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Do you trust your agents?

In Edelman’s Trust Barometer 2013, Singapore is ranked the 2nd country with the highest trust index, after China (yes China)! Earlier in the year, while making a panel presentation, I saw the disbelief in some when I shared this finding.

Edelman is a highly respectable PR firm that was founded in 1952. The 2013 Trust Barometer was their 13th year in running and according to them, their largest exploration of trust. They had a clear methodology in sampling respondents.

I briefly summarize the results for Singapore.

  • Singapore’s trust index in 2013 has risen to 76, 9 points higher compared to its score in 2011 and 2012.
  • Singapore is the country with the highest trust score after China.
  • The informed public is significantly more trusting than the general public in Singapore. Informed public are respondents aged between 25-65, college educated, in top 25% household income and have significant media consumption and engagement in business news and public policy.
  • Corruption or fraud is a key reason for distrust in business.
  • Banks, financial services and media remain the least trusted industries in Singapore, though their 2013 scores have shown improvement from previous years.

On the last point, it hardly comes as a surprise. I suspect trust levels for the banking and finance sector would have again fallen in next year’s survey, given the high profile involvement of Singapore based traders in the Libor and Sibor rigging scandals. Also, another potential blow-out may be on the cards with the tax files leak.

When news like these break, they make people wonder about the financial sector – has it morphed to merely being the playground of the few, whose acts are now so esoteric, reclusive and outlandish that they become disjointed and to a certain extent, parasitic to the broader real economy? When intermediaries control (rig) the market to line their own pockets, that’s not doing God’s work, hell no!

That’s squandering and decimating the trust that people have of the financial services sector. These scandals are consequences of the lop-sided, misaligned and short-termist incentive structure that financial services firms had in place that promoted “agency capitalism” (versus “entrepreneurial capitalism”) as observed by Alfred Rappaport, Professor Emeritus at Northwestern University’s J. L. Kellogg Graduate School of Management in his book “Saving Capitalism for Short-Termism“. There is this particular acronym in Finance, “IBGYBG” (I’ll be gone, you’ll be gone) that was validated in the Libor rigging trials. Everyone on the stand knew of the manipulative practice and played along with it, because that’s how everyone (in their trading community) got round to getting paid. And, according to Rappaport’s account of agency capitalism, because increasingly everyone down the line is an agent, as managers (employees) managing other people’s money (banks, funds, clients), the resultant is a self-interested orgy of wealth transfer, until when finally the bluff is called, the system crumbles and dives into a crisis of distrust.

So what relevance does this have with P2P lending? I’ll mention one for now – the distinction is that of being a principal (the platform serves only to bridge borrowers and lenders). There are no agents in the middle that bring about conflicts of interest or misalignment of incentives. This go-direct mode of investing not only passes through fewer hands (hence reducing “contamination”) but also fosters the build-up of social capital. And with social capital comes trust and reciprocity, a need becomes satisfied by a want.