The Austrian Way: Here comes the next regulatory cock up

These last few years have seen the rapid rise of a welcome new sector in the economy – tech finance – full of exciting new business models, platforms and ideas.

Entrepreneurs have been leaving other parts of the economy, seeking to harness these new technologies to provide us with new or improved services, often trying to disintermediate the banking system.

This creative destruction has got quite a bit hotter since 2008, with businesses like Wonga becoming soaring successes, even though they were started with seed capital of little more than a million pounds.

Today this alternative finance sector is growing nicely with pioneers like Wonga, Zopa and MarketInvoice being chased by ‘fast-followers’ (if you like your VC-speak). The sector is evolving and already successful business models are being challenged by multiple new arrivals.

It all looks pretty awesome to us, especially given that lots of these businesses are growing out of London. That most regulated and protected of sectors – finance – is being challenged and changed by technology and consumers stand to benefit.

Then the regulators arrived

This alternative finance sector is now doing well enough to be approaching the mainstream and as more and more clients use these business our regulatory bodies are now gearing up to ‘protect consumer interests’ and ‘manage risk in the sector’. (If you actually believe the regulators can achieve these aims you should stop reading this now and head back to la la land).

Apparently, those evil pay day lenders and their high interest rates need to be brought in check. Those P2P finance companies, acting independently of deposit insurance and the fractional reserve system, need their fast practices being brought back in check. All these sharp operators with their new business models are meaning that innocent, vulnerable consumers are facing too many confusing choices and risks.

Obviously consumers acting in the amoral market are not able to act as an effective part of market forces, so here come ‘the Feds’.

The FCA is now stepping into the pay day lending and P2P lending sectors.

Who is actually shafting the consumer?

The problem with the FCA’s meddling is that all it will do exactly the opposite of what it set out to do. It will stifle competition, reduce innovation and protect not the consumer, but the already ‘made it’ companies.

The FCA’s intervention will make it more expensive to launch a business to challenge the status quo and make it generally more tricky to run a new, disruptive business.

These wonderful new rules and regulations will take management time away from important things like reacting to real client needs in the market and instead require it to be spent ticking boxes, meeting the FCA at their incredible swanky Canary Wharf offices and wrangling with bureaucracy.

FCA intervention will favour the businesses it is trying to bring to account for basically being too successful and thus exploitative. The cash rich Wonga’s of the world will be able to pay for lawyers, regulatory consultants and whatever else you need to work through the regulatory rigmarole. The cash poorer, newly arrived competition will not.

This is a great shame. I’d much rather see new business models challenge Wonga – like TrustBuddy which is seeking bring the short term pay day loan market onto a transparent, efficient exchange.

The shareholders of Wonga, Zopa, Funding Circle et al must be rubbing their hands with glee. Errol Damelin – if you’re reading this and were considering buying that yacht, do it! Your personal wealth just got  a whole load more secure.

Once more our government advances corporatism and crony-capitalism over the proper sort of capitalism us Austro-Libertarians dream of.

Thanks a fucking bunch.

3 comments on “The Austrian Way: Here comes the next regulatory cock up

  1. I love Kevin Marx
    October 15, 2013 at 8:49 am #

    Now that the government has turned banks into wards of the state, they’re keen to get their claws into the new financial sector and suckle on new opportunities.

    Given that Wonga, Zopa and their competitors operate in the credit market this is even more ironic as our Keynesian-guided establishment muppets don’t know a damn thing about credit, credit cycles or especially credit bubbles.

    The whole thing stinks and is utterly unsustainable in the end… the problem is, I’m buggered if I know where ‘the end’ is.

  2. silverminer
    October 15, 2013 at 11:52 am #

    The irony is that Zopa etc are doing what banks ought to be doing, i.e. intermediating between depositors and borrowers and organising loans of money that already exists. The pay day loans people are discounting real bills, another proper function of a bank. Normal private sector business transactions.

    The banks themselves are involved in the fractional reserve fraud where they create money out of thin air and lend it out at interest. All that is required to participate in this fraud is a banking license. State sanctioned fraud.

  3. Roger L
    October 15, 2013 at 9:31 pm #

    Well said. It all comes down to whether you believe in the state to advance the interests of consumers or not.

    I agree that it doesn’t and tends to create all sorts of distortions and opportunities for parasites. The UK has such a golden opportunity to become a Singapore-like beacon off Europe, yet we’re nowhere near taking it!

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