Industry stakeholders have called on the Financial Conduct Authority to level the playing field between social investment and crowdfunding, to let the former grow like the latter has in recent years.
Earlier this week, the FCA published a call for input on how its regulation of the social investment market is working, with director of strategy and competition Christopher Woolard commenting that he wants to make sure growth is not inappropriately restricted, while continuing to protect investors.
Social investment is a term used to describe investments where the aim is to provide a wider social benefit, rather than the primary driver being a purely financial benefit to investors.
Speaking to FTAdviser, Bestinvest founder and EQ Investors chief executive John Spiers stated his firm’s submission to the regulator would include a request for crowdfunding’s ‘10 per cent rule’ to apply to social investing.
This refers to rules brought in last year introducing an ‘appropriateness test’ which requires firms to check prospective clients are either advised, defined as ‘sophisticated’, or only investing a maximum of 10 per cent of investible assets.
He also called for a more ‘simplified advice’ option to apply when IFAs were discussing only social investments, rather than the full fact find that is necessary when discussing investments made from a clients complete portfolio.
“So far there has been negligible adviser and client take-up, due to a lack of product and stern warnings from the FCA on more complex investments, so we’d like to see the 10 per cent exemption apply across the board and some form of restricted advice allowed,” commented Mr Spiers.
City of London research cited by the regulator shows that the UK social investment market is currently worth just over £200m, although retail investors currently have a minority stake.
That study, carried out by Social Investment Research Council last summer, also found that rules around investment suitability were deterring advisers from recommending social investments, impacting on growth in this sector.
When the regulator previously consulted on its approach to crowdfunding in 2013, some respondents from the social investment sector raised concerns about the potential impact of crowdfunding regulation on the growth of the social enterprise sector.
In a policy statement in 2014, the FCA said it would comment further on the social investment sector, with this call for input being the follow-up to this commitment.
Big Society Capital’s strategy and market director Simon Rowell said he hoped the FCA’s spotlight should help demonstrate demand for social investments, which will in turn encourage advisers to talk about them with clients.
“I think there is a genuine desire amongst people to invest into charities and social enterprise in their local communities, but these organisations have been held back up until now by financial promotion rules, as it’s often costly to get the required permissions,” he explained, adding that this is one of the areas he hopes the FCA will focus on.
Gavin Francis, founder of social investment resource for advisers Worthstone, urged the regulator to help clarify the sector to help advisers understand why their clients may want to invest.
“Our research has shown latent demand amongst high-net-worth investors, but advisers must ask the questions, as both my not be aware that such structures actually exist.
“If proper suitability work has been done, then I think there are actually a lot of investors who can afford it, have the capacity for risk and long-term outlook required for social investments; many have money earmarked for charity anyway.”
Mr Francis’ website is working on educational material to help get more advisers on board, as he argued that the biggest barrier is unfamiliarity with the sector.
peter.walker@ft.com
