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A new breed of banker?

26 Apr

 ‘Difficult but talented’ replaced by ‘Pedestrian but hard-working’.

A slew of regulatory reforms have made banks much safer places – Dodd-Frank in the US, and the Markets in Financial Instruments Directive (Mifids 1 and 2, as they are affectionately known) – have made it harder for banks to market and sell risky securities to ‘unsophisticated’ investors, and regularised professional trading standards to combat volatility.

But now that over-the-counter derivatives and so-called ‘dark pools’, where large trades can be placed anonymously without the onerous reporting obligations of licensed exchanges, have been strait-jacketed by legislation, is there any place for the dashing, risk-loving daredevil of popular stereotype?

According to eFinancial careers, which keeps a close eye on trends in the industry, the typical banker has become almost… boring.

“A lot of people who had successful careers – the most talented people of my generation – have left the industry to do other things,” Kerim Derhalli, the ex-Deutsche MD who himself has quit banking to head Invstr, a social network for amateur investors, told the recruitment firm.

It is certainly true that investment banking still pays the highest starting salary for graduate recruitments, according to a UK survey by graduate recruitment research company High Fliers. Their report, on ‘The Graduate Market in 2016‘, put the welcome package at investment banking firms at £47,000, the top-ranking sector, with banking and finance ranked third at £36,000.

Though the number of positions at banking and finance companies did not increase by even a quarter of the increase seen within IT & Telecommunications, which went up 219% compared to just a 37% rise in finance positions.

The High Fliers report recorded that “The number of entry-level positions available for graduates in IT & telecommunications and in the public sector has more than doubled over the last ten years, whilst recruitment at the top consulting firms has increased by two-thirds.”

This is corroborated by another eFinancial careers source, former head of rate sales at Deutsche Bank Chris Yoshida. “When I went into banking [in 2000] my graduate class was comprised of the best students from the best universities in the world,” said Yoshida, who now advocates for the Kairos Society, an organization that helps young entrepreneurs effect global change. “This is no longer the case – the very top students now want to work for Google and Facebook. Banks are attracting the students who are in the top 50% to 75% (rather than the top quartile).”


Even banking interns, such as those enrolled in the Goldman Sachs 2016 ‘summer analyst class’, which prepares those keen on a financial career in its inner workings before they have even graduated, have become less motivated by materialism.

Goldman Sachs, which has a spoof twitter account under the label ‘GSElevator… Straight to Hell’, reported on its blog that its interns were predominantly interested in saving to buy a house (46%), while just 3% wanted to own luxury items. I suppose it might come across as presumptuous before you’d even been offered the highly desired and competitive job to say ‘I just want a Ferrari’, but… the tone of the industry has definitely changed.

Perhaps this is partly due to the emergence of multiple sources of alternative finance like crowdfunding and peer-to-peer lending platforms; and alternative payment systems such as Paypal and now blockchain-linked crypto-currency mechanisms.


LGC appoints Ryder to oversee high-rise in Newcastle’s new science hub – ‘Silicon Square’?

17 Mar

Legal and General Capital, which bought a £350million stake in Newcastle’s exciting new science and technology development hub in June 2016, has announced award-winning international firm Ryder Architecture to oversee the first of its grade A office buildings at Newcastle Science Central.

Newcastle Science Central is a site linked both geographically and academically with Newcastle University, which is situated on the 24-acre plot. Commercial space so far is restricted to the 30 businesses operating from the Core, which include among their number a nation-leading computer science institute. Businesses have been selected on the basis of their “positive impact economically, environmentally and socially.”

Also in the pipeline is Newcastle Laboratory, 76,000 sq ft of commercial lab space with supporting office accommodation for science-based companies, which is scheduled to open spring 2018. It will add to the ripe environment for invention fostered by Newcastle University centres such as the National Institute for Smart Data Innovation, and the National Innovation Centre for Ageing.

More vital office space will be provided through a development partnership between LGC, Newcastle City Council and Newcastle University, which aims to raise 100,000 sq ft of Grade A office space, then a second office adding another 100,000 sq ft to the site. A spokesperson envisioned it becoming the ‘gateway’ to the site, and the area enclosed by the three buildings will become a public square, providing a hub and meeting place for workers, residents and visitors to congregate.

Richard Wise, partner at Ryder, said: “Building A promises to deliver a high quality, timeless piece of architecture which will provide unique, much needed flexible office space on one of the most prominent gateway sites in Newcastle.  It will set the tone for the subsequent developments.  Ryder is delighted to have this opportunity to build upon the success enjoyed to date on Science Central.”

Ryder Architecture, alongside Aura, have together been appointed as the design team to deliver the Newcastle Laboratory on Newcastle Science Central. This state-of the art building will provide over 70,000 sq ft of specialist facilities for the flourishing life sciences and healthcare sector in the region, offering high quality, incubation and grow-on space to meet the needs of innovative businesses in this sector. Construction is due to start on site in Spring 2017 and the facility is due to open in Spring/Summer 2018.

Gottfried Haberler’s contribution to trade theory

17 Feb

Gottfried Haberler was a member of what is loosely termed the ‘Austrian’ school of economics, to denote the group of theorists who opposed centralised – government – intervention in money creation, which they argued artificially distorted capital flows and created structural inefficiencies.

He was more closely tied to the Austrian school at the beginning of his career, when while in that country he was a regular contributor to the seminars organised by Austrian economist Ludwig von Mises; as part of the Mises-Kreis, the celebrated group of economic, sociological and philosophical thinkers.

In what was, for the time, a departure from the orthodox theory of value, quantified it in terms of labour and output, the Austrian theory of value focused on the process of production itself. And how in electing to lend part of the finite amount of money to certain industries over others, there was a danger of creating structural inefficiencies which would self-correct over the course of the business cycle.

A Pioneer in Trade Theory

In the 1930s Haberler was instrumental in creating an alternative framework for analysing cost and value, moving away from the theory of comparative costs (advantage) on the single-product model which had underpinned trade theory since Ricardo. Haberler’s framework mapped out the relationship between the opportunity cost of producing two competing goods, under a given supply of productive factors. This he performed both for constant and fluctuating opportunity costs.

Previously orthodox theory had been based on the ‘real-cost’ theory of value, which saw prices as quantified largely in units of labor. The new approach enabled the determination of relative prices to be analysed under more realistic production circumstances as variable factor productions, in a much simpler and more direct manner than under a real-cost approach.

This paradigm shift triggered a wave of writings by other academics, which incorporated and expanded Haberler’s theory, like Lerner (1932, 1933, and 1934), Leontief (1933)  and Viner (1937), who introduced ‘social’ or ‘community indifference’ curves. When these two curves – those of opportunity cost and social indifference – are plotted together – Marshall’s reciprocal demand curves can be derived; and most general equilibrium effects of trade on relative commodity prices, production, and consumption then shown.

What Haberler’s analysis did not include was an attempt to model consumer preferences for the commodities being produced. Nor an explanation of how productive factors evolve as an economy moves along its production-possibilities curve. This would have to wait until Stolper and Samuelson (disciples of Haberler) published their ground-breaking article in 1941, which elucidated more fully the way the production-possibilities curve is determined, and how factor proportions fluctuate along the curve.

 Where Trade Theory Fails

Haberler’s 1950 work, ‘Some Problems in the Pure Theory of International Trade’, examined the less-than-ideal situation of real wage rigidity, which can be caused by insufficient mobility of labour between a developed and less developed sector; one of the scenarios examined by economists who later expanded his model. This article formed the precursor for an extensive body of literature on ‘domestic distortions’ in which orthodox theories of trade relations might be non-applicable.

The consensus that in the majority of situations free, unimpeded trade has a net benefit did not change dramatically. The theory so-called Hicksian optimism rehabilitated the argument for free trade largely on the basis that wider availability of goods and increased competition leading to cheaper prices would yield a welfare gain; the need for protection arises only when there is a market failure in the domestic economy. Where there is a domestic divergence between prices and marginal costs, foreign competition can hurt some domestic industries.

In the event of real wage rigidity, the opening-up of trade – whether in a full customs union or a free trade area – could cause loss of output. Industries which for whatever reason are unable to pay a competitive rate which attracts new workers would be threatened by removing tariff barriers, which would allow unimpeded entry of competing products.

As the marginal return on these products became unviable, but wages were not flexible enough to change accordingly, labour would move out of these struggling industries and into more competitive ones. Often the industries that suffer are those at the breaking edge of new technology and development, which lacks a mature labour pool with the necessary skill set.

Let’s Get Technical

In his econometric model Haberler demonstrated that increased availability of products and a wider market to stimulate output had a net benefit, provided this increase was to the right of the domestic indifference curve.

In trade theory the state of ‘autarky’ is where the factors of production are deployed to their maximum potential, accounting for the limiting factors of the opportunity cost of manufacturing that product over another, which are assumed to increase; and a community indifference curve which has an inverse relationship to the opportunity cost curve, (increasing where there is scarcity of a particular good’.

The material gains from trade are represented in graphical form by the international trade ratio. In a model comprising two exchangeable commodities, this describes the amount of commodity A that can be exchanged for commodity B. If commodity A buys two of commodity B abroad, but at home you need two of commodity A to get one of B, then domestically A is more valuable. Therefore B should be exported.

However, Haberler has a caveat. If T, the international trade ratio representing the increased availability of goods from trade, is such that there is a net outflow of goods, that “these imperfections are persistent, … and that they persistently operate in such a direction as to weaken (rather than to strengthen) the case for free trade,” protection might be justified.

His idea of a desirable welfare position is not an overly naive one in which all individuals are necessarily better off, but “it is sufficient that everybody could be better off.” He distances himself from the idea that “perfect mobility of factors within each country is a necessary condition for the ideal classical model”, going on to assert that “what really causes trouble and may make trade detrimental and justify protection is rigidity of factor prices, which may or may not be associated with immobility of factors.” The most likely factor to experience difficulty transitioning between industries is that of labour.

Expanding this theory further, Brecher (1974) examined a number of scenarios involving real wage rigidity, starting with one in which free trade was combined with unemployment; he analysed the consequences of using different policy instruments. If the importable is labour-intensive to produce, a tariff would increase employment and output, by shielding domestic industry. But capital and labour would move disproportionately into the protected industry; also there would be a by-product consumption distortion.

When the demand for a product, reflected in its price, is proportionate to the marginal cost for each firm and product, there is zero distortion. But protectionism can mean the output swells beyond sustainable consumer demand, as that industry is protected from foreign competition and, more indirectly, may benefit from tariff revenue.

The Austrian school holds that distortions of this kind inevitably self-correct over the course of the business cycle, and ‘creative destruction’ can mean boom-time companies do not survive when they lose policy protection.

The second scenario Brecher modelled was polarised between a subsistence, and an advanced sector, where high skills and/or costly technology necessitated a wage rate in excess of the opportunity cost of labour – i.e. higher than the marginal product of labour in the subsistence sector. To phrase it in plain English, these advanced sectors would have trouble attracting capital which could be profitably employed in more basic industries.

This form of domestic distortion, he argued, necessitates subsidies in place of tariffs or taxes on trade. Because the revenue effect is negative and so higher distorting consumption taxes are needed, he acknowledges the extent of the offsetting subsidies may have to be incomplete.

The distortions not offset are weighed against the new distortions created as a consequence of financing the subsidies. While not a perfect solution, he concludes it is ‘first-best’, the most beneficial option, to deal with distortions in this way.

This theory of ‘domestic distortions’, which Haberler led the field in, is admittedly a far cry away from his origins as an Austrian School disciple, a staunch defender of the principle of unimpeded trade. This just goes to demonstrate his intellectual versatility and ability to break with orthodoxy and form new approaches.

But today it might be time for a new school of thought on the subject. As is so often the case in institutions where collective decision-making is skewed by relative economic and political weight, the WTO is governed to a large extent by the vested interests of the countries with the biggest economic muscle. Trade or customs unions like that existing within the EU and the proposed Trans-Pacific Partnership (TRIPS) which Trump made guillotining one of his first official presidential acts, only yield a net benefit to those participating in them.

For those countries outside the golden circle, they can face significant obstacles to equitable trade not limited to tariffs; customs’ scrutiny of imports is far lower, for example, within the EU which has a unified legislative framework to enforce commercial and legal standards. Trump’s announcement of his intention to renew the North American Free Trade Agreement is another step towards his avowed position as a champion of ‘free trade’[1] and greater competitiveness.



‘The Normative Theory of International Trade’ – W. M. Corden, Australian National University, Canberra  (Seminar Paper no.230)

‘Gottfried Haberler (1900 – 1995)’ – Joseph T. Salerno.

‘Some Problems in the Pure Theory of International Trade’ – Gottfried Haberler, 1950

‘Gottfried Haberler’s Contributions to International Trade Theory and Policy’ – Robert E. Baldwin, The Quarterly Journal of Economics vol. 97, No. 1 (Feb 1982), p.141-48



Is Haberler’s theory of the business cycle still relevant today?

22 Dec

Gottfried Haberler

‘Money and the Business Cycle’

Haberler believed over-ambitious expansion funded by easy credit would not create sustainable growth, as after the initial expansionist drive the factors of labour would return to the less complex strands lower down in the production chain and demand for, as well as volume of, the products which are more costly and complex to produce would slacken.

During the time taken to construct these new-fangled production processes, the labour employed in so doing would spend more on traditional consumer goods, thus stimulating demand for these and eventually causing a shift in production and in the factors of labour back towards manufacture of these less complex products.

Haberler strongly critiqued solely monetary theories of the boom and bust cycle, seeing inflation and deflation in the first incidence as being responses to the volume of production and demand. His was primarily a structural explanation, which conceded that once a recession had set in and investor confidence was set back, the value of capital would fall in isolation to the assets it was tied to as no one wanted to be left holding risky debts.

These days in our highly developed economies, we might argue that this is a deterministic view, and demand for ever more sophisticated gimmicks and technology is such that the market for innovative and complex products is unlikely to dry up simply because they used leverage to kick-start their idea. But it could prove instructive in trying to explain the lack of uptake for things like ‘smart’ homes and gadgets.

The Internet of Things was lauded as the next ‘big idea,’ but it was not certain it was meeting a clearly demonstrated consumer need, and security oversights by ‘smart’ gadget manufacturers have made some question the point of linking things like burglar alarms and cars to a worldwide web where any user can potentially hack into them.

Interest rate risk? What interest rate risk?

27 Oct


Growth in the third quarter of 2016 seems to be on track to remain consistent with that of Q2, at the identical figure of 2.1%. Which will doubtless engender much self-congratulatory patting of backs among the BOE’s Monetary Policy Committee, for steering the country through a potential capacity surplus and dip in employment. Do they really deserve this round of applause?

There is an opinion held in some quarters that central bank control is the main obstacle standing in the way of the perfect equilibrium that would be achieved if interest rates were allowed to compete in a free market. While I do not necessarily believe that free-market capitalism always acts in favour of the greatest good of the greatest number of people, the tried-and-tested sticking plaster of QE does not reach the deeper systemic problems – something the BOE itself admits.

As well as announcing the continuation of its asset repurchase policy (quantitative easing), the BOE’s Monetary Policy Committee decided in August to cut bank rate to a growth-stimulating – at least in theory – 0.25%. The negative effect this would have on bank’s lending profit margins they hoped would be countered by the Term Funding Scheme (TFS) they were offering to institutions affected.

They elaborated in the August Inflation Report that “the Term Funding Scheme (TFS)… will provide funding for banks at interest rates close to Bank Rate.  This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions.  In addition, the TFS provides participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against the risk that conditions tighten in bank funding markets.”

This is all very good and of noble intention, but it is doubtful this alone would counteract the many factors acting against the free lending by banks to needy applicants. For one, the alternative finance market is proving serious competition, as the nimbler new competitors are far more proactive in sourcing customers, using sophisticated data analysis to find leads; and their pricing algorithms bypass the more thorough risk profiling traditional banks undergo. In addition, they often avoid taking direct liability for issuing the loans, doing this instead through partner banks. By keeping their balance sheets free of these liabilities, they avoid the imposition of different tiered capital ratios along the lines of Basel III.

Let’s get Specific

Interest Rate Risk in the Banking Book (IRRBB) is a quantified metric which is itself the subject of constant, international regulatory scrutiny. In a report released April 2016, the Basel Committee on Banking Supervision succinctly explains the complex relationship between different loan products:

IRRBB arises because interest rates can vary significantly over time, while the business of banking typically involves intermediation activity that produces exposures to both maturity mismatch (e.g. long-maturity assets funded by short-term liabilities) and rate mismatch (e.g. fixed rate loans funded by variable rate deposits). In addition, there are optionalities embedded in many of the common banking products (e.g. non-maturity deposits, term deposits, fixed rate loans) that are triggered in accordance with changes in interest rates.”

An option is linked to a specified contingency which, if occurring, gives you the right but not the obligation to exercise that option. For example if you end up stuck with a loan at 4% interest which was originated when base interest rates were at 1.2%, and then base interest falls to 0.5%, your interest payments will be overpriced relative to the rest of the market. The option might specify that if interest rates fall below a certain point, you can choose to switch to a floating-rate linked to a benchmark like LIBOR. (London Interbank Offered Rate, administered by ICE or IntercontinentalExchange group)

Definitions, definitions, definitions

‘Option risk’ is just one of three defined types of interest rate risk that can occur; the others being ‘gap risk’ and ‘basic risk’. Automatic option risk is when an optionality is included as part of a synthetic product, be it an asset, liability and/ or off-balance sheet item. Behavioural option risk is where the change in cash flow results from the autonomous human decision to exercise an option.

So-called gap risk describes the shortfall that arises when banks’ debt instruments undergo rate changes which occur at different times. Some loans, particularly for construction or infrastructure projects, are staggered so interest payments increase towards the end of the loan’s duration, as during the early set-up phase there is little to no cash flow or income.

Basis risk is classified as the impact of relative changes in interest rates between instruments which are linked to different pricing benchmarks; say for EM bonds over Treasuries, which are priced by different market factors and whose basis points might change at different rates, though their tenors are the same. One might even be used to hedge the other, and basis risk quantifies the effectiveness – or not – of this hedge.

The regulator admitted it was having difficulty persuading banks to fully assess the IR risk on their books, as in their internal assessments they tended to focus on earnings measures over the period under review, rather than economic value measures which examine assets and liabilities right until their expiration. In their guidance the Basel supervisory committee stressed the importance of having both types of assessment compliment each other.

If the late troubles of Deutsche Bank are any indicator, it is that banks can struggle to reconcile their regulatory obligations with taking on high enough risk assets to turn a viable profit. That, and the importance of having a smoothly running infrastructure and back-end. On the other hand, JP Morgan’s recent triumphant quarter shows you can make a killing out of trading bonds, if you know what you are doing.


Why Recycling is the new Moisturising.

19 Oct

Of all the business workings you must archive and report, ‘waste’ is probably the least appetising. Trying to tot up the margin of product that fell off the production line, the bits you’d like to pick back up off the scrapheap… it’s not an auditor’s most exciting way to spend a day.


There are a number of different regulations in the UK currently, which as many are derived from EU guidelines might change over the course of the Brexit negotiations. They govern aspects as diverse as a ‘tax’ on packaging for prolific producers of paper, polyethene and cardboard hybrid coffee cups, glass, etc. And punitive fines and even jail-time for companies which engage in unlicensed disposal of ‘controlled waste’.

Wrapping-paper Tax

Any UK-listed or operating producer which emits more than 50 tonnes of packaging a year, and which has a turnover of over £2million, is obligated to submit a Packaging Tax Return to HMRC. They then have to offset their obligation by funding a commensurate amount to the government’s packaging recycling programme.

The private sector too has cashed in on the packaging sector, with a wealth of innovative initiatives to minimise waste. Probably the greatest expansion has been in devices to prevent food wastage, from the now fairly commonplace ethylene absorbers to special types of bacteria-fighting film. Ethylene is a hormone produced by metabolism in most fruit.  It initiates and accelerates the ripening of fruit and causes vegetables to start decomposing. Several companies now provide packaging with ethylene absorbers to increase produce shelf life.

Still more exciting are some of the patented inventions now seeking corporate sponsorship. For example, the wrappers with built-in anti-microbial properties recently developed by the Fraunhofer Institute for Process Engineering and Packaging IVV in Freising. Sorbic acid is the active component of the bacteria-fighting film; which in clinical trials reduced the size of an E.coli colony cultivated on day-old pork loin for the experiment to around a quarter of its initial size. Crucially, in the concentration of the laquer applied to the film, sorbic acid is neither poisonous nor allergenic and virtually odourless and tasteless.  )

Dodge the Plastic Bag Tax

The resource-efficiency bar has been raised still higher in the compostable plastic department, where a number of global competitors jostle for supremacy. In the UK there are several competing providers of biodegradable plastics, including Scotland-based BioBags, and Biopac, the self-described ‘leading developer’ of a very wide range of eco-friendly food packaging and catering disposables.

In Australia, where ‘sustainability’ is a buzzword even for the big mining companies, one player dominates the market. Publicly listed ‘Secos’ was formed in a reverse merger of Cardia Bioplastics Ltd with Stellar Films Group Pty. Ltd. In April 2015. Post-merger, its preliminary annual report for December 2015 showed total assets including cash, trade and other receivables and prepayments, was $9,076,829. The most recent figures available from show that the Australian stock market looks favourably on its prospects, as its P/B (price-to-book) ratio is 2.33, compared to 1.43 the market benchmark, and 1.54 for the sector.

UK-based Biopac’s impressive range of products enable catering and hospitality companies to proudly declare their green credentials; not only can they cite their sustainable container purchases on their annual reports, it is also often branded on the product itself. There is the ‘I am not a plastic cup’ made from renewable cornstarch that also carries the government approved CE marking (£130 for a case of 2100).   And the 12oz single use* ‘I’m a Green Cup,’ made from certified FSC (Forest Stewardship Council) board with a starch material, which is actually 100% compostable (£57.45 for a case of 1000). Various PLA (polylactic acid) clear tumblers …

If you needed further proof that this was a growth trend that has become impossible to ignore, there’s even a site called ‘Biodegradable Plastic Glasses’ (insert domain name here).

Or, if you prefer a more official stamp of approval, a market research report by Markets and Markets entitledBiodegradable Plastics Market by Type (PLA, PHA, PBS, Starch-Based Plastics, Regenerated Cellulose, PCL), by Application (Packaging, Fibers, Agriculture, Injection Molding, and Others) – Global Trends & Forecasts to 2020  states that the biodegradable plastics market is projected to grow from more than USD 2.0 Billion in 2015 to USD 3.4 Billion by 2020, at a CAGR of 10.8% between 2015 and 2020.

That’s a nice return on your investment.




Why ‘Defined Benefit’ should become ‘Pre-Defined Benefit Re-Defined in Light of Changing Conditions’

4 Sep


A recent well-intentioned but technically inaccurate FT article laid out the pitfalls of employers continuing to offer Defined Benefit (DB) schemes, in light of the recent bout of QE and interest rate revisions. Briefly, in a separate article it reported that consultancy Hymans Robertson had conducted research analysis which hypothesised the BOE’s announcement of a £70bn QE programme would lead directly to another £70bn DB shortfall.

The BOE also announced it would cut interest rates by 0.25%, which will hit all fixed-income returns by reducing the value of gilts and ‘safe haven’ government securities, and correspondingly increase the demand for, and price of, riskier fixed-income products. Pension trustees had better make some shrewd investment choices.

The writer argued that in order to solve the deficit overhang, the government needed further legislation to prevent the proliferation and even the continuation of DB schemes. He stopped just short of saying they should be outright banned.

A Lighter Touch

What the government has done, under the 2014 Pensions Act, is more of a soft-touch approach which controls market incentives to withdraw money from schemes, and window-shop continually for better ones. This provides more security for scheme managers, in terms of the available capital for investment.

To issue a ban on Defined Benefit schemes would be a hostile move, which might be resisted by certain interest groups and create a conflict both sides are surely keen to avoid. When a legislator has a choice between prohibition measures and providing incentives for industry participants to behave a certain way, a collaborative approach is usually more effective.

Though that is not to say that the government hasn’t laid down some firm rules on scheme governance and providing Value for Money.

Can Members Leave a Scheme if they Want to?

Although members are technically free to leave the scheme at any time, there are a number of barriers which impede them from doing so. Many funds impose exit fees, to try and keep investments safely enclosed in the fund and prevent a deficit from occurring.

Another barrier is that administrative provisions for transfer of their pension pot might be insufficient or incomplete. Scheme member data storage and integrity has recently been the subject of widespread audits and reforms, because so much information was missing or compromised. For example, employees would be classed as ‘absent’ from the scheme and hence the records, when in fact they had a Personal Pension Plan that the employer made regular contributions to.

Pre-existing pension legislation held that if you had been in the scheme less than 2 years, and the scheme rules permitted it, you were entitled to a refund of the contributions already made. Though having received the refund you would not be entitled to any benefits for the period to which the refund relates. However, the Pensions Act 2014 made it harder to leave or withdraw money from a scheme in several new ways, one of which was the abolition of these ‘short service’ refunds, for people who leave a money purchase occupational pension scheme after the mandatory 30-day period, and within 2 years of entering the scheme.

Mandatory Disclosure

Money purchase schemes are simply Defined Contribution (DC) by another name, where an employee contributes an agreed percentage of their salary at set intervals, with no guaranteed level of return. Targets and benchmarks are shared with scheme members, and indeed it is a legal requirement that trustees provide members with an annual statutory money purchase illustration (SMP), which states the likely pension at retirement based on in-house assumptions about market conditions including inflation. Also with details of contributions credited (before deductions) to the member in the preceding scheme year.

So a major advantage of DC schemes is that the governing directors’ expectations and projections of expected returns are continually revised. In the current fixed-income investment climate, with the BOE still steering interest rates on a tight rein particularly in the uncertainty surrounding Brexit, to make the kind of gold-plated promise to employees which Defined Benefit schemes make does not seem… prudent.

This enhanced level of disclosure was also introduced in the recent reforms governing trustee accountability. Not that I’m biased, but the now fairly stringent requirements on trustees of money purchase schemes seem to make them the better option. Among the other provisions are that:

–              Investments made with each contribution should be documented, recording the date of each. Best practice is that every new contribution be invested within five working days; where a member’s contributions are invested in more than one fund, and “the total amount contributed in a period is recorded explicitly”, verify the sum of the individual transactions elements equals the total contribution.

–              To this end, there should be a record of every investment sold, date sold and amount realised. This does not have to be recorded separately for each contributor, but must be categorised by investment fund.

Reasons not to Shop Around

The 2014 Pensions Act contained a number of other measures relating to private pensions, many of which strengthen existing legislation. Many seem calculated to try and ring-fence the contributions to existing schemes. They include provision for:

  • a new power to make regulations to prohibit the offering of incentives to transfer pension scheme rights
  • the introduction of a new statutory objective for the Pensions Regulator, to minimise any adverse impact on the sustainable growth of sponsoring employers when exercising its functions relating to scheme funding
  • measures to restructure the Pension Protection Fund compensation cap to better protect long serving scheme members
  • an amendment to the Public Service Pensions Act 2013 to allow smaller public body pension schemes to transfer accrued rights into one of the larger public service schemes

So in conclusion, measures have been taken to make DB schemes vastly less attractive. But to outright ban them would itself be infringing on the rights of those existing DB scheme-holders whose right not to have their scheme fold due to insufficient funds these lobbyists are defending in the first place.

The important thing is for DB scheme managers to have the freedom to adjust their expectations and projected returns to a level which is compatible with their income stream and all their liabilities. Which I suppose would mean they were no longer ‘Defined Benefit’ but ‘Pre-Defined Benefit Re-Defined in Light of Changing Conditions’. If only someone would outline the circumstances in which this decision would be permissible.



How does a “soft pull” affect your credit score, and your ability to participate in P2P marketplaces?

14 Jan


A ‘soft pull’ or ‘soft inquiry’ is when an institution, or indeed yourself, does a credit check on you without it affecting your credit score. If you were applying for a loan and the bank did a ‘hard pull’ on you, and you were subsequently denied the loan, this would stay on your permanent credit record.

A hard pull resulting in a failed application would likely lower your credit score, because if you already have debts owed and are making further loan applications, this would make you a less attractive applicant.

Many organisations can ask for a ‘soft pull’ on your credit record, including P2P lenders. A potential employer can ask your permission to do a superficial credit check on you. Financial institutions you already have an account or relationship with check your credit; and credit card companies that want to send you preapproved offers check your credit.

What kind of checks do P2P lending forums perform?

The level of scrutiny a marketplace lender will put a potential applicant under varies greatly depending on the loan provider. Some target the upper tier of borrowers, while others offer sub-prime loans to those with credit scores too low to allow them to qualify anywhere else.

Some hire bespoke credit database companies to do an in-depth background check on applicants, usually if they are the company CEO and it is a business loan; other, perhaps less discerning, lenders stick to the three main credit reporting bureaus, Equifax, Experian and TransUnion.

Avant is an example of a company which deliberately targets applicants with low credit scores, offering them the chance to “repair” their credit score with a history of prompt loan repayments. Naturally applying for a loan with Avant, the company assures consumers, will not affect their credit score.

FICO (Fair Isaac Corporation), the independent industry body which is responsible for pooling the scores of the three credit scores from Equifax, Experian and TransUnion, warns that loan companies promising quick-fix solutions to a credit score are making empty promises.

The company does warn applicants that the interest rate on the loan they take out will be more favourable if they have a good credit record. It uses this as incentive to borrow, in the hope of ‘saving money’ in the future:

“We’ll send notice of payment history to the major credit bureaus which may improve your credit score with timely payments. As your credit improves, you may be eligible for lower rates on subsequent loans through AvantCredit.” Note that the representative APR is a hefty 48.5%.

It is true though that timely reporting to credit bureaus of prompt repayments on a loan might in the long run make a borrower seem more trustworthy. But if you are only looking to improve your credit score, remember that much of your scoring comes from paying bills on time (about 35%) and how much outstanding debt you have. Factors like drawing on a range of different forms of credit (e.g. credit card and long-term loan) comprise around 10% of your score.

Social Selection at Social Finance

Social Finance inc. (SoFi) carefully selects its borrowers, assessing a range of financial and cultural factors to determine not only the applicant’s creditworthiness, but also effectively their social status. It asks questions about their education and their career experience, as well as monthly income vs expenses, and obviously their financial history.

SoFi likes to keep loans within the SoFi community, operating a subtle social streaming process. It offers cash rewards for successfully referring a friend. Previous loan applicants can share a referral link to let someone else refinance their student loan or take out a personal loan.

The platform also mentors newly graduated entrepreneurs through the SoFi Entrepeneur Program, and here some of the application questions are indicative of the parallel socio-cultural assessment. The company is asking itself, “Is this individual a long-term investment?”

Such questions include details like the name of school the applicant graduated from, and details on their employment such as “Are you a founder/ co-founder?” and “Are you working full-time?”.

In Conclusion

The question is how thoroughly the organisation manages its data, and if it sells it to a third party. Information in this industry is currency, and there is no guaranteeing the privacy of everything you disclose in an application.

Consider that, while the Federal Housing Association (FHA) says anyone with a credit score of 500 can apply for a mortgage loan, 97% go to those with credit scores of 620 or over. While a ‘soft pull’ will not affect your permanent credit score, there is no guarantee the information unearthed will in no way affect your application for a marketplace loan.



Back to the Future: Bitcoin, Blockchain and how Marketplace Lenders are Using Technology to Overtake Banks in the Race to Attract New Lenders.

13 Jan


Encumbent institutional investors themselves admit that they have a lot of catching up to do before they can compete with the ‘upstart’[1] marketplace lending providers. A Morgan Stanley research paper published in June discussed how banks were hampered both by their due diligence restrictions, and by the backwardness of their big data analysis techniques.

Because the new marketplace lenders have less operating costs, they are attractive to borrowers as they are able to offer lower commissions; their risk assessment criteria are less exacting than banks, and they incorporate demographic data into their analysis. Thus they are able to offer lower interest rates to interested investors.

Morgan Stanley analysts wrote: “Traditional banks excel at originating loans and underwriting credit, but are slowed by the batch process and portfolio approach to their deposit and loan legacy systems, which are the backbone of the US and global payments system, and by liquidity and capital rules.”

Disruptive Innovations

As well as raising the bar in big data analysis, both for existing users and in targeting potential loan seekers, many in the marketplace lending sector have enthusiastically adopted Bitcoin and the blockchain in their payments system.

BTCjam was among the first forums to facilitate lending in Bitcoin. Founded in late 2012, in 2013 it gained a wealth of sponsors in Ribbit Capital, 500 Startups, FundersClub and the Bitcoin Investment Trust. By the end of 2014, BTCjam had facilitated bitcoin loans of over of $10 million in value, with more than 100,000 users in over 200 countries. The fact that its due diligence procedure only goes so far as an “optional soft credit check” helps explain its popularity.

Bitcoin and BTCPOP both offer bitcoin-denominated loans, of the ‘instant’ and collateral-tied variety. Loanbase, formerly known as BitLendingClub, specialises in bitcoin loans to developing countries, where beneficiaries might not have a bank account.

Why Not Create A New Currency With Your Payments System?

Another start-up has created an entire new currency, LoanCoin, which appreciates as interest is paid on a loan. Once the interest and principal are paid off, the attached LoanCoin is destroyed and exchanged for a currency of the Coinholders’ choice, so the currency value is preserved.

Within the system created by the developers Lending DApp, aspiring loan issuers, or ‘officers’, can source and guarantee new loans for Coinholders and charge fees for their service. Financial institutions, marketplace lenders, and even individuals can act as loan officers; though their commission and the size of the credit or ‘Trust line’ extended to them is dependent on their credit record. Lending is also at the issuer’s own risk and in the event of default or missed payment, the loan officer loses their collateral.

The Trust line is calculated by applying an aggregate function to its collected weighted trust ratings. The network is thus able to draw on the accumulated knowledge of its participants when assessing a loan officer’s reputation and creditworthiness. Percentage of performance fees is dependent on the difference between the risk-adjusted performance of the loans selected by the loan officer, and the mean risk-adjusted loan performance of all loans in the network.

Lending DApp, with its innovative decentralised business model, which relies almost wholly on pre-programmed systems, is typical of the new hybrid marketplace lending product, where banks and what we loosely define as “P2P” lenders co-exist to mutual profit.

Smittipon Srethapramote, who covers the North American payments industry at Morgan Stanley, confirms this is a growing trend. He says “The fastest growing marketplace platforms are not really peer-to-peer but institutional investors partnering with tech platforms to cherry-pick borrowers, often with offline marketing.”

 What The Future Holds

Max Rangeley, who works for the Cobden Centre, a thinktank which has been charged with creating a Bitcoin exhibition for the European Parliament, explains how the Bitcoin transfer system, the ‘blockchain’, might be adapted for other purposes. One potential use is to allow users to better insure the asset they use as collateral on a loan.

“Transactions can be conditional on any event which can be programmed into the blockchain (or even other events, if there is third-party verification whether the event occurred or not). Smart property (property registered on the blockchain) can be used either as collateral or for repo loans, are when the “lender” effectively buys the property from the borrower and sells it back to them at the original price plus interest after a specified period of time.”










Trendwatch. What will impact equity prices in 2015?

13 May
man with telescope

Taking the long view

What are the possible storms on the horizon which might make waves in the UK market? Recent macroeconomic trends which will heavily impact the relative success of British equities are the strong pound, and the continuing low price of oil.

Invest in UK Buyers

Companies which depend heavily on exports might not do as well as those selling largely to a domestic market. Sterling is outperforming vs the dollar, with the 200-day moving average this Wednesday standing at 1.5632. The peak providing point of comparison was 1.5710 on December 16th. And the Euro, the currency of Britain’s other main export market, is also waning in comparison with the pound as GBP:EUR continued to increase today, to 1:1.39EUR, correct at time of publication.

The pound surged on the strength of news the Conservatives were back again, and was given an added boost after better than expected UK March industrial output data on Tuesday, which implied a moderate upside revision to Q1 GDP.

Labour market data released today are also positive: the 3-month moving average for earnings (including bonuses) is at 1.9% vs a predicted 1.7%. And unemployment rate is, as predicted, 5.5% though the number of claimants did not fall by nearly as many as expected.

Expert predictions for the Sterling Euro outlook were given to ( They include


“EUR/GBP has slid sharply after the decisive victory by the Conservatives but it has only unwound the election uncertainty premium built in just ahead of the election. Moreover, with Grexit risk on the rise GBP may benefit from some late safe haven flow. Bottom line EUR/GBP risks have flipped and wouldn’t be surprised to see the pair test 0.70 in the next week or two.”

Charles Stanley:

“Pre-election jitters drove the UK currency down to a three-month low of 1.34 last week but Friday’s result provoked a rebound that looks like it might have further to run in the short-term. Despite its recent choppy price action the chart is suggesting that a run back above 1.40 has become a realistic near-term expectation and that we have probably seen the bottom for now. “

And the Consumer Staples and Consumer Discretionary sectors catering to a UK market are likely to look increasingly attractive, as the Conservative electoral victory means an EU referendum is back on the agenda and Britain’s relationship with the Continent is clouded by uncertainty. The Guardian reported today that Cameron plans to bring the referendum forward, from 2017 to 2016.

Black Gold? Fool’s Gold…

And, while oil prices –taking Brent Crude Oil as an indicator – have recovered some ground over the past month, the long-term outlook is not great. Between April 14 and May 12, Brent Crude rose from 58 to 65GBP.

However, a recent OPEC assessment, as reported on by the Wall Street Journal, predicted that over the next ten years it was unlikely oil prices would rise above $100 barrel again. OPEC is allegedly considering re-introducing the quota system it dropped in 2011. The most positive scenario modelled by OPEC was that oil would retail for $76 a barrel in ten years’ time.

Clearly competition from rival energy sources like natural gas and renewables means that now is a time to avoid oil company stocks, unless you are confident in following a contrarian strategy. Green energy, on the other hand, keeps going up and up.

As a general proxy, look at the all-world Dow Jones Sustainability Index (DJSI), whose total return at the end of last month (April) was 1896.15, denominated in USD. The price return of the DJSI World Index, which is a better indicator of the value gains of its constituent parts, had increased to 1305.37 USD from 1264.41 at the end of March.

Historic data are not publicly accessible for beyond the three-month period, which is a shame because February was an unusually volatile period for markets in general so does not offer an accurate point of comparison: The Dow Jones went from around 17200 to 18500USD over the course of February, ending on a 6-month high.

So essentially, consider disinvesting from the big oil corporations which dominate the FTSE 100 and switch to any company which will benefit from cheaper oil prices – which is almost all of them, bar those providing services or equipment in some way to oil companies. Unless you are convinced your oil-producing asset has a strategy to ride out the new pricing norm.