Lawyers Who Code

My name is Simon and I can't code. 

There. I've said it. Despite working with and around computers since 1990, I can't really tell one what to do - at least not in any language it will respond to. 

But as internet and mobile technology becomes ever more accessible, it's becoming clear that computer programming is something I should learn. After all, it's really about writing rules and I write contracts all the time. Since writing the article on Linked Data for the SCL in March, it's also occured to me that more and more legal contracts should be capable of being acted upon by machines without any human intervention. Indeed, as a colleague on the SCL Media Board pointed out today, Creative Commons licences have a machine-readable layer, as well as legal code and human readable layers - which is also something we discussed in the WEF's tiger team on Rethinking Personal Data in June last year.

So I've decided to get a Raspberry Pi and give it a whirl. No doubt I'll struggle to find the time, and maybe the kids will learn faster than me, but so it goes with the guitar and piano. Hopefully it will be as much fun.

In the meantime, I'd love to hear from any lawyers (or others) who've learned to code, how they're getting on with it and any top tips on how to go about it.

Regulating Peer-to-Peer Lending

The Government recently outlined its proposals for regulating peer-to-peer lending, at the same time as its plans for moving the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority in April 2014.

Since the launch of Zopa in 2005, peer-to-peer lending platforms have provided nearly £500m in loans to consumers and small businesses. However, it has long been clear that regulation and perverse tax incentives are constraining the development of the sector. In 2011, the leading operators formed the Peer-to-Peer Finance Association to seek proportionate regulation that would encourage responsible growth. The government welcomed the creation of the P2PFA in several reports during 2012, and the Treasury foreshadowed its latest consultation at the P2P Finance Policy Summit in December, following some fairly intense debates on the Financial Services Bill in the House of Lords. At that time, the Department of Business Innovation and Skills also announced that the Business Finance Partnership would lend about £30m to small business borrowers through peer-to-peer platforms.

The latest Treasury consultation maintains this momentum, stating (at paragraph 4.12) that:

“The Government is keen to see this sector continue to grow and evolve, and therefore it will be important to develop a proportionate regime that recognises the needs of this innovative sector.”

Under the Treasury's proposals the activity of “operating an electronic system in relation to lending” will become a 'Tier 1' regulated consumer credit activity (along with consumer lending, for example), and certain 'ancillary' consumer credit activities will become more lightly regulated 'Tier 2' activities. There are various issues relating to the finer points of the definition which will hopefully be ironed out in the response to the consultation.

While corporations will not get the benefit of regulatory protection, the Financial Conduct Authority "envisages the lending aspect of a peer-to-peer platform’s activities being treated as an investment activity and that lenders providing the finance should be appropriately protected regardless of the status of the borrower." However, we won't know exactly what sort of protection this involves until the FCA consults on the detail of its proposed rules during the autumn of this year. It is to be hoped that the reasonably straightforward customer experience of today will be maintained...

What we do know is that firms wishing to undertake consumer credit activity (including peer-to-peer lending) after 1 April 2014 will need to obtain a Consumer Credit licence from the OFT (if they don't already hold one) and apply to the FCA for "interim permission" prior to 1 April 2014. OFT-licensed firms who are already FCA-authorised, or who are appointed representatives of FCA-authorised firms, must apply to the FCA for an “interim variation of permission”.

The FCA will then invite the various types of firms who hold interim permissions to apply for full authorisation in waves (since there are over 40,000 consumer credit licence holders in total). A firm's interim permission will last for as long as the FCA takes to consider the firm's application for authorisation or 1 April 2016, whichever comes first. 

However, it's worth noting that firms with interim permission “may not act as principal for appointed representatives in relation to the activity for which they hold an interim permission”. The effect of this could be that service providers who hope to avoid the cost of full authorisation may need to apply for interim permission in their own right until such time as the firm with interim permission obtains full authorisation and is entitled to appoint them as representatives. Perhaps this issue will be ironed out during the autumn, along with certain others. 

If you would like to know more, by all means get in touch via @sdjohns on Twitter.

Payday Loans: Can Borrowers Have Speed, Convenience And Affordability?

Source: OFT

Problems with payday lending are not new. As with payment protection insurance, campaigners in the US were attempting to address poor practices in this area long before they rose to prominence in the UK - and still are. Regulatory solutions don't seem to make much difference. However, recent research shows that 46% of the UK's online borrowers shop around, versus 28% of those on the high street. This suggests technology may also help ensure compliance with affordability requirements, if only creditors would provide transaction and fees data in machine-readable format.

In its consultation on Payday Lending in the UK, the OFT estimates that the volume of payday loans has grown from £900m to £2.2bn since 2008. It says the top 3 providers account for 57% of all payday loans, but concedes the number of lenders has grown from 96 in 2009 to 190 in 2012. This growth, and the efforts of UK campaigners, sparked the OFT's payday lending compliance review in February 2012. As a result of that review, the OFT is now considering a referral of the industry to the Competition Commission, though it believes the transfer of its own regulatory role to the Financial Conduct Authority in 2014 "is likely to increase regulatory costs and make entry to the payday lending market more difficult."

True, the FCA will have more powers, e.g. to limit the number of roll-overs, cap interest rates and control advertising (see the Treasury and FCA consultation papers on the transfer of consumer credit). But the past decade here and in the US has shown that regulation itself is no panacea. Technology appears to have had a bigger impact, both in terms of access and the ability to shop around, and this suggests that technology represents the best avenue for addressing affordability issues.

It's important to start with the borrower. You can't ignore the fact that 90% of online customers who responded to the OFT survey find it "quick and convenient" to get a short term loan and 81% say it makes it easier to manage when money is tight. Customers expressed their satisfaction in terms of decision speed (36%), convenience (35%) and customer service (27%). While affordability therefore appears to be a secondary consideration for all concerned, that's a bit misleading. Research shows that customers ignore the annualised interest rate and look at the absolute charges. These may make loan cost comparison harder, but makes more sense to someone who believes he's only borrowing for a month - which is the case for 72% of payday loans (see graphic). Assessing affordability is also hard - especially for the borrower, on whom the lender is largely relying to provide the relevant figures.

It is therefore no suprise that the industry advertising generally emphasises 'time to cash'.  But the OFT also found that some lenders seem to skimp on credit and affordability checks in order to deliver that speed. You would think that's a dangerous game for lenders to play when their own money is at risk. But the OFT found that about half lenders' revenue come from the 28% of loans that 'roll-over' at least once before being repaid (see graphic). Instinctively, that looks bad. But if those loans are so valuable to lenders, it seems odd that the OFT found little evidence of competition for them loans that are about to roll-over. Perhaps borrowers think they have no alternative at that point, or perhaps they don't care about the cost. But it's also consistent with the fact that these borrowers - and lenders - find it really hard to assess affordability.

While the OFT will decide in June whether to refer the payday lending 'market' to the Competition Commission, you can see from Annex A to its report that it's struggling to define that market. There's a long list of potentially competing finance products. But there are at least 4 unmentioned 'gorillas in the room'. The 'silverback' is the overall debt scenario facing any borrower considering a payday loan. Another gorilla in this troop is the charge for unapproved overdrafts, about which the OFT is understandably gun-shy after its long-running court battle with the banks. Yet another is the fact that when you use a credit card you have no ready means of knowing what the outstanding balance is, as some transactions may not yet be recorded, and interest and charges may only be added to the bill at the end of the month. That's a common reason that the so-called 'financial excluded' give for not trusting financial services, including cheque books and debit cards. The final gorilla in the troop is the borrower's overall financial situation, including the non-financial implications of failing to pay existing or potential creditors, like kids having no school shoes...

However, like a credit reference search itself, these gorillas are all really data problems that are capable of a technological solution, as I've explained previously. Rather than skimp on affordability checks, lenders should figure out how to enable them to be carried out quickly and conveniently. Small lenders might share the cost of a common underwriting platform, for example. But, more importantly, borrowers need to be armed with an application that very simply presents an option that is affordable, based on the analysis of their own transaction data (including fees) from their existing creditors, and the competing costs of different financing options (including charges for missing a payment). 

This may sound futuristic, but it only requires a commitment on the part of all the typical creditors and financial services providers to make this data available to their customers (or their nominated service provider) in machine-readable format. The analysis can be done by either the customer's or a supplier's computer, with the results accessible either online or physically, via a print-out. 

There are plenty of examples of individual customers' transaction data being made available to them or their nominees in this way already, and the immediate focus of the government's voluntary 'Midata' programme is to persuade the banks, telcos and energy companies to do this for all their customers (rather than only those with internet banking accounts, for example). 

Problems like the affordability issues in the £2.2bn payday lending sector represent a good argument for getting on with it.