Unregulated Collective Investment schemes (UCIS) - Why use them and what do you need to know?
And so now the FSA are looking to ban UCIS for retail investors. See http://www.fsa.gov.uk/library/communication/pr/2012/083.shtml
This seems a fairly consistent FSA position and given the information they are discovering potentially appropriate if somewhat big brother and heavy handed in approach. There can be no doubt that it will be difficult for many of the 'green' style investments to get off the ground as a result, not just because of the FSA but the impact it will have on scared compliance departments who will simply ban UCIS for all, including High Net Worths and Sophisticated Investors.
The story of 'Closed' funds on Worldwise Investor
The soft closure of the two First State Funds does not mean they are completely closed to new investors, but that they have to wait until there are other holders who want to sell and the fund managers are willing to accept them. A trust I am on has bought into both in the last few months.
Is Environmental Investing Dead in the UK Equity Income Market?
The Multi-Asset approach seems to be a sensibel approach.
There looks to be quite a future for example for corporate bonds in the 'Climate Change Arena'. See 'Bonds and Climate Change' report issued by HSBC.
Is Environmental Investing Dead in the UK Equity Income Market?
Our view is that multi-asset investing is a very different discipline to long-only equity (which is the area that WHEB and others specialise in). Cheviot's expertise is in multi-asset investing across all our portfolios and the Climate Assets Fund encapsulates our multi-asset offering for Sustainable Investors.
Is Environmental Investing Dead in the UK Equity Income Market?
Has the same sort of definition slipping also happened to Jupiter Ecology? I hope not.
Is Environmental Investing Dead in the UK Equity Income Market?
Very true Mark (the solution is a multi-asset fund). I hope that at some point soon Wheb will launch such a fund, and lets hope others will follow their lead (when it comes).
Baroness Kramer brings 'Social Investment' to the 2012 Financial Services Bill
The following debate took place in the House of Lords on 25th July 2012 in which the issue of social investment was debated and the amendment proposed withdrawn.
Moved by Baroness Kramer
118AZA: Clause 5, page 17, line 35, at end insert-
"(3) Section 21 of the Financial Services and Markets Act 2000 (restrictions on financial promotion) is amended as follows.
(4) At the end of subsection (2) insert "or
(c) the content of the communication is for the purposes of a social investment.""
25 July 2012 : Column 709
Baroness Kramer: My Lords, this amendment takes us back to social impact investments. In moving Amendment 118AZA, I also very much support Amendment 121A in the name of my noble friend Lord Hodgson; it is also in mine. However, I know that he will speak eloquently to that amendment so I ask noble Lords to assume my support in the interests of the time pressures that we have today, and I will confine myself to speaking to the first amendment in this group.
Again in the interests of time, I will not go through the issues that define why social impact investment is so important and so beneficial, yet it currently feels very constrained. That has been done already, very eloquently, by my noble friends Lord Phillips and Lord Hodgson, both of whom are in their places here today, so I will talk within the narrower terms.
I want to make two points about social impact bonds, which are the primary form of social impact investment under general discussion. These bonds are, by definition, small. If the sector develops as it hopes, the range typically will be £1 million to £5 million. The bonds are small because they deal with very specific, local social problems, which might include building new social housing within a particular community or the resettlement of prisoners from a particular prison. That small size is key to understanding the regulatory environment in which these bonds need to live and thrive.
Secondly, qualified investors are not likely to provide a very large market for social investment bonds. Certainly the one that has been offered in Peterborough for prisoner resettlement is indeed funded by qualified investors, but that will be a less frequent occurrence. The real market for these bonds is people who live in the community and whose primary objective in purchasing the bonds is social good, with a financial return being secondary. That is the market that has to be reached if we are to develop this sector effectively.
That brings me to the problem that is addressed by this amendment, which is Clause 21 of FiSMA on the financial promotions order that sits underneath it. Under these rules a financial instrument cannot, in effect, be marketed except by an authorised person. Under the order there are a few exceptions but they do not apply at present to social impact investments. To become an authorised person requires going through a process that costs some £150,000. We have talked directly with the FSA and the FCA, with independent financial advisers and with others who do structuring, and there is a general consensus around that number. In a traditional investment, which might include a fund for £20 million, £30 million or £40 million, £150,000 is nothing. However, for a bond issue of £1 million, £2 million or £5 million, £150,000 is a very large amount of money and effectively makes it impossible to develop the instrument and market it to the general public. Therefore the rules as they stand make it impossible, in practical terms, for social impact bonds to actually be marketed to their primary would-be buyers, who are the general public.
That strikes all of us, I think, as a real flaw in this legislation and it has to be tackled. We have the irony that a charity could come to any Member of this
25 July 2012 : Column 710
House and say, "We have a very good cause. Please give us some money to fund this cause"-no problem with that at all. However, if that charity were to go to any of your Lordships and say, "We have a very good cause. Please give us some money and, no promises, but I will try to get you back your original investment and maybe even a small return on it", that is handcuffs at dawn; it is actually breaking the law. That is an insane situation in which to be placed, but it is where we currently sit.
I say to the Government, to the Minister and even to the Bill team that, since the Government themselves are considering whether they should enter the field of promoting social impact bonds, I would hate to see members of the Civil Service finding themselves serving at Her Majesty's pleasure as the consequence of having promoted these kinds of investments. It is an anomaly, and we seek to address it by this amendment. I will not pretend that the amendment is brilliantly crafted, but our goal is to get the Government to sort this problem out before the law of unintended consequences has a severe impact. This rule is already inhibiting the development of this market for no good purpose. It needs to be dealt with promptly, and I ask the Government to consider this issue seriously.
Lord Hodgson of Astley Abbotts: My Lords, I proposed Amendment 121A in this group. I am grateful to my noble friend Lady Kramer for her support. She has covered some of the ground that I wish to cover, and I will endeavour not to repeat the very powerful arguments that she has made. My amendment proposes inserting into the Bill a new clause with a further consumer protection objective, as stated in its subsection (a), in situations where consumers are,
"engaging in investment activity ... to benefit society or the environment",
so it comes at the problem in a slightly different way.
As some noble Lords will know, I have just completed a review of the Charities Act 2006. My terms of reference, given to me by the Government, were widely drawn. One of them stated:
"Measures to facilitate social investment or 'mixed purpose' investment by, and into, charities".
My report, published a week ago, ran to 159 pages and contained 130 recommendations, a large number of which-15 or 20 or so-were concerned with social investment. I think that there is a great opportunity here, as my noble friend mentioned, and we are in danger of missing it.
So far my noble friend Lord Sassoon's comments on this, no doubt written for him by the Treasury, are disappointing. As my noble friend Lady Kramer pointed out, we have this counterintuitive situation where you can give money but you cannot invest it. As long as you give it away and cannot possibly get it back, you are fine. However, you cannot say, "I will give you this money. I might lose it but I might get it back, and I might get it back with a small incremental return", perhaps linked to gilts. You cannot do that, which must be counterintuitive. As the Government seek to develop social impact bonds-covering school exclusion, prisoner reoffending, getting people back into work-where charities and voluntary groups can do better
25 July 2012 : Column 711
than the state, which is therefore prepared to share some of the savings with these very effective voluntary groups, it must be sensible for us to try to find ways to facilitate the flow of money from the private sector into these sorts of schemes.
As we said in earlier debates, this idea is at an early stage, and there are many challenges. The first, not least, is to find some corporate form that can encompass all the different strands of funding: the charity itself, other funding charities, the Government and the private sector, which subdivides into corporate investors and individual investors. All these have different timescales, different legal requirements, different tax structures and different objectives. It is on the last of these-in particular, the objectives of private individuals-that I think we should focus and that my amendment seeks to focus.
Research suggests that if people could invest relatively modest sums-say, £500 or £1,000-in a social investment proposal with which they sympathised, with the possibility of getting their money back but no certainty, and perhaps with a modest incremental return, it would attract substantial support from across our society. One would hope that successful operators in this field might create a record of success that would enable them to raise larger sums of money and provide increasing services in the future.
So what are the problems? Well, there are many of them, including the approach of investment managers and advisers, and that of the actuarial and accounting professions; pricing of the initial risk; and providing interim valuations. At the heart and more important than any others is the prospectus directive. As the noble Baroness pointed out, that prohibits offering investments other than to a very limited number of people, unless that is accompanied by a full Companies Act prospectus, which she also pointed out is very expensive. By the time you have provided warranted indemnities and for financial advisers, lawyers and accountants, there is easily no change from half a million pounds, and very often it costs much more. That does not fit with small schemes of the sort that the market now needs and can now bear. The market is not mature enough to take on the very large schemes that a full Companies Act prospectus would justify.
There is a way in which we can get round this in the short term. As the noble Baroness pointed out, the Financial Service and Markets Act 2000 (Financial Promotion) Order has very wide and quite appropriate prohibitions on people being communicated with on schemes unless they are in a position to understand the risks that they are undertaking. The order has in it some exceptions already-for example, when an offer is made to an individual who has reasonable grounds to believe that he is a certified "high net worth individual". That in turn means that the recipient understands that in the words of the order:
"The content of this promotion has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested".
25 July 2012 : Column 712
In order to achieve that, the person becomes what is called a "sophisticated investor". He self-certifies that he is knowingly taking on a higher degree of risk and undertaking therefore a greater degree of responsibility.
If we can conceive-and have already introduced into law-the idea of a self-certified sophisticated investor, why can we not have a self-certified social investor? It would be somebody who understands that what he is taking on is not financially oriented alone but is aimed at providing a social benefit. If we could do that, it would begin to break the logjam, which is statutory, regulatory and administrative and is holding up the development of this movement.
If the Government could see some way in which to accept an amendment such as Amendment 121A, it would enable the consumer protection objective to be met but would empower and require the FCA to have regard to the possibility of creating the social investor alongside the sophisticated investor that currently exists. It does not require the Treasury to do anything now but enables it to make changes in future and gets the issue of social investment on to the face of the Bill. My noble friend Lord Phillips of Sudbury and the noble Baroness, Lady Kramer, proposed some amendments late the other night which were what I would regard as a full-frontal assault on the castle. This is more a way of creeping round the back to provide the Treasury with opportunities in the future.
My noble friend should consider a further argument. Interest in social investment is rising around the world, and the UK has played a leading role in the developments in that sector so far, undertaking a lot of the intellectual heavy lifting required. We are now beginning to move to the implementation phase, and this amendment would be a modest first step towards making the UK and London a centre of excellence for this new activity and ensuring that the UK is best in class in its delivery.
Lord Phillips of Sudbury: My Lords, I support totally the tenor of the amendments in this group, which have been so well spoken to. I add some practical examples of where I believe that these amendments or amendments like them would be of immense social utility. It is generally accepted that community life in our dear land is breaking down everywhere. At the same time, there is a general perception and I think agreement that anything that can be done by a community or a group within a community to shore up its social assets is doubly valuable against the background. For example, a local scouts organisation might want to build a new hut; a local sports club may want to build a pavilion or buy some boats or a bus to take teams away; or a local amenities society may want to improve a local building or acquire one. A local church might want to do something. One can go on and on. Local organisations every day of every week in every part of the land want funds to do something that they all agree would be of great benefit to that community. At present, the regime that my noble friend Lady Kramer so vividly described is a complete road block against having a general appeal to the community to chip in perhaps £10, £20 or £100-it need not be £500 or £1,000.
25 July 2012 : Column 713
What is needed is for my Government to be imaginative enough, although I realise that the Treasury is not the homeland of social imagination, to see that if we could amend the arrangements provided for by this Bill, realising that one size does not fit all, we could unleash an unpredictable but extraordinary outpouring of funds. Many will be reluctant to give but much readier to lend, even though they appreciate that the basis on which they lend is somewhat uncertain. As my noble friend Lady Kramer said, the upfront costs of having to comply with the present regime are simply prohibitive. She mentioned social impact bonds of £1 million to £5 million, but I am talking about appeals of £50,000.
The value of those small local appeals, which can be met by people lending in small amounts but large numbers, is double. They provide badly needed social facilities and, in the process, bring the community together and give them the sense of achievement. They shore up community and are of inestimable public benefit. My noble friend the Minister has had a horrendous job steering this Bill through its stages and has dealt with it in an exemplary fashion. I hope that the Government will think again over the two next months and come back in the autumn realising that they have to make major concessions on this part of the Bill for the good of us all.
Lord Tunnicliffe: My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people's life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.
On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today's debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.
Lord Flight: My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say,
25 July 2012 : Column 714
"Here is a green light. Be an investor like a sophisticated investor", but behind this territory lie quite big issues concerning good conduct.
Lord Sassoon: My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.
I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge my noble friend Lady Kramer's numbers; but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.
The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole-my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products
25 July 2012 : Column 715
around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.
To illustrate the point for the benefit of the Committee, Members may have seen a report in the Guardian just last week of the case of a firm advertising a very high guaranteed return bond, generated through investment in social enterprises. The provider in question is registered with the FSA as an industrial and provident society, but not authorised. It does not appear to have permission to offer bonds with the exact characteristics of those it promotes; operating without such permission is a criminal offence under Section 23 of FiSMA. Any investors in such an operation as is being promoted would be left entirely without protection should it collapse. That particular case is being looked into by the FSA. However, it represents a timely reminder that we have to proceed with great care in this space. So I oppose this amendment and also, for similar reasons, Amendment 121A. However, I think we have an opportunity here. As my noble friends may well be aware, the Red Tape Challenge, which seeks to reduce the burden of regulation right across the entire regulated space, is currently looking at civil society. We do want, under the Red Tape Challenge-which is open to submissions at the moment-to see what specific ideas there may be, to changes to the financial promotions order or other regulations-
Lord Hodgson of Astley Abbotts: I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.
Lord Sassoon: I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.
Lord Phillips of Sudbury: My Lords-
Lord Sassoon: Perhaps I may make one other point and then I will let my noble friend in. My noble friend Lord Hodgson mentioned the exceptions to the financial promotions order for sophisticated persons. Although I should not discuss the advice I gave Ministers in my previous life as an official, all I would say is that I am extremely familiar with the construction of that order
25 July 2012 : Column 716
in that particular respect. In my view, Ministers at the time made a very wise decision about that particular provision. I do have form, as it were, in this space. I encourage practical ideas for amending, which will be seriously considered, and although it is not easy to amend the financial promotions orders as regards the Red Tape Challenge, Ministers will look at them. Specifically, Amendment 121A is not needed in order to make that happen.
Lord Phillips of Sudbury: In his final remarks, my noble friend pre-empted what I was going to ask him, which was to confirm that it is not beyond the wit of this House to take account of the very proper points he raises and, at the same time, to take account of this big, potentially vital sector of social investment. However, I think that he has already impliedly agreed with that.
Lord Sassoon: I have drawn the Committee's attention to the opportunity that exists at the moment, and of course the Red Tape Challenge is a cross-government initiative. No. 10 and others take it very seriously; it is not simply a Treasury matter; and it goes with the wider drive in this area. I shall leave it at that.
I should say just a little about Amendment 128AA. I do not believe that the FCA needs to have a dedicated panel for representatives of social investors. As the FSA's panels already do, the FCA's panels will advise on a wide range of policies and regulations from a broad range of perspectives, and I do not believe that it is necessary or proportionate to establish another panel, at additional cost, purely to represent the interests of social investors and social sector firms. Social sector organisations will be able to feed in their views through public consultations. The interests of socially oriented financial services firms can be adequately represented by the Practitioner Panel and Smaller Businesses Practitioner Panel, and many of the FSA's Practitioner Panel members belong to firms which are involved in social investment.
However, again in the spirit of wanting to be helpful in response to the amendment, and accepting that the interests of smaller specialist firms also need to be appropriately represented, I have sought and gained assurance from the FSA that from now on it will approach trade associations which represent social investors, such as the UK Sustainable Investment and Finance Association, asking them to put forward nominations to the Smaller Businesses Practitioner Panel. I hope that that will give additional reassurance to the noble Lord, Lord Tunnicliffe, about the approach in this area. Given all that, I ask my noble friend to withdraw her amendment.
Lord Lucas: My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.
25 July 2012 : Column 717
Perhaps I may draw my noble friend's attention to an organisation called lendwithcare.org, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.
Baroness Kramer: I join in thanking the Minister for a very positive reply. It sounds as though we have real hope of making progress in this area. I very much appreciate the process that the Government have gone through to get to this point.
I also appreciate the comments of my noble friend Lord Phillips. I read into them that, with his legal-eagle mind, he and some of his colleagues may now be turning to this clause and to this area of the legislation to work out an amendment which, if properly drafted, could both address the issues which I, together with my noble friends Lord Hodgson and Lord Phillips and others, have raised and cover the absolutely fair and relevant point made by the Minister, which is that we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important.
Feeling very positive about all these issues, I beg leave to withdraw the amendment and I look forward to the summer discussions.
Amendment 118AZA withdrawn.
Amendments 118AA to 118E not moved.
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