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Government urged to establish bespoke regulator for social investment

Finance | Vibeka Mair | 23 Jun 2011

Bates Wells and Braithwaite, Nesta and the Red Tape Task Force are calling on the government to create a new regulatory regime catering specifically for social investment in place of the Financial Services Authority (FSA).

They warn that without reform, a meaningful social investment market will not develop, and the mission of the Big Society Bank will be impeded.

Both BWB and Nesta have written a report, released today, which suggests how such a social finance legal and regulatory regime could be established.  The report, Investing in Civil Society, has been recommend to government by the Red Tape Task Force, led by Lord Hodgson of Astley Abbotts, president of NCVO.

Speaking at the launch of the report Lord Hodgson said : “Expanding existing exemptions from financial services law, reforming Trust Law and introducing a new social investor exemption should increase the fund raising potential for civil society. Why should neighbours be prevented from investing in civil society if they are well-informed and wish to do so?”

In most cases, if a charity or social enterprise wants to invite investment from a member of the public, the organisation must be approved by an FSA-authorised person, which can incur high costs and time.

Luke Fletcher, a BWB associated and author of Investing in Civil Society, said at the launch, that carving out social investment from financial regulation would make it easier and more proportionate for charities and social enterprises to engage with social finance:

“The framers of financial services law think about the City and not about civil society. There is therefore no such thing as the law of social finance – yet.

“However, as the FSA is currently being reformed, there is a window of opportunity for civil society.”

The Treasury is looking at reforming the FSA as part of the Financial Services Bill. Fletcher said the reforms outlined in his report would not be complicated or expensive to implement alongside the Treasury’s current work.

Retail appetite for social investment

Also speaking at the launch, Joe Ludlow, director of social ventures at Nesta, who has done research into supply and demand for social investment, said its studies showed a significant group of wealthier individuals had an appetite for social investment, but this potential risked not being realised without a bespoke proportionate regulatory regime.

“The demand exists,” he said. “But this is a new asset class and there is the risk of people being confused. We need a regime to protect investors and incentivise them into the market.”

The Social Enterprise Coalition (SEC) is also calling on government to implement a social finance regulation framework. Peter Holbrook, chief executive of SEC said: "Swift action is required to lever in this capital otherwise civil society will be starved of the finance it needs."

Lloyd who closed the launch said the Treasury was the key institution to drive the reform, but warned that they were notorious blockers and urged supporters to write to their MPs about the new proposals.

“This report shows how the law could be changed to open up a retail market for investment into charities and social enterprises for ordinary investors,” he said. “Getting the law and regulation right is key. If the costs and bureaucracy are too high, a retail market will not develop, which would be to the detriment of everyone and would torpedo government efforts to achieve the Big Society. We believe these simple and cheap reforms will give the general public the chance to invest in job creation through social enterprise growth.”

Key recommendations

The key recommendations of the Investing in Civil Society report are as follows:

1) The government should, as a matter of urgency, issue a consultation on proposals to establish a bespoke co-regulatory regime for community and social finance.

2) Exemptions under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 should be extended to include offers by charities, community interest companies, wholly-owned trading subsidiares of charities and companies limited by guarantee and offers to ‘social investors’

3) A new Community and Social Finance Order, dedicated to community and social finance, should be issued under the revised Financial Services and Markets Act 2000

4) A new independent sector-led Standards Board should be established to articulate practice standards for community and social finance offers

5) A new office of the Social Finance Regulator should be established under the revised Financial Services and Markets Act to review and approve standards issued by the Standards Board and to act as the registrar of community and social finance offers.

To view the full report click here.

Directory: Bates Wells & Braithwaite
Who's Who: Stephen Lloyd | Lord Hodgson of Astley Abbotts