that has allowed crowdfunding to thrive in the UK to now and establish this country as the leading exponent of the form is now being reigned in by group of dullards on little evidence of anything being wrong whilst at the same time other countries are clamoring to liberalise their rules in order to access a resource we already have. Sadly this would have us destined to coalesce in the middle and the parting on the left will simply become a parting on the right.

As a historian  by training I look at this as reminiscent of the journey of the great emancipation and reform acts of the 19th Century. The rigid resistance and arrogance of anti reformists then read, from todays relative freedoms, like the ravings of lunacy , and the FCA might one day go down with with unrepentant pomposity of a Viscount Sherbrooke declaring that  “we must educate our masters”. But be sure of this - we will mount the barricades, we shall overcome, and financial emancipation will come - one day!

Tuesday, February 26, 2013

Italy - A vote for change?

Being part of an Anglo Italian company means I get to speak to a lot of Italians. No surprise there. But what I have found surprising and saddening is the sense of resigned despair that has affected so many in recent months. Last nights results in the Italian elections however give me some cause for optimism.

Over the years I have visited Italy and been subject to its frustrations, its  bureaucracy, its crime and corruption and indulged in all the cliched and prejudicial chat which pretty much goes along the lines - “well what do you expect, its an Italian tradition!” I remember distinctly sitting in a restaurant in the far south listening to a learned friend describe a significant aspect of the local economy being what he referred to as “factory farming”. This was not chickens in large numbers but the proliferation of empty factories and buildings springing up across the dusty countryside, empty and redundant and with no more purpose than to access funding and grants that supported their construction, and of course many groups would take their cut. Whilst a lot of the banter we had was good humoured and my Italian friends in the main would josh along but defend their corner well. But later last year I noticed a change. It seemed that many of the educated, intelligent and eloquent Italians I met in Rome were articulating views about Italian institutions being broken, corrupt and hopeless, only this time they really meant it. Worst of all no one could see an answer. There was a hopelessness I had never encountered before and it made me sad. But maybe, just maybe they have begun to find a way to resolve it.

The results from yesterday's election and the success of Beppe Grillo and the Movimento 5 Stelle, or Five Star Movement, is simply not a surprise to me at all. Nor is the lack of support for Mario Monti. The continued, albeit reduced, support for Berlusconi should not surprise us either - even if it may depress me profoundly.

Whilst we hear expressions of surprise at the success of Grillo and his fellow candidates,  described in the UK in hushed tones as “political novices”, this is entirely what one should expect when the established parties have demonstrated to the populace that they are incapable, untrustworthy and inept - surely much more damning than being novices. One can forgive novices their errors. I would be particularly interested to see the demographic of his supporters of Five Star. I would bet they are younger, significantly so, and this is for me cause for hope because it represents a vote for change unencumbered by consideration with convention.

As for Monti - apart from being the architect of Italian austerity and thereby almost inevitably unpopular - he represents a profoundly undemocratic imposition by European and global institutions and vested interests seeking not to change a system that is patently flawed, but to prop it up.

Those inside and perhaps importantly outside of Italy that are fearful  of the inevitable instability that will follow this muddled election outcome are in many cases those that typically do not want change, espouse the idea that there is no alternative because they do not wish to see one, and hope for a return to a “stability” that will see them as winners.

Manuel Castells suggests that as traditional institutions, be they banks, legislatures, retailers, are increasingly seen as failing the people they purport to serve that those same people will now more readily embrace and supply alternatives. And importantly now in our networked world people are increasingly empowered to bring about those changes and create those alternatives and take ownership of the issues because technical tools allow us to collaborate and act with so much greater ease than previous generations. Increasingly they are disinterested in the fate of established institutions and do not seek to reform them, they simply bypass them. So why bother trying to change a bank from the outside by buying a share and attending the AGM? Simply ignore it and build an alternative one. Why stand for a political party or  legislature in hock to vested interests and lobbyists? Ignore or it or start a new one.

I carry no torch for Five Star or any of the Italian parties, I am not closely enough engaged to cast a vote. Nor do I know what the outcome of this particular period of confusion might be. But what I find hopeful is that whilst some are scornful of the idea that a vote for a comedian as an anti vote I can see it as a very positive act. That is a vote for change even if you don't know what that change might be. So oddly and perhaps counter to what many might feel, I consider the outcome a positive one.

Today's result is a wake up call to the Italian political institutions, and the wider European and Global ones so unnerved by this outcome and so concerned what this impasse might mean to “markets”. Reform yourselves now, from the inside or you may well just be by passed by those that care nothing for your traditions. We the people are now empowered to ignore you.