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Thursday, 29 November 2012

Caution On Payday Loans Cap: It's A Midata Problem

The government is right to resist automatically capping interest rates for short term or 'payday' loans, and to insist on an evidence-based approach to the market which takes account of unintended consequences. Powers to cap rates, prevent endless renewals and aggressive, unsupportive collections activity are important. But it's critical to understand the real problem confronting the payday borrower before leaping to solutions.

Until now, the popularity of short term loans has been positioned in Parliament as a moral problem (rich for MPs!) for which an interest rate cap is the solution. 

But the annualised percentage rate (APR) for short term loans is misleading and unhelpful for borrowers in context. It only enables comparison of one short term loan against another. And it produces such a strange result against longer term loans that borrowers ignore it - especially, as those loans may not be available to short term borrowers anyway.

Typically, a short term loan is applied for when other debts are due, fees are about to be incurred and other consequences are biting or about to bite. The relevant data points include the cost of unauthorised overdrafts, default fees on card accounts, the consequences of missing the rent, failing to pay a phone or energy bill, and so on. Borrowers react to the worst of the known consequences when borrowing, but may not be aware of them all, let alone take them all into account when assessing the best option.

This is a data problem, not an interest rate problem associated with just one of the options available to the borrower.

What would be helpful is a tool that enables comparison of all the options facing a short term borrower in the borrowing context.

Such applications are evolving, and it's important to note that the government is also playing a role to foster that evolution.

The Midata initiative, for instance, is aimed at producing solutions to meet exactly this kind of challenge. It aims to drive the development of simple applications that will access a person's own transaction data (including fees) to enable that person to make better purchasing decisions. Initially, the government is targeting suppliers in markets for energy, mobile phones, current accounts and credit cards. But it has issued a warning to others. 

If only we could get our MPs to focus on proportionate solutions to the root causes of society's problems rather than embarking on populist moral crusades and fiddling their expenses!

Tuesday, 20 November 2012

Warning Shot Fired Over Midata

The government is preparing the way for regulations to enable consumers and small businesses to request all their transaction data related to energy, mobile phones, current accounts and credit cards. If considered necessary, regulations could be in place in 2013, and may target other markets where certain factors point to consumer detriment.

The decision follows a consultation in the summer, and the full  response is here.

The proposals should add momentum to the voluntary Midata programme fostered by the Department for Business Innovation and Skills to help industry and consumer representatives resolve some of the key challenges in the 'core' consumer markets.

The Information Commissioner’s Office would take the lead role in enforcing any regulations, while concurrent enforcement powers could be given to sector-specific regulators.

The 'transaction data' at stake are the records of a consumer’s own purchases or consumption from a supplier - what the consumer bought, where and how much they paid for it - not the supplier's subsequent analysis. The data would have to be released in computer-readable format to enable it to be analysed by the consumer or a service provider of his/her choosing. This would help prevent suppliers gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider when deciding whether to expand the programme to other sectors include: 
  • the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;
  • there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;
  • consumer engagement is limited, e.g. low levels of switching or competition; and
  • suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.
I should add that I am involved in the Midata programme, as a member of the Interoperability Board, and on working groups considering issues related to data transmission and law/regulation.

Tuesday, 13 November 2012

Should The CBI Chief Resign?

Despite purporting to represent 240,000 businesses of all sizes, the Confederation of British Industry (CBI) has long been an apologist for the UK's banks (who account for a substantial proportion of its funding). But in one hilariously poorly judged article in the Times, its director-general has finally eroded all credibility by calling for both a time-bar on PPI compensation claims and protection for UK banks against any successful court proceedings arising from their Libor fixing activities. 

Now you might think it particularly poor judgement to choose the current bank-driven economic scenario as a golden opportunity to demand yet more public assistance for the authors of our doom.  

And you might well believe it to be spectacularly naive, irresponsible and even downright absurd to demand protection for the beneficiaries of what is now the largest case of financial mis-selling in British history, at the expense of victims, from the very regulator who is bound to protect them.

But surely then you'd have to consider it to be successfully suicidal to invoke retrospective sovereign immunity for fixing a global interest rate benchmark while domestic criminal investigations are in progress, not to mention civil suits of the kind one or more of your own members might bring.

I can't imagine that even the banks would have the barefaced cheek to ask for any of this privately, let alone in an article in the Times. Still, you never can tell with Britain's institutions.

Finally, however, let's not ignore the CBI chief's bold and cunning suggestion that the banks' £12bn in provisions for PPI compensation might somehow represent spare funds that could, or would otherwise be lent to people and businesses (in other words, not to the low income earners who would have received it in compensation). 

Conflating the accounting for civil penalties with the privilege bestowed on banks by the state to create credit is not just silly in its own right. It also invites attention to the fact emphasised by Richard Werner, that only 10% of the credit created by UK banks in the exercise of that great public privilege is actually directed toward the people and businesses who need it to grow the economy, while the other 90% goes to fuel speculative deals in non-GDP financial assets. So, whatever you might think of opportunistic, ambulance-chasing PPI claims management firms, you might find it utterly contemptuous for anyone to suggest that consumers should forego compensation for being sold phoney insurance when it would barely amount to a rounding-error on such rampant, unchecked public exploitation. 

But maybe this is what the CBI means by "asking for immediate action to smooth the transition to a "new normal" in banking lending [sic]."

Yes, Mr Crudland, I reckon you should get your coat.