Bankers’ Conduct: Yet another reason why SMEs and savers are avoiding the Banks

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Date

17th November 201525th May 2016

Potential misconduct by bankers has been included in the banks’ compulsory stress checks carried out by the European Banking Authority. Good news? Well, partly. Their hand has been forced by the stark reality that banks see litigation costs as a result of foul play by their employees as part and parcel of operating cost. This isn’t exactly a morsel, either; poor conduct accounts for 7.5% of the average bank’s operating cost, according to The Group of Thirty, an international body of financiers and academics charged with examining the consequences of private and public sector issues.

Holding back capital to account for misconduct is not the same as trying to stamp out misconduct. The rather feeble ruling lacks the teeth to punish the banks for continuing the attitude of short-termism that provided the stimulus for the financial crisis in 2008: bankers can still get away with borrowing short-term, lending long-term and apply the leverage by borrowing from each other. The bonus culture that was so vehemently criticised is still prevalent. Those who wished for prison sentences, confiscation of funds and other sanctions for the culprits of the financial crisis won’t be celebrating this new ruling. The cost of covering for this misconduct is likely to be keenly felt by ordinary savers and SMEs who find access to finance increasingly difficult to access.

The “conduct” ruling comes in light of the new stress tests that global financial regulators hope will force banks to hold sufficient capital in their reserves to absorb an economic downturn. The figure bandied around in the US press is a staggering $1.19 trillion of debt that can be written off when the banks fail. This will take away billions of pounds, dollars and euros, all of which could be lent out through directly matching lenders with borrowers. The fall guys? UK SMEs with restricted access to finance, and savers stuck with the miserable gruel of savings accounts and ISAs. The Solution? P2P Lending matches up lenders and borrowers, cuts out the banks and middle men and allows SMEs to benefit from the wisdom of a crowd. Ultimately it is a huge fillip for the global economy: surely the band of global regulators should spend less time trying to shore up a broken model that puts social cohesion and economic solidity at risk, and more time focussing on producing fully regulated P2P lending platforms.

The momentum is already shifting away from the banks: including the conduct of bankers in the stress tests is not the answer for the regulatory authorities. Investing in P2P will ultimately benefit SMEs, the lifeblood of any developed economy, and savers who can earn decent interest on their savings by matching directly with borrowers through secure, regulated platforms.

Why P2P Platforms are Slowly Usurping Traditional Savings Accounts

Author

Angus Dent

Date

6th November 201517th May 2016

The prospect of boosted savings returns has seen traditional savers become SME lenders through Peer to Peer lending platforms. In fact they are flocking in their masses, and both the banks and building societies are running scared. The Yorkshire Building Society has taken particular umbrage at what it views as “bad investment decisions” and “would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so”, according to a scaremongering article in the Daily Telegraph. It’s worth noting that such “independent financial advice” can of course be received at the Yorkshire Building Society for any Telegraph readers particularly affected by what they had read.

Yet it is hardly a surprise that the banks are launching their own counter offensive: they are losing out on bucket loads of low cost capital. The implementation of the Innovative Finance ISA next year should see even more switch to P2P lending, as they will be afforded tax breaks on profits earnt through peer to peer lending platforms. This is obviously good news for all the platforms, but is better news for existing lenders who should see more security as the money comes in.

Whilst there are risks when investing through Crowdlending websites, the larger platforms are doing everything they can to mitigate the risk to ensure that they can offer savers a viable alternative to banks. RateSetter, in my view, have the best offering from the big players. They have operated a provision fund since 2010 that proudly boasts a 100% record of reimbursing investors who have lost their money when a borrower has defaulted on repaying a loan. The fund contains over £16 million, offering more than 150% cover against claims. Every borrower contributes to the fund by paying a compulsory fee when they agree to lend over the platform, and should a default occur, the money is paid back in full. Should the fund become depleted for any reason, all outstanding loans would be redirected to the provision fund and pooled repayments would be shared back proportionately to investors to ensure they aren’t fully exposed to a particular default. To put this in perspective: the government guarantees the banks at the cost of the taxpayer. Furthermore, the guarantee only pays out if the bank goes bust and then only to up £75k. If a P2P platform fails, the FCA’s rules dictate there’s always an alternate supplier who will run off the loan book.

My response to Yorkshire Building Society’s view that investors are entering peer to peer lending with their eyes closed would be to say that investors are in fact more likely to act cautiously when lending across online platforms. People should always question what looks at face value and exceptionally good rate, and should always choose an investment on the value of its security first and foremost. There are enough platforms who operate provision funds, and who also demand borrowers take out credit insurance or in some cases personal guarantees. Transparency is, and should be, prioritised above all else; it is hard for banks to argue that platforms are complicated to use when it was the banks themselves that propounded the concept of “borrow short term, lend long term”, a notion that stimulated the financial crisis and the demise of the likes of Bear Stearns. P2P lenders instead advocate a “lend for 12 months, borrow for 12 months” policy that is wholly transparent. And with no leverage used to facilitate the loans, arguably the two major structural causes of the financial crisis won’t be an issue for Peer to Peer lenders.

Whilst more money is poured into Peer to Peer lending platforms, the alternative finance industry as a whole will see some consolidation as well. The bigger companies will obviously continue to get bigger, but the consolidation will also help smaller players offering niche services to replace traditional banking facilities such as invoice discounting and property lending. The result? More streamlined, better-run companies who prioritise lender security and endeavour to minimalize the risk for regular individual investors, who can offer a viable alternative to those sick of the miserable rates offered by banks, but without the appetite for investing in the risky world of stocks and shares.

Moreover, institutions with a low cost of money, such as family offices, schools and county councils, will be drawn into investing over peer to peer lending platforms rather than leaving their money to stagnate in bank accounts. Local government treasurers would be particularly keen to lend to platforms that subsequently lend the money to constituents or local SMEs in an attempt to further support their local community. This could see an increase in localized Peer to Peer lending companies such as Folk2Folk, who operate solely in the West Country.

The result of all this? Bad news for banks, good news for savers and SMEs.

Crowdlending, Crowdfunding and Football

Author

Angus Dent

Date

27th October 201517th May 2016

Generating a sufficiently large cloud of individual investors is one of the major obstacles for any young crowdfunding or crowdlending platform. Myfootballclub.com, however, didn’t have that problem: founded in April 2007, by November the “Society” of members was 20,000 strong, eventually growing to more than 50,000 members. They soon completed the takeover of Ebbsfleet United FC and through raising the profile of the club were able to save it from debt and eventually win a trophy, all the while allowing the fans to democratically involve themselves with the day to day running of the club. The transfers and playing budget were crowdfunded and members could vote on matters ranging from kit sponsorship to team selection. Yet membership numbers started to decline as interest dwindled, and eventually the club was taken over by a Kuwait-based consortium who cleared the urgent debts of £100,000. Funding Ebbsfleet United entirely through a crowd had temporary benefits, but ultimately the financial commitment was insufficient. Myfootballclub was ultimately about enthusiasts indulging in a hobby rather than investors making money. However, surely there is an opportunity to combine the two?

Football fans are an odd bunch. Aspirational to the point of delusion, insatiably demanding and harbouring passion that borders on neurosis, they would be the type of shareholders every director of any other business would swim through hot acid to avoid. For fans, a chairman who is deemed to run a football club “as a business” is the paradigmatic taboo. The Premier League’s inception saw England’s game of the masses catapulted into a corporate beast that at its best has the power to transcend cultural, geographic, racial and religious boundaries and at its worst has torn the game away from the working class who cannot afford the cable subscription to watch it on the television, let alone the ticket prices to watch it live.

The “corporate beast” of the Premier League…

Yesterday, the definitive “beast” of English corporate football, Manchester United, appointed a former director of Ladbrokes PLC into the newly created position of Chief Financial Officer at the club. For a club (business) valued by Forbes at $3.1 billion, the creation of such a crucial position in every other business seems massively overdue. The title may only be a ceremonial amalgamation of what has existed before, yet the position of CFO firmly entrenches the corporate structure that fans see as the scourge of modern football. The disenfranchisement felt by certain factions led to the creation of FC United of Manchester, a club run solely by the fans. It remains to be seen whether the club can keep the democratic structure as it moves up the leagues, when raw enthusiasm is won’t be enough to withstand the financial constraints.

Yet running a football club in a sensible, corporate manner can bring rich reward, on and off the pitch. Take Swansea City, a team who avoided relegation from the football league in the most dramatic of circumstances having been rescued from liquidation months earlier by a hastily assembled consortium. A member of that same consortium, lifelong fan Huw Jenkins, was appointed Chairman within a year. Within ten years, the club had an annual profit of £14.6 million, had won the League Cup and most importantly was established in the Premier League.

What, then, can offer a blend between the unavoidable corporate structures that a club needs to take advantage of the huge popularity of football, and the necessity to give some power back to the fans? For me, the answer could be crowdlending. Allowing fans to earn interest on money lent to their football club will offset the spiralling costs of going to games and cable television subscription. The clubs themselves would benefit from the publicity, as Ebbsfleet did, and receive finance from lenders who understand the club, without putting too much power in the hands of the uninitiated. Yes, there are problems: clubs would have to be very cautious not to exploit the trust of the erstwhile fan, and would have to ensure that the loan can be paid back with revenue that is both unaffected by performance and is guaranteed income over a structured term. Moreover, authoritative bodies such as the Football League and Premier League will be quick to put pressure on any practices that put a club at higher risk of liquidation. Yet the opportunity for fans to use crowdlending platforms to support football clubs financially would benefit all involved and ensure that football clubs can give back more to fans.

Peer to Peer Lending Regulation: the benefit for SMEs

Author

Angus Dent

Date

9th October 201517th May 2016

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A recent article written by Dr Avinash Persaud of Intelligence Capital caught my eye this morning in which he discussed the major issue of financial regulation and the difficulties facing SMEs in trying to raise finance through the traditional lending avenues. Persaud is a well-qualified source of knowledge: a former governor of the London School of Economics, a former member of the UN Commission on Financial Reform and a visiting scholar in both the European Central Bank and the International Monetary Fund, as well as the Chairman and former employee of a range of private, public and investment banks. The article is written for an Indian digital newspaper, but it certainly is written from a global outlook. It can be found here: http://www.livemint.com/Opinion/fQpaevJ8DX7KUpwBVdeXQK/Crowd-financing-is-not-banking.html

I have identified two important points from his article. Firstly, he is at pains to highlight the importance of facilitating finance to SMEs to drive economic growth, and he recognizes that banks cannot be expected to provide all of the finance. He recognizes that “a large part of the problem of financing development is not the absence of cash but an inability to mobilize it“. In my view, this is the result of the lending vacuum left in the wake of the Basel III rulings that ensure banks must have proportionately more capital in the bank when lending to small businesses than they would lending to more established businesses, tying up more of funds than banks would like. Dr Persaud recognizes the need to “use technology to match untraditional borrowers with untraditional lenders and provide opportunities for diversification and other forms of risk and information management.” Persaud fails to recognize that the bulk of the lending can come from institutions who will pledge alongside individuals on the same terms. Dynamic, flexible and secure Peer to Peer (P2P) crowdlending platforms that are properly regulated will fill the SME lending vacuum, facilitating finance from SMEs from a range of institutions and investors whose money would otherwise be unavailable to borrowers.

This leads me to the second main point: regulation. I think Dr Persaud is right to highlight the importance of differentiating lending platforms from traditional banks, a job that the regulators must do to ensure that prospective lenders know exactly what the risks are. The P2P industry itself wants FCA regulation for clarity as much as credibility. Regulation needs to be a long, drawn-out process to avoid simply bracketing it with banking regulation. Persaud reasons that “regulating crowd financing platforms as a bank and not an exchange would not only undermine the point of it, but would create systemic risks”. However, Persaud’s belief that P2P alternative finance platforms should drop “conventional” nomenclature is not necessarily the answer. I disagree with his statement that the banking terminology “Market Place lending” shouldn’t be used by alternative finance P2P lenders because that is exactly what is on offer to SMEs wishing to borrow money and individuals willing to lend.

In the words of Dr Persaud, “moving to the next level of social and economic development depends on these borrowers getting through”, which in turn depends on regulated Peer to Peer crowdlending platforms facilitating the finance from a range of savvy individual and institutional investors.