This research explores the ‘Financial Promotion Regime’ and other overlapping regulation where relevant. It provides an overview and guidance on the practical application of the Regime for social enterprises (investees) and retail investors.
Access to finance continues to be a major challenge for social enterprises, and subsequently a barrier to the growth of the UK social investment market.
One means of attracting investment capital is for investees – social enterprises – to issue a ‘financial promotion’: a communication which is an invitation to engage in investment activities. In so doing, the investee will be required to comply with the legislative and regulatory regime applying to financial promotions – the ‘Financial Promotion Regime’. This is understood here to include the Financial Services and Markets Act 2000, the Financial Promotion Order, and FCA Principles for Businesses, among others. Other overlapping regulation such as the FCA Crowdfunding Regulations is also considered where relevant.
In order to help social enterprises and retail investors to better understand this regulatory landscape, the Social Investment Research Council is delighted to have jointly commissioned this research, which provides a practical and accessible introduction to the Financial Promotion Regime. In addition, it considers how it affects the marketing of social investments to ordinary retail investors. This work includes an analysis of the barriers to social investment for investees and investors, and to market growth more generally.
The research is particularly timely in light of the FCA Crowdfunding Regulations, published earlier this year, which are certain to have a profound effect upon the marketing of unlisted social investments to retail investors in the future. The research highlights that the complex and multi-layered nature of the Financial Promotion Regime in application is in itself a challenge for investors and investees alike to understand. This can cause uncertainty as to what rules apply and when, and which course of action is subsequently required. Additional barriers also arise – for example the associated costs of compliance for investees, or the costs of financial advice for investors. Given the relatively small size of most social investments, these costs are likely to be disproportionately high compared to the level of protection required in the case of social investments which, due to their small size, have low associated risks. In addition, such challenges are likely to be felt most acutely by the smallerscale social enterprises which make up much of the social sector, and have a significant restrictive impact on their ability as investees to market small investment amounts to retail investors. There are also important considerations raised around the degree and nature of the risk that ordinary retail investors are being protected from, particularly where some investors may be willing to blend financial and social return, or even entertain the prospect of philanthropic donation.
In identifying such areas of challenge for investees and investors, this guide presents valuable insights towards addressing a key barrier to growth for the social investment market – access to finance. It highlights that the nature of the Financial Promotion Regime as it currently stands, in failing to recognise the specific needs and features of many social investment contexts – where investments are often small-scale, localised, involve personal associations and financial return is often a secondary consideration – presents barriers both for investors and investees, which risk stifling the growth of the marketplace. While the Financial Promotion Regime provides valuable and necessary regulatory protection to retail investors, there is scope for the regulatory landscape to be improved and clarified, to enable the growth of the social investment market.
The Government has demonstrated clear support for the growth and development of the nascent social investment market, including the creation of Big Society Capital in 2012, and the establishment of the G8 Social Impact Investment Taskforce in July 2013. Likewise, the commitments made by HM Treasury as set out in its ‘Social Investment Roadmap’ published on 30th January 2014, which culminated in an announcement in the 2014 Budget that the Social Investment Tax Relief (SITR) will be set at 30% for retail investors. For the positive impacts of these developments to be felt, the commitment to growing the social investment market needs to be reflected across the wider legal, regulatory and policy landscape.
The Social Investment Research Council commends this research for providing muchneeded practical guidance on the Financial Promotion Regime and highlighting that there remain a number of barriers to the social investment market in relation to the marketing of social investments to ordinary retail investors.
It also highlights potential opportunities to facilitate such marketing with a view to encouraging the growth of retail investment in the social investment market generally. In so doing this research provides valuable insights for the market’s development and will inform wider dialogue on the regulatory landscape and policy framework.