11 May

What has economics done for us?

“The Age of Chivalry is gone,” the political philosopher Edmund Burke wrote, “that of sophisters, economists, and calculators has succeeded.”

Once upon a time, a person’s fate was largely settled by the social circumstances of their birth, today each of us is very much an economic being who must produce things of market value if we are to survive and thrive. As economist Paul Samuelson put it, “All your life, from cradle to grave and beyond—you will run up against the brutal truths of economics”.

As a discipline, how has economics done?

For a supposedly empirical science, it has been plagued by ideological divisions, fads and fashions. As British economist Ronald Coase argued, the biggest problem in economics is that theories and models have been constructed on assumptions which practitioners have not been bothered to examine and admit. He coined the term “blackboard economics”, in which everything works perfectly in theory, not so much in reality.

Another serious allegation is that economics has ignored the lessons of history. University economics students rarely read books or articles more than 30 years old, and instead have textbooks presenting the current orthodoxy. Yet if there is anything that the financial crisis of 2007-08 told us, it is that economic and financial history matters. Each generation believes that some fundamental change has occurred in the economy such that manias, panics and crashes won’t happen again – and yet they do.

At an event at the London School of Economics in the wake of the crisis, the Queen asked, “Why didn’t anyone see this coming?” The fact that only about a dozen economists did (according to Australian economist Steve Keen, who counted them) tells us that economics is far from being an objective science that can make reliable predictions – as, for example, meteorologists increasingly do.

John Maynard Keynes noted that because it involves so much psychology and expectations, and has outcomes that affect lives in a deep and lasting way, economics is a moral science. People’s decisions can’t be reduced to mathematical equations, even if it would be more convenient if they were. French political economist Thomas Piketty criticises the discipline’s attempt to put itself above other social sciences. Its obsession with mathematics, he writes in Capital in the Twenty-First Century, “is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.” Ha-Joon Chang, a Cambridge University economist, goes as far as to say that “Good economic policy does not require good economists”. The East Asian economic miracle, including the rise of his native South Korea, was implemented mostly by lawyers, politicians and engineers, he notes.

Even so, the ‘Great Enrichment’ of the last 250 years, in which the world became much, much richer than it had been for the preceding two thousand years, is thanks in part to economic thinkers such as Adam Smith, and his belief that it is people and businesses, not armies or governments, that make countries rich, and David Ricardo, whose counterintuitive insights into comparative advantage in trade became one of the great laws of economics. These classical economists, Ludwig von Mises argues, were crucial in creating the conditions for modern wealth-creation, in that they attacked “age-old laws, customs, and prejudices upon technological improvement and freed the genius of reformers and innovators from the straitjackets of the guilds, government tutelage, and social pressure of various kinds”.

Not only did the laws of economics provided a counterweight to the conceit of those in power, but the industrial revolution would not have happened without a laissez-faire economy working its magic. Today, when economists get it right, through emphasising simple ideas such as the benefits of markets and trade over defensive self-sufficiency, their ideas can and will continue to raise the welfare of billions.

Beyond the achievement of personal or national security, what is economics ultimately for? Keynes, who was a lover and supporter of the arts, thought it was so we could enjoy the good things in life. This was only possible with a stable, growing economy in which damaging cycles of boom and bust were ironed out. This often seems an impossible task, but economists, Keynes said, are the “trustees, not of civilisation, but of the possibility of civilisation.”

Tom Butler-Bowdon is the author of 50 Economics Classics: Your Shortcut to the Most Important Ideas on Capitalism, Finance, and the Global Economy, released this month by Nicholas Brealey Publishing.

12 Apr

To be, or not to be? A bank

2016 was a difficult year for the alternative finance industry. Lending Club was hit by a series of scandals and Lord Adair Turner publicly questioned the P2P model (albeit in a commentary that he subsequently modified).

But 2017 promises to be a transformational year, with some industry insiders talking about ‘A Golden Age’…

As the scale of online lending expands, so does the ambition. And so the relationship with banks becomes ever more complicated. This was the central theme at the recent AltFi Europe Summit, which saw around 350 fintech leaders gather in London to tackle the future of the industry.

The sector is rethinking its relationships with the financial incumbents. There’s a bigger push on partnerships. But do platforms want to compete with banks, collaborate with them – or become them?

Blurred lines

As Samir Desai, Founder and CEO of Funding Circle, stated ‘the lines between platforms and banks are blurring.’

This is indeed true. P2P founding statesman Zopa has applied for a banking license, whilst Goldman Sachs has announced its intention to offer a new online lending platform.

Zopa’s CEO Jaidev Janardana said that the company is launching a bank to achieve its vision of offering the best home for customer money. As it prepares to offer traditional products, such as cash ISAs, alongside P2P investments, he pointed to Zopa’s customer service record in the 12 years since its birth.

He said that banks’ duty of care primarily covers managing customer money and data – and this is something Zopa has built a reputation for. So has P2P moved full circle and become what it set out to disrupt?

Alternative routes

As to be expected, the industry is fragmenting as it matures, and different platforms will take different routes. An audience poll at the AltFi event revealed that 59% of attendees don’t think that high street bank collaboration is bad news for customers, but the remainder disagreed. So there’s a sizeable minority committed to replacing banks.

This includes Monzo’s Founder Tom Blomfield, who believes that the sector’s collaboration with the incumbents risks simply plugging gaps in a broken banking system.

He called for fintechs to take the lead in ‘marketplace banking’ – rooted in smart software driving open banking in a fertile PSD II environment.

Ultimately, consumers want choice. One way ahead, that we’ll see more of, is co-branding or white labelling of products.

There is room for both banks and platforms, and it will be fascinating to watch how their relationship develops.

17 Dec

Safeguarding London’s FinTech crown

London’s status as the world’s FinTech capital has been the subject of numerous panel debates at industry events.

At the recent FT Banking Summit, the publication’s Financial Editor Patrick Jenkins referenced a conversation that he had with the Eastern European founders of one of London’s hottest FinTech startups. They told him that if they were to found the company again, it would be in Berlin.

On the other side of the coin, at Sibos 2016 Geneva, Kay Swinburne, Conservative MEP for Wales, asserted that the City of London will continue to play a key role.

She said that London is “a global financial centre and will maintain that expertise, investor base and capital base that the rest of Europe will need to tap into.”

The truth is that the full implications of the Brexit vote are unknown. What is clear, though, is that FinTech will continue to be about ‘location, location, location’ – and London has a number of advantages.

For a start, there’s a few hundred years of financial history to consider. The strength and appeal of the City’s financial infrastructure can be traced back to Sir Thomas Gresham in the 1500s, and this advantage won’t simply be eroded overnight.

An unlikely champion

And it’s a core part of this infrastructure that will help London to remain at the forefront of FinTech. The regulator.

Since 2010 the UK government has been looking to encourage new types of finance to offset damage from the financial crisis. The FCA’s regulatory sandbox creates a ‘safe space’ in which businesses can test innovative products, services and business models in a live environment.

While many regulators are known for stepping in to shut down new ventures, entrepreneurs are unequivocal in their praise of the FCA. Along with Singapore’s MAS, it’s seen as one of the most progressive regulators in the world.

A 2016 report by management consultancy Oliver Wyman suggests that if the UK opts for a ‘hard’ Brexit (losing access to the single market), it may actually benefit the London FinTech scene.

This is because UK FinTechs currently have to comply with a raft of EU regulations, not all of which are particularly favourable to UK business. With Brexit, the government could pick and choose which laws benefit its burgeoning companies and implement them on its own terms, easing the regulatory burden.

The report also argues that a hard Brexit could simplify the visa process and make it less expensive for FinTechs to hire the brightest and best from further afield than the EU.

So against a backdrop of uncertainty, one certainty is that both the UK government and the FCA will do their upmost to defend London’s status as a FinTech hub.

Because it’s FinTech which may help to balance any wider economic damage.

22 Aug

Knowing when to show them the money

capitalise global accountantI’ve written a number of pieces over the last couple of months about the way in which the accountancy industry is being changed and shaped by the digital age.

Tech advances are giving professional services firms including accountants the opportunity to move from a cost centre to a value driver for the businesses they serve.

Rather than focus on financial administration, practices for SMEs are increasingly offering a far broader and more consultative set of financial management products and services.

With the SME economy an ever buoyant part of Britain’s business fabric, advice for startups is widespread.

However, financial support for the businesses that find themselves in between – neither startup nor corporate – is regularly neglected. Growth stage businesses can present the most challenging clients for accountants. But these businesses are often open to a high level of engagement with their accountant.

Business funding marketplaces, such as ours, are giving accountants the power to take their counsel to the next level for these high growth clients.

But how can you identify the optimum time to suggest a financial injection?

  1. Going global

Sooner or later, an SME is likely to look longingly beyond the UK borders. Indeed, recent research from Kingston Smith demonstrated that 60 percent of the SMEs they surveyed export to both the EU and the Rest of the World.

While exporting brings growth potential and increased revenue, it also often heralds significant expense. Expanding into global markets can be a daunting proposition for a small business client.

Louis Taylor, CEO of UK Export Finance (UKEF), has said that “no viable export should fail for want of the right finance or insurance”. Indeed, UK Trade and Investment (UKTI), UKEF and the ICAEW are already working together to help accountants better understand and assist their exporting clients.

Capitalise – as an ‘Exporting is Great’ partner – is also working closely with accountants, to help them advise SME clients on export finance options.

  1. Selling like hot cakes

Landing a major contract can feel like the ‘big break’ an SME has been waiting for. Unfortunately, without appropriate financial planning, it can turn into the straw that breaks the camel’s back.

More stock and raw materials, new machinery, new staff, or all of the above – understanding the financial implications of this kind of major business decision will help you offer a far more valuable service to your SME clients.

  1. ‘Tis the season

A lot of small business are beholden to seasonality in their sales cycle, purely by virtue of being part of a specific industry. This can present a financial challenge not only during the off-season, when times are tight, but in ensuring the flexibility necessary to react quickly to seasonal change.

Do you know which of your clients is impacted by seasonality? Suggesting a bespoke financing option to ride the peaks and troughs of the financial year could be the difference between an SME client remaining on your books, or falling victim to the tides of change.

As an accountant to an SME, you can often feel like an extension of a small business team, even playing the role of a Financial Director in some cases. In these instances, it is imperative to know that business’ industry inside out in order to give the best counsel.

It is important to seize the moment when it comes to addressing SMEs’ financial needs. With so many finance options on offer, from banks, independents and alternative lenders, in the past you could be forgiven for simply recommending the comfortable, mainstream option. Now, however, online lending marketplaces are giving you the potential to provide high level financial counsel on bespoke funding solutions for your business clients.

It’s time to embrace this new digital funding era. It’s time to show them the money

12 Apr

Becoming a professional chameleon 4 tips for accountants working with SMEs

Capitalise Global AccountantAs an accounting professional working with small businesses, you have the opportunity to become a professional chameleon, offering counsel far beyond your traditional remit.

Working with our partners – such as PKF, CIMA and the Association of UK Accountants – we hear this on an almost daily basis. Many, it seems, are already aware of the need to broaden their skill-set to serve particular clients.

As the number of high-growth SMEs reaches its highest level since the dot-com bubble burst in the early 2000s, this market presents an incredibly lucrative opportunity.

Becoming an indispensable source of business knowledge to your SME clients will not only benefit their business prospects, but it also secures their custom in an increasingly competitive advisory landscape.

With this in mind, Capitalise has pulled together some tips on how you can go the extra mile for your SME clients:

Cut through the red tape
Develop a working knowledge of the red tape challenge associated with SME expansion activity. Build up useful resources on these topics that you can share with clients. These may include areas as varied as employment, data, or environmental legislation.

While this is traditionally the preoccupation of the SME’s legal counsel, familiarising yourself with these potential pitfalls will allow you to advise confidently, while also providing an extended service to your client.

Find finance
As SMEs face sustained pressure on their financial well-being, being able to advise in the area of funding is an incredibly valuable asset. While banks are the obvious, traditional option, the recent boom in alternative finance can not be ignored. The Alternative finance industry is now worth an estimated £2.2bn a year to UK SMEs, based on figures from 2015.

The end goal is to facilitate introductions between funding sources and SMEs. While this can be done the old fashioned way, sites like Capitalise.com are increasingly empowering accountants through technology.

Become the introducer
If good business is built on solid relationships, then being able to forge these relationships will always be viewed as a valuable client service. Think more laterally about what kind of relationship would be of use to an SME, whether this be with other clients or external professionals.

Your aim is to create a mutually supportive and empathetic environment in which beneficial insight can be shared.

Hone your speciality
If providing all of these additional services to clients feels a little out of your comfort zone, then consider providing only a handful but ensure quality in each. Clients will always value well-informed, strategic advice, it takes time to build up.

Assess which areas of ‘value-add’ you should be investing time in, and which can be outsourced to the likes of finance comparison platforms. This will be to the benefit of not only your clients, but also to your firm’s reputation within the SME community.

As long as economic uncertainty continues to drive competition within the SME arena, the goalposts for accountancy professionals will continue to shift. An SME now sees squeezing as much value and counsel as possible from their accountant as a necessity.

While this will take some time to adjust to, it’s worth bearing in mind that – in this fast paced SME landscape – the small businesses of today are likely to be some of your largest clients in the near future.

Becoming a professional chameleon may be challenging, but it is guaranteed to pay dividends in the long term.

Article by: 

Paul Surtees, MD and Co-founder of Capitalise

04 Jan

2016: The Year of the Unicorns

unicorn global accountantIt was venture capitalist Aileen Lee who first coined the term “unicorn” to describe a private technology firm valued at over US$1 billion. The name was a nod to the rarity of such enterprises, but 2016 will see a shift as unicorns become the norm.

In fact, this year the leading fintech companies will likely begin to surpass this and establish a US$10 billion league. Lending Club in the US, following its hugely successful IPO at the end of 2014, is primed to be an early joiner of this new club.

Banks could easily dismiss the company – (and indeed the wider peer-to-peer (P2P) lending model in general) – back in 2012, when it was only arranging US$60 million of loans per month.

But now, with large institutions recognising the power of this new lending model, hedge funds provide much of the capital loaned out, and it’s predicted that Lending Club will finish 2016 doing well over US$1 billion of credit a month.

Stanley Pignal, Banking Editor at The Economist, has remarked that fintech’s “T-shirt-wearing denizens think of banks as the Kodaks of the 21st century: incumbents whose time is up.” Given the success of fintech companies over the past couple of years, the banks should indeed be worried. And the UK’s leading P2P platforms are ready to replicate Lending Club’s success.

An innovative ISA at last

A major factor behind the continued exponential growth of the UK’s P2P industry will be the launch of the Innovative Finance ISA (IF ISA) on Wednesday 6 April, the start of the new financial year.

Back in April last year, George Osborne’s expansive changes to the pensions industry provided savers aged 55+ with the freedom to better leverage their pension pot. Realising the positive disruptive force of P2P and the increased confidence and appetite of retail savers, the government paved the way for this new type of ISA.

The IF ISA is perhaps the biggest-ever change to the popular ISA format, and is the first time that people will be able to include higher-yielding P2P investments in their tax-free wrapper.

And this change is certainly needed – according to research carried out by P2P giant RateSetter, almost two thirds of cash ISA holders are unhappy with their interest rate, which has been falling for years and presently stands at around 1.38% on average for one year cash ISAs.

Investing through P2P lending means putting capital at risk, but with that risk comes substantially better returns. This is appealing to today’s more financially savvy investor.

Rhydian Lewis, CEO at RateSetter, said:

Savers have been offered terrible rates for years, and this survey shows they are now reaching breaking point

The launch of new IF ISAs in April 2016 is a significant milestone. With the majority of cash ISA holders identifying interest rates as a priority, this will give them the opportunity to increase their returns.

This opportunity will further boost the nascent industry, helping the platforms to establish themselves firmly in the mainstream. The potential of these fintech companies has been strengthened by a wider, more positive profile across the media.

According to Andrew Hagger of Moneycomms.co.uk, a regular contributor to the personal finance pages in the press –

Just because you might not be familiar with the names, it doesn’t mean you should discount them. The P2P sector is now regulated and has established itself as a credible alternative to the big banks – and the rates are much better than you’ll find on the high street.

The pendulum has swung, and all the elements are in place for fintech to change the face of finance. It will be quite a year.

08 May

Aussie rules: a new fintech superpower

Most commentators agree that London has firmly established itself as the world’s premier fintech hub. The UK capital benefits from a supportive government, and a progressive regulator in the form of the FCA. It is the envy of many.

Tech modelsOther markets are fighting hard to catch up. In this competitive environment it looks as though Sydney has now surpassed New York as London’s main challenger for the fintech crown.

Indeed the UK’s leading platforms are already targeting the Australian market.

In April 2014, RateSetter Australia was launched. RateSetter’s founder and CEO Rhydian Lewis explained at the time:

When looking at international markets in which to expand, Australia was the obvious choice as it bears great similarity to the UK before the advent of P2P lending. Its savings and loans industry is ripe for disruption as banks have been offering below-par deals for too long with little true competition

In December, peer-to-peer business lending platform ThinCats followed, founding ThinCats Australia and joining RateSetter and a number of local platforms, such as SocietyOne and Lending Hub, in a burgeoning marketplace.

What are the factors that make Australia so attractive?

Australia undoubtedly has a very robust financial services industry, including a strong and stable banking system. The country’s big four banks have ensured that it is a major financial power on the global stage.

Su-Lin Tan, writing for BRW., highlights how Australia’s banking oligopoly has, by effectively stifling competition, helped to fuel the country’s boom in financial technology. Investors are queueing up to back disruptive entrepreneurs keen to challenge the established order.

So it has a strong financial base, but one that is primed for disruption.

Australia is also well ahead of other nations in terms of deploying advanced payments systems. In the USA, as a comparison, paper cheques are still popular and contactless payment systems are only just taking off.

A local perspective

Start-up advisor Kim Heras points out that Sydney provides easy access to the fast-growing Asian markets, and the Australian government has forged impressive trade agreements with China. This means that Australian financial services organisations get unparalleled access to China.

Heras also believes that Sydney is taking advantage of New York ‘dropping the ball’:

I guess [New York] just always assumed that they would be a financial services capital, and so they haven’t done that much, especially around new forms of currency. On top of that, New York’s got another issue, which is not unlike every other startup hub around the world: They’ve got Silicon Valley envy. So while New York, you would think, would be focused on fintech, media, advertising, the reality is what they’re dying to see out of New York are consumer tech companies that mirror what’s happening in the Bay Area

And, perhaps most importantly, Heras stresses that in financial realms, Australia has scale:

If you look across all other industries, you have a real challenge with scale in Australia, because normally, your audience are people. Australia’s population of 23.8 million just isn’t enough for a startup to scale up as quickly as venture investors might like, but not so with fintech.

In managed funds, we’ve got the fourth-largest pool of capital, so you can get to global scale very quickly in Australia by focusing on fintech. That’s something that makes fintech really attractive for Australian founders

Regulatory support

The Sydney Morning Herald reported that the Australian Securities and Investments Commission (ASIC) is setting up a Digital Finance Advisory Committee, manned by members of the fintech community, as the corporate regulator focuses its attention on the fintech sector.

ASIC chairman Greg Medcraft said that they want to make it easier for start-ups and fintech businesses to navigate the regulatory system.

He believes that the time is “ripe” for digital disruption, as the financial services sector has yet to feel the full impact of modern technology:

The great drawcard of digital disruption is the opportunity it brings. Digital disruption offers new forms of access, greater competition, and greater efficiency

ASIC will now be taking part in fintech initiatives such as Stone & Chalk – a not-for-profit hub established to accelerate the development of fintech start-ups. The group counts giants such as Amazon, American Express and KPMG as partners.

With the inherent advantages in the market and increasing government and regulatory support, Sydney is set to flourish in the fintech arena. One to watch!

20 Feb

Transparency and trust: alternative finance is anchored in traditional values


It has been another difficult month for the banking sector. Swiss prosecutors have raided the offices of the Geneva subsidiary of HSBC to aid an inquiry into alleged money laundering. This happened just a week after allegations that the banking giant may have helped wealthy clients to evade tax. Sky News was amongst those to report that the Financial Conduct Authority (FCA) is now examining the company’s ‘current practices and culture’ in light of the allegations.

These events further undermine consumer confidence and trust in the UK banks, which has already been significantly weakened in light of the financial crisis. Last year, Barclays Chief Executive Antony Jenkins admitted that it could take a decade for the bank to regain public trust. Many commentators applauded his honesty. Many more thought that he was being optimistic.

Beyond the rates

Trust is the most valuable currency in finance.

It is clear that the banks need to implement robust measures to improve transparency and behaviour in order to win back the consumer. It is also clear that there are senior people in the industry, Jenkins prominent amongst them, who are determined to fight hard for this reform.

But I believe that such indiscretions in the traditional banking industry serve to highlight and explain the reasons behind the rise of alternative finance, and in particular peer-to-peer (P2P) lending.

AltFi Data, a fantastic resource which tracks growth in the UK alternative finance industry, shows that the UK P2P market is close to £3bn. The much better rates on offer for both borrowers and lenders in the industry is only part of the story – the growth is being propelled by excellent customer service, transparency and an educational approach that engenders trust.

Allowing informed and intelligent decisions

The major UK platforms work together closely under the banner of the Peer-to-Peer Finance Association to ensure that the ascendant sector grows responsibly, with a notable emphasis on informing their customers.

The UK market leader RateSetter, for example, has produced a useful guide that outlines the key checks people should be making before deciding whether P2P is right for them. I would encourage anyone interested in getting involved to give it a read. This approach is mirrored across the industry with the platforms putting education at the heart of their communications.

Critics of P2P say that it isn’t covered by the Financial Services Compensation Scheme (FSCS). This is true and there is no guarantee in place, but the platforms have created their own robust system of customer protection which is more fit for purpose for modern savers.

RateSetter pioneered the idea of a Provision Fund. Very simply, all borrowers pay a fee into the fund, which is in place to cover any bad debt. It repays lenders should any borrowers miss a payment. To date, this bespoke solution has ensured that not a single lender has lost any capital or interest due to them.

The Provision Fund also covers all of a lender’s money, whereas FSCS currently only covers the first £85,000. This model has now been adopted across the wider industry and is ensuring that P2P offers strong returns at a minimal risk profile.

Rhydian Lewis, Chief Executive of RateSetter, has commented:

By creating bespoke solutions for the industry, we have tried to ensure that are lenders are as protected as possible whilst allowing them to enjoy greater returns

Putting the customer first, at last

Another characteristic of the P2P platforms is excellent customer service. Of course a model that is built on the idea of disintermediation, and giving the consumer value, should indeed offer excellent customer service. But the platforms are going above and beyond to offer the ultimate customer experience. This is evidenced by the amount of awards that they are beginning to pick up. For example, industry leaders Zopa and RateSetter have dominated the Moneywise Customer Service Awards over the last couple of years.

It is this combination of award-winning customer service, transparency and great rates that is feeding the growth of P2P lending. And it is this mix that the banks lack.

People are increasingly noticing these advantages over traditional finance. Respected City commentator Anthony Hilton recently wrote in the Evening Standard:

Peer-to-peer lending and crowd-funding – the process of investors and savers being introduced via the internet to people and companies who need finance – is the phenomenon of our time, the first really useful innovation in finance since the automatic cash machine

If the platforms stick to their values whilst continuing to offer market-leading rates, the scope for further growth is limitless.

22 Jan

Finance ready to evolve in 2015

Lending Club’s successful IPO ensured that 2014 ended on a high note for the peer-to-peer (P2P) lending industry. The largest platform in the US saw its stock shoot up by 56% on the first day of trading, helping the company to achieve a valuation of around $9bn – higher than all but 14 of the country’s many banks.

London City Global AccountantIt shone a bright light on the ascendant sector, and represents a further signal that P2P is moving to the mainstream. It also sets the stage for other alternative lenders.

Nesta’s latest research, which is well worth a read, highlights that the UK alternative finance market has more than doubled in size year-on-year since 2012. It is predicted to hit £4.4bn in 2015, with P2P contributing the majority.

But what exactly are the key factors that will be powering this growth, pushing the industry more firmly into the public view?

Pension freedom at last

From April 2015, Chancellor George Osborne’s well-publicised changes to the pensions industry will give savers aged 55+ the freedom to do as much, or as little, as they want with their pension pot.

They will now have that most important of commodities – choice, rather than simply being herded into buying annuities.

Giving people more choice, and control, over their savings will see more turning to alternative finance as they look for higher returns than those on offer through more traditional products. With cash savings accounts at rock bottom rates, P2P will see a significant increase in new business.

If Pensions Minister Steve Webb gets his way to also extend the freedoms to existing pensioners, then up to another 5 million people may be given the chance to trade in their annuities for cash; cash which many would then look to invest.

The country’s platforms are busy preparing for this influx of new business. UK market leader RateSetter, for example, is very close to launching in the retirement space with four self-invested pension firms. Due diligence has been completed and fee structures agreed, with work now beginning on technological integration.

A green light for ISA inclusion

My last blog focused on how the government was consulting on how P2P will be included in ISAs. Allowing the higher rates of interest that the sector provides to be protected from tax will revolutionise ISAs, which are something of a nation’s favourite – the most popular, trusted and widely used savings product.

The consultation has now closed and the industry expects to hear exactly how things will work shortly, with a policy statement expected before Easter.

The Peer-to-Peer Finance Association (P2PFA) has called for a new ‘Lending’ ISA, which would be preferable to trying to shoe horn P2P into Cash, or Stocks and Shares ISAs.

This idea of a third type of ISA has widespread support. It would give consumers another option to weigh up against high risk Stocks and Shares and low yielding Cash. It would provide a rather fertile middle ground of 6% returns with very minimal risk.

A lifeline for British businesses

The Small Business Enterprise and Employment Bill, which aims to address the issue of high street banks restricting the growth of Britain’s SMEs, includes a series of ground-breaking measures.

It looks to support smaller businesses seeking growth capital by helping them seek out alternative lenders if they are turned down by the banks. Importantly, the banks may be made to actually refer failed loan applications to alternative finance platforms.

Whilst these measures aren’t yet law, the bill is widely expected to be passed before the May general election.

Alternative lenders are already seeing an increase in applications from sole traders, entrepreneurs and small businesses, who are turning to the more affordable and flexible loans on offer from the P2P sector.

This will also help keep that important balance between borrowers and the increasing number of savers bought in by pension reforms and ISA inclusion.

An exciting future

When you consider the factors I have outlined above, it is clear that 2015 will be a huge year for the P2P sector. In fact, I believe that the UK alternative finance market will quite easily surpass the £4.4bn estimated by Nesta.

Commentators agree. Andrew Hagger, a leading personal finance analyst, put it very well when he said:

The growth of P2P and alternative finance over the last couple of years has been impressive; however there is a potential triple whammy on the horizon which could deliver an increase in investment on a much larger scale and prove to be a real ‘game changer’ for the sector in 2015

25 Oct

Charting a Course Out of Dark Waters?

The accounting industry will be aware of the allegations of failures of culture and conduct that continue to surface within the banking sector – most recently against Barclays relating to its Dark Pool. With many firms working for clients in, or having strong links to, banking and financial sector companies, it can be difficult to look beyond the headlines and get a grasp of what sits at the root of all these incidents. Some will argue that that all significant bad behavior has been uncovered and it is now time to move on. This, however, appears unlikely.

Dark Waters Becky Stones Global Accountant

What should be clear to the accounting industry from the recent scandals is that being proactive, engaging and cooperative with regulators and prosecutors pays off. The penalties and fines for those banks and financial sector companies that are not being proactive and fully cooperative with the authorities have been heavy, a recent example being the $8.9bn fine for BNP Paribas. Denial and/or deferral is not the ethical or economic option.

In contrast, UBS avoided a €2.5bn fine from the European Commission for proactively reporting its participation in the LIBOR fixing cartel. Banks who undertake a thorough review of parallels, to “read-across” from each of the conduct based scandals over the last years together with implementing effective remediation throughout all business areas will stand at a significant advantage.

Regulators and prosecutors are now more aggressive, clients less trusting and ex-employees more disaffected. Those who do not actively get on top of conduct issues run the risk of paying a significantly heavier price in the future if these issues are subsequently unearthed by regulatory enquiry, through client complaints, by whistleblowers or by pier group allegations and revelations. The resultant damage for banks and financial sector companies will extend beyond penalties and fines to loss of reputation, clients, profits and the loss of control of business development or strategic direction to various regulators. Those who remain reactive, putting out one fire after another, executing one set of plans after another at the behest of or in response to different regulators, can expect to lose significant market share to those able to focus on a well-defined strategic path.

This read-across informed by recent and ongoing investigations is not just a review of the low-hanging fruit where small pockets of employees have behaved badly in the past. It is a thorough deep-dive lateral analysis into all areas of activity, for example a look into the finer details of client order handling and trade execution, client communications and representations and market observations and fixings and associated trading behavior across all asset classes and trading venues. At its heart lies the question as to what the root cause is and where the next manifestation is likely surface.

This requires the banking and financial sector – and those who service it, such as accountants – to undertake far more than staff training on the broad concepts of culture and conduct. Whilst this a good place to start it is indeed just that, a start. Such generic training would be unlikely to cause a trader doing his job in the same way as he has always done, just as he was taught by his manager, to adequately question whether his specific conduct stands up to scrutiny. And it might not alert third party service providers or in-house accountants to potential incidences of wrong doing before they become public, and the topic the next day’s news headlines.

We look at the read-across from the recent lawsuit filed against Barclays relating to its ‘Dark Pool’ activity. Dark Pools are private trading venues. They were created to enable institutional investors to match buy and sell orders for large volumes of stock away from traditional exchanges where High Frequency Traders (‘HFT’) operate.

In the US, financial market rules (specifically Reg. NMS) lead to large orders being split across multiple traditional exchanges because of the requirement to get the best price regardless of speed or reliability of order execution.

HFTs take advantage of this order fragmentation by placing aggressively priced orders in small size across multiple exchanges and watching the patterns of execution to identify when large orders are being executed. To gain a critical few microseconds advantage in accessing trade order data and the placing their own orders, HFTs use the very latest computer and network technology and pay exchanges to keep the computers which run their HFT algorithms in the same data centres as the exchanges own computers. Once a large order is identified, HFTs can apply their speed advantage to trade with the market in front of the remainder of the large order. This pushes the price to a worse level for the original order. A few microseconds later, the HFT can then put this liquidity back into the market at the worse price with the expectation that the large order will execute against it providing a quick profit for the HFT and worse pricing than anticipated for the large order.

This HFT behaviour led to the creation of alternative opaque trading venues. These dark pools were actively marketed by their operators – which include some of the largest stock-trading investment banks – as a safe haven from HFTs for institutional investors. Eric Schneiderman, NY state attorney general, filed civil fraud charges against Barclays over its dark pool alleging that it favoured HFTs over other investors and misrepresented the level of HFT activity in its dark pool to client.

What can the accounting industry take from this?

Paradoxically, the equity market is one of the better regulated markets. Dark pools, however, fall outside of many of these regulations. To read across, banks should proactively examine other areas of market-making activity for falsified marketing material and representations to its clients. We would recommend that banks undertake a risk-based sampling of marketing material and examine for misleading client representations and to confirm that different clients receive consistent information and a consistent message. The risk-based sampling would focus on areas where trading is lightly or not regulated and pricing is opaque.

Looking beyond the read-across to marketing of different products, banks should, in addition, employ risk-based sampling to examine other external and internal representations. As accountants will be well aware, many of these involve valuations, both of client positions and of a bank’s own balance sheet items. On the client valuation side, areas of review should include disclosures around client valuation methodologies, fees and commissions. On the own balance sheet side, review should include checks on appropriateness and consistent implementation of policies for fee recognition, provisions, reserves and adjustments. Any policy or deviation from policy which is subjective in nature should be considered a red flag and warrants detailed investigation, documentation of rationale and audit trail of changes.

Ongoing risk-based sampling should be based upon an understanding of the fundamental risk – in the instance of dark pools, though not in themselves inherently problematic, potentially a combination of a lack of transparency disguising conflicts of interest as evidenced by misrepresenting marketing – sampling should be based upon where else these risks could surface and result in potential abuse.

The role of internal audit and compliance has been significantly expanded in many banks over the last few years. However, much of the business subject matter expertise in these functions has been acquired from interaction with the business functions which are being overseen or reviewed. Given the complexity of these businesses, if the control and review functions are to be effective guardians of conduct they must either include or have access to independent business subject matter experts.

All such testing and deep-dive review results should be fully documented and evidenced to provide audit trail of both good and sub-standard practices requiring remediation throughout the organization. As banks become more proactive they should be in a position to demonstrate good behaviour and ongoing sampling results. As such they frame breaches as anomalous rather than systemic – a key defence, a key element of compliance and a key way to test and underpin the fundamental value of a specific business line.

Forensic Risk Alliance

FRA Global AccountantForensic Risk Alliance is a leading firm of international firm of forensic investigators and accountants, data protection experts and eDiscovery specialists with offices in the US, UK, France and Switzerland. FRA has been involved in some of the largest regulatory investigations worldwide and frequently deals with US and EU prosecutors. It helps businesses to resolve complex and high-risk financial, legal and regulatory challenges. Its people provide independent, conflict-free advice and litigation support services. For more information visit, www.forensicrisk.com 

Becky Stones, Partner, Forensic Risk Alliance

Becky is a member of the Institute of Chartered Accountants and has an MA in Mathematics from Oxford University. With over 20 years of industry experience in the Investment Bank – Credit Suisse, most of which was at managing director level, Becky is one of the leading professionals in valuation, regulation, risk, control and associated strategic design with deep experience and knowledge in all these areas.

Her main hobby is the breeding and training of show jumpers up to Olympic level where her stallion was part of the 2008 British Olympic Show Jumping Team. She is currently aiming two of her young horses at the 2016 Olympics.