Apfa: Regulation is not the only barrier to social investment


Social investment has become increasingly fashionable in recent years, from the launch of specialist bank Big Society Capital in 2012 to the Social Investment Taskforce established by the UK G8 Presidency in 2013 and HM Treasury’s social investment tax relief introduced in 2014.

The latest initiative in this field comes in the form of the FCA’s Call for Input: Regulatory Barriers to Social Investment, which outlines the current regulatory environment and requests views from intermediaries about barriers to offering such investments to clients.

Proof that the current regulatory set-up is complex and unwieldy is evidenced by the sheer number of presentation slides the regulator uses in its overview.

Advisers should be thinking more seriously about this issue as there is evidence of growing consumer appetite for values-based investments. For example, a YouGov survey last year showed 54 per cent of UK people with investments wanted their pension or savings to have “some positive impact on the world beyond just making money”.

There is also evidence millennials are more concerned about values-based investment than older generations, so getting involved in social investment could be a useful selling point for advisers keen to build relationships with that demographic.

So what are the possible regulatory barriers for advisers? Advice on any investment must be suitable and take into account a client’s objectives, needs, risk appetite and so on. Some that specialise in social investment have said they would like to see the FCA require advisers to ask about non-financial objectives.

Greater clarity in this area would be helpful but I would not be keen to see further requirement imposed on advisers in this currently over-burdensome regulatory environment.

Meanwhile, speaking to social investment providers I often hear the same complaint that “mainstream” advisers are reluctant to offer or discuss their investment options with clients. Research undertaken by Worthstone and Standard Life in recent years would indicate there is some truth to this.

There seems to be an unwillingness to become involved in what are seen as “new” areas of the market more generally, as we have seen recently in the area of pension transfer business, for instance.

I believe caution has in part been exacerbated by perceptions of a decision-making process at the Financial Ombudsman Service that unfairly assigns liability to advisers. It is reasonable to imagine this may have an impact on willingness to recommend social investments too.

However, I do not think it is simply a case of reforming the regulations and watching as money floods into social investments via advisers. The problem goes much deeper. Anecdotal evidence suggests advisers do not feel they have the knowledge necessary to make a recommendation, although there have been moves by the CII, the City of London and others to offer courses, seminars and resources in the area.

It is also partly owing to the nature of the investments themselves. There is no track record of performance available yet and many of the investments are illiquid. Indeed, surveys show advisers prefer to recommend more liquid investments to clients in most cases.

The former will resolve itself over time but there are some social investment practitioners who believe that “liquidity is the enemy” and that it runs counter to the long-termist philosophy underlying such investments. If this remains the case, it may provide a natural ceiling for levels of social investment.

Greater clarity from the FCA would be welcome but it can only do so much without imposing unnecessary burdens on the advice community. With what looks like growing demand for values based investment, advisers need to make their views heard and get up to speed in order to take advantage.

Caroline Escott is
senior policy adviser at Apfa