Historically, the Young Foundation has had a pivotal role in social investment, developing the concept for social impact bonds and authoring landmark policy papers such as Growing Social Ventures and Lighting the Touchpaper. However, so far we have only been able to dip our toes into becoming a social investment intermediary, wary of landing the wrong side of financial regulation.
As an organisation that works with both the social investment market and directly with social entrepreneurs, The Young Foundation is better positioned than most to bridge the gap between these groups, help investors understand the actual financial need on the ground and entrepreneurs what it really means to be perceived as ‘investment ready’, often felt akin to asking for the moon on a stick. So why isn’t the Young Foundation holding regular mixers, proactively introducing these groups so they begin to understand and speak each other’s language? In short, the answer is the Financial Services and Markets Act 2000 (FSMA).
Given the very vocal frustrations on all sides about the lack of a decent pipeline and availability of capital, we would be thrilled if an actual investment came out of an introduction we made possible, but if it did, there’s a possibility the FSA would take a different view. While an introduction may be innocuous, arranging a deal is quite different. Defining where one ends and the other starts can be nebulous and getting this wrong is a criminal offence. In this environment, our reticence at the role we can play is easily understood.
We are increasingly asked to act as a broker, actively seek out investors. Could this be done without being authorised? Perhaps. The answer often depends on the structure of the investment, who the investors are and the implications for financial promotions under Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Yet the answers to these questions often emerge over the course of the process rather than at the beginning.
We recognise and welcome the need for financial regulation, however the reality is that the current group of social investors are socially motivated, they tend to be charities or philanthropists, rather than the financially motivated pension funds or retail investors for whose protection the current regulation is designed. If social investment is to be subject to financial regulation then we need a pragmatic response from the FSA (and its antecedents), that explicitly clarifies the treatment of social investment instruments. If not, it risks stalling the growth of the market.
Aside from financial regulation, we strongly believe that there is a need for a standardised model for social investment funds. Many people in the social sector have a clear concept of how they could channel social investment and Big Society Capital funds into the social sector. The more difficult question is deciding on the best legal structure to make this happen. The complexity of answering this question can be dazzling and dependent, most often, on the provision of serious and pro bono intellectual capital from financial, legal and tax professionals. Queue the scrabble to find a lawyer who is conversant with social investment and charity law but also private equity and financial regulation. While we recognise that developing a new market engenders trying out different structures, the social investment market is now at a stage where a clear model, recognised by the FSA and HMRC, would be welcome.
This is why the Young Foundation fully endorses the Ten Reforms to Grow the Social Investment Market set out by Bates Wells & Braithwaite in response to the Red Tape Challenge, and in particular, we urge the government to:
- Clarify the treatment of social investment instruments under financial regulation.
- Place a social investment duty on each of the Financial Conduct Authority and the Prudential Regulation Authority to encourage sensitive regulation.
- Reform the rules governing financial promotions to take account of investors who invest with social or philanthropic motives, crowdfunding and peer-to-peer lending.
- Introduce a tax break for social investment and community interest companies to level the investment playing field and encourage more social enterprise start-ups.
- Reform company law and co-operative law to encourage the formation of more start-up companies with a social purpose and more new co-operatives.
- Introduce a model social investment fund structure to enable Government, charities and other investors to more easily invest in structured funds for social impact.