Charities must be allowed the freedom to approach potential social investors in a more informal way than they can currently if the social investment market is to grow, Lord Hodgson of Astley Abbotts said this week.

Lord Hodgson – who is leading the official review of the Charities Act 2006 - was speaking at the second reading of the Financial Services Bill in the House of Lords on Monday.  He pointed out that although the government is keen to encourage social investment, it is barely mentioned at all in the Bill.

He said that the biggest challenge to the growth of the market concerns the interaction between charities and their individual supporters.

“The missing piece in the jigsaw at present is the ability to approach individuals about social impact investments without the need for a full Companies Act prospectus, the cost of which renders almost any scheme uneconomic,” he said.

“We are therefore in the counterproductive and counterintuitive position that an individual can give his or her money to a project and be certain that he or she will not get it back, but he or she cannot lend or invest it if there is any prospect of any return at all. That cannot be a sensible way of proceeding to try to encourage our fellow citizens to put money behind social impact projects that this country badly needs.”

Lord Hodgson said he hoped that when the Bill reaches Committee stage, ideas will be discussed to “help the social impact butterfly out of its chrysalis”.

Self-certified social investor

One such idea he proposed is to establish a class of individual supporters or investors, “perhaps by creating a self-certified social investor along the existing lines of the self-certified sophisticated investor”.

In 2005, the rules relating to approaching people regarding financial promotions were relaxed so that so-called ‘sophisticated investors’ - high net worth individuals - could be more easily approached with a view to making investments in unlisted securities. The purpose was to remove impediments to business angels and others seeking finance for small businesses and to allow entrepreneurs to find venture capital more easily.

Lord Hodgson acknowledged that various government departments will need to be involved if the social investment market is to move forward significantly, and added: “In my view, it will probably take a generation for the social impact investment movement to reach its full potential, but we need to plan now, and financial regulation, more than any other sector, holds the key.”