Social finance choked at birth by regulatory thickets – Treasury asked to consider a new approach
July 2011
The seeds of social entrepreneurship and finance are in danger of being scattered to the wind before they have even had a chance to germinate because of an adverse regulatory climate, according a new report coinciding with the government's overhaul of the Financial Services Authority.
The public services (social enterprise and social value) bill, will (if enacted) require all public sector contracts to deliver positive social, economic and environmental wellbeing in communities across England and some parts of Wales.[1]
Commenting in the Guardian last November, Social Enterprise Coalition CEO Peter Holbrook explained: “Durham county council (one of the largest councils in the country) is currently carrying out a programme of activity to support a more sustainable local economy. It's developing new protocols for supplier engagement that will support social enterprises and other civil society organisations to bid for contracts, as well as training procurement officers and commissioners so they can assess the kind of additional value that contract providers can offer, rather than just the cheapest price.”[2]
However, civil society organisations need capital to be in a position to bid for some of these contracts and, with the launch of Big Society Bank looking on hold for the time being,[3]they are going to need to attract social investment from as wide a pool of investors as possible.
A new regulatory regime
According to a new report, Investing in Civil Society,from law firm Bates Wells and Braithwate, commissioned by the National Endowment for Science, Technology and the Arts (NESTA), the restrictive regulatory framework for community and social finance is holding back outflows of money from the City into civil society investment. And when Big Society Bank does eventually open for business, part of its role is to leverage further private funding into the social investment space and untie the hands of ordinary investors. The current regulatory regime doesn’t encourage that.
Speaking at the launch of the report on 23 June, Joe Ludlow, director of social ventures at NESTA explained that the body’s previous analysis had identified the demand for financial products designed specifically for those investing in civil society, but without and ‘appropriate’ regulatory regime.
Lord Hodgson (who was also at the launch), author of the Red Tape Task Force’s Unshackling Good Neighbours,[4] Task Force was surprised to learn that while individuals are free to give money to CSOs, whose objectives they support, they are effectively prevented by the regulatory regime from investing in such projects. It seemed to the Task Force that it made no sense that individuals could give money to community and social finance schemes but could not invest in those same schemes which, while involving some risk, might nevertheless return their investment to them.”has called for the creation of a new type of ‘social investor’ exemption from financial services law to free up investment into civil society by ordinary people. In the report he points out: “the
Part of the problem lies in the way the architects of financial services law think about the City and civil society – according to Luke Fletcher, an associate of Bates Wells and Braithwaite who wrote the Investing in Civil Society report, the lawmakers have failed to grasp why the law of social finance should be different.
He went on to tell delegates at the launch of his report that the window of opportunity to get this oversight addressed is right now because the government is currently setting out its reforms to the Financial Services Authority.[5] In the light of this, NESTA has asked HM Treasury to open a formal consultation on the idea of a bespoke regulatory regime.
The key recommendations of the Investing in Civil Society report are:
- 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.
- Exemptions under the Financial Services and Market Act 2000 (Financial Promotion Order 2005) should be extended to include offers by charities and companies limited by guarantee and offers to ‘social investors’.
- A new community and social finance order, dedicated to communityi and social finance should be issued under the revised Financial Services and Markets Act 2000.
- A new independent sector-led Standards Board(s) should be established to articulate practice standards for community and social finance offers.
- 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.
In the lap of HM Treasury
The challenge facing NESTA, the social enterprise sector and the Cabinet Office remains in convincing HM Treasury it needs to take the action and treat social finance rather differently from the rest of the financial services industry.
Model letter
Stephen Lloyd, senior partner of Bates Wells and Braithwaite, has drafted a model letter for prospective campaigners for the new regulatory regime and this is set out below:
Dear [insert name of local MP]
Reform of Financial Services Law – Social Investment
I am writing to ask if you could write to Mark Hoban MP, Financial Secretary to the Treasury, to request that a consultation be issued on the idea of a new regulatory regime for social investment, as part of the Treasury’s reforms of the financial system in the UK.
There needs to be a special regime for social investment – investment in civil society for social as well as financial returns – for the following reasons:
- There is a window of opportunity. Financial services law is currently being reformed and HM Treasury intends to introduce legislation on financial regulation reform to Parliament shortly. The passage of legislation is expected to take around a year and the new regulatory framework is anticipated to be in place by the end of 2012.
- Third sector organisations, such as charities and social enterprises, play a vital role in communities throughout the UK by:
- delivering socially beneficial goods and services
- promoting collective action and community responsibility; and
- generating jobs and wealth in communities which really need it.
- There is an urgent need to help charities and social enterprises to become less reliant on state funding and to diversify their resource base, given recent public spending decisions. Investing in social enterprise is attractive to a growing number of investors.
- Under current financial services legislation, charities and social enterprises are unable to raise investment from the general public unless an investment offer is issued or approved by a person authorised by the Financial Services Authority.
- FSA authorisation is prohibitively expensive for most modestly sized charities and social enterprises which struggle to understand and conform to mainstream financial regulation and cannot always justify the professional fees required for approval.
- As a result, the current system prevents ordinary members of the public from investing in civil society and this is choking the social investment market.
NESTA has recently published a report “Investing in Civil Society” written by the law firm Bates Wells & Braithwaite London LLP which recommends the establishment of a special regime for social investment, including the establishment of a Social Finance Regulator: ttp://www.nesta.org.uk/publications/policy/assets/features/investing_in_civil_society .
I would be grateful if you would consider supporting proposals along these lines.
Please could you kindly ask Mark Hoban MP to look into these issues as a matter of urgency and to make arrangements for the Treasury to consult with the charity and social enterprise sector on the ideas in the BWB-NESTA report, as part of the reform of the financial system.
Many thanks in advance. I look forward to hearing from you.
Yours sincerely
[insert name]
[2]www.guardian.co.uk/social-enterprise-network/2010/nov/18/making-the-most-of-the-public-services-social-enterprise-and-social-value-bill
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from
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