Another Netflix / Blockbuster moment? Don’t miss this one.
If you don’t remember who Blockbuster was, it was a video rental business. It had 9,094 stores and employed approximately 84,300 people: 58,500 in the United States and 25,800 in other countries. It officially breathed its last breath in 2014. On its journey it had the opportunity to buy Netflix for $50 million but laughed the founders out of the door.
This story has become a cautionary tale for many industries who feel that they are indestructible and untouchable. The problem is that when you put global, massive scale into the mix it is very tough for people to see or even believe. Look at Elon Musk, if 30 years ago you had said a private company would be building reusable rockets you would also have been laughed at almost as much as Musk himself was when he started SpaceX. The thing is, as we all know, it happened.
This is why the financial sector, especially in the UK is sleep walking into, at best, obscurity and at worst oblivion. I can hear the sniggers of those that have stumbled across this article even while I am writing it, because they believe there is zero chance of that happening. I will give you 5 reasons why it is more likely then not and what you should do about it.
- The Regulators
In the UK the regulators have a tough job. They are under resourced and trying to keep up with an ever changing environment. Any organisation that finds itself in that position would have to concentrate its resources on a few areas and let the rest go. That cannot happen with regulators, so what do they do? They pick sectors they don’t like, or are causing too much work or bad PR for the regulator and they decide to get rid of it. It starts with over regulation as a response for protecting against some recent bad actor going bust and losing investors money, making it not cost affective for new players to join the sector, tick: stopped anyone else coming into the space. It moves to over aggressive surveillance and retroactive changes in rules to snuff out business models, tick: make it painful or uneconomical to run that model so some players fold or just give up. If there is anyone left it finally moves on to out and out bans either of the model, or of crucial parts of the model so as to make it impossible to operate, job done a sector of the financial industry closed in the name of protecting consumers. That is a noble claim but really, were all principal dealing firms evil? Was every single mini-bond the work of the Devil?
This has been a pattern for years and it has worked for the regulators and the government that they work for.
It is a strategy however whose time has gone. Governments around the world have looked on with envy at the riches that the City of London has poured into the UK, known to some in Europe as ‘Treasure Island’. They are now realising, however, that those riches are up for grabs. If they they make their jurisdiction more business friendly, not less secure, just more open and accessible where regulators work with businesses, those businesses (and the cash they throw off) will happily move. Business is more mobile now than any time in history.
We also have to remember that Brexit has annoyed many in Europe and having an opportunity to steal parts of the UK financial infrastructure and the inevitable consequences, would be a stark warning to other would-be leavers. Macron has already started by courting financial CEOs and encouraging moves out of the City, JP Morgan being his current mission.
If you are looking to take advantage of this fact, look at those jurisdictions where regulatory oversight is forward looking and use that knowledge to position your business, your investments but most of all, your attention. There will be huge opportunities. Zug in Switzerland, Dubai, Gibraltar to name but a few.
2. Crypto / DEFI
Crypto and the decentralized finance movement have been able to experiment and expand without the burden of regulation and it has done the one thing that is kryptonite to regulators, it has got very big, very quickly. For the regulators to try and pick off this industry would now be nigh-on impossible. What this means is that Defi and Crypto will start picking off massive chunks of the UK financial infrastructure. For example;
- If you tax someone between 1%-3% for sending or receiving money your company is walking dead, i.e payment processors, credit cards. My business pays over £50k per annum in banking and related payment fees at a minimum. We are implementing new Defi related processes that will cut down to a tenth of that if not less.
- If you are traditional credit card business charging 20% and you hope to stay in business, or even a card with a low rate for wealthier customers you need to think again. I have 10 credit cards with probably £70k worth of credit available. I have not used any of them in a long time and will probably just cut them up. I have a new card, provided by a crypto firm that pays me 8% cash back.
- If you are a legacy bank, with terrible technology, a dwindling branch network, woeful customer service and an awful attitude towards customers you have probably 10 years, if you are very lucky. I have banked with a major UK bank for 37 years, the only thing I use it for now is my dwindling set of direct debits. This has happened in the last 12 months, it won’t take too many people doing the same to start causing massive issues. The only way legacy banks will be saved is if they become the rails that the new banking system runs on, even then, I believe it will be a struggle.
These are just some of the industry verticals that will be destroyed in the coming years. I would be short any legacy business that is not adapting and long any well thought out business that is addressing this market.
3. Retail investing are waking up, just at the same time that their options are being shut down.
Gamestop showed us that the power of a harnessed group of retail investors could take down whale investors, hedge funds and anyone else who that group pointed their ire towards. Crypto has made some retail investors millionaires and in some very lucky cases billionaires. The genie is out of the bottle and the tools to continue this revolution will continue to be developed. Short of massive police, military or oppressive government intervention the new wave of financial products and services in the digital asset space will continue unabated.
This is at the same time that regulators and governments in the UK are restricting access for retail customers into many regulated products. The FCA for example have a consultation paper out last year which was aimed at “Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions”
“A key theme in responses we received to the CfI was the need to further segment high‑risk investments from the mainstream market, and to further disrupt consumers from investing in inappropriate investments that do not meet their needs.” — Financial Conduct Authority
“Disrupt consumers from investing in inappropriate investments..” that is a fairly Orwellian statement. Not ‘further protect investors from unscrupulous providers’ but ‘disrupt’ the consumer themselves. While everyone should be 100% behind the protection of investors, where does it become a matter of choice?
Thirty three years ago I transferred a pension from the RAF of £1,500, it is currently worth £6,500. In the biggest bull run in history, the biggest asset inflation in history, greatest technological advancements in history and the invention of new digital assets producing outsized returns, that part of my pension pot has increased by 4.5% per annum.
I suspect the FCA are happy with that. I am am not. I would have preferred that to have been risked in the early days and manage in the latter years. The trajectory of the current regulatory environment is to leave retail investors with one choice, low return investment products.
That stance may have been fine for my generation who basically just did as we were told in financial terms, but this new generation of investors are not going to be told what they can and can’t invest in.
So we have an issue, if there are restrictions on regulated business offering retail investors better returns, retail investors will head more and more to unregulated platforms or overseas platform seeking better returns. Operators of perfectly legitimate platforms will move their operations to more friendly jurisdictions and their UK customers will still deal with them.
4. The rise of ‘Smart Equity’
Full disclosure; I am a large shareholder in a platform that allows the trading of security tokens, and we are developing ‘smart securities’ products for our customers. It is currently only for HNW and Sophisticated Investors.
This type of product, where holders of smart securities will be able to access the types of products generally reserved for the wealthy, will revolutionise investing for millions of people.
For example, if you have a private wealth manager and a portfolio of investments with them over £1 million, the chances are you will be able to utilised a Lombard Loan. Rates are around 0.5%-1% depending on the provider. You can uses that for investing, buying and asset etc, if it returns over 1% per annum you created some free money.
Smart Securities will be able to be used for this for a wider range of people because the rules can be programed into the loan using smart securities as collateral. The rates are likely to be based around the relative risk of the collateral, and how much you are willing to stake for the loan, but that is perfectly possible to achieve in a cost effective, transparent way because the securities in question, and the loan against them, will be subject to a smart contract. No human intervention, just a valuation of the collateral, a rate generated, a smart contract created and a security/loan agreement created on a trustless basis. i.e the system generates the rates offered, the collateral is pledged to the lenders wallet (subject to the terms of the smart contract) and the funds flow back to the borrower. Margin calls, forced liquidation etc would be dealt with automatically.
This is just one way that smart securities will change the way we invest.
5. Expectations of the working population
The workforce is changing the way they see work. The Pandemic accelerated the work from home trend, but it will not be that which is a problem for the UK financial system. What will be problem is that workers now, whether they are 25 or 50 are coming to the conclusion that that the rat race their parents endured is not for them. My son is 27 has two kids of 2 and 3 and works from home because he wants to see them grow up. I basically hardly ever saw my father, he was awesome when he was there and he provided for his family very well, but I barely interacted with him.
People are now realizing that sitting on a train for hours (if you can get a seat) and paying exorbitant amounts of money for the privilege (as of writing a standard annual ticket from Henley to Paddington £5,972) is just not worth it. The lifestyle of a cubical rat is just not something people want to do anymore and it is even more acute for entrepreneurs. Building a business is a challenge at the best of time, so if you are going to do it, you might as well do it somewhere pleasant and business friendly.
If I can be sat in a jurisdiction like Dubai, safe with zero tax, or similarly in the Caribbean on the same deal why would I not do that? Our UK cities are becoming more dangerous, congested and polluted. What has the City of London got to offer a young investment professional these days?
If you live in London, you probably won’t be able to afford a house, the media whip up resentment against you as a ‘fat cat banker’ and your salary is cut in half by tax.
Conclusion
All of this may make me come across as a UK hater, that could not be further from the truth, I love my country. I think the UK is one of the most innovative, beautiful, diverse and tolerant places on the planet. My problem is that those running it, those in our establishments, cannot see what is happening and are unable to act quickly enough.
We have politicians saying the UK is ‘open for business’ and praising the Fintech space for being so innovative. You then have regulators saying they want to ‘disrupt’ consumers from investing in products that are not ‘mass market’. i.e low yield savings accounts.
Rishi Sunak in 2017 did a report on creating an SME bond market ‘A new era for retail bonds’. He eloquently explained the issue of lack of funding for the SME space, he suggested a market where smaller bonds could be traded. In the UK the P2P market flourished, hundreds of million of pounds flowed into the SME market, secondary markets (we built one that traded over £55 million) provided liquidity and it looked like Rishi Sunak’s vision was coming true.
The regulators have a different idea and brought in regulations, which if applied in the way that some of the regulators feel they should be, would kill off Rishi’s dream.
My hope is that Rishi (now Chancellor) Sunak can see what this incongruent position between regulators, law makers and providers, is doing to to the UK financial service industry. I hope he can do something about it quickly because all of the factors I have mentioned above are converging into a big issue for the UK. I have no faith that this will happen sadly, and like many of my competitors and friends I am positioning myself for the future.
We have businesses, customers, employees and family's to protect and when it comes to that risk we all should be very careful about leaving that to the regulators and politicians to have our best interest at heart.
