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You may have seen Maggie Pagano's incisive article in The Independent this week in which she challenges the new head of the FCA to 'walk with all angels and not just the rich few'.
The article below from Barry James, one of the leading protagonists working for more democratic finance, who is familiar with the matter, explores in greater depth the emerging battle for an alternative, more democratic, approach to finance - and how this could be 'strangled at birth'.
Barry James is a recognised authority on Crowdfunding and Open Finance and will be part of a panel launching new research from the Bank of England and Tim Berners-Lee's Open Data Institute next week at the Centre for the Study of Financial Innovation.
The Two Kinds of People... and the Modern Robber Barons of Canary Wharf
A friend of mine who used to run a venture capital fund says there are two kinds of people in this world. Those who day “Yes, but" and those who say ‘Why not?". He should know. Professor Allan Barrell now trains young entrepreneurs all over the world - from Beijing to Bedford and Helsinki to Toronto.
My mother thought that there are two sorts of people too: Those who can be trusted and those who cannot. Her folk wisdom was based on her own insights into human nature. Strangely the FCA (Financial Conduct Authority - the FSA as was) would agree with her - but for a different reason. They believe that some people can be trusted to look after their own interests, and their own money - and then there’s ‘The mass market’ - who by clear implication cannot.
The FCA divides the world into ‘Sophisticated Investors’ (or ‘High Net Worths’, as some would have it) and ‘consumers’. A.K.A ordinary people.
They believe - they’ve said so - that there should be different rules for ordinary people and those that are, to borrow a phrase, ‘rolling in it’. Against all sense and precedent (legal or otherwise) they have decided, without any consultation whatsoever, to seek to exclude ordinary people from participating in one of the most powerful opportunities for change in many a long year: Equity Crowdfunding.
It’s pretty clear that ordinary people are fed up with being herded around and told what they can do. They’re fed up with dinosaur banks fleecing them at every end and turn. They are - by and large - furious with the modern robber-barons of Canary Wharf who continue to demand their huge ‘bonuses’ regardless that the harvest has failed, and continues to fail, thanks to them. Who can stop them? Not the FCA that’s for sure.
Whatever they say the banks are not lending so ordinary people and real businesses (often run by ordinary people) are looking for an alternative. Open Crowdfunding and ‘alternative finance’ are starting to provide one. Peer to peer lending is shifting into second gear now. Who’d not want a decent return on savings and to support ‘lending without banks’? The original form of Crowdfunding, based on pre-sales, such as provided by BloomVC.com is thriving because it’s allowing people to support people starting new businesses. To get things they actually want made, and done.
Then there’s Equity Crowdfunding. Equity (or shares to most of us) has been, to quote Richard Branson, a ‘rich man’s game’. Equity Crowdfunding means that it need no longer be - as Richard has pointed out.
In a time when the banks have fled the fields of real business, reneging on their role in society, to play the international casino with the bail-out money we so obligingly provided them we badly need an alternative for the real economy. The one that actually produces things that create wealth rather than just shifts it around.
Because that’s what the much vaunted ‘financial engineering’ does. No really. The banks produce no wealth. Hear it from the horse’s mouth. Or rather from one of the people who took home a Nobel prize for inventing it. In a book published this coming week (to which I was privileged to contribute a small part on Crowdfunding) there’s a telling anecdote on page 9 when Paul Volker asks the 'inventor' "what all the financial engineering does for the economy, and what it does for productivity”. The answer was unusually direct, comprehensible and simple. It was also shocking: "Nothing”. Asked what it did do he said it "moves around the rents in the financial system, and besides, it's a lot of intellectual fun”.
There we have it. We need hardly guess where the ‘financial engineers’, employed by the dinosaur banks are placing these ‘rents’ - or more properly the tolls they’re taking from us. Meanwhile the real economy continues shrinking. Starving for lack of fuel. No one will every really know what the real toll actually is - just that it’s unimaginably huge.
So at a time when banks have fled why would we prevent ordinary people from helping each other? Ordinary people who are prepared to take a small risk, a few tens or hundreds of pounds, to help a small business get off the ground?
This is what the FCA have sought to do. There is nothing whatsoever that prevents you or I from putting our shirt - and underwear if we so choose - on a nag in the 2.30 at Kempton Park. A Casino continues to thrive a half mile from where I live in times that are testing the businesses that surround it. Yet the FCA have, without any consultation with Parliament, or anyone else, decided that they will - to quote them (speaking rather fittingly in Brussels to their peers there) ‘deter the mass-market’ (aka ordinary people) by not allowing them to ‘play’. To quote precisely creating an entirely artificial £1,000 minimum stake with the intention of then limiting it to ‘those who can afford to play’. Why? Why would you ban friends, family and other willing contributors from taking this kind of small risk to help get something they like the look of off the ground?
Well firstly because they apparently believe that ordinary people are stupid, and don’t understand what risk is - lotteries, horses and casino notwithstanding. Also that some may be mendacious. That a wilful fool-in-a-hurry might later complain. And one of their main mindless targets is to keep complaints to a minimum of course. So they’re ‘just doing their job’ it seems?
Welcome to the world of a regulator in the post-crash 21st century. Rather than do their real job of taking sensible precautions to protect people from fraud - rather than from themselves - and supporting and enabling business and financial innovation, they’re happy to just bolster their own position - and that of their friends in Canary Wharf - by lazy and clumsy regulation that preserves only the status quo. Just what we need!
The damage to society and the economy is incalculable - for this and other reasons - but that’s OK if they can tick their boxes and keep complaints to a minimum of course.
They’re also ready to spread this poisonous nonsense around. Last week they hosted a closed-door session for regulators from around the world. We can only guess at what was said there but the regulator’s smug demeanour when delivering the above lines in Brussels recently (see video at 3095.07) gives us our best clue I suppose. But isn’t that the point? That we can only guess. In a democracy are not public bodies, such as the regulator, supposed to be both open and accountable? Isn’t it time to demand and ensure that they are?
Because it wont happen unless we demand it. The FCA are currently engaged in fortnightly closed-room negotiations with a nascent industry body who represent the commercial interests of a small minority of around 100 UK Crowdfunding platforms either launched of in various stages of pre-launch.
Despite repeated requests information remains scarce. The recent Banking Standards Commission has said
The FCA has little expertise in this area and the FSA’s track record towards unorthodox business models was a cause for concern. Regulation of alternative providers must be appropriate and proportionate and must not create regulatory barriers to entry or growth. The industry recognises that regulation can be of benefit to it, arguing for consumer protection based on transparency.
In the past regulation has been routinely used to raise barriers to entry and it would be tragedy if this were allowed to happen. Closed-room negotiations do not inspire confidence, especially when they exclude representation from all the other major stakeholders - not least ordinary entrepreneurs and ordinary people.
What this does present is the clear possibility that there will be a pre-bake of these regulations, before they go out to ‘consultation’ in the early autumn. When we will, I suppose, be offered the choice of white or pink icing. Does this sound like a very old tune to you too?
It’s time for a new one. It’s time for openness, It’s time for us to demand it. The formal consultation is coming soon - but now is when many decisions will be made and our future freedoms could be won or lost. This is the reality.
John Prescott just made history being the first person ever to resign from the Privy Council on just this sort of issue. Manoeuvres ahead of time to load the dice for a pre-baked result.
The consultation will matter only if the ingredients are right and the process over the coming weeks and months is an open one. The outcome will effect everyone for generations to come. Entrepreneurs, investors and other contributors, other professionals as well as the crowdfunding platforms. People wanting, or needing, to start a business. Ordinary people.
There is a big issue at stake: will Crowdfunding remain open - or will private profit and vested interests take control and take the crowd out of Equity Crowdfunding?
Ordinary people are fed up with dinosaur banks and predatory capitalism. Now we have the beginnings of an alternative will we allow the FCA to ‘strangle it at birth’ as Jon Moulton fears?
Or will ordinary people take the opportunity to speak up for themselves, to ensure openness? It’s up to you.
