18th June 2012

A new generation of peers

The sums as yet may seem small when compared to the leviathan banks that we are all so much more familiar with, but there is a vibrant and growing deposit and lending service which I believe has the opportunity of creating a very exciting and timely alternative at this financially sensitive moment. Now reaching a figure of £250 million, this is still relatively minor in its impact - but in an environment of financial constriction, its impact may well be greater than some expect.

So far, relatively few have heard of the 'peer to peer' facilities that are just starting to burgeon into a more popular domain.  The concept is simple, as all the best ideas usually are.  It is to use the internet as a matching facility between willing depositors and lenders and willing borrowers.  Such an idea is hardly new, as in the past we have seen the growth and application of mutuals and co-operatives as a means of local financing but unlike our continental colleagues, these have never really broken through in any scale and size to the consumer market.  I suppose to an extent this is because there was no need for such a system in earlier times, with higher interest rates, more competition, better returns elsewhere and credit that was as easily available as water.

Now we are in a new world, where the 'new normal' is a very different beastie, with suppressed interest rates (thanks to Quantitative Easing and money printing), low money supply due to bank risk aversion and capital constraints, together with erratic stock markets that react more to political ineptitudes and indecision than corporate strength, results and profits.  Not actually a very pleasant situation, all told.

So now we are in a position where smaller companies are desperate for more liquidity, but of course at the right price and margin.  However, we are also in the position where we want to encourage more entrepreneurship and dynamism in the economy, and yet this is the very moment when such funds seem to be drying up.  If we set up over 400,000 new businesses a year in the UK, then you would think that this should be a key target for the politicians to try and address.

Additionally, we should also consider the other side - we all know that it has been the much oppressed depositors that have suffered most under this low interest rate era (especially as there are far more savers than borrowers). Many older folk have seen their income decimated as interest rates have plummeted to levels often such that they are losing real value below the rate of inflation.

Thus a mechanism where better deposit rates can be achieved (and at various rates according to the levels of risk that a depositor finds acceptable), has to be a valuable alternative. However, there are of course still some significant risks.  Firstly, these operations are as yet unregulated, so the depositor has little recall or rights and is certainly not covered by the £85,000 bank deposit guarantee.  This is an area that should be addressed and I see no reason why they should not be brought under the ambit of the regulator; this in turn can only serve to encourage further consumer confidence and consequently greater participation.

This to me is an attractive concept, but one that I believe can and should be taken much further.  Why could we not have regional and local facilities whereby local depositors and investors could be investing and supporting local businesses directly?  In effect, we could be recreating the same facilities as the old regional stock exchanges that formed such a vital financing need for industry years ago.  I am sure some will recall that in 1945 we had 45 stock exchanges around the UK.  Now whilst we don't need to recreate such antique structures again, we can redevelop the concept into a modern facility.

Around the country I have found quite a number of very vibrant entrepreneurial groups, and growing numbers of business angels.  These are often formed by either more sophisticated individuals or previously successful business people, therefore a service which is simple and straightforward and accessible for the smaller investor and depositor could well be a very attractive alternative.  A simpler method of funneling investment to where it is needed to stimulate growth has to be beneficial to all and sundry.

Given the current situation with the structure of our national finances, I am surprised that the government has not been addressing these initiatives more directly, and acting to encourage further development. This doesn't need to involve any financing but rather acting to foster the right environment and regulation. In fact, how refreshing it would be if a bank could consider redesigning part of its business model to adopt such a structure.  A new '3i' (not the private equity company) in my view is needed - Imagination, Initiative and Invention, where depositors can get a better return and borrowers get more choice - not just nationally but also regionally and locally.

And finally... Public swearing has been outlawed in a Massachusetts town.

A fascinating report from Reuters highlights that 'lobbing F-bombs' and other curses across the leafy streets of Middleborough, Massachusetts is now an offence punishable by a $20 ticket.

The ordinance outlawing public swearing, approved by town residents recently, was the brainchild of Mimi DuPhily, a member of the town's wonderfully titled 'Beautification' Committee.

She pushed for the law after becoming upset over loud swearing by teenagers hanging around the small town which is about 50 miles south of Boston.

"We're not talking about just conversation, but screaming it across the street," DuPhily, 63, a former selectman, said in an interview on Tuesday.

"Dropping F-bombs and so on.  It was the same group of kids.  It was very irresponsible behaviour, and it was getting out of hand."

The ordinance does not specify which curses are banned, and police can decide whether to ticket offenders.

Legal analysts said the law could raise issues for the town under the First Amendment to the U.S. Constitution.  Part of the Bill of Rights, the amendment prohibits the making of any law that abridges freedom of speech, among other things.

If we did this in Shepherds Bush, the Borough would be rolling in cash - or very silent.

Have a good week.

Justin Urquhart Stewart
Director
Seven Investment Management Limited
www.7im.co.uk

P.S. Perhaps I should also add a comment about the Bank of England and Osborne's latest bank funding initiatives. Whilst putting more money into the system is to be welcomed, some key issues need to be addressed. Opening the sluice gates is helpful, but you also have to address the issue of creating real demand.

Much will depend on the cost to the end user and thus the margin charged as a spread from the bank.  Previously this didn't work under project Merlin, money was available but not taken up - not at that price!

It seems that they fail to understand that they also need to stimulate demand and confidence, rather than just expect miracles to happen.

No ideas? Well what about these:

• Where are the initiatives for construction and infrastructure projects?
• Where are the more imaginative tax changes for smaller business and capital allowances (rather than cutting them!)?
• Where are the initiatives on areas like Stamp Duty to encourage moving and expenditure (more VAT take for the Treasury)?
• Where are the initiatives about releasing local authority pension money for social housing, providing better and more reliable returns for local development?

Come on George some more practical initiatives please to give confidence to the real world and not just looking as though you are all playing the political version of 'game of thrones'.

Well it could be worse - we could have the worst storm for fifty years heading our way and also having a near miss from an asteroid - oh-er!

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