Financial Services should be for everyone.

It’s no over-statement to say that nearly all the change and innovation in Financial Services over the last 15 years has been led by the supply side of our economy. Regulation in the shape of our own UK Retail Distribution Review and the Mortgage Market Review – not to mention international legislation in the shape of Basel III and Dodd Frank – are stil changing the landscape of Financial Services.

While geo-political volatility means that London remains an international ‘go to’ destination for the uber-wealthy, our UK mass market retail financial services are still licking their wounds. Certainly innovations like the Current Account Mortgage or Offset Mortgage, arguably the last time any real customer-led innovation occurred in domestic FS, is very thin on the ground. (For the avoidance of doubt extending LTVs in my opinion does not, as it may appear in some trade press headlines, count as innovative).

Ironically FS is getting more complex as a result and there are fewer and fewer people who actually understand the products or who are qualified to give any meaningful insight. By the way I choose the word insight because advice is so overused / abused / and confused in FS I feel insight reflects what we all want.  If you have ever tried to move the shares you own into an ISA wrap, as I have, you will know what I mean.

Standards bring with them barriers to entry so new entrants are effectively blocked from the market and bringing the challenge of new thinking to products and services.

For some years now , our collective economic eye has been focussed on simply getting the UK up and running again. I am sure by cloaking FS in more mystery and difficulty and thinking only about the risks, we are disenfranchising people from the opportunities. People are not as afraid of risk we and our Lord and Masters might like to think. It’s why our betting shops are so full.


Prudence was killed off, now Austerity. But was it a mercy killing?

In some quarters of Financial Services, there is gnashing of teeth with regards Government’s policy initiatives, such as Help to Buy, further inflating a recovery in a housing market that will lead to more debt. But to see this in isolation, as some neglect at the wheel, is to miss the change of mood that has occurred at the heart of global politics.

At the recent G20 meeting in Russia, a 27-page release stated, “Strengthening growth and creating jobs is our top priority,” highlighting a continued move away from the past emphasis on repairing national budgets. The biggest challenges to the world economy, the G-20 statement said, were “weak growth and persistently high unemployment” – a shift away from the focus on repairing national budgets, a priority for deficit hawks like Germany.

The world’s indebted premier economies know that with elections looming and patience thinning, growth and prosperity are a priority. The answer is to help consumer spending and loosen the grip on the credit reins. So while the mood music is still all about “Austerity”, the reality in the UK is that house prices are growing across the nation, affordability is steadily worsening, and lending is increasing to meet the pent up demand. But if consumer confidence returns as a result, this is a price worth paying.

There has not been any resolution to the West’s debt issues. Does it matter? Possibly not because as policy people know, a crisis postponed often becomes a crisis resolved. The point is we all feel better for this.

While in Scotland recently I was struck by some RBS advertising in Edinburgh airport that proclaimed the benefits of their financial education activity in schools.
Now, if you can put aside the irony that the bank that received the largest financial bail-out in UK history is teaching our children how to manage money, there is a more depressing and serious point to consider – why are we doing this to them? They are only children after all.
I am a parent so have to declare an interest. I do think our kids are growing up faster than in even my time. Childhood has always been fleeting, but these days, children have access to so much more information. Devices are multiplying and data is ever more accessible. This can be a lot of fun if you are learning about science, music or whatever but, though knowledge is a good thing, everything has a price. Not all information is necessarily helpful and, in some cases, may actually be harmful and cause anxiety. Of course the likelihood is that knowledge of financial management is most likely to increase boredom. As Mick Jagger said in 2002, “All I know from business I’ve picked up along the way. I never really studied business in school. I kind of wish I had, kind of, but how boring is that?”
I’m not saying accelerated learning is all bad – it is clearly anything but – however if we are all going to live longer what’s the rush to obliterate the fun of childhood? They will likely have a sixty year plus working life to get to grips with all this stuff the way we are going.
It may be guilt or an admission of our hopelessness. After all, we have created a society where personal and national indebtedness are our gift to all but the most privileged young people. We cannot sort this out so we do the only thing left which is to tell them how to deal with the monsters.
Alas if Michael Gove has his way children as young as five could be taught about personal finance at school under plans put forward by MPs that call for children to receive compulsory financial education lessons, including credit card interest rates and mobile phone contracts. The fun never stops.
On its website, RBS Group says it has been supporting schools to deliver financial education since 1994. It also details the scale of the misery to date. In 2011 they delivered 34,838 MoneySense lessons in Great Britain reaching 386,604 pupils. Rock and roll. Head for the hills, kids, the bankers are coming!

Many years ago, high loan-to-value (LTV) lending was supported by the Mortgage Indemnity Guarantee (MIG).

This was an insurance policy designed to protect the lender (the mortgagee) against loss in the event of homeowners defaulting and ceasing to repay their mortgages.

The policy was insisted upon by the lender at the start of the loan, and the borrower (the mortgagor) paid the premium.

The premium was calculated by the level of perceived risk to the lender of borrowers defaulting on their loan. In such circumstances, the lender would repossess and sell the property.

But MIG fell out of favour for very understandable reasons. In the past, mortgage lenders did not explain MIG clearly enough (often calling it a High Lending Fee) or they neglected to explain at all that the policy was for their benefit, not that of the borrower.

Also, when claims were made, if the insurer didn’t pay up, the lender might go after the homeowner for recompense prompting the question: what was the point of it at all?

Those who opposed MIG pointed out how homebuyers paid through the nose for it with lenders making as much as 30% commission on each policy they sold – although borrowers never knew this because lenders were not obliged to disclose it.

What’s more, the astronomical premium was as often as not added to the loan, so it might accrue interest that would compound over the life of the loan. Nice.

It’s clear that the MIG of yesterday was far from perfect in execution but that does not mean it was entirely wrong in concept. A way forward for introducing higher loan to value lending in the mortgage market would be to ensure the insurance is in place but to break the lenders’ monopoly over the sale of the policy. That way the consumer would insure themselves.

Inject transparency and choice into the process and there is no good reason why this idea could not be made to work. After all, it apparently works in other countries.

The new Governor of the Bank of England, Mark Carney, comes from a central bank in a country whose housing market operates with compulsory MIG insurance. If we are to see a growth in higher loan to value lending this year, the return of MIG might be imminent.

Banning commission on investment and pension advice has already hurt advisers – but could damage our consumer finances even more in the long run.

If you are already a regular purchaser of financial advice and products through an adviser, you may well be familiar with the Retail Distribution Review, which is due to become law at the end of this year.

If, however, you are an occasional user, like myself, or are even contemplating getting advice in the near future, this new legislation might come as a bit of a shock.

The Retail Distribution Review is changing everything about the way we understand, purchase, and use advice. One of the key measures is to stop commissions on the sale of investments and pensions. This has subsidised the advice offered by firms and large banks in the past and enabled advisers to have seemingly acted on a “free” basis for clients, while the charges were then deducted annually from investors’ funds.

From January 2013, customers who want advice will be charged a separate and transparent fee.

At first glance, this measure seems perfectly reasonable but as ever the law of unintended consequences, which afflicts every policy drive, may render the transparency it achieves on one hand redundant on the other.

Unsurprisingly, several high street banks and many larger IFA firms have decided to focus their services on wealthier consumers who are more likely to be willing to pay, and have made hundreds of commission-based advisers redundant in advance of the changes.

This is going to leave a gaping hole.

The RDR is likely to limit access to financial advice, especially on investment products such as equity ISAs, trusts and bonds that people typically buy through advisers.

My concern is that we are creating a world of financial advice “haves” and “have –nots”. Moving from commission to upfront payments will come as a big shock.

Not many of us need to pay £500 to be told investing is a difficult business and that we can expect volatility and low returns for the next five to ten years as we deflate our way out of our national deficit.

If you have a significant amount of wealth then little will change. But getting the rest of us to save and invest is a pressing problem.

We live in a world where personal investing is key to everyone’s provision for old age. As a nation we have plenty of ill–advised and un-advised debt, but few of us have a plan to fund our retirement.

Removing the commission model entirely does nothing to help this.

To be trusted is a greater compliment than being loved.”

So spoke the children’s author George Macdonald. Indeed, given the prominence and importance of trust in every story we hear or read from childhood to adulthood, you might assume we cherish it above all else. Sadly in banking and the wider financial services industry this has not been the case. From recent charges of money laundering, miss-selling Payment Protection Insurance, Liborgate, to outrageous pension charges, you’d be forgiven for thinking Western capitalism was in something of a meltdown.


As a nation, we have become collectively richer over the last few hundred years so it was inevitable that the financial services industry should play an increasingly important role in our daily lives. But with privilege comes responsibility and these breaches of trust, felt so acutely by many, will not be easily assuaged.


There is good reason for this. Trust has played a defining role throughout human history. From our beginnings as tree dwelling mammals, co-operation and trust have underpinned our success as a species. You cannot efficiently harvest trees that are bearing fruit at different rates, at different times, across a wide area without co-operation and trust.


In their book, the New Penguin History of the World, J.M Roberts and ODD Arne Westad, note that our development from Homo Erectus to Homo Sapiens was built upon our ability to co-operate and trust one another. Advances in communication (and much later language) enabled us to move from a predominantly vegetative diet to hunting big game. Our ability to pool resources, experience, practice and ideas to everyone’s benefit means we value trust above anything else in our relationships.


Trust continues to play a central role in human evolution. It is true that people who are related collaborate on the basis of nepotism and that it takes immense provocation for someone to turn on a relative with whom they share a lot of genes. But trust allows unrelated individuals to collaborate and benefit by monitoring who does what and punishing cheats.


With trust so hard wired into our being, its small wonder Financial Services is having a hard time justifying some of its behaviour. If, as some maintain, trust is like a mirror then it can be fixed but we will always see the cracks in it.


It’s fairly certain that, as a nation, we are still a long way from feeling better about life at the moment. The budget, rightly or wrongly, hasn’t cheered anyone up, but I suspect George and David will sail through the current grumbling – cash for access included – because even though we might not approve or like what they get up to, we trust them more than anyone else to sort out this mess.

What makes me so sure? I am by no means a unequivocal supporter of any political party but when in doubt we can always rely on television to indicate the real mood of the nation and our viewing habits do not lie.

For a good two or three years we have been rooted in reactionary conservatism. We know our place and secretly like the stability. While we hardly dare to contemplate the future with anything but trepidation, our hearts are firmly hankering for the comforts of the past. The Royal Wedding, the Kings Speech, Downton Abbey, Upstairs Downstairs and even last nights remake of Titanic all focus on class and order. For better or worse, everyone knowing their place temporarily, at least, appears to alleviate the mental anguish of today’s chaos.

This may be a cathartic, perfectly natural healing process. It won’t go on forever but TV commissioners are ordering more period dramas. Expect more Henry the Eighth.

As someone said to me last year, “It’s funny how the ruling classes are quite good at it.” Whether you agree or not, that sentiment is why George and Dave need not worry yet.

Just recently I have noticed that Facebook has become a little – how can I put this – unsurprising. The reason is obvious. I am selective about whom I befriend. Twitter by comparison is a hot bed of casual liaisons full of people who, whether genuine friends or cyber acquaintances, are allowing me to experience the joy of discovery that can come by getting involved in the thoughts and lives of strangers.

I’ve always been a bit prone to hanging out with alternative types but I think these newer and more unconventional acquaintances do offer the opportunity to expand our creative potential.

By all accounts human imagination is a rather predictable thing. In study after study, people, when asked to free associate, are very conventional in their responses. The word “blue” prompts answers like “sky”, “sea” etc Apparently, this is because language shapes our choices and our language is full of cliches. Someone has to create dissent and, in familiar social circles where all present have connections or stakes, this is harder to come by.

Dissent is really about surprise. Imaginations are fired up by encounters we didn’t expect. In fact if you go to art galleries and museums you will know this. These places often make us reconsider things. This is the value of Twitter. It’s not to find another stereotype of an arty soul to reinforce a social view of oneself or some kind of comfort zone – that’s what facebook does. Twitter is to find something we wouldn’t normally interact with that can inform and get us to reconsider. I think newspapers used to do this once.

I like a good blog and, in my brief time writing them, I hope I have written one or two that have amused, provoked or entertained to one extent or another. But my regular use of Twitter (@mattsmithwpb) has made writing blogs feel increasingly onerous and this bothers me.

Now I am not predicting the death of the blog. It’s just that from a personal point of view I have concluded that I must re-invent the way I write my own content.

As a side effect of tweeting, the discipline of 140 characters has encouraged speed and concise writing (as well as abominations of language and grammar) to the point of excluding anything that may enhance the point being made. Comments are easily taken out of context and can appear unnecessarily emotive and reactionary. This is a rum state of affairs because sometimes the best creative writing efforts are borne of a stream of consciousness that is not edited to death. It’s a journey that starts in one place and ends in another but when the route must always be 140 paces you can’t travel far. The broadcast scale and speed of Twitter has no time for much more than news statements or one-liners which are hugely entertaining to read and write but like any quick dalliance with strangers will inevitably at some point leave you feeling unsatisfied (dirty Twitter).

So I am resolved this year to nourish and cherish my blogs. Of course this has spurred other thoughts on how to deliver more creative content but I am not sure the world requires or is ready for my first video blog?

There is an irony in the nature of the Western “Occupy” movements. In real terms, most of the protesters remain in the top 1% earners in the world. In his book of last year, the Haves and the Have- Nots, World Bank economist Branko Milanovic states that to be in the top 50% of earners on the planet, you need to earn just $1,225 a year. To be included in the top 0.1% requires an annual income of $70,000. We Western Europeans should discount our dollar-denominated incomes by 10%-20% to allow for differences in purchasing power but even so most of us are doing very nicely.

If it were really about the evils of capitalism then we should be protesting against ourselves. According to the U.N. nearly half the world’s population, just under 3 billion people, earn less than $2 a day and the World Bank say 95% of those living in the developing world earn less than $10 a day. So it appears that many westerners we consider poor are among some of the world’s most well-off.

The Occupy movements are about trust. It is as deep rooted as instincts get. As a species, we often prefer to see those who breach trust punished – even if we all consequently suffer for it. Co-operation has underpinned our success from the earliest times – from the earliest harvesting to the first basic rules of society. Commonality of purpose and neighbourly behaviour enable us to achieve bigger things. All the big scandals are about breaches of trust – MP’s expenses, phone hacking, and even the credit crunch (no-one could trust the dodgy mortgage assets they had been sold).

But globalisation is redefining how physical communities experience trust (or a lack of it). The nation state might not have a fully fledged mechanism to manage the global super rich at the moment but it has served many of us very well. As Milanovic notes, “One’s income … crucially depends on citizenship, which in turn … means place of birth. All people born in rich countries thus receive a location premium … all those born in poor countries get a location penalty. It is easy to see that in such a world, most of one’s lifetime income will be determined at birth.”

If you are born in the West at any level you can be said to have gained a significant advantage. Cecil Rhodes wasn’t far off the mark when he said, Remember that you are an Englishman, and have consequently won first prize in the lottery of life.”


November 2017
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