Bank of Dave, Channel 4’s attempt to make entertaining television out of our national crisis of faith in finance, was an interesting concept. The pitch: indefatigable and heroically blunt man of the people Dave Fishwick, a Burnley Minibus tycoon, attempts to launch his own bank, over the objections of the grey eminences of finance.
And it certainly delivered as great TV. One scene particularly sticks in the memory; a montage of Dave being rejected over and over again by lawyers, banking experts, regulators and civil servants, all of whom seem appalled that he’s got past security and into their offices, let alone the idea that he might start lending money to people.
As someone who writes on new models of finance, I wondered whether the snobbery and inflexibility depicted represents the true reality of trying to get a finance start-up off the ground, or whether in fact the climate was friendlier to entrepreneurs than Channel 4 makes out.
The alternative finance business which is the most tied into the UK regulatory framework is unquestionably Seedrs, a crowdfunded P2P equity platform for start-ups. It’s one of the alternative finance businesses in the UK to have put its whole business model under FSA scrutiny. Seedrs officially launched earlier this month, and already has funded several interesting start-ups.
But it started down the regulatory road a long time ago. “I knew I wanted to be FSA regulated about 3.5 seconds after I had the idea”, says founder Jeff Lynn, a former corporate lawyer. “What we wanted to do was trade shares in unlisted business; that’s pretty much what regulation was invented to govern.”
I ask him how long it took to get Seedrs regulated. “Well, we started the process of getting regulation in November 2009. What followed was 18 months of preparation, during which time we were trying to get our first meeting with the FSA. At first, they made it clear there was zero prospect of a conversation or, indeed, any guidance. Eventually, we managed to get our first meeting [in April 2011], and then that started a 13-month long review process, which concluded with a green light in mid-May 2012”.
A 31-month long process after an initial snub? So far, so Bank of Dave. Yet, other competitors with similar business models (notably Crowdcube, which launched in 2010 and has now provided £3.9 million of funding for businesses, including household names like Bubble & Balm) have been able to launch much earlier. I ask Lynn if he ever wonders where Seedrs would be if he had just launched the platform, to hell with the consequences.
“I wanted to follow both the letter and the spirit of the law,” he says. “If I couldn’t get both right, I didn’t want to launch. I would have loved to have moved faster, but this isn’t just a tech business – it’s a corporate finance business. I wanted those systems and controls in place.”
James Meekings of Funding Circle had a similar experience: “We [Meekings and his co-founder, Samir Desai] were both working at high-profile consultancies, and wanted to wait on the FSA before we quit our jobs. The process of applying to them is incredibly negative: you send them a proposal, and then wait. You only get answers in the negative. There’s no feedback. You just get a ‘yes, legal’ or ‘no, illegal’.
“It was very frustrating. Every month that went by, we were reading about banks not lending, knowing we could do it better. Eventually, we found a way to do it”. Meekings explains to me that found a structure for the business that was legal, but outside the the FSA’s regulatory framework.
It’s safe to say that the FSA is not at all warm to new models of lending. Indeed, the legendary frostiness of the regulator, and the stories of exactly how long they twiddle their thumbs before approving new business models, have put off some from applying at all. Anil Stocker, co-founder of MarketInvoice and my colleague, told me: “When we were setting up, we got professional advice, and, in doing so, we of course heard the horror stories about the FSA.
“We never had any direct contact with them, as we found that what we wanted to do isn’t regulated by them. Legally, it’s the sale of an asset, governed by statute law. I remember feeling very relieved when our lawyers came back and told us what we wanted to create fell on the right side of that law; the conversations Dave was having with the lawyers and regulators were all very familiar though.”
Other alternative finance entrepreneurs are much less sanguine about regulatory hurdles. Kevin Caley of Thincats (the opposite of “fat cats”), a P2P lender offering secured loans to business, pulls no punches. “In our experience regulation is a ‘box-ticking’ exercise designed to give investors confidence in the financial markets, rather than to protect their interests.
“Regulators are obsessed with conforming to the rules irrespective of whether the scheme is in the interests of investors or not. It creates huge barriers to entry and stifles innovation and competition in the sector without providing any protection to lenders.”
Caley has also had a direct run in with the FSA. Recently, Thincats attempted to launch a fund, which smaller, unsophisticated investors could participate in. Instead of trying to make their own decisions on which businesses to lend to, a FSA regulated fund manager would pool the money, and make the investment decisions.
To this unsophisticated financial journalist, it sounds like a relatively safe and sensible model. But within days of launch this April, the FSA swooped. Caley tells me the story: “The FSA decided that the fund was a ‘collective investment scheme’ and therefore subject to a great deal of regulation. They also decided that the fund was only suited to experienced investors.
“This meant that our attempt to work within the existing regulatory system and allow all investors the opportunity to benefit from this low risk investment class was blocked. We believe that this is a perfect demonstration of how regulation is stifling innovation and distorting the market by encouraging people to operate outside of the regulatory system.”
The Financial Services Authority depicted in The Bank of Dave was snobbish, cold, foolish and regulating for regulation’s own sake, without really thinking about what was best for investors. That was the TV show. But, here at the Kernel, we’ve found it’s also the day-to-day truth of an organisation that seems to be, as one tweeter wryly observed to me today, obturate by design.