The Role of Big Society Capital in boosting Social Investment
On 4th April 2012 Big Society Capital was launched with funding of £600m, primarily from 15 year old dormant acccounts in the banking sector. At the launch of the Big Society Capital fund David Cameron said:"this is about supplying capital to help society expand. Just as finance from the City has been essential to help businesses grow and take on the world, so finance from the City is going to be essential to helping tackle our deepest social problems." Sir Ronald Cohen, the Chairman of Big Society Capital added: 'Big Society Capital aims to transform the flow of capital into the social sector and to boost significantly its ability to improve people's lives.'
As with all things this is easier said than done. While £600m seems a lot of money in the context of Britain's social problems it is not. This fund is really about creating an environment in which far greater amounts of capital can be directed towards solving social problems, both because people want to help and because there is a financial case to do so. More recently Lord Hodgson in the House of Lords when considering the wider challenges that this poses asked "how can we help the social impact butterfly break out of its chrysallis," adding that "it may take a generation to deliver".
Social Investment ranges from dealing with homelessness to re-offending rates of ex prisoners and today a range of innovative investment products are due to come to the investment market which aim to provide financial returns from dealing with the causes of social problems, rather than treating the symptons. However there are many challenges in raising the required capital as the report highlights.
About the Report - 'Financial Planners as Catalysts for Social Investment'
Introducing the report on the 13th June and putting it into context Antony Elliot of The Fairbanking Foundation explained how prevous research indicated that 40% of wealthy individuals have an IFA (Independent Financial Adviser) and thus how important the IFA is in helping to bring into reality David Cameron's vision. There are 7 recommendations made by the report, but three stood out in driving private investors to seriously consider the Social Investment or Impact Investment market. These were:
1). Defining the Social Impact Pot
There is clearly a challenge in helping investors understand what Social Investment, or Impact Investment, is and how it fits into an individual's financial strategy. For most private investors their primary concern will be how much can I afford to risk? The report challenges investors and financial planners to start to redefine their financial strategy and look at dividing their wealth between three different pots - the charity pot, the Social Investment pot and the Investment pot. This goes to the heart of the advice process and asks investors and financial planners to redefine how they look at wealth and how they arrive at their financial plan.
2). Clarifying and softening regulation to allow for Social Investment
There are many rules around the promotion and marketing of products to the private investor which are prohibitive to the development of the Social Investment market. IFAs are becoming more and more aware of the compliance implications of recommending products deemed to be higher risk products such as UCIS (Unregulated Collective Investment Schemes). Indeed many IFAs are prevented from recommending a UCIS by their compliance department. The point was raised at the launch of the report that while it is possible for a person on the street to give all of his money away to charity without any regulatory implications, it is not possible to make an investment for social reasons, with the possibility of getting your money back. Clearly in order to move capital into the 'Socail Investment' market government needs some joined up thinking around this regulatory point and new solutions need to be found which recognise much more fullly 'social' motivations for investment as apart from financial.
3). Providing Tax incentives
The report calls for government to introduce tax incentives around Social Investment. Government are all too aware of the real driver that tax breaks can provide to investment. In 2011/2012 George Osborne increased the tax breaks to Enterprise Investment Scheme investors from 20% income tax relief to 30% to encourage greater investment into new start up companies. In order to really give Social Investment a boost David Cameron really needs to get some buy in from the Treasury to encourage private investment into the Social Investment world.
What role for Financial Planners and Private Investors?
While financial planners cannot alter today the regulatory or tax environment it is important that they understand their clients and help them achieve their goals. The report draws reference to the FSA (Financial Services Authority) initiative known as TCF (Treating Customers Fairly). It is important for financial planners to understand the Social Investment market and perhaps to ask some extra questions of clients in the fact find, or discovery process. The report provides a proforma questionnaire to help financial planners do this and establish if there is a client need. David Thomson, Director of Policy and Public Affairs at the Chartered Insurance Institute, at the launch said it is key that our members understand "how this might play a part in the financial planning profession". While Nick Cann, Chief Executive of the Institute of Financial Planning said this type of advice "was a natural transition to where financial planners were moving".
For private investors it is perhaps a little more simple - What do you want to do with your money?