Major Barriers for Social Impact Investment
The development of social investment in the UK is being seriously hampered by the regulatory environment. Charities can market to people in the UK and ask them to give all of their money away, but they cannot market products which have similar social goals and offer the prospect of getting some money back, or even a return. This is because these are deemed investments and fall under financial services regulation.
What is Social Impact Investment?
Social impact investing is really the modern version of philanthropy, but it is unlikley to have reached you because it is not possible to market these type of products to the wider general public cost effectively and within the law.
There is growing recognition that simply giving money away does not solve social problems. Often what people need are the tools to help themselves, rather than charity. They need empowerment rather than gifts. This commercial philosophy has been spread far and wide by persons such as Muhammad Yunus who won the Nobel Peace Prize in 2006 and who was the founder of Microfinance in Bangladesh which has now developed worldwide.
What is the problem with the Financial Service Regulation?
It is very expensive to launch investment products in the UK which do not have significant market demand and scale. To achieve a full regulated product requires funds to be launched confidently in excess of £20m. There are some examples of commercial organisations seeking funding from the general public which get around the marketing regulatory hurdle, by issuing non tradeable loans (we have previously written about Ecotricity's £10m bond launch), but this route would not suit the full range of social investment needs and it would be regrettable if the social investment market had to use a financial services loop hole such as this to be viable.
There are two problems in the social impact investment market:
- Organisations looking for funding are doing so for specific scenarios, usually on a local basis and thus require much lower levels of finance in the £1m to £5m range.
- It is not possible to market 'unregulated' financial products to the general public.
Of course there are good reasons why 'unregulated' products are not marketed to the general public. However, these are based on the premise that an individual's primary goal is that he is looking for an investment. The primary goal of a social impact investor is not financial, but social - the funding sits in a half way house between charity and investment. It therefore requires a regulatory environment which recognises this.
Fourth Marshalled List of Amendments to 2012 Financial Services Bill
In a meeting Baroness Kramer had with Richard Taylor, Acting Head of the Investment Policy Department at the FSA (Financial Services Authority) on Friday 13th July, it became apparent that it is not the FSA themselves who are the barrier to the development of the social impact investment market, but the 2000 Financial Services and Markets Act and the subsequent 2005 Financial Promotions Order issued by the Treasury which provides for certain marketing exemptions.
As a result of this meeting Baroness Kramer felt the most appropriate course of action was to table an amendment in the Houses of Lords to the 2012 Financial Services Bill. This would have the impact of amending the following 2000 Financial Services and Markets Act clause:
with the following addition:
(c) the content of the communication is for the purposes of a social investment.
The amendment which appears in the Fourth Marshalled List of Ammendments to the Financial Services Bill is as follows:
It may look small but this amendment would have a significant impact on the ability of social enterprises to raise money. It would become possible to market social investment products to the retail investor and require a whole new regulatory framework for dealing with social investment, similar perhaps to that in Holland.
What can be expected for Social Investment?
In the event that Lord Sharkey and Baroness Kramer's amendment does not make it into the Financial Services Bill, Baroness Kramer hopes that it will bring the issue to the attention of the UK Government. If David Cameron truly wants to develop his concept of the 'Big Society' there are real practical steps needed and financial regulation is currently a key block.
It is Lord Sassoon who is responsible in the House of Lords for getting the Financial Services Bill back to the House of Commons for a vote. Let's hope that he understands the significance of this issue and speaks to David Cameron about it.