tag:theconversation.com,2011:/us/topics/fca-5109/articlesFCA – The Conversation2023-10-30T13:33:05Ztag:theconversation.com,2011:article/2151962023-10-30T13:33:05Z2023-10-30T13:33:05ZWhat Revolut’s attempt to secure a UK banking licence could mean for its current customers and for the ‘unbanked’<figure><img src="https://images.theconversation.com/files/556090/original/file-20231026-15-8jym8f.jpeg?ixlib=rb-1.1.0&rect=10%2C3%2C1200%2C792&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Revolut CEO Nik Storonsky: all he wanted for Christmas (2022) was a UK banking licence.</span> <span class="attribution"><a class="source" href="https://www.revolut.com/news/">Revolut</a></span></figcaption></figure><p>Last year, the CEO of financial technology (fintech) company Revolut added a UK banking license to his 2022 Christmas wish list, <a href="https://sifted.eu/articles/revolut-storonsky-fundraise-interview">telling startup news outlet Sifted</a>: “I would love to have it as a Christmas present. A present for me personally and for the business.” </p>
<p>But it’s nearly Christmas 2023 and Revolut still hasn’t secured the right to take deposits from the UK customers – the main benefit to the company of getting a UK license. </p>
<p>Revolut has been offering e-money services such as currency exchange and transfers (which do not require a UK banking licence) in the UK since 2015. It generated £196 million in revenue from this <a href="https://www.revolut.com/financial-statements/">in 2021</a>, or nearly one-third of its business – the rest mostly comes from banking activities in 18 EU countries.</p>
<p>Revolut, which says it has <a href="https://www.revolut.com/en-IE/news/revolut_surpasses_30_million_retail_customers_worldwide/">more than 30 million retail customers worldwide</a>, now wants to join other “<a href="https://www.which.co.uk/money/banking/bank-accounts/challenger-and-mobile-banks-aiYuO7u4JjWJ">challenger banks</a>” (those attempting to break the historical dominance of the “big four” UK banks: Barclays, Lloyds, HSBC, NatWest) in becoming a fully licensed bank in the UK. </p>
<p>The main benefit of this would be that it could take deposits <a href="https://www.altfi.com/article/6274_revolut-reportedly-preparing-uk-banking-licence-application">and handle more loan business</a> instead of “outsourcing” these activities to a number of UK-licensed banks. It could also boost financial inclusion by providing people in the UK with more choice and access to products that help manage money – a key concern amid the current cost of living crisis.</p>
<p>Whether deposits are handled directly by Revolut or through a third-party provider is unlikely to make much difference to customers. But for Revolut, outsourcing means additional costs so this could provide the company with cheaper access to finance. So, in theory, Revolut could pass any savings on to its customers.</p>
<p>Getting a UK banking license involves an extensive application process but <a href="https://www.ft.com/content/6d2eef34-d414-49c7-8557-c43a3d9ab803">typically takes about a year</a>. Once a bank gets one, it has to adhere to more stringent reporting and monitoring requirements. </p>
<p>During the nearly two years since Revolut first applied in January 2021, it has experienced IT system issues that have delayed its reporting of annual accounts. Requesting an extension is not an unusual process, but <a href="https://www.uktech.news/fintech/revolut-auditor-revenue-bdo-20230302#:%7E:text=The%20report%20stated%20the%20company,of%20the%20company's%20reported%20revenue.">concerns were also raised by Revolut’s auditor BDO</a> about its 2021 revenue reporting. </p>
<p>In March 2023, a Revolut spokesperson <a href="https://www.reuters.com/business/finance/revoluts-2022-revenues-grew-by-33-despite-crypto-winter-2023-03-01/#:%7E:text=Finance-,Revolut%20auditor%20flags%20concern%20about%20%24576%20mln,in%20long%2Ddelayed%202021%20accounts&text=LONDON%2C%20March%201%20(Reuters),its%20long%2Ddelayed%202021%20accounts.">told Reuters</a> the concerns were “remedied” in 2021. The company’s chief financial officer Mikko Salovaara said: “There is not any doubt over the completeness of the balance sheet, which, in turn, logically means that total revenue is also correct.”</p>
<p>More recently, Revolut has <a href="https://www.reuters.com/business/finance/revolut-strikes-share-deal-with-softbank-remove-barrier-uk-licence-ft-2023-10-03/">simplified its ownership structure</a> – its use of different classes of shares was more common in EU countries – which could help unblock the UK banking license application process for the company.</p>
<p>Whether, after all of this, customers would actually benefit from lower operating costs will depend on various factors, including what the competition is charging and the need for Revolut to maintain its profitability. </p>
<p>Another possible (perceived) benefit for customers could be greater financial security. Deposits of up to £85,000 held with licensed banks are secured through the Financial Services Compensation Scheme (<a href="https://www.fscs.org.uk/">FSCS</a>). However, the outsourcing model already offers the same protection to Revolut users if its third-party provider operates with its own UK banking license anyway.</p>
<h2>Enhancing UK financial inclusion</h2>
<p>More generally, fintech companies offer easier and often cheaper <a href="https://www.bis.org/cpmi/publ/d191.htm">access to financial products</a> than traditional banks, which means they boost financial inclusion according to <a href="https://onlinelibrary.wiley.com/doi/full/10.1002/jid.3524">research-based definitions</a>.</p>
<p>World Bank <a href="https://www.worldbank.org/en/publication/globalfindex">research on financial inclusion</a> suggests the UK scores almost perfectly in this area: 99.76% of respondents to World Bank surveys have personal current accounts and 95.46% with a debit card (although only 88.91% say they use their card). </p>
<p><strong>How people bank in the UK:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bar chart showing results of World Bank survey of UK banking customers." src="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.worldbank.org/en/publication/globalfindex">Author provided using data from the World Bank Findex Database, 2021</a></span>
</figcaption>
</figure>
<p>But the limited sample size for the UK (the World Bank’s survey relies on 128,000 adults in 123 countries) makes it difficult to truly identify the small number of “unbanked” people in the UK and their struggles. The Financial Conduct Authority’s (FCA) more comprehensive <a href="https://www.fca.org.uk/publication/financial-lives/financial-lives-survey-2022-key-findings.pdf">Financial Lives Survey</a> puts the number of unbanked people in the UK at 1.1 million in 2022, down from 1.7 million in 2014 but largely unchanged since 2017. </p>
<p>The UK Treasury’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1125329/Financial_Inclusion_Report__002_.pdf">Financial Inclusion Report 2021-22</a> argues that the more basic bank accounts now offered by all banks have improved financial inclusion, but it also stresses the importance of fintechs in increasing choice and launching innovative products like mobile budgeting tools. </p>
<p>On the other hand, fintech’s reliance on mobile and internet banking arguably widens an existing digital divide. According to the World Bank, <a href="https://www.worldbank.org/en/publication/globalfindex">92% of UK respondents</a> had access to the internet and used mobile phones in 2021, leaving some without access to fintech products. </p>
<p>For those that can access them, fintech solutions could help reduce costs and provide tools to manage people’s stretched budgets. This could help mitigate the current <a href="https://theconversation.com/uk/topics/cost-of-living-crisis-115238">cost of living crisis</a> while also enhancing financial inclusion. Studies show better financial inclusion can <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2020.1792960">reduce income inequality</a> under certain conditions. </p>
<figure class="align-center ">
<img alt="Woman sitting in a window using a laptop." src="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tech companies can provide easier access to financial products.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-pondering-female-person-beautiful-curly-747373468">GaudiLab/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Becoming a challenger bank</h2>
<p>Revolut has a convincing track record of obtaining banking licences in its short history. After its 2015 UK launch, Revolut obtained its first banking licence in Lithuania in 2018. It has operated as a bank in 18 EU countries since 2021. That same year, Revolut applied to become a deposit-taking institution in Australia. This is a good sign that its UK banking licence should be achievable. </p>
<p>However, the benefits for customers are less clear. Most customers already use e-money accounts together with traditional bank accounts. Looking at <a href="https://www.thebanker.com/What-does-Metro-Bank-s-troubles-mean-for-UK-challenger-banks-1698136247">Metro Bank’s recent problems</a> – investors were <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">concerned</a> that it could not meet regulatory requirements on its capital levels, although it has since <a href="https://news.sky.com/story/metro-bank-seeks-bids-within-weeks-for-3bn-mortgage-book-12984988">secured additional financing</a> and continues to serve customers as normal – it is not evident that one more challenger bank will benefit UK customers. </p>
<p>On the other hand, a more comprehensive range of different types of financial service providers <a href="https://www.tandfonline.com/doi/full/10.1080/02692171.2022.2090522">tends to stabilise the financial system</a>. In this sense, diversity could enhance financial stability.</p><img src="https://counter.theconversation.com/content/215196/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span><a href="mailto:gerhard.kling@abdn.ac.uk">gerhard.kling@abdn.ac.uk</a> receives funding from the ESRC-NSFC (Newton Fund), FP7, FP6, and the Maava Foundation.</span></em></p><p class="fine-print"><em><span>Aravinda Meera Guntupalli receives funding from ESRC, GCRF, World Cancer Research Fund, Canadian government and World Bank. </span></em></p>More diversity in the banking sector can help with stability, but Revolut’s two-year wait for a UK banking licence indicates regulatory caution.Gerhard Kling, Chair in Finance, University of AberdeenAravinda Meera Guntupalli, Senior Lecturer in Global Health, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2139662023-09-20T14:06:19Z2023-09-20T14:06:19ZCity watchdog finds no evidence for recent political ‘debanking’ – but private banks have been picky for centuries<figure><img src="https://images.theconversation.com/files/549303/original/file-20230920-25-h5u8vx.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4724%2C3154&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ex-politician Nigel Farage accused his bank of refusing his business because of his political views.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-november-1-2019-brexit-1547668835">Frank 2012/Shutterstock</a></span></figcaption></figure><p>After a row over the closure of his bank account earlier this year, former politician Nigel Farage has hit out at the UK financial regulator for saying it has found <a href="https://www.fca.org.uk/news/press-releases/fca-sets-out-initial-findings-bank-account-access-and-closures#:%7E:text=The%20FCA%20has%20published%20the,of%20a%20customer's%20political%20views.">no recent evidence</a> of customers being “de-banked” over their personal views.</p>
<p>Farage believes private bank Coutts <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">closed his account</a> because his political views didn’t align with the company’s values. Coutts and its parent company NatWest Group denied his accusations, saying <a href="https://news.sky.com/story/nigel-farage-doesnt-deny-he-fell-below-wealth-cap-at-coutts-bank-used-by-royals-12914753">he didn’t have enough funds</a> to be a customer of the private bank. Farage was offered an account with NatWest’s high street arm <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">but reportedly turned it down</a> as unsuitable.</p>
<p>UK chancellor Jeremy Hunt asked banking regulator the Financial Conduct Authority (FCA) to <a href="https://www.fca.org.uk/news/news-stories/we-request-data-banks-account-closures">gather data</a> from all UK banks about the reasons for any account closures, suspensions and services denied between July 2022 and June 2023. Farage’s account was closed during this period.</p>
<p>Admitting the data was gathered very quickly, FCA chief executive Nikhil Rathi, said: “While no bank, building society or payment firm reported to us that they had closed accounts primarily due to someone’s political views, further work is needed for us to be sure.”</p>
<p>Indeed, banks being choosy about which customers they accept is nothing new. Farage’s furore has simply highlighted private bank behaviour that has persisted without much comment over centuries.</p>
<h2>The origins of private banks</h2>
<p>When Coutts was set up <a href="https://www.coutts.com/about/history.html">in London in 1692</a>, banks generally acted as an intermediary to encourage trade and the free flow of goods and services – but only for the rich. Banks facilitated the greater flow of capital among this exclusive group by lending them money, discounting their bills of exchange (like an IOU note) and providing them with deposit accounts.</p>
<p>In the 18th and 19th centuries, <a href="https://www.worldcat.org/title/country-banking-in-the-industrial-revolution/oclc/249850">banks proliferated outside London</a>, throughout England’s provinces. <a href="https://global.oup.com/academic/product/private-banking-in-europe-9780198735755?cc=gb&lang=en&#">London banks</a> were typically larger and often funded international as well as national trade. Otherwise, there were few differences between London banks such as Coutts and these new country banks. They were both generally single units (no branches) and founded by a similar social group – the gentry – who initially offered financial services to their peers. </p>
<figure class="align-center ">
<img alt="Window with Coutts sign and three crowns." src="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Coutts was founded in 1692 and has counted the British royal family among its customers since the late 18th century.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-october-15th-2022-main-2214749407">Alex Yeung/Shutterstock</a></span>
</figcaption>
</figure>
<p>Things started to change in the early 19th century with the introduction of joint stock banking. Joint stock banks tended to have much larger ownership structures comprising a local community of shareholders. Some even <a href="https://www.tandfonline.com/doi/abs/10.1080/00076791.2017.1323883">opened branches</a> and offered their services regionally, rather than just to a small number of local customers. But still, these bankers only expanded their financial services to the <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">mercantile classes</a> – business owners, who had lacked access to banking previously.</p>
<p>Even then, customers of joint stock banks were carefully restricted by the commercial communities that owned them and the managers that ran them. They used self-regulation to protect their industries <a href="https://doi.org/10.1111/j.1468-0289.2004.00287.x">from “bad” traders</a> – people who ran up debts, made poor business decisions or engaged in unethical business behaviour that didn’t align with bank owners’ values, aims and goals. </p>
<p>In the 1850s, for example, Sheffield steelmaker Naylor Vickers & Co. ran up high levels of debt with the Sheffield Union Bank. The bank was only saved from failure by <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">a Bank of England intervention</a>. Such behaviour, when it occurred, was usually not worth litigating because the courts were busy and so commercial lawsuits were often <a href="https://doi.org/10.1080/01440365.2017.1289671">discouraged by leading judges</a>. This meant these matters were usually dealt with by “debanking” or refusing service to offending business owners.</p>
<p>Joint stock banks were more inclusive than the private banks, but still didn’t serve the working classes. They applied a strict process of scrutinisation for all depositors, loan applicants and shareholders. Bank staff gathered information <a href="https://www.cambridge.org/core/journals/enterprise-and-society/article/abs/constructing-corporate-identity-before-the-corporation-fashioning-the-face-of-the-first-english-joint-stock-banking-companies-through-portraiture/DE8AB45BFEB81F97E3BB93C8C24A1FA1">from the local community</a> through their economic, social, religious and political networks. </p>
<p>This was an important process because these banks didn’t have limited liability – shareholders were responsible for all of their banks’ debts. </p>
<h2>Building high street banking behemoths</h2>
<p>Another shift occurred in the late 19th and early 20th centuries. As joint stock banks grew they became limited liability companies to protect shareholders by ensuring that they were no longer liable for all of their bank’s debts, only for an amount corresponding to the shares they held. </p>
<p>These banks also became national as opposed to regional. It was then that they transformed into the high street behemoths with large branch networks that we know today. In fact, <a href="https://www.natwestgroup.com/who-we-are/about-natwest-group/our-history.html">the origins of NatWest</a>, the high street banking arm of Coutts, can be traced back to joint stock banks. </p>
<p>Alongside this growth, bank managers could no longer use local information to assess customers. Head offices had to <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799900000201">undertake more standard checks</a> on those applying for accounts or credit instead, losing some lending flexibility along the way. </p>
<p>As British banks <a href="https://www.taxjustice.net/wp-content/uploads/2015/06/Linda-Arch-Competition-and-the-London-Clearing-Banks-1946-1979-for-Should-Nation-States-Compete.pdf">became more competitive</a> in the latter half of the 20th century, they wanted more deposits so they could offer more loans. So high street banks began to <a href="https://doi.org/10.1080/00076791.2020.1791823">target the previously “unbanked”</a> – largely working-class people paid cash in hand. But private banks didn’t change their business models or services at this time; to this day they remain concerned with serving the wealthiest people.</p>
<h2>What about today’s ‘unbanked’?</h2>
<p>British banks have long excluded customers based on their membership of a certain social class or group, making Farage’s experience rather conventional when it comes to private banks. But there are <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/1642/164205.htm#:%7E:text=The%20FCA%20has%20published%20research,not%20have%20a%20bank%20account.">over a million people</a> in the UK without a bank account – private or high street. It remains to be seen if this lack of access can be solved by new rules, such as those <a href="https://www.gov.uk/government/news/government-clamps-down-on-unfair-bank-account-closures">recently announced by the government</a>.</p>
<p>Like many other businesses, banks have long been using <a href="https://www.sciencedirect.com/science/article/abs/pii/0305048377901037">market segmentation</a> to design the kinds of products, services and advertising that will <a href="https://www.investopedia.com/terms/m/market-segment.asp#toc-how-are-market-segments-used:%7E:text=value%20business%20customers.-,How%20Are%20Market%20Segments%20Used%3F,-Commonly%20used%20in">attract customers</a> they want to serve. As a result, British banking, and in particular private banking, will probably remain exclusive rather than inclusive.</p><img src="https://counter.theconversation.com/content/213966/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows banks – especially private banks – have always been concerned about their customers’ social status and respectability.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingFrancesco De Pascalis, Senior Lecturer in Financial Law, Brunel University LondonVictoria Barnes, Reader of Commercial Law, Queen's University BelfastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2088532023-08-04T11:59:41Z2023-08-04T11:59:41ZFive ways to take advantage of rising interest rates to boost your savings<figure><img src="https://images.theconversation.com/files/539289/original/file-20230725-12812-rqkfwb.jpg?ixlib=rb-1.1.0&rect=186%2C28%2C6043%2C4072&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's always a good time to save more, if you can.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/smiling-black-woman-saving-goal-future-2253367631">tommaso79/Shutterstock</a></span></figcaption></figure><p>With the Bank of England base rate <a href="https://theconversation.com/how-the-bank-of-englands-interest-rate-hikes-are-filtering-through-to-your-finances-210344">currently the highest</a> it has been since early 2008, you may have a valuable opportunity to increase your earnings on pensions, investments and savings accounts. After all, when the central bank raises its main rate – the base rate, which is typically used as a benchmark for loans as well as savings accounts – it is trying to encourage people to spend less and save more.</p>
<p>But UK banks and building societies have <a href="https://www.independent.co.uk/money/martin-lewis-savings-rates-mortgage-crisis-b2362955.html">recently been accused</a> of letting their savings rates lag the recent rapid rise in the base rate. UK regulator the Financial Conduct Authority has urged these financial firms to offer “<a href="https://www.fca.org.uk/news/press-releases/action-plan-cash-savings">fair and competitive</a>” savings rates in response to the increasing interest rates. </p>
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Read more:
<a href="https://theconversation.com/interest-rates-why-your-mortgage-payments-are-going-up-but-your-savings-arent-and-how-better-monetary-policy-could-help-196528">Interest rates: why your mortgage payments are going up but your savings aren't – and how better monetary policy could help</a>
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<p>Many financial institutions do offer accounts with <a href="https://www.theguardian.com/money/2023/jul/15/uk-savings-accounts-interest-nsi-building-societies-banks-deals">rates of 6% or more</a>. This is good news for avid savers – but only if you keep an eye on the market so you can switch from less competitive products. This is why it’s important to establish a regular savings habit, but many people are unsure about what that should involve.</p>
<p>My colleagues and I have studied the <a href="https://dspace.stir.ac.uk/handle/1893/32240">correlation between people’s savings goals</a> (if they have any) and how they invest their money. We also looked at how seeking financial information advice, and being “good with numbers”, both influence this correlation. </p>
<p>We analysed data from more than 40,000 individuals in 21,000 UK households from five waves of the Office for National Statistics Wealth and Assets Survey (WAS), conducted between 2006 and 2016. This data captures comprehensive economic wellbeing information and attitudes to financial planning. </p>
<p>Our research shows the importance to your finances of setting multiple savings goals, keeping up with financial news, and seeking professional advice. Based on this, here are five research-based ways to make the most of your money.</p>
<h2>1. Set specific savings goals</h2>
<p>Establishing personal savings goals is one of the first steps most financial institutions and advisers will recommend to their customers, because it’s a good idea to <a href="https://www.investopedia.com/terms/c/compoundinterest.asp">save regularly</a>. Plus, our study shows that total financial assets increase in line with the number of savings goals you have, and that setting specific, rather than vague, goals leads to higher performance.</p>
<p>Specific savings goals should have an end date, target figure, and even a meaningful name – for example, “£1,000 for 2024 trip to Asia” or “£250 for 2023 Christmas present fund”. This will create tangible reference points that encourage self-control and increase the pain you feel if you fail to meet your goal.</p>
<figure class="align-center ">
<img alt="Three glass jars of coins with labels that say: insurance, retirement, travel plan." src="https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539288/original/file-20230725-21-wi4q3k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Savings goals – but try an interest-bearing account, rather than a jar.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/money-coins-jars-insurance-savings-retirement-1036970458">simon jhuan/Shutterstock</a></span>
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<h2>2. Seek professional financial advice</h2>
<p>Rather than relying on friends, family and social media for financial advice, speak to an expert.</p>
<p>Our research shows households that access professional financial advice were more likely to allocate a higher share of their wealth to stock portfolios than those that rely on friends, family and social media for financial advice. This result was consistent even across different wealth and income levels, with lower earners possibly using products like ISAs to make investments in stocks and shares. Other <a href="https://academic.oup.com/qje/article/134/3/1225/5435538">research shows</a> stock portfolios outperform most other types of investment in the long term.</p>
<p>We also found that access to professional financial advice can substitute for setting goals, because your adviser should help you to determine the kinds of products to invest in (which is called asset allocation) for specific timelines and aims.</p>
<h2>3. Brush up on your maths</h2>
<p><a href="https://doi.org/10.1111/j.1475-5890.2007.00052.x">Several studies</a> show numerical skills affect how households gather and process information, <a href="https://psycnet.apa.org/doi/10.1037/a0013114">set goals</a>, perceive risks, and <a href="https://heinonline.org/HOL/P?h=hein.journals/fedred89&i=791">decide to invest</a> in various financial assets. So, by brushing up on your basic numeracy and financial literacy skills – even with free online videos – you could boost your savings for the long term. </p>
<p>Our study shows that individuals with high confidence in their numerical skills tend to have better financial planning habits – such as investing more in stocks and bonds than cash, which carries more risk but also the potential for greater returns. This trend is particularly evident among households with no savings goals, suggesting that numerical ability could compensate for failing to set such goals.</p>
<figure class="align-center ">
<img alt="Overhead shot of person at desk with papers, pen & notebook, watching video on laptop of woman at a whiteboard." src="https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539294/original/file-20230725-20-nsyh2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Brush up on your maths skills.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/high-angle-view-video-conference-teacher-1676998303">Ground Picture/Shutterstock</a></span>
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</figure>
<h2>4. Adopt appropriate savings strategies</h2>
<p>Diversified stock market portfolios generally outperform bonds and cash savings <a href="https://doi.org/10.1093/qje/qjz012">over longer periods</a>. However, stock markets can be volatile, so putting savings into less risky assets like bonds and cash is wise for savings goals of less than five years.</p>
<p>In the longer term, investing across different global stock markets for more than five years can help counteract inflation. And you can access low-cost, diversified investment portfolios via financial products based on indices of stocks or other assets, such as exchange traded funds.</p>
<h2>5. Set, monitor and adjust your plan</h2>
<p>Free financial planning and budgeting apps can help you save money by tracking your spending and savings goals, and encouraging you to adhere to a budget.</p>
<p>Most importantly, once you set savings goals and create a budget, don’t forget about them. Check regularly to see how your savings are building up and to monitor for any spending changes. A growing array of fintech tools can prompt and encourage this kind of long-term planning.</p>
<p>Keeping an eye on savings rates is also important. As banks change rates or create new accounts, consider switching to get a better deal if you can do so without falling foul of account closure fees.</p>
<p>It’s important to make sure your savings are working for you at any time, but its crucial in the current economy, when finances are tight but interest rates are rising.</p><img src="https://counter.theconversation.com/content/208853/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fredrick Kibon Changwony does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Specific savings goals can help increase your pot – but so can advice and confidence with numbers.Fredrick Kibon Changwony, Lecturer in Accounting & Finance, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2101692023-07-28T12:52:46Z2023-07-28T12:52:46ZHow new ‘consumer duty’ rules for financial products could reduce debt-related stress<figure><img src="https://images.theconversation.com/files/539741/original/file-20230727-29-u1qts5.jpg?ixlib=rb-1.1.0&rect=49%2C55%2C4072%2C2688&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sad-woman-holding-her-head-over-2140114687">Grusho Anna/Shutterstock</a></span></figcaption></figure><p>New “<a href="https://www.fca.org.uk/publications/policy-statements/ps22-9-new-consumer-duty">consumer duty</a>” rules introduced by the Financial Conduct Authority (FCA) aim to set clear standards for the protection of financial consumers. Banks, building societies, investment and insurance firms, as well as many other types of business, are being told to “<a href="https://www.fca.org.uk/firms/consumer-duty">put their customers’ needs first</a>”. </p>
<p>The timing couldn’t be better. Amid a cost of living crisis, the UK regulator’s new rules should hopefully address the <a href="https://wearecitizensadvice.org.uk/living-on-empty-245f4b9acbe3">increasing recognition</a> by consumer groups that people cannot always solve the financial problems they face. Consumers are under pressure and need more support. Yet, trust in financial services is low: the FCA recently found that <a href="https://www.fca.org.uk/publications/financial-lives/financial-lives-survey-2022-key-findings">just 36% of UK adults</a> see most financial providers as honest and transparent in how they treat customers.</p>
<p>The new rules cover not only direct customers of products such as bank accounts, credit cards and loans, but also anyone that ultimately makes use of a product or service, including family members of a borrower who may benefit from the loan. Even if the provider does not have a direct relationship with the user, <a href="https://www.fca.org.uk/publication/policy/ps22-9.pdf">the rules still apply</a>.</p>
<p>In future, companies will have to demonstrate to the regulator that they are proactively putting consumer needs first and preventing any harm. They will be expected to continuously review their operations to identify and resolve areas where they could be going against these needs – from product design and delivery to customer services and communications.</p>
<p>The new regime should lead to a step-change in how consumers are treated. And this may improve financial wellbeing in the UK, especially for those in vulnerable financial situations. The FCA has suggested financial service organisations will need to make <a href="https://www.fca.org.uk/news/speeches/countdown-consumer-duty">fundamental cultural changes</a> to be more aware of and responsive to consumer needs across their operations.</p>
<p>A major part of this responsiveness will involve listening to and understanding the real-life experiences of financial consumers. Research shows the ways in which financial service companies could improve how they deal with their consumers.</p>
<h2>Preventing problems from escalating</h2>
<p>Our recent <a href="https://www.fincap.org.uk/en/reviews/money-and-mental-health-rapid-evidence-review">evidence review</a> on the connections between financial and mental health challenges highlights the negative effects of being behind on payments or in debt. Overly punitive approaches to dealing with these situations, such as the use of debt collection agencies, exacerbates financial stress. It also reinforces the stigma people can experience when dealing with both financial and mental health challenges. </p>
<p>An <a href="https://www.aston.ac.uk/research/bss/abs/centres-hubs/cpfw/our-projects">ongoing project</a> by Aston University and Birmingham City Council explores gambling and housing security. It shows problem gamblers often turn to debt, including payday loans, to fund their betting activity. This limits their ability to pay rent and can result in tenancy loss, which negatively affects long-term wellbeing. </p>
<p>The stigma associated with problem gambling has encouraged most of those surveyed to try to control their habit or stop gambling altogether. But they had not received any support from their financial providers or from other agencies they were engaged with, such as their housing association. </p>
<p>Preventing negative escalations should be a priority when consumers in tough financial situations are unable to pay their bills and debt starts to mount. They also need appropriate support to help overcome the stigma of experiencing financial problems. </p>
<p>The government’s “<a href="https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors">breathing space</a>” scheme gives people experiencing debt problems time to receive advice and find a solution without penalties. This is a positive step. Similar interventions could help relieve the financial stress of other experiences – for example, <a href="https://www.tandfonline.com/doi/abs/10.1080/19424620.2013.819680">after a bereavement</a>, when the burden of dealing with complicated financial matters can have a detrimental impact on relatives’ wellbeing.</p>
<figure class="align-center ">
<img alt="Man and woman in front of a laptop with another woman speaking to them." src="https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/539744/original/file-20230727-15-uyr3qk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The FCA’s consumer duty rules should encourage financial firms to listen to and support their customers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-female-realtor-manager-real-estate-1926167858">fizkes/Shutterstock</a></span>
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</figure>
<h2>Listening to feedback</h2>
<p>Another strand of our research highlights the need to examine the impact of financial stress and debt across different groups of consumers. Disparities in income and wealth between men and women, for example, relate to different work and employment experiences and opportunities.</p>
<p>Financial products such as pensions and investment accounts often appear to be gender neutral, but do not actually align with different life experiences. A woman working part-time due to caring responsibilities may struggle to save in a traditional pension, for example. This can <a href="https://doi.org/10.1080/09692290.2022.2113114">ultimately discourage women</a> from using these products.</p>
<p>This is one of the reasons why it is important for consumers to give feedback directly to the firms they deal with, so they can create different products. The FCA’s consumer duty aims to encourage this interaction. Again, this is crucial because <a href="https://www.fca.org.uk/publications/financial-lives/financial-lives-survey-2022-key-findings">7.4 million UK adults</a> have struggled to contact their financial providers in the last year.</p>
<p>The consumer duty rules should help to facilitate this kind of feedback, resulting in financial products with a more diverse appeal and better outcomes. Support for those experiencing repayment problems and dealing with stress about their finances should also be more accessible.</p>
<p>In time, if followed correctly, these new standards should lead to a more equitable and trustworthy financial system. If so, this will improve financial wellbeing by reducing undue stress for many people.</p><img src="https://counter.theconversation.com/content/210169/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hayley James has received funding from the Economic and Social Research Council, the New Opportunities for Research Funding Agency Cooperation in Europe (NORFACE) consortium, and is currently working on a project funded by the Aviva Foundation (realaccounts.org.uk).</span></em></p><p class="fine-print"><em><span>Andy Lymer has recently received funding for his work from the UK’s Money and Pension Service, Vivid (a UK housing association) and via the Gambling Commission amongst others. He is currently engaged in a project funded by the Aviva Foundation. </span></em></p>Making financial firms more aware of their consumers’ needs could provide much-needed support during the cost of living crisis – and beyond.Hayley Louise James, Senior research fellow, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2073322023-06-16T14:52:20Z2023-06-16T14:52:20ZUS regulators continue crypto crackdown – but here’s why the latest charges are different<figure><img src="https://images.theconversation.com/files/532215/original/file-20230615-13202-uuij1l.jpg?ixlib=rb-1.1.0&rect=92%2C53%2C5002%2C3304&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Binance is one of several crypto firms that have been sued by US regulators recently.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/calgary-ab-canada-feb-22-2022-2129352677">oasisamuel/Shutterstock</a></span></figcaption></figure><p>The US Securities and Exchange Commission (SEC) sued the cryptocurrency platform Coinbase shortly after launching a lawsuit against the world’s largest cryptocurrency exchange, Binance. </p>
<p>This isn’t the first time Binance and Coinbase have caught <a href="https://theconversation.com/what-binances-us-lawsuit-says-about-the-future-for-cryptocurrency-regulation-202930">the SEC’s attention – it’s not even the first time this year</a>. But <a href="https://www.sec.gov/news/press-release/2023-102">the latest charges</a> are much more <a href="https://www.sec.gov/news/press-release/2023-101">serious</a>, including accusations that the exchanges are operating without the correct registration. </p>
<p>Both cases boil down to whether or not cryptocurrency tokens should be classed as “securities”, like stocks, and regulated in the same way. Binance and Coinbase have spoken out in support of regulation. And many <a href="https://www.coindesk.com/consensus-magazine/2023/05/10/we-need-regulatory-clarity-to-keep-crypto-exchanges-onshore-and-defi-permissionless/">crypto firms believe</a> that by taking legal action instead of creating clear rules, the SEC has failed to provide the industry with enough guidance, leading to uncertainty for people and businesses.</p>
<p>Since Gary Gensler became chair of the SEC in April 2021, he has regularly testified before Senate committees on the need for <a href="https://www.cnbc.com/2021/09/15/sec-chair-gensler-says-regulator-is-short-staffed.html">more staff</a> to regulate cryptocurrencies, calling the market a “<a href="https://www.c-span.org/video/?514606-1/securities-exchange-commission-oversight-hearing">wild west</a>”. On the other hand, he has also said he has no plans to <a href="https://www.cnbc.com/2021/10/06/bitcoin-jumps-to-nearly-5-month-high-topping-55000-on-wednesday.html">ban cryptocurrencies</a>, while the SEC approved the first <a href="https://theconversation.com/bitcoin-why-its-value-has-rocketed-once-again-170396">Bitcoin ETF</a> in 2021, as well as <a href="https://theconversation.com/coinbase-is-listing-for-us-100-billion-on-nasdaq-but-you-might-be-better-buying-bitcoin-instead-158843">Coinbase’s stock exchange listing</a> that same year.</p>
<p>But now the SEC has filed <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/">13 charges against Binance</a> and its founder Changpeng Zhao, as well as a motion to <a href="https://www.reuters.com/legal/sec-files-motion-restraining-order-freeze-binance-us-assets-2023-06-06/">freeze assets</a> belonging to Binance’s US affiliate (Binance is based in the Cayman Islands). The SEC has also accused both Binance and Coinbase of operating unregistered exchanges, and offering the sale of unregistered securities in the form of crypto tokens.</p>
<p><a href="https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402">Binance has pledged</a> to vigorously defend itself against the lawsuit, which it said reflected the SEC’s “misguided and conscious refusal” to provide guidance and clarity on regulation to the cryptocurrency industry. </p>
<p>Coinbase’s chief legal officer said <a href="https://www.cnbc.com/2023/06/12/coinbase-sued-by-sec-over-alleged-unregistered-securities.html">in a statement to CNBC</a> about the charges that “the SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance”.</p>
<p>He called for legislation that “allows fair rules for the road to be developed transparently and applied equally, not litigation”.</p>
<h2>Counting the costs</h2>
<p>These cases are similar to another brought against <a href="https://www.cnbc.com/2023/05/08/ripple-will-have-spent-200-million-fighting-sec-lawsuit-ceo-says.html#:%7E:text=In%202020%2C%20the%20U.S.%20Securities,registering%20it%20as%20a%20security.">a crypto company called Ripple Labs</a> by the SEC in December 2020. It argues that XRP, Ripple’s cryptocurrency token, is an unregistered security. Ripple disputes this and expects to spend US$200 million (£156 million) fighting the suit, <a href="https://www.cnbc.com/2023/05/08/ripple-will-have-spent-200-million-fighting-sec-lawsuit-ceo-says.html#:%7E:text=In%202020%2C%20the%20U.S.%20Securities,registering%20it%20as%20a%20security.">according to its CEO</a>. He argues such cases are preventing US innovation around the blockchain technology that powers crypto trading.</p>
<p>At the heart of this case is the question of whether Ripple’s token satisfies <a href="https://www.investopedia.com/terms/h/howey-test.asp">the Howey test</a>, which would deem it a security, just like a stock or a bond, for regulation purposes. The test sets out three key criteria for deciding whether a financial product should come under securities regulations:</p>
<ul>
<li>it is a financial investment, meaning that participants in the transaction must be risking their own money </li>
<li>it is a shared enterprise, so the financial success of investors should be somehow connected</li>
<li>there is an expectation of profits solely from the effort of others.</li>
</ul>
<p>According to <a href="https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets">the SEC</a>, the first criterion is easily satisfied with crypto because fiat money or other digital assets are being exchanged. Likewise, the “common enterprise” test is also easily met when trading cryptocurrencies. The third criterion largely turns on whether digital assets come with an “expectation of profit to be derived <em>from the efforts of others</em>”.</p>
<h2>Why does this matter?</h2>
<p>The most recent SEC lawsuits against Binance and Coinbase go after the lifeblood of the cryptocurrency industry: the exchanges or platforms on which people trade, as opposed to the individual digital assets or tokens. These platforms enable investors to buy and sell cryptocurrencies easily without the need for expert knowledge of how blockchains work. </p>
<p>The lawsuits have had an immediate and significant impact on crypto values. Coinbase customers pulled about US$1.28 billion from the exchange after the news broke, according to initial estimates from data firm <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/">Nansen</a>. Coinbase’s parent company, Coinbase Global Inc <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/#:%7E:text=Shares%20of%20Coinbase's%20parent%20Coinbase,%22demonstrated%20commitment%20to%20compliance.%22">(COIN.O)</a>, saw its shares close down US$7.10, or 12.1%, at US$51.61, after falling as much as 20.9% earlier on the day the charges were announced. </p>
<p>In the meantime, customers <a href="https://www.reuters.com/technology/crypto-exchange-binance-hit-by-outflows-780-mln-last-24-hours-nansen-2023-06-06/">withdrew around US$780 million</a> from Binance and its US affiliate in the 24 hours following the lawsuit, according to Nansen. The Bitcoin market has rallied since, although Binance.US has <a href="https://cointelegraph.com/news/binance-us-halts-trading-for-dozens-of-usdt-btc-busd-pairs-amid-sec-lawsuit">stopped trading</a> in a number of its cryptocurrencies.</p>
<p>These latest lawsuits look like US regulators are drawing a line in the sand. If successful, these cases will limit US investors’ access to assets on these platforms and will also create further market uncertainty for companies and people. </p>
<figure class="align-center ">
<img alt="Blue screen with white ripple logo in background, foreground image is a phone that says " src="https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ripple Labs was charged by the SEC in 2020.</span>
<span class="attribution"><span class="source">Grey82/Shutterstock</span></span>
</figcaption>
</figure>
<h2>Global coordination on crypto rules</h2>
<p>Research shows <a href="https://www.pewresearch.org/short-reads/2023/04/10/majority-of-americans-arent-confident-in-the-safety-and-reliability-of-cryptocurrency/">around 17% of people</a> in the US have traded, invested in or used a cryptocurrency. If the crackdown by regulators cuts their access, these people may be able to use centralised exchanges in other countries, decentralised exchanges, or other means to trade cryptocurrencies.</p>
<p>But regulators in other major financial markets could follow the SEC’s lead when it comes to crypto rules. The UK’s Financial Conduct Authority recently announced <a href="https://www.fca.org.uk/news/press-releases/fca-introduces-tough-new-rules-marketing-cryptoassets">new regulations for cryptocurrency</a> firms operating in the country. This includes measures to ensure investors know the risks involved, that adverts are clear and not misleading, as well as a ban on “refer a friend” bonuses. But these rules will only affect the marketing of cryptocurrencies in the UK, so it’s a relatively small step. </p>
<p>Cryptocurrency providers seem to want regulation to provide legitimacy and clear parameters in which to work. Given the borderless nature of cryptocurrencies, regulators need to align internationally or exchanges will simply move to “friendlier” jurisdictions. Global leadership is needed to establish how – and if – cryptocurrencies should be regulated. Without this, regulators like the SEC will struggle to corral the growing global crypto market.</p><img src="https://counter.theconversation.com/content/207332/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrency.</span></em></p>Crypto platforms are calling for clear regulations rather than lawsuits from regulators.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1626252021-06-14T13:07:03Z2021-06-14T13:07:03ZThe Klarna conundrum: why treating buy-now-pay-later apps like banks will not protect consumers<figure><img src="https://images.theconversation.com/files/405913/original/file-20210611-15-1yi7ob0.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Buy or bye?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/barcelona-spain-july-14-2020-klarna-1776038513">Sulastri Sulastri</a></span></figcaption></figure><p>Whether you use Klarna all the time or have barely heard of it, it’s time to start paying attention: the buy-now-pay-later app has just become the biggest private fintech company in Europe. Klarna <a href="https://www.ft.com/content/9f73b352-723f-471b-b098-5f090279b5bb">has completed</a> a new round of fundraising, valuing it at US$46 billion (£33 billion). That’s four times what it was worth <a href="https://www.ft.com/content/c52d466b-40c2-4114-bfed-20dc54c8d97c">last September</a>, and on a par with fellow Swedish tech giant <a href="https://finance.yahoo.com/quote/SPOT/">Spotify</a>. </p>
<hr>
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<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/uk/topics/audio-narrated-99682">here</a>.</em></p>
<hr>
<p><a href="https://www.klarna.com/uk/smoooth/">Klarna offers</a> interest-free credit on purchases with participating retailers, including Decathlon, Desigual, JD Sports and Oasis. It allows shoppers to delay payment, or split larger purchases into manageable sums, and does not perform traditional credit checks, opting for a more permissive “<a href="https://www.klarna.com/uk/smoooth/">soft search</a>”. Retailers cover the cost of the interest as if it was a sales discount. </p>
<p>Klarna operates in western Europe, Australia and the US, and has exploded in popularity during the pandemic. It <a href="https://www.klarna.com/uk/business/reach-our-shoppers/">claims to have</a> 90 million customers, including 13 million in the UK, and has numerous rivals such as <a href="https://www.clearpay.co.uk/en-GB">Clearpay/Afterpay</a>, <a href="https://www.affirm.com/">Affirm</a> and <a href="https://sezzle.com/">Sezzle</a>. Traditional retailers like M&S and John Lewis are <a href="https://www.thisismoney.co.uk/money/cardsloans/article-9342889/John-Lewis-M-S-launch-buy-pay-later-schemes.html">also reported</a> to be looking at entering the fray. </p>
<p>Such offerings are controversial, however. <a href="https://www.money.co.uk/guides/generation-debt-trap">Critics allege</a> such schemes encourage overspending and can <a href="https://www.vice.com/en/article/qjdwj3/what-happens-if-you-dont-pay-klarna">potentially ruin</a> customers’ credit histories if they fail to keep up on payments. Many <a href="https://www.theguardian.com/money/2021/jan/12/mps-warn-buy-now-pay-later-firms-could-be-the-next-wonga">see parallels</a> between these schemes and notorious “pay day lenders” from years gone by <a href="https://www.bbc.co.uk/news/business-51303908">such as Wonga.com</a>. </p>
<p>Four in ten customers in the UK who have used these apps in the last 12 months <a href="https://www.bbc.co.uk/news/business-56841948">are reportedly struggling</a> to repay. A quarter of consumers reported that they regretted using these platforms, with many saying they cannot afford repayments or are spending more than they expected. Similarly, <a href="https://www.yourmoney.com/credit-cards-loans/buy-now-pay-later-users-struggling-to-pay-back-debts/">Comparethemarket.com reported</a> earlier this year that one fifth of users couldn’t repay Christmas spending without taking on more debt. </p>
<p>In the UK, the concerns prompted <a href="https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf">a review</a> published in February by Christopher Woolard, formerly of the Financial Conduct Authority (FCA). As a result, the FCA is now subjecting these operators to the same regulations as more traditional creditors, requiring things like affordability checks and making sure customers are treated fairly. </p>
<p>Some might <a href="https://www.klarna.com/uk/blog/the-time-is-right-for-regulation/">argue that</a> this solves the problem, but I disagree. Insights from behavioural psychology can shed light on this, and seemingly dusty debates from ancient Greek philosophy reveal why it’s wrong. </p>
<h2>The psychological risks</h2>
<p>Klarna claims to offer a “healthier, simpler and smarter alternative to credit cards”. It primarily targets millennials, with an <a href="https://www.theguardian.com/money/2020/oct/03/klarna-debt-buy-now-pay-later-fees-interest">average customer age</a> of 33. <a href="https://www.klarna.com/uk/">Marketing material</a> presents the app as the choice of the savvy shopper, with a clean wholesome aesthetic, reminiscent of a Scandi-style ad agency or hipster café menu.</p>
<p>Under FCA regulation, such lenders will be treated like other financial services targeting millennials such as <a href="https://www.starlingbank.com/">Starling Bank</a> or <a href="https://monzo.com/">Monzo</a>. So why isn’t it a case of problem solved?</p>
<p>By offering goods immediately, and delaying the pain of parting with any money, buy-now-pay-later lenders exploit the human tendency to undervalue future losses and overvalue present satisfaction – known as present bias. <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/bdm.1771">Research shows</a> that this bias increases in response to instability and stress, raising the worry that such services disproportionately target consumers who are already vulnerable.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Woman looking bored on her phone." src="https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405953/original/file-20210611-13-6saxjt.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Vulnerable customers may be most at risk.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bored-young-asian-woman-looking-disappointed-1896939895">kitzcorner</a></span>
</figcaption>
</figure>
<p>You could argue that credit cards also do this, but buy-now-pay-later lenders operate without hard credit checks, and go about this in an especially concerning manner. The service is offered at the online checkout, and often set by the retail partner as the <a href="https://www.thisismoney.co.uk/money/cardsloans/article-9227501/Buy-pay-later-Dont-let-shoppers-sign-default-MPs-say.html">default payment option</a>. As Nobel prize-winning economists Richard H. Thaler and Cass R. Sunstein argue in their influential book Nudge, altering defaults is <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/default-optionsetting/">particularly effective</a> at changing behaviour. </p>
<p>Lenders primarily focus on consumer goods such as clothing and cosmetics, which are typically the subject of impulse buys. Focusing on products related to physical appearance, and targeting a particular age group, could shift social norms regarding consumption within the demographic, making higher value clothing items the norm. Once established, such norms are <a href="https://academic.oup.com/jcr/article/35/3/472/1856257">difficult to avoid</a>.</p>
<p>These lenders also take advantage of “<a href="http://www.albacharia.ma/xmlui/bitstream/handle/123456789/32051/statusquo%20bias.pdf?sequence=1">loss aversion</a>” – the universal human tendency to prefer avoiding losses to acquiring equivalent gains. They do this by <a href="https://www.size.co.uk/page/klarna/">promoting their services</a> as a way for online shoppers to order multiple items and then return those they don’t like. Because of the bias, shoppers <a href="https://francis-press.com/uploads/papers/tpwXpk6X2a0ajYkJUIHbdGYxt8kmjWOwCLNSHdya.pdf">may not</a> return products once they have them at home – even if that was their original intention. </p>
<h2>Thank you, Aristotle</h2>
<p>One might say these strategies manipulate customers. Yet one person’s manipulation is another’s persuasion, and all commercial businesses employ persuasive strategies to encourage customers to spend. </p>
<p>Ancient Greek philosopher Aristotle and his followers can help us draw a meaningful distinction between persuasion and manipulation. In a debate with the Sophists (specialists in the art of persuasion), the <a href="https://oxford.universitypressscholarship.com/view/10.1093/acprof:oso/9780199338207.001.0001/acprof-9780199338207-chapter-4">Aristotelians argued</a> that the difference between manipulation and other persuasive strategies is that it bypasses or subverts the target’s rational capacities.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Statue of Aristotle" src="https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405956/original/file-20210611-17-s22efv.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Aristotle knew a thing or two about manipulation.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/statue-aristotle-great-greek-philosopher-421724455">Ververidis Vasilis</a></span>
</figcaption>
</figure>
<p>On that rationale, buy-now-pay-later apps are arguably manipulative as they rely on our irrational psychological biases. The concern is therefore less that they encourage us to spend, but how they do it. Some might argue that manipulation is everywhere, especially in advertising, but that doesn’t make it right. This is an ethical issue that simply classifying Klarna as a bank won’t solve.</p>
<p>What, then, is to be done? An outright ban would unfairly impact responsible users of the service. What is needed is regulation sensitive to the unique nature of these lenders, their service and the risks. It needs to include a duty to inform customers of the psychological biases that these services take advantage of (unwittingly or otherwise), to help consumers to make rational financial decisions. Apps would therefore need to point, for example, to the risks of consumers being tempted to keep more items once they have been bought, and the risks of default payment options. </p>
<p>Alongside this, we need a new professional body dedicated to overseeing this form of lending. It would need regulatory powers, and a commitment to act in the public interest enshrined in a code of conduct reflecting the unique ethical risks involved.</p><img src="https://counter.theconversation.com/content/162625/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joshua Hobbs does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Apps like Klarna, Clearpay and Sezzle have rocketed in popularity during the pandemic.Joshua Hobbs, Lecturer and Consultant in Applied Ethics, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1541162021-01-28T18:39:47Z2021-01-28T18:39:47ZContactless payment limit: raising it to £100 could push more people into debt<figure><img src="https://images.theconversation.com/files/381073/original/file-20210128-15-c8k9cy.jpg?ixlib=rb-1.1.0&rect=212%2C22%2C7240%2C4938&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/cashier-hand-holding-credit-card-reader-1754539082">Rido/Shutterstock</a></span></figcaption></figure><p>In recognition of our changing spending behaviour during the pandemic, the UK’s Financial Conduct Authority (FCA) has announced plans to consult on <a href="https://content.govdelivery.com/accounts/UKFCA/bulletins/2bd4801">increasing the contactless spending limit from £45 to £100</a>. Prior to the COVID-19 outbreak, this same limit was just £30. And while the FCA limit is advisory, it sets an industry standard observed by the vast majority of card providers and retailers.</p>
<p>Clearly, our ability to pay for goods and services via contactless options is useful in a pandemic. Maintaining social distance by reducing queues, plus negating the need to touch keypads, will all help to fight transmission of the virus. Meanwhile, the Bank of England recently reported on the <a href="https://www.bankofengland.co.uk/quarterly-bulletin/2020/2020-q4/cash-in-the-time-of-covid">diminishing need for cash</a>, amplified by the pandemic, which has strengthened calls to increase the contactless payment limit. </p>
<p>On the other hand, increasing the limit for such transactions to £100 will lead to increased fraud, despite the use of <a href="https://www.finextra.com/newsarticle/36542/how-to-combat-payments-fraud-with-machine-learning-in-the-cloud">machine learning methods</a> to spot fraudulent contactless payments quicker. But our real concern is not fraud, but rather personal indebtedness. Behavioural science suggests that raising the contactless spending limit may encourage reckless spending and high levels of credit card debt.</p>
<h2>Shifting frames</h2>
<p>Spending limits have <a href="https://www.frontiersin.org/articles/10.3389/fpsyg.2017.01204/full">behavioural implications</a>, and changing those limits can change our behaviours. One mechanism by which this change might take place is through “<a href="http://psy2.ucsd.edu/%7Emckenzie/Sher&McKenzie2006Cognition.pdf">information leakage</a>”, which occurs when individuals infer additional information from a particular decision or environment – potentially incorrectly or unwisely. </p>
<p>For example, many travel websites strongly encourage you to buy insurance from them when booking a flight. Based on this framing, you might infer that travel insurance is an important or even essential thing to have. This inferred or “leaked” information may then inform your eventual decision, and you may now buy insurance you otherwise wouldn’t have.</p>
<p>The contactless spending limit likely produces information leakage, and changing the limit certainly will. It is likely that by increasing the limit to £100, many people will infer that, for example, it is normal to spend this much in a single transaction. Such an inference may then <a href="https://static1.squarespace.com/static/5353b838e4b0e68461b517cf/t/583ca5acd2b8571174b28e40/1480369581625/48-Beshears_et_al_2016.pdf">nudge them to spend more</a>, in alignment with what they now believe is normal.</p>
<figure class="align-center ">
<img alt="A man in a mask takes a contactless payment from a seated woman" src="https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Many merchants and vendors have stopped accepting cash during the pandemic.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/female-customer-making-contactless-payment-waiter-1742688896">Drazen Zigic/Shutterstock</a></span>
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<p>On top of this, the convenience and ease of contactless payments reduces our opportunity to reconsider our purchases. Ordinarily, the process of paying provides us with a final touchpoint to reconsider our purchasing decision. At the last minute, we have the chance to ask ourselves whether we really want or need what we’re about to purchase.</p>
<p>Contactless payments are so quick and simple that we’re denied this final touchpoint. Indeed, a cynical way of thinking about financial innovation is as a set of products that make it easier for us to part with our money. The commercial world is well aware of this last barrier to your purchase and has invested in conveniently remembering your card details, signing you into an automatic rolling subscription, or allowing you to buy with a simple click, swipe, or contactless swish.</p>
<p>Seen this way, contactless payments are the “buy it now” button of the physical world – and are affecting spending behaviour accordingly. <a href="https://newsroom.mastercard.com/press-releases/new-mastercard-advisors-study-on-contactless-payments-shows-almost-30-lift-in-total-spend-within-first-year-of-adoption/">A study</a> by MasterCard found that, in the 15 months following the introduction of contactless payments on bank accounts, total spend from those accounts increased by an average of almost 30%. Many people cannot afford such a behaviour change.</p>
<p>It seems that once we’ve had a taste of frictionless payments, our spending behaviour tends to become more automatic and – arguably – reckless. The implications of this could be considerable, especially as contactless features are included on credit cards, which allow us to slip into our overdrafts instead of finding our payment rejected.</p>
<h2>Reckless spending</h2>
<p>We have long known that people spend more using credit cards than cash. Twenty years ago, researchers showed that credit card users were prepared to pay <a href="https://link.springer.com/article/10.1023/A:1008196717017">up to twice as much for sports tickets than cash buyers</a>. Coupling this effect with contactless payments of up to £100 may lead to considerable additional spending – and when this extra spending is on a credit card, it risks thrusting people into debt. </p>
<p>In principle, the increase of the contactless spend limit during a global pandemic is sensible. In the UK, contactless debit cards are now the most popular method of in-person payment, followed by contactless credit cards, <a href="https://www.thetimes.co.uk/article/cash-falls-behind-the-credit-card-in-shops-mj6k5fpk6">which overtook cash to claim second place in 2019</a>. In 2020, nine out of ten UK card payments were contactless - and <a href="https://www.computerweekly.com/news/252495222/Nine-out-of-10-UK-card-payments-in-2020-were-contactless">just 2.5 pence of every £100 spent using contactless payment options was attributed to fraud</a>.</p>
<p>Nonetheless, we would urge regulators to be wary of extending contactless limits for credit card customers in particular. We should fully consider the downsides this new limit may have in encouraging reckless spending, leading consumers to incur additional debt at a time when many are already suffering financial strain.</p><img src="https://counter.theconversation.com/content/154116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Whittle has previously received funding from the Money Advice Service to research behavioural interventions to counter problem debt accumulation.</span></em></p><p class="fine-print"><em><span>Gavin Brown and Stuart Mills do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Contactless payments may be convenient – but they also make it easier to overspend.Gavin Brown, Associate Professor in Financial Technology, University of LiverpoolRichard Whittle, Research Fellow in Economics, Manchester Metropolitan UniversityStuart Mills, Fellow of Behavioural Science, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1446882020-08-21T11:46:03Z2020-08-21T11:46:03ZThe PPI scandal is far from over – here’s why<figure><img src="https://images.theconversation.com/files/353877/original/file-20200820-24-1sf9ay2.jpg?ixlib=rb-1.1.0&rect=103%2C236%2C4817%2C2803&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/uk-poundmoney-united-kingdom-close-on-1243360342">Shutterstock/kamui29</a></span></figcaption></figure><p>The PPI scandal led to the largest consumer redress scheme in British history, with over £38 billion paid to claimants <a href="https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation">to date</a>. The deadline for customers to submit their claims was set at midnight on August 29 2019. But, almost one year later, hundreds of thousands of registered claims remain <a href="https://www.which.co.uk/news/2020/03/more-than-half-of-ppi-claimants-still-waiting-for-a-decision/">outstanding</a>. And to make matters worse for the banks, a swathe of new claims have started rolling in.</p>
<p>The Financial Conduct Authority (FCA) hoped the deadline would bring the scandal to an orderly conclusion and offer protection to consumers while helping to restore market integrity. The banks hoped it would enable them to draw a line under it and move on. But the situation seems to be getting worse. </p>
<p>The problem now comes in the form of <a href="https://www.fca.org.uk/publication/finalised-guidance/fg18-02.pdf">unfair commission payments</a>. PPI commission rates were deemed to be unfair for two main reasons: when they were too high or when they were kept secret.</p>
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<p>When they were too high they accounted for, on average, 67% of the PPI price. In the most serious cases they accounted for 95% of the cost of a PPI policy. </p>
<p>When secret, they were (obviously) undisclosed to the customer. That customer – had they been better informed – may have queried the value of their PPI policy. Especially if they had they known that the majority of the price was not going to the product provider (for example, the insurer underwriting the protection cover for the loan or credit card) but to the bank who sold the PPI policy to them.</p>
<h2>Court judgements</h2>
<p>Awareness of the unfair commission payments on PPI policies is not new. But recent <a href="https://pressat.co.uk/releases/court-decides-consumers-who-missed-the-august-2019-deadline-can-still-claim-ppi-451011ea52ba85aefb710630ebede451/">court decisions</a> mean that customers can potentially claw back all of the commission they have paid and claim after the 2019 deadline. </p>
<p>The issue first came to light in the November 2014 Supreme Court case, Plevin v Paragon Personal Finance Ltd, after which the FCA <a href="https://www.fca.org.uk/news/press-releases/fca-finalise-plans-place-deadline-ppi-complaints">changed its guidance</a> on what could be claimed as part of the PPI redress scheme. This change enabled customers to claim commission that accounted for over 50% of the price of the PPI policy and became known as the <a href="https://www.bbc.co.uk/news/business-44696362#:%7E:text=This%20means%20that%20policy%2Dholders,13%20million%20PPI%20pay%2Douts.">Plevin rule</a>.</p>
<p>Payments to customers were however restricted to commission that was in excess of 50%. In other words, successful claimants only received part of the commission that had been paid to the banks. </p>
<p>A series of other court cases saw the position change again, as claimants were awarded the <a href="https://pressat.co.uk/releases/court-decides-consumers-who-missed-the-august-2019-deadline-can-still-claim-ppi-451011ea52ba85aefb710630ebede451/">full commission</a> where the bank failed to disclose large commission payments to the customer. As almost all PPI policies earned high commission rates, this change was significant and opened the floodgates to new claims. </p>
<p>Customers who have received a partial payment, have had their claims rejected or have not claimed so far can now claim, citing the unfair compensation. Even customers who were not mis-sold PPI and were happy with their policy can potentially claim as the high commission payments may not have been disclosed to them.</p>
<p>The potential for new PPI claims based on the unfair commission payments could not have come at a worse time for the banks as they are still facing a backlog of existing claims to process. <a href="https://www.which.co.uk/news/2020/03/more-than-half-of-ppi-claimants-still-waiting-for-a-decision/">A survey</a> conducted in March this year found that 60% of PPI claimants had not heard from their bank about the progress of their claim and half of these had not even received an acknowledgement letter. </p>
<p>Banks were overwhelmed by the volume of claims and although the expected time for banks to respond to such claims is typically eight weeks, the FCA managed this expectation <a href="https://www.fca.org.uk/news/news-stories/ppi-complaints-handling-update">by predicting</a> that most claims would be resolved by summer 2020. </p>
<h2>Coronavirus disruption</h2>
<p>But this deadline was set before COVID-19 disrupted the world and it now appears unlikely to be met. Now many customers remain frustrated that their cases have not been resolved as the new unfair commission charges issue further aggravates and complicates the issue. </p>
<p>The original PPI scandal severely damaged consumer trust in the banks as a lack of integrity was at the heart of the case. PPI mis-selling was something that the banks could have controlled and was an intentional act as the banks placed profits above their customer welfare. </p>
<p><a href="https://eprints.bournemouth.ac.uk/32088/3/QMR_Service_brand_rehab-with_authors%20info_accepted%20version%20%281%29.pdf">My own research</a> has shown that when trust is damaged by a lack of integrity, it is difficult to restore. The banks needed to display clear evidence of an intention to get rid of negative influences. </p>
<p>For a start, all banks should have immediately apologised for the mis-selling. Some did, but this was only after <a href="https://www.choose.co.uk/news/banks-apologise-over-ppi-rip-off.html">they lost</a> a high court case trying to overturn the FCAs ruling on PPI mis-selling. The banks really needed to signal to employees the importance of a customer-centered culture and change employee incentive systems to align with long-term performance, rather than short-term profit. </p>
<p>Banks need to embed ethical values into their routine actions and decisions. So far, <a href="https://www.ft.com/content/2abb8482-c9b3-11e9-a1f4-3669401ba76f">the evidence</a> is that not all banks have bothered to take such steps.</p><img src="https://counter.theconversation.com/content/144688/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Robson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks hoped last year’s PPI deadline would draw a line under the scandal - but the claims keep coming.Julie Robson, Associate Professor Marketing, Bournemouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1217092019-08-23T10:46:50Z2019-08-23T10:46:50ZPPI claim deadline is looming – but damage to banks from the scandal is far from over<figure><img src="https://images.theconversation.com/files/289104/original/file-20190822-170941-atmzwi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pound-gbp-coin-gold-money-on-247546294?src=-8jrZaLJe8xRQ-JitZU0RA-1-39">Shutterstock/Valeri Potapova</a></span></figcaption></figure><p>Borrowing money can be a risky business. So, in theory, payment protection insurance (PPI) sounds like a sensible precaution to take – a financial safety net in case loan repayments suddenly become difficult to make because of redundancy or illness. </p>
<p>But charging customers to insure their own borrowing has ended up costing British banks a fortune in compensation, because of the way PPI was sold – or rather mis-sold – to customers. It has also cost them dearly in terms of trust.</p>
<p>Some banks (and other credit providers) told customers that PPI was compulsory, or added it to products without the customer’s knowledge. In some cases, it was sold to customers who were not eligible to claim, like the self-employed. </p>
<p>With the PPI claim <a href="https://www.fca.org.uk/ppi/">deadline looming</a> at 11.59pm on August 29, more than £35.7 billion has already been <a href="https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation">paid in compensation</a>, with the <a href="https://www.moneyadviceservice.org.uk/en/articles/reclaiming-payment-protection-insurance">average pay-out coming to around £2,000</a>, and the <a href="https://www.moneysavingexpert.com/news/2019/05/retired-couple-s-joy-over-p175-000-ppi-payout-after-using-mse-fo/">largest sum hitting £175,000</a>. </p>
<p>That PPI deadline was partly set to allow banks to finally draw a line under the scandal, move on financially and repair consumer trust. But given the actions taken by banks, trust repair is unlikely – and the sector will remain damaged for many years to come.</p>
<p>One reason for this is simply that not everyone entitled to compensation has been paid. According to the industry regulator, the Financial Conduct Authority (FCA), 64m PPI policies were <a href="https://www.fca.org.uk/ppi/ppi-explained">sold in the UK</a>, mostly from 1990 to 2010. </p>
<p>Millions of customers who were mis-sold PPI have yet to make a claim (for the money they paid, plus accumulated interest), and risk losing out on their share of an <a href="https://www.telegraph.co.uk/money/consumer-affairs/claim-ppi-12bn-still-paid-just-four-weeks-deadline/">estimated £12 billion in unclaimed compensation</a>. </p>
<p>More widely, the PPI scandal has damaged consumer trust in the banks who appear to have consciously prioritised profits over customer interests – a clear failure of integrity. </p>
<p>When customer trust is damaged, companies have various methods they can use to try to repair that trust. But when that trust has been damaged by a lack of integrity, effective options are more limited, because integrity is seen as being controllable and intentional. </p>
<p>With PPI, the banks did little to explain to the general public why they had mis-sold it. Our <a href="https://www.researchgate.net/project/Trust-erosion-and-trust-repair-in-the-financial-services-sector">own research</a> with consumers has identified that most people learned about PPI from the media – and, in particular, the adverts run by “claims management” companies. </p>
<p>Because many banks failed to explain and make sense of the PPI scandal with consumers, the information which subsequently filled this void has further eroded trust. </p>
<p>Trust can sometimes be restored through symbolic acts, such as public apologies, high profile resignations, and the paying of compensation. But <a href="https://www.researchgate.net/project/Trust-erosion-and-trust-repair-in-the-financial-services-sector">our research</a> also highlights a deficiency in the use of such responses by the banks over PPI – particularly the absence of an apology. </p>
<p>The banks were, of course, initially <a href="https://www.theguardian.com/business/2016/apr/26/uk-big-four-banks-face-19bn-compensation-fines-legal-costs-libor-ppi">fined</a> and ordered to pay compensation to their customers. But again this is unlikely to restore trust. </p>
<p>To begin with, the payment of compensation was not voluntary – it was enforced by the industry regulator, and customers had to apply rather than receive it automatically. To make matters worse, the FCA also found that some banks were <a href="https://www.thisismoney.co.uk/money/saving/article-2409646/Banks-unfairly-reject-hundreds-thousands-PPI-claims-year-worst-offender-Lloyds-losing-cases.html">unfairly rejecting</a> valid claims. </p>
<p>The use of a deadline for claims is also problematic, because although it enables banks to better manage their funds, it also puts pressure on customers to claim within an imposed timescale. </p>
<p>And while many people have received compensation, even this has not been found to be very <a href="http://europepmc.org/backend/ptpmcrender.fcgi?accid=PMC4694657&blobtype=pdf">effective</a> in restoring trust lost due to a failure in integrity. </p>
<h2>Banking on trust</h2>
<p>To successfully restore trust, the banks needed to display clear evidence of an intention to get rid of negative influences, embedding ethical values into their routine actions and decisions. We found that customers have not seen this kind of voluntary change in behaviour. </p>
<p>The main problem with trust damaged through lack of integrity is that consumers are not easily convinced that it will not happen again. It seems plausible to suggest that PPI was not the first time banks have displayed a lack of integrity, and nor will it likely be the last.</p>
<p>And thanks to a general lack of knowledge about the financial services sector, consumers often fail to differentiate between different providers and institutions. As a result, any misdeed by a single company tends to contaminate the sector as a whole. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retail-banks-are-on-a-charm-offensive-but-mis-selling-continues-81918">Retail banks are on a charm offensive – but mis-selling continues</a>
</strong>
</em>
</p>
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<p>So after August 29, banks should not assume that all has been forgiven. As a deadline, it has been reasonably successful in encouraging valid claims. But its secondary purpose of enabling the banks to draw a line under the scandal is less clear cut.</p>
<p>Yes, the banks can draw a line in terms of ring-fencing payments which will enable them to move on financially. But in terms of rebuilding trust, many consumers will continue to feel that the banks owe them a considerable debt.</p><img src="https://counter.theconversation.com/content/121709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trust has been broken, and will not be easily fixed.Julie Robson, Associate Professor Marketing, Bournemouth UniversityJillian Dawes Farquhar, Professor of Marketing, Solent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/583722016-05-06T12:50:33Z2016-05-06T12:50:33ZPoliticians should not be able to sidestep money-laundering scrutiny<figure><img src="https://images.theconversation.com/files/121365/original/image-20160505-19844-1qiotfv.jpg?ixlib=rb-1.1.0&rect=9%2C0%2C2038%2C1045&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cleaning up?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/thepreiserproject/11732169633/in/photolist-iSJrhM-phbmfo-9VAmAB-xY4eL-9VDebQ-e8C8V2-ehLS2P-boZ7FK-qbqa1z-qsRL8Z-qqzAEf-bDNHus-cYUMtq-qbqame-559zLS-pWDep6-hTsWGd-9VAqRa-qbqa6e-qbrFeX-d5T4ju-cNakWm-dSh77r-o1Bkfo-4fEEuA-8iYhV2-m8Yc4T-gXi2Q2-w7D2L-dVhGE7-5koRnU-nB45bb-3rry4A-2FS3k-dSCerw-9Wfiui-dHu6PV-jHXsxL-mw6pcM-cfQgH-4Lq9Yy-cBKHzJ-9VDh7N-o8Dfuc-ac55u-psuZVo-psuZUS-8wfv3d-dSCd4W-qYPJAD">The Preiser Project/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Efforts to scrutinise potential money-laundering in Britain are hitting some last-minute lumps in the road. The <a href="http://services.parliament.uk/bills/2015-16/bankofenglandandfinancialservices/stages.html">Bank of England and Financial Services Bill</a> has been making its way through parliament since October last year and is now in the so-called “ping-pong” stage of trade-offs and amendments between the House of Commons and House of Lords before it becomes law. </p>
<p>One part of the bill tackles the extent to which politicians and those around them are watched for signs of anything untoward. But political resistance to this idea is throwing up a genuine risk. Former US President Ronald Reagan once said the most terrifying words in the English language were “I’m from the government, and I’m here to help”. This described the subtle miscalculations, unintended consequences and ironies that follow from political actions. Of course, the ironies become starker when politicians appear to be “helping” themselves.</p>
<p>Banks typically monitor politicians for potential money laundering activity as part of their general monitoring requirements for tackling <a href="http://www.fatf-gafi.org/documents/documents/peps-r12-r22.html">politically exposed persons</a> (PEPs) – who are entrusted with prominent public functions. Yet, in discussing amendments to the bill, Chancellor of the Exchequer George Osborne expressed his concern:</p>
<blockquote>
<p>Banks are at risk of going too far and being disproportionate when applying their rules to politically exposed persons in Britain, and their families in particular.</p>
</blockquote>
<p>Pushed by <a href="http://www.charleswalker.org/">Tory backbencher Charles Walker</a>, Osborne came to accept a new clause with a series of amendments which addressed this point. The technical reading of the amendments is rather alarming. This is not because they contain any preposterous assertions, nor do they exempt politicians from money-laundering monitoring altogether. But they do create all the necessary conditions for a watered-down monitoring of politicians (and their families).</p>
<h2>PEP talk</h2>
<p>Banks, and other institutions that need to comply with anti-money laundering regulations, will be pushed to take a softer approach to monitoring PEPs. For instance, banks may be fined if they’re overdoing it (concerns will be reported, assessed and adjudicated by the City regulator the Financial Conduct Authority). The amendments also demand very specific categories to be included and excluded from any definitions of PEPs. </p>
<p>Put simply, an MP could be designated as a PEP but a member of his immediate family might be excluded. If excluded from the definition this person would not receive increased scrutiny for money laundering. </p>
<p>But the question of who is a PEP and who is not cannot be put into such a straitjacket. If we had a strict answer to the question of who is suspicious for money-laundering purposes and who is not, then the whole anti-money laundering regime would collapse. Simply put, those that would know they were being monitored less, would be more likely to engage with money laundering. If anything, we should impose more oversight on those who might wield or have access to political power and influence. </p>
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<a href="https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121216/original/image-20160504-22761-37g25v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Sun sets on money laundering scrutiny?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/garryknight/16037087689/in/photolist-qr9grT-ebTQYW-6VZ5Lr-dq2qjE-proyLg-oVH1Dd-ebQKvb-ch6CPu-cAMNF3-nyk3BG-e3TKoS-bhwuhk-qK4tnM-pYbKss-gVgAXk-DWz3y-hkn2MC-GYR47-9iLD2N-ebQKuL-r2kdAt-aEzGnw-9M7qvc-ed8u5o-rSSjsv-dJbzbp-dX5Wsk-eeM3QK-r68j2x-nryHRg-nMaU3Z-5WQjQB-7Th2q8-7SoJRT-4MhHuy-gGZTVL-4fi1zf-oGeGPH-qwQpME-e7jANe-ixDuVK-4Zm5zt-oo3Ewf-svxkCj-oCcgGL-hz4Ani-7ZU3Ab-4sVjb6-4fcn8L-dPfQQ9">Garry Knight/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Absurd thinking</h2>
<p>The first reason for that is that many of us that have been conducting research on anti-money laundering, have always pointed out the travesty of politicians excluding themselves from monitoring. This lasted for more than two decades, with the <a href="http://www.fatf-gafi.org/about/">Financial Action Task Force</a> (FATF) that had set the global guidelines for anti-money laundering, considering only the risk of foreign PEPs for money laundering. </p>
<p>When the task force finally acknowledged how absurd this was, it changed its recommendations and included domestic PEP monitoring under <a href="http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf">Recommendation 12</a>. Through this change, the FATF now requires financial institutions to apply “enhanced ongoing monitoring of the business relationship” when the customer is a domestic PEP. The FATF explicitly extends these requirements to all types of PEPs and says that they “should also apply to family members or close associates”. </p>
<p>This was done for a very good reason. What Osborne failed to mention is that the families of domestic PEPs are exposed themselves. In fact, family members are more risky. Time after time, money laundering cases and considerations on PEPs, reported in the <a href="http://www.emeraldinsight.com/action/doSearch?AllField=PEPs&SeriesKey=jmlc">academic literature</a> and in FATF’s analysis of red-flags for PEP-monitoring (<a href="http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-PEP-Rec12-22.pdf">see Annex 1 here</a>), indicate that husbands, wives, fathers, mothers, siblings, children, close business associates, and even in-laws actively participate in the money laundering process. </p>
<p>They do this to reduce the risk of detection for corrupt politicians that are in the public eye, and of course, because they have immediate financial interest in doing so. It is why all domestic PEPs should be subject to more scrutiny and monitoring, not less. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121367/original/image-20160505-19848-s4sat3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Scutiny.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/featheredtar/2949748121/in/photolist-5uEeme-c5gFGy-pdeaF8-oNnKXQ-e5ap1v-ps9Vjm-psbxE8-5YrZkq-rfCuUm-paBjj6-6c1jve-9NDgMs-nY6C7x-9U8dH5-mYDZL4-paEJuo-bcyxGZ-e5g1FN-qFqN8-CYdQh-dcaBvR-ptYD8z-4qUs8F-5YnL7r-dcazQy-pc9Z1q-4Pja4u-7LCmSR-dcaAXA-8FTLVn-9kQrtz-9NJbtw-pcaAMV-9Xm5NB-aDf6gb-nQpbyn-yP8Ni-cX5cA1-9NFmxc-ejZfVN-e5aq78-7LAwHr-wghQ-d39L8Q-9U7Hkj-dcazVN-pyeBd8-scCRJZ-9U6Y1s-dcazfK">Joel Penner/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Suspicious minds</h2>
<p>When banks monitor such activity, their “highest course” of action after their own analysts review a client’s transaction records and profile is the submission of a suspicious activity report to the government’s Financial Intelligence Unit. This agency can request additional data from other institutions and may or may not forward for prosecution. </p>
<p>It seems highly unlikely that a PEP or a relative will be “disadvantaged” and not be able to use banking services. If it is made clear that banking services cannot be refused to an individual due to suspicion of money laundering then why should specific PEP-categories be excluded from increased scrutiny? It is, in any case better for anti-money laundering efforts if all activity is kept where we can see it.</p>
<p>It is also worth noting that banks are already regulated by the Financial Conduct Authority and under this regulation, they apply a risk-based approach to detect money laundering. It may not be perfect, but if politicians start to dictate the exact conditions of “proportionate” monitoring, then who guards us from the guardians?</p><img src="https://counter.theconversation.com/content/58372/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dionysios Demetis has received funding from three past research grants: a) Spotlight EU AGIS Fund on Anti-Money Laundering Research, b) FIDIS project EU 6th Framework on information-society related research., c) Next Generation Anti-Terrorist Financing Methods (GATE), funding from PASR EC Programme. </span></em></p>The government should resist the temptation to soften monitoring efforts aimed at MPs and their families and associates.Dionysios Demetis, Lecturer in Management Systems, University of HullLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/341502014-11-16T09:19:21Z2014-11-16T09:19:21ZCommon currency: a forex scandal that epitomises the blindness in the banking crisis<figure><img src="https://images.theconversation.com/files/64378/original/8wr7x79v-1415791257.jpg?ixlib=rb-1.1.0&rect=1021%2C185%2C1015%2C729&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Small beer? Bank fines and the culture they punish.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/steeljam/7905918216/in/photolist-abf5rZ-yAMP6-apffX7-5fSSJY-hLB1Fy-4KRfQM-63WV9y-ndMZLg-88DRkc-ciTw1-52pdwk-7yKbFf-azeaxk-azeaTv-azgNSL-azeaEt-azgPzA-azgNZ9-azgPVw-azgPdq-azgPP3-azeajX-axVP51-d3BU3L-p5EoGp-5DoeZS-bUoNoY-6JiY8D-7bvtg1-dr4HgS-dr4vJi-7yFrhv-7yFqDi-7yKcjb-49ipy1-45p7W4-45tqNm-8WREzW-79965G-aSMdnp-3ibsRr-6NHuud-A7osB-i6fr4X-i6eQTo-7376c8-6dJU9s-6dEfKB-6dEetP-6dEgGV">Steve James</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The biggest open secret in the financial world has been confirmed. Regulators in the UK, the US and Switzerland <a href="http://uk.reuters.com/article/2014/11/12/uk-banks-forex-investigation-idUKKCN0IW0H120141112">have announced massive fines</a> for some of the world’s largest banks for a manipulation of global currency markets that in its callous ubiquity says so much about the banking behaviours that sparked the global financial crisis. </p>
<p>Fines levied by the UK regulator add up to £1.1 billion. The US regulator announced fines of $1.4 billion. Banks hit by these fines include UBS, Citi, JP Morgan, HSBC and RBS. Barclays is yet to come to a settlement on the back of the investigations. </p>
<p>The probe uncovered individuals traders within large banks who were working together in trading clubs which had names you would expect from the “ruthless narcissists” on <a href="https://theconversation.com/ruthless-narcissists-churned-out-by-the-apprentice-arent-fit-for-the-real-business-world-32971">BBC TV show, The Apprentice</a>. These included “the players”, “the 3 musketeers” and “1 team, 1 dream”. </p>
<p>These clubs worked together to influence the WM Reuters 4pm fix – essentially the official number used to fix currency rates. It shapes everything from how much we pay for currency when we go overseas to how much our pension fund pays when it wants to buy into an offshore investment. This is one of the core numbers in global finance. </p>
<h2>Monopolies; commission</h2>
<p>So, it sounds important, but why should we actually care? Well global currency markets are worth over £5 trillion a day. They are the world’s biggest financial market. More than 40% of the trade takes place in London, and more than half of this trade is dominated by just four players: Citi, Deutsche Bank, UBS and Barclays. </p>
<p>A small percentage of the trade relates to buying actual things (such as a shipment of coffee or oil). Most of it is either purely speculative or part of the process buying other speculative financial instruments. According to one piece in the Financial Times, there are really only a hundred or so people who really matter in this market. About 30 of them have been either placed on gardening leave or have been fired from their position in the last year.</p>
<p>The various documents released reveal a world where people talk in a mix of financial jargon, and the salty slang of an Cockney street trader. <a href="http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/hsbcmisconduct111114.pdf">The traders say things like</a> “you getting betty on the mumble still” or “have that my son” and refer to “other numptys” in the market. The documents also reveal strategies used to manipulate the markets. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Taken down a peg or two. RBS.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/0olong/3236846175/in/photolist-5W2FAF-9MZWKS-9MZKwQ-9z4gti-9z7ibj-9z4gjv-9z7i47-arM9aK-9z7hih-9z7haC-9z7gUE-9z7gLJ-9z4fED-9PhvBK-9MXadi-9PkkAh-9N17Uw-9MXgeV-9MXgor-9MX2yT-9MZUJN-9MZKQ3-6bZruX-9MX71P-9MX4JF-9MZQ6N-9MZNy7-9MZUSU-9MWXrT-9MZKnm-9MX3v2-9N13F3-9MZMvQ-9MZK1L-9MX4Be-9MWZUk-9MWXAi-9MWZqa-9MWWN6-9MZRKG-9MZQfJ-9MX284-9MZW9A-9N14j1-9MZPKh-9MX9xe-9MZR8U-9MZRrd-9MXbb8-9MX4sz">Fergus Ray Murray</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In one, based on records of traders activities at RBS, we find traders <a href="http://www.fca.org.uk/static/documents/final-notices/final-notice-rbs.pdf">using three techniques</a> to get the fix to move the way they wanted it to. They might conduct deals outside of the accepted channels, skew their trades to one buyer in an effort to consolidate influence or simply go hell for leather on trades in one direction as the fix approached. Such methods were given descriptions such as “taking out the filth” or “leaving you with ammo”.</p>
<p>Perhaps most worrying was the institutional failures of process at work. Various reports show that the large banks did not have systems in place to understand what was going on. They did not monitor the chat rooms where traders co-ordinated market fixing. When concerns were spotted, they were not elevated. <a href="http://www.bankofengland.co.uk/publications/Pages/news/2014/146.aspx">One official at the Bank of England</a> who was aware of irregular behaviour in the market did not push this information upwards in the organization. When whistleblowers did speak out about practices they were concerned about, their <a href="http://www.fca.org.uk/your-fca/documents/final-notices">concerns were largely overlooked</a>. </p>
<h2>Major failings</h2>
<p>The investigations reveal a number of serious failings in the world’s biggest financial market. These include significant shortcomings in the way markets are designed, the way firms function, and the over-arching culture at play. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Putting on a facade. The Bank of England.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bankofengland/14842338124/in/photolist-oByS2s-kWZQrx-hHFUYi-g4B8Cm-g4AQn9-g4APaj-g4AQcv-6SHuNG-g4ANJa-g4AWvS-g4ATHj-8PY4BV-fFHJpA-6cfAbw-ojzqsC-kZXpon-nEiLh8-6c78xC-6o8nSq-4j1Qd5-6bZZBP-6c1J5X-dir1RR-6c2frx-6c2cjV-5qwmXd-6c1GeM-6c1Fbk-9L3jzs-6c4Gom-dd81yF-6c5Ehw-6c1XCp-9cgr4Q-6c2mJR-6bZyCc-69M9m4-oDxi1r-4C6eGg-oY4Xck-4pA8Po-4cryQP-sQTEw-oBKDcA-g4Bype-g4BmgB-6c4eYS-6cbmN2-6bU8sc-9cgNDH">www.bankofengland.co.uk</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>There are big problems with the design of the global currency market which make it a hot-house for growing bad behaviour. It has almost no rules, meaning activities like sharing insider information, collusion or trading on your personal account at work – illegal or banned elsewhere – are perfectly legal in the currency market. There has been little in the way of oversight or policing. The main body involved in regulating the market based at the Bank of England is made up of a group of senior traders (some of whom have <a href="http://www.theguardian.com/business/2014/mar/05/bank-of-england-suspends-employee-forex-investigation">subsequently been suspended</a> for bad behaviour). </p>
<p>There is little or no transparency about what is actually going on in the market. Because it is an “over the counter” market there is no centralised record of what price people are actually making trades at or any indication of the number of buy and sell orders on the market. The only people who have a reasonable idea of this are traders working for the biggest banks. </p>
<p>Finally, the market remains highly concentrated – the position of the four banks that run the market is increasingly entrenched due to their ability to deal with large scale orders, their tight client relationships and their electronic trading platforms.</p>
<p>There are also significant problems with the way currency trading has been managed within the banks. The various reports paint a picture of a business division which was allowed plenty of autonomy – as long as it returned juicy profits. There was little in the way of internal oversight with control and risk functions weak or non-existent. </p>
<p>Rules that applied in other parts of the bank’s trading operations – such as not trading ahead of your client or not trading on your personal account – did not apply. What is perhaps most striking is that the currency trading divisions seemed to be immune from learning from other scandals. The furore following LIBOR did not mean currency traders stopped manipulating their own market. </p>
<h2>Culture club</h2>
<p>Underlying all this was a culture of collusion in the world’s biggest market. Currency traders identified more with each other than they did with their employer or their clients. They formed a frat-house sensibility, bonded by a shared salty language, dense and ongoing interactions and shared experiences working on the same trading desk. </p>
<p>Investigations by journalists at Bloomberg also <a href="http://www.bloomberg.com/news/2013-12-19/how-secret-currency-traders-club-devised-biggest-market-s-rates.html">suggest they frequently socialised</a> with one another, and many London-based traders lived close to each other in Essex. They shared an unofficial code of ethics. </p>
<p>It was based on keeping the market liquid, responding to each other almost instantly and in some cases being loyal to their own clique. If you didn’t follow these rules, you could be frozen out.</p>
<h2>The fix</h2>
<p>The question of how to fix the market is complex. <a href="http://www.reuters.com/article/2014/06/12/fx-investigation-osborne-idUSL5N0OT20N20140612">There are already initiatives underway</a> by the Bank of England to address the structure of the market and conduct issues. </p>
<p>Unfortunately many radical reforms in this market have already been taken off the table. The idea of moving away from an over the counter market towards a centralised market structure has been rejected. Questions of providing more transparency – such as information around order flow are still on the agenda. There is a nervousness around adding rules of regulations to this ultra-light touch market. And the question of creating meaningful competition remains somewhere in the background. </p>
<p>There has been more progress in addressing dynamics within banks. Each of the banks has undertaken significant reforms in its currency trading divisions. Many senior people have left. Those who remain are under a great deal of scrutiny. They have banned chat rooms and stopped trader operating their own personal accounts at work (though some have found ingenious work arounds). They have also beefed up their risk and compliance function. Much of the trading activities has disappeared into automated algorithms, leaving less space for “human interference”. </p>
<p>The big question that remains hanging is what to do with the market culture that systematically encouraged collusion. Some initial steps might be for the forex community to take a serious look at its own moral code. They need to ask what the line is between collusion and hedging risks. </p>
<p>There also need to be clearer forums – both within organizations and beyond – for people to speak out when things go wrong. Some degree of external oversight would probably help and a degree of diversity would help break up a homogeneous culture which encourages collusion. The goal must be to give traders a sense of what the outer limits are of acceptable behaviour and a better sense of where their ethical duties lie.</p><img src="https://counter.theconversation.com/content/34150/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The biggest open secret in the financial world has been confirmed. Regulators in the UK, the US and Switzerland have announced massive fines for some of the world’s largest banks for a manipulation of…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/341492014-11-12T12:35:36Z2014-11-12T12:35:36ZDespite credit cap, Britain’s payday lenders will live to loan another day<figure><img src="https://images.theconversation.com/files/64370/original/phr6s2tt-1415786725.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Eyes on the prize. Regulation will hamper, but not destroy the payday loan industry.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/photograham/429123216/in/photolist-c9g7k1-pWdwTc-4TwUQu-vmW8b-4S7Zut-4ScbkJ-4HHZ4a-4HNeB7-5DUNis-DVno9-pomrai-pmjpbf-DiqnA-breYFs-8njiPH-4uFEeN-4uFFiQ-vmW8g-4uFFzu-4uFEv5-7AVknJ-Nikhx-bZUdH-w3rTY-9VDTvQ-9VzMCj-aoMkWT-3Kw7VG-opFZF-9VE8JS-9VxVeT-7Rkh6M-4uFEL3-4uBDuV-8TR4TZ-2PVaLK-cAEhT-cAEmU-cAEjY-cAEpd-cAEs9-MN3Xh-NikhV-Nikha-bvu93R-bvuc4r-opFRm-5DPx3-HprBy-BaTBm">PhotoGraham</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The announcement that payday lending industry will – finally – <a href="http://www.ft.com/cms/s/0/ac77fe6c-6971-11e4-8f4f-00144feabdc0.html">see a cap on the cost of credit</a> is welcome news. But any belief that this one simple measure will eliminate the industry would be mis-guided.</p>
<p>For a start, the cap on the cost of a payday loan introduced by the Financial Conduct Authority (FCA) is well behind the trends within the sector. Take the problem with what <a href="http://www.cbsnews.com/news/the-wild-west-of-shady-online-payday-lenders/">has been called the “wild west”</a> of the payday industry. While firms such as <a href="https://theconversation.com/uk/topics/wonga">Wonga.com</a> or <a href="http://www.kreditech.com/">Kreditech</a> are very well known companies operating solely on the internet, the “wild west” refers to companies that fall under the radar. They perhaps operate from abroad and trade in the UK market, or are set up to appear like a payday lending website when in fact they are a broker firm that takes an online application and sells it on to a lender. That particular trick means a borrower incurs the cost of the loan, and additional associated fees, but also the fees for the brokerage firm. </p>
<p>What is beginning to happen more and more, somewhat spurred on by the wider presence of online companies, is that payday loan trade associations are suggesting there is a “them and us” situation in the market. Some associations try to convince the FCA that they should concentrate less on regulating the “nicer” end of the payday market, and more on those “wild west firms” online and indeed offline. </p>
<p>The artificial distinction between the online and offline worlds of payday lending is really about regulators’ inability to monitor compliance in the retail credit industry. For every regulation there is a workaround: for example, payday lenders can change the length of the credit contract to avoid falling under the cap. There is no friendly policeman on the high street or knocking on website doors to make sure the rules are being obeyed. </p>
<h2>Back to the streets</h2>
<p>Carl Packman’s <a href="http://www.amazon.co.uk/Payday-Lending-Global-Growth-High-Cost-ebook/dp/B00MGOB91C">work on the sector</a> has revealed evidence of this attempted schism as well as the lack of any united front among the lenders in the UK or in any other country:</p>
<blockquote>
<p>Interestingly more payday firms are coming away from online, despite the fact that many consumers are migrating to online lending. Some lenders are in a battle to appear nicer and better and more responsible and effectively saying to the regulator ‘go and regulate someone else, leave us alone; we’re doing everything fine’. </p>
</blockquote>
<p>In some ways this is a simple response to stricter regulation; an attempt to focus attention elsewhere. An attempt at misdirection, you might call it. Packman notes that this trend has already started to appear in the US: </p>
<blockquote>
<p>What I’m assuming is that, as the regulation in this country becomes far stricter, particularly with the payday lenders themselves and the movement towards a more consumer-friendly regulation, then I think we’re going to see a migration back from online to offline … particularly as some of the bigger companies in the States are doing that right now.</p>
</blockquote>
<h2>Bottom up</h2>
<p>The lenders have not only been subject to regulations imposed from on high. There have been localised initiatives to dent their influence – as well as the odd <a href="http://www.huffingtonpost.co.uk/2014/10/29/darren-cullens-pocket-money-loans-kids-lampoons-vile-culture-payday-loans_n_6066576.html">sharply focused satire</a>. However, in looking at the grass roots efforts, we actually see more evidence of a viable future for the payday sector.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=458&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=458&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=458&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=576&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=576&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64368/original/99ybbgf8-1415785691.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=576&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Calm down. It’s a joke.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/darrencullen/15640395381/in/photolist-bbd4JT-pQ67Dk-c2mMrL-dWpUpe-oR28JE-9CxRRL">Darren Cullen</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In addition to efforts by national politicians and campaigners to bring sense to a previously poorly regulated industry, some UK local authorities have been keen to take a strong stand against the industry. In 2012, Lewisham council passed a vote that pledged to promote credit unions in the borough, while <a href="http://www.eastlondonlines.co.uk/2013/11/a-downward-spiral-of-debt-in-lewisham-quick-cash-from-payday-loan-shops-proves-too-tempting-for-many-residents/">dissuading people</a> from taking out loans from payday lenders. </p>
<p>In 2013 Medway council <a href="http://www.bbc.co.uk/news/uk-england-kent-19148677">decided to block websites to payday loan companies</a> from all council computers, including in public libraries. Other measures carried out by Medway included banning loan adverts on council-owned hoardings and free advertising for Medway Credit Union. Newham Council, meanwhile, has agreed to a ban on advertising payday lenders on its property.</p>
<h2>Credit Unions as alternatives</h2>
<p>Bizarrely, until such time that the cap on the cost of payday loans takes full effect, scheduled for January 2015, their benign cousin, the Credit Unions, remain the only financial institution in the UK where a price ceiling is mandatory. Credit Unions were obliged by legislation to an interest rate cap of 26.8% (or 2% per month) which increased to 42.6% (or 3% per month) from April 2014 to give them more scope to compete with high-cost short-term retail credit providers, like the payday and doorstep loan industry. </p>
<p>In fact, Credit Unions are the most regulated retail credit providers and offer proof that a cap does not serve to eliminate an entire industry. As part of the Credit Union Expansion project initiated when Archbishop of Canterbury <a href="http://www.theguardian.com/money/2013/jul/25/church-england-wonga">Justin Welby vowed to “out-compete Wonga”</a> there are still many more restrictions on the way Credit Unions operate.</p>
<p>Efforts to give Credit Unions more freedoms as Community Development Finance Institutions seeks to better serve those who are otherwise reliant on payday lenders and other forms of high cost credit. But we are still a painfully long way from realising Welby’s ambition. CDFIs in the UK – which includes all Credit Unions and other forms of CDFI – still only serve around 4% of the market for retail banking services.</p>
<p>The big challenge is to create a level playing field between the different segments of the retail banking industry. Those who want to use finance to improve communities and people’s lives and are content to make a reasonable profit, like Community Development Finance and social enterprise, should not be at a regulatory disadvantage compared to those firms that believe in maximum profits no matter what the costs.</p><img src="https://counter.theconversation.com/content/34149/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johnna Montgomerie receives funding from the Communities and Cultures Network +. This research was funded by the CCN+ Pilot project Digital Technologies of Debt Resilience.</span></em></p>The announcement that payday lending industry will – finally – see a cap on the cost of credit is welcome news. But any belief that this one simple measure will eliminate the industry would be mis-guided…Johnna Montgomerie, Lecturer in Economics, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/316932014-09-15T15:54:56Z2014-09-15T15:54:56ZWall Street tries to weed out the wolves while London stays sheepish<p>When Mathew Martoma, the former portfolio manager of SAC Capital, was <a href="http://online.wsj.com/articles/martoma-sentenced-to-nine-years-1410208845">sentenced to nine years in prison for insider trading</a> last week, much of the comment was about how harsh the punishment looked. It must have seemed particularly so to traders in the dealing rooms of light-touch London.</p>
<p>In truth, Martoma should take some of the blame. <a href="http://www.nysd.uscourts.gov/judge/Gardephe">Federal court judge Paul Gardephe</a> justified the length of the sentence by the exceptionally high gains that he had made from this deal, his lack of repentance and his refusal to co-operate with the authorities.</p>
<p>Martoma had been dealing on non-public information he had received from a doctor about clinical trials of a new Alzheimer’s drug. He received the private information on a Sunday in July 2008. The next day, SAC Capital sold its $700m stake in US-based <a href="http://www.fiercepharma.com/story/doctor-2-elan-wyeth-insider-trading-case-said-be-well-connected-alzheimers/2013-09-06">Wyeth Pharmaceuticals and Irish Élan Corporation</a>, the two joint developers of the drug, before the stock prices of the latter two crashed. Martoma’s trade generated roughly $275m for SAC Capital and just above $9m in bonuses for himself. Meanwhile, <a href="https://theconversation.com/sac-capital-and-the-curious-economics-of-insider-trading-25403">billionaire Steve Cohen</a>, the only owner of now-defunct SAC Capital, managed to avoid jail and <a href="http://dealbook.nytimes.com/2013/11/04/sac-capital-agrees-to-plead-guilty-to-insider-trading/">walked off with a fine of $1.2 billion</a>.</p>
<h2>Rebirth</h2>
<p>This was not the first time SAC Capital had been in the spotlight for insider trading. While several traders associated with the fund – <a href="http://nypost.com/tag/michael-steinberg/">such as Michael Steinberg</a> who was sentenced for insider trading of Dell and Nvidia stock – had been convicted of insider trading offences, the prosecutors had never been able to go after Steve Cohen, Mr Big himself. </p>
<p>The Martoma case was different, though, and there was enough evidence for the courts to shut down SAC Capital. Although Cohen had to pay $600m in a settlement with the Securities and Exchange Commission (SEC), in addition to the $1.2 billion fine and the shutting down of SAC Capital, he nevertheless managed to avoid a prison sentence. He is now in charge of <a href="http://qz.com/187063/point72-inside-joke-in-sac-capital-new-name-that-everyone-is-missing/">Point 72 Asset Management</a>, which invests the massive fortune he made as a hedge fund manager.</p>
<p>Martoma’s prison sentence is one of the longest for insider trading in US history, <a href="http://online.wsj.com/news/articles/SB10001424052970203914304576627191081876286">alongside Raj Rajaratnam’s 11 years</a> in 2011 and <a href="http://fortune.com/2014/07/07/matthew-kluger-talks/">Matthew Kluger’s 12 years</a> also in 2012. He made a fundamental error of judgement by refusing to co-operate with the investigators or testify against Cohen. By contrast, Cohen’s SAC itself pleaded guilty. </p>
<p>In fact, when we take into account the gains he generated from his trade, Martoma’s sentence still compares favourably to those of Rajaratnam and Kluger. While Kluger had made illegal profits of a mere $32m from three trades over 17 years, he was sentenced to 12 years. Rajaratnam’s illegal trades also spanned over several years and raked in a relatively modest $70m. </p>
<h2>London calling</h2>
<p>All these sentences have brought the number of successful convictions for insider trading in the US to about 80 cases since the 2007/8 financial crisis. The UK Financial Conduct Authority (FCA) and its predecessor, the Financial Services Authority (FSA), have <a href="http://www.risk.net/operational-risk-and-regulation/feature/2253142/fsa-toughens-insider-dealing-enforcement">so far secured just 24 convictions</a>.</p>
<p>There is another way of looking at it. In 2013, UK-based trader <a href="http://www.telegraph.co.uk/finance/financial-crime/9923248/Financier-jailed-for-insider-trading.html">Richard Joseph</a> was sentenced to 4 years in prison for insider dealings around takeover bids which made him a net profit of just £591,117. Aside from his prison sentence, in <a href="http://www.fca.org.uk/news/insider-dealers-ordered-to-pay-32m-in-confiscation">September 2014</a> he was also subjected to a confiscation order amounting to £2,170,191. You might argue that FCA and UK courts do seek to create deterrents, via harsh sentences, to dissuade those tempted by illegal insider dealing. By contrast, Martoma could probably have got away with an out-of-court settlement had he decided to be more co-operative. </p>
<p>That said, the conviction rate remains underwhelming, but it does at least represent an improvement on the pre-crisis period. The FSA managed to secure only one successful conviction between 2001 and 2006. Historically, there have been few successful convictions in the UK. For example, between 1981 and 1998 there were only 17 prosecutions of which only 12 were successful. </p>
<p>And even if the authorities do come knocking, London’s City traders can comfort themselves with the knowledge that the maximum prison sentence for illegal insider dealing in the UK is only seven years. The highest jail sentence so far in the UK has been four years, as it was <a href="http://www.theguardian.com/business/2012/jun/20/husband-and-wife-jailed-insider-dealing">for James Sanders in 2012</a>. </p>
<p>At the heart of the matter seems to be a conscious decision by the US prosecutor to doff its cap to public opinion and seek to to weed out the wolves of Wall Street. In the UK, meanwhile, there seems little evidence as yet that City traders who engage in illegal insider dealings are being treated any harsher than was the case before the financial crisis.</p><img src="https://counter.theconversation.com/content/31693/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc Goergen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When Mathew Martoma, the former portfolio manager of SAC Capital, was sentenced to nine years in prison for insider trading last week, much of the comment was about how harsh the punishment looked. It…Marc Goergen, Professor of Finance, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/301142014-08-04T12:51:15Z2014-08-04T12:51:15ZPayday lenders let off the hook as regulators miss the point<p>British regulators have finally made some progress in efforts to keep a lid on the payday lending sector. <a href="http://www.bbc.co.uk/news/business-28305886">A cap on costs</a> will reduce the impact on those forced to borrow under the industry’s tough terms, but the Financial Conduct Authority (FCA) has failed to deal with the very issue they outline as the most problematic.</p>
<p>The <a href="http://www.fca.org.uk/news/fca-proposes-price-cap-for-payday-lenders">FCA proposal for a price cap</a> on high-cost short-term credit is the product of a long-standing campaign. It is designed to better regulate the practices of a small and very exploitative, not to mention profitable, part of the everyday consumer credit sector in the UK. </p>
<p>There is some cause for celebration. The proposal for a price ceiling on how much a lender can charge per day is a good result. The move from about 4% to 0.8% means the current £30 per of interest for £100 loan is reduced to £24 per £100.</p>
<h2>In harm’s way</h2>
<p>There remains a more fundamental issue at hand. Some 50% of individuals taking out a payday loan are significantly financially harmed by it – that is, made worse-off by using this credit product, according to the FCA’s own 2014 <a href="http://www.fca.org.uk/your-fca/documents/consultation-papers/cp14-10">Consultation Report</a>. In fact, this new consultation paper shows that nobody makes a financial gain from a payday loan (except the lenders that is), only varying degrees of harm. It is the most financially vulnerable who experience the negative effects of payday lending the hardest. </p>
<p>The FCA is seeking feedback for its <a href="http://www.fca.org.uk/your-fca/documents/consultation-papers/cp14-10-response-form">consultation</a> until the beginning of September but it has already received criticism from both the industry and those campaigning to change it. It is anticipated that a large amount of extortionate lenders will leave the market and, consequently, consumers are estimated to make an annual median saving of £76 overall (a saving of £14 per loan according to the FCA). Some consumer groups are worried that the price of a payday loan will still be much too high. </p>
<p>To put it in context, the Bank of England lends at 0.5%, effectively a negative interest rate when you factor in inflation, and that serves as the benchmark for the cost of credit to financial markets. On the other side, the payday lenders will complain that the £15 cap on default charges – meant to curb the excess fee creation and extraction rife within this industry – simply adds a new risk that lenders will take borrowers in arrears straight to court.</p>
<h2>Bending the rules</h2>
<p>As we have come to expect in the post-financial crisis era, every new financial regulation has built-in workarounds for the industry. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=752&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=752&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=752&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=946&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=946&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55688/original/3sv36b7r-1407152357.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=946&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A simpler time.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/robwatling/7461798898/in/photolist-cnnER9-6hBSYq-6hxP7t-687fQ2-6FqCfJ-81yG78-9hdcrn-5vASf9-eb5tVj-aj3jsN-o2Sz9K-mZbna7-5KFZYX-agzoSb-dgUarC-6NtoYJ-eQT3sV-6zgu6e-9CLbDE-25udEe">Rob Watling</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Importantly, this is a cap put on a very specific product, payday lending, and we could conceivably see lenders simply renaming their product “micro-lending”, for example, to get around this. Alternatively, lenders could simply extend the term of the loan (so, you pay back £100 over 16 or 23 days instead of 14 or 21) so it falls out of the category of payday lending as they do in the <a href="http://www.bloomberg.com/news/2013-05-29/payday-lenders-evading-rules-pivot-to-installmant-loans.html">United States</a>. In reality, high-cost short-term credit describes a large number of consumer credit products that could be used and abused in varying degrees by lenders. That includes bank overdrafts, door-step lending, catalogue loans, logbook loans (on cars), pawn broking, and also more mainstream products like store cards and credit cards. </p>
<p>Framing payday lending as the last credit outpost before crossing over to illegal “loan shark” lending territory is a well-rehearsed red herring of the industry. The tactic effectively legitimises bad business practice on the grounds that it is better than illegal business practice. However, industry standards set as marginally better than a leg-breaking mobster essentially means setting standards so low that the persistent malfeasance in the industry are overlooked. </p>
<p>One easily circumvented regulation basically means campaigns and activism around payday lending are not over, far from it. More practical solutions for solving this problem are needed, such as how to effectively offer better, more responsible alternative finance.</p>
<h2>Bred by austerity</h2>
<p>The <a href="https://www.gov.uk/government/organisations/department-for-work-pensions">Department for Work and Pensions</a> has undergone a Credit Union modernisation programme, but there is a risk that in working with credit reference agencies such as Experian the DWP will be reverting back to type with lending decisions pegged to credit scoring. This, while not a bad thing in principle, may not be the initiative that encourages credit unions to bring custom from those once in hock to less responsible payday lenders.</p>
<p>In reality, looking to the credit unions to out-compete the payday lenders simply ignores the fact that credit unions are much more regulated than the payday lending industry. This regulatory quagmire also means that even the most pro-active credit unions (because it is important to note that not all credit unions are keen to lend more to the urban poor) cannot help those in need because of rules imposed on them, but they could if they were operated under the same limited rules as the entire payday lending industry. </p>
<p>The FCA’s consultation on its proposals has at least given us a document to debate from, but the problem of irresponsible payday lending and access to responsible alternative finance is far from over. The conversation between the regulator, the industry, and consumers over the coming months – until a price cap is set in January 2015 – will be some of the most important we’ve seen. However, the problem of payday lending is not entirely a regulatory one. </p>
<p>In other words there is not a simply “supply-side” solution to the payday problem. A significant part of the problem is the demand-side: the growing legions of poor families living in urban centres or rural communities with limited access to retail finance services and who only have payday lending to cope with pressures of a stuttering economy <a href="http://www.theguardian.com/business/2014/jun/11/employment-surges-wages-lag-inflation">which has seen wages lag prices</a>. The most obvious remedy for the scourge of payday lending is beyond the scope of the regulators. It lies in addressing the growing problems of poverty and deprivation that appear to be the price of pursuing the austerity-led growth strategy favoured by the coalition government.</p>
<hr>
<p><em>This piece was co-authored by Carl Packman, a writer & researcher and author of Loan Sharks: The Rise and Rise of Payday Lending.</em></p><img src="https://counter.theconversation.com/content/30114/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johnna Montgomerie receives funding from Communities and Culture Network+ (CCN+) as part of the RCUK Digital Economy initiative. Project details can be found here: <a href="http://www.communitiesandculture.org/projects/digital-technologies-of-debt-resilience/">http://www.communitiesandculture.org/projects/digital-technologies-of-debt-resilience/</a>
</span></em></p>British regulators have finally made some progress in efforts to keep a lid on the payday lending sector. A cap on costs will reduce the impact on those forced to borrow under the industry’s tough terms…Johnna Montgomerie, Lecturer in Economics, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/190892013-11-01T06:17:09Z2013-11-01T06:17:09ZPoliticians go wild in Wongaland, but there are bigger fish to fry<figure><img src="https://images.theconversation.com/files/34190/original/894bzfnm-1383243789.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An easy ride? Politicians love to bash payday lenders.</span> <span class="attribution"><span class="source">Andos_pics</span></span></figcaption></figure><p>October was a particularly good month for the spectacle of politicians, policymakers and their ancillary retinue of experts getting all hot and bothered about the buoyant payday loan industry. </p>
<p>We saw the Financial Conduct Authority’s consultation paper on <a href="http://www.fca.org.uk/news/firms/consumer-credit-detail">regulating the consumer credit market</a>, Ed Miliband’s pledge to introduce a <a href="http://www.independent.co.uk/news/uk/politics/labour-leader-ed-miliband-declares-tax-war-on-payday-lenders-8884944.html">special tax on lenders</a>, and a cross-party group of MPs, together with consumer rights and anti-poverty campaigners, launching a “<a href="http://www.theguardian.com/money/2013/oct/15/payday-loans-regulatory-crackdown">Charter to Stop the Payday Loan Rip-Off</a>”.</p>
<p>Amidst this fanfare, “poor outcomes”, “irresponsible lending” and “harming consumers” are only some of the choice phrases used to vilify the industry. </p>
<p>Of course, elite anxiety about dodgy lending is nothing new. Right back to medieval times, the religious principle of usury prohibited the exploitation of another’s need through lending at interest. Later, in the 18th and 19th centuries, the greedy figure of the pawnbroker and the spectre of the industrial poor forced to pledge their meagre possessions were grist to the mill of novelists and pulpit preachers. </p>
<p>Clearly, as in previous times, there is quite a bit of political opportunism at work here in singling out these “bankers to the poor” for public attention.</p>
<h2>Loaded phrasing</h2>
<p>In the FCA’s consultation paper, for example, the very term “payday lending” is rejected and replaced by the far more loaded phrase “high-cost short-term credit”. The manipulation of meaning becomes all too clear when high-cost borrowing from banks and mainstream financial institutions is deliberately excluded from such a definition. </p>
<p>One doesn’t have to be a fan of the payday industry to appreciate their argument that bank <a href="http://www.bbc.co.uk/news/business-16002022">current account overdraft fees</a> and late-payment penalties on credit cards can produce effective rates for borrowers <a href="http://www.thisismoney.co.uk/money/saving/article-2458568/Bank-overdrafts-just-expensive-payday-loans-claims-Which.html">on a par with anything charged by Wonga and their ilk</a>. Yet, strangely, these don’t fit the definition.</p>
<p>The general thrust of the proposed regulations is all about protecting individuals from themselves – not all individuals, of course, just those “high risk” (read: poor) borrowers who tend to have recourse to this kind of credit. </p>
<p>The paper ostensibly presents the case that such individuals cannot be trusted to know their own needs and lenders must be directed to decide how much they can be given. Not that, of course, such lenders can be trusted: affordability criteria are suggested that dictate how much can be borrowed and limits proposed on how many times loans can be rolled over.</p>
<p>Given a political context that supposedly lauds the market, this approach appears deeply sceptical of the capacity of markets to promote individual interest. But, of course, these are not perceived to be normal consumers. </p>
<h2>Poor targets</h2>
<p>Taking a step back a moment, it’s important to note that the payday loan industry is not being targeted on its own here. In fact, lots of practices associated with poor working-class consumers have been targeted in recent years. For example, we have seen the banishment of smoking from public spaces, initiatives for alcohol minimum pricing and government threats to regulate, or even tax, processed foods and fizzy drinks. </p>
<p>This suggests a set of authorities who find the lifestyles of the lower orders repugnant and would seek to save these wretches from their unhealthy and undesirable habits. Here, denial and restriction are prioritised over education and awareness. It is to this stigmatised rank that the figure of the payday lender is added.</p>
<p>Now, let me be clear. While I may be sceptical of the motivations of our policymakers in regulating the payday lenders, I exude no love for the industry’s grasping cynicism in making money from those in poverty.</p>
<p>Yet, one should recognise that the industry continues to be successful for a reason: it’s quick, easy and convenient to get relatively small amounts of money at short notice. Furthermore, one can do this for short periods of time that reflect the <a href="https://theconversation.com/short-of-cash-rent-and-food-britons-in-dire-financial-straits-16379">precarious and “of-the-moment” household finances</a> of Britain’s welfare claimants and working poor.</p>
<h2>Thriving in poverty</h2>
<p>Targeting payday lending practices rather misses the point of why poor people might have to resort to these forms of borrowing in the first place. It’s a little bit like pushing someone off a cliff and blaming gravity for the fall. </p>
<p>The reason the industry thrives is because poverty – the natural constituency of the payday lender – is a burgeoning phenomenon. The remarkable success of the industry is not really down to clever marketing and <a href="https://theconversation.com/wonga-is-watching-you-how-payday-lenders-follow-your-online-trail-14541">convenient online “sliders”</a>. On the contrary, it lies with unemployment, the proliferation of low-paid service sector jobs, welfare cuts, high inflation and stagnant wages which serve up more and more needy customers onto the platters of the payday industry.</p>
<p>Perhaps it is worth casting our minds back to the past to note the rapid decline, since reversed, in the numbers of licensed pawnbrokers that occurred in Britain over much of 20th century. This was not accomplished by interest rate caps, stricter borrowing rules or limiting opening hours; on the contrary, it occurred because the material reasons people had to pledge and borrow were substantially removed. Vibrant economic growth, better-paying jobs and a universal welfare state did more to limit the traditional pawnbroker than “concerned” regulators ever did. Perhaps it’s time we revisited that lesson.</p><img src="https://counter.theconversation.com/content/19089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Donncha Marron does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.</span></em></p>October was a particularly good month for the spectacle of politicians, policymakers and their ancillary retinue of experts getting all hot and bothered about the buoyant payday loan industry. We saw the…Donncha Marron, Lecturer in Sociology, Robert Gordon UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/131052013-03-27T02:39:55Z2013-03-27T02:39:55ZASIC lacks bite as UK regulators chew down on financial spruikers<figure><img src="https://images.theconversation.com/files/21755/original/nwy953hd-1364275640.jpg?ixlib=rb-1.1.0&rect=23%2C11%2C959%2C603&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While ASIC Chairman Greg Medcraft this week warned the Australian funds management industry to clean up their act, in the UK, financial regulators will soon have the power to intervene directly in the market.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>In opening the Australian Securities and Investment Commission (ASIC) forum this week, chairman Greg Medcraft <a href="http://www.theaustralian.com.au/business/markets/do-right-thing-medcraft-targets-complex-products/story-e6frg916-1226605820118">pulled no punches</a>.</p>
<blockquote>
<p>“Manufacturers [i.e. banks and financial institutions] - and, frankly, this is what annoys me – should make sure that the products that they sell, how they are marketed, who they are marketed to, are appropriate, and the consumers understand the products that they are buying.”</p>
</blockquote>
<p>Medcraft went on to say:</p>
<blockquote>
<p>“My position on this is clear - those selling complex products to unsuspecting investors need to wise up and do the right thing.”</p>
</blockquote>
<p>I bet the assembled bankers and fund managers must have cried all the way back to their banks when told to “wise up and do the right thing”. Whether the tears were of laughter or remorse is, however, questionable.</p>
<p>While rightly warning against complex products, Medcraft did forget to mention that in several of the recent <a href="http://www.abc.net.au/news/2013-03-04/lm-investment-investigated-for-potentially-misleading-investors/4550414">failures</a> of financial companies that were regulated by ASIC, the products were not very complex at all. In fact, they were little more than simple mortgage-backed bonds and term deposits.</p>
<p>But Medcraft did correctly identify the huge and growing size of the Self Managed Super Funds (SMSF) sector as a honey pot that will prove irresistible to every financial spruiker in Australia.</p>
<p>Although he admitted that the current ASIC disclosure regime did have “inherent weaknesses”, Medcraft did not go so far as identifying any new regulations to head off this stampede, other than to warn that while “they [the spruikers] might get away with it for a while, but government and courts will inevitably rule in favour of investors”. Cold comfort for the investors in <a href="http://primetrustactiongroup.com/#/retirees-nightmare/4574297154">Prime Trust</a>.</p>
<p>Compare and contrast Mr. Medcraft’s rather lackadaisical approach to consumer protection to that of the new head of the <a href="http://www.fsa.gov.uk/about/what/reg_reform/fca">UK Financial Conduct Authority</a>, Martin Wheatley, who just this week laid out the UK government’s <a href="http://www.guardian.co.uk/business/2013/mar/21/financial-conduct-authority-raising-fines-will-not-change">vision</a> for the new FCA.</p>
<p>In a blinding realisation that “an ounce of prevention” is after all “worth a [few billion] pounds of a cure”, Wheatley warned that since it was “better to deal” with problems early, “we will be on the front foot when we see things we don’t like”.</p>
<p>This is not just cheap talk. When the Act to set it up is finally agreed, the FCA will be able to intervene directly in the markets, and will have new “product intervention” <a href="http://www.fsa.gov.uk/pubs/other/journey-to-the-fca-standard.pdf">powers</a> that will allow the regulator to order firms to stop selling a product immediately and for up to one year.</p>
<blockquote>
<p>“If necessary, we will be ready to intervene directly by making product intervention rules to prevent harm to consumers – for example, by restricting the use of specified product features or the promotion of particular product types to some or all consumers,” Wheatley said.</p>
</blockquote>
<p>Note this is not just one product in one firm, but could mean a whole class of products across the industry.</p>
<p>While free-market advocates may need to reach for the smelling salts when reading the latest FCA rules, the new regulations are not necessarily as draconian as they might appear.</p>
<p>The rules are aimed at the highest levels of the firm, the board and its executives.</p>
<blockquote>
<p>“So from the boardroom to point of sale and beyond, firms’ behaviour, attitudes and motivations must be about good conduct – especially in terms of the experiences and outcomes they offer their customers and clients, whether it is someone buying a basic product or completing a complex transaction.”</p>
</blockquote>
<p>While the initial response from Martin Place and Collins Street to such a regime might be to claim that the sky is about to fall in on the richest banks in the world, a moment’s reflection would suggest that maybe a much better product development process could be a good thing. If products are developed properly, it will head off potentially huge fines later and/or loss of income when products are taken off the shelf. This is Risk Management 101. Manufacturers do it, so why don’t banks?</p>
<p>But what about the spruikers?</p>
<p>If the major banks and fund managers were to spend the time and effort to ensure a particular family of financial products is non-toxic to consumers and get the nod of approval from ASIC then they will have a marvellous marketing advantage over fly-by-night operators.</p>
<p>The vision of the UK FCA is simple: “to make financial markets work well so consumers get a fair deal”. Maybe we just need to change that to a “fair go” in the Australian context?</p><img src="https://counter.theconversation.com/content/13105/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In opening the Australian Securities and Investment Commission (ASIC) forum this week, chairman Greg Medcraft pulled no punches. “Manufacturers [i.e. banks and financial institutions] - and, frankly, this…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.