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Groundbreaking report sets out ‘suitability’ principles of social investment
It is vital for members of the financial advisory and wealth management community that they have confidence in the regulatory status of any product which they are recommending. For social investment to become a recognised asset class we therefore need to see a clear connection between government policy, the stance of the regulator and the actual design of the products on offer.
Gavin Francis, founder, Worthstone
Investment advisers, professional bodies and financial regulators are being urged to take steps together to champion social investment.
A report launched today by Big Society Capital, lawyers Bates Wells & Braithwaite and social investment experts Worthstone sets out a set of principles to help investment advisers decide on the ‘suitability’ of social investments for clients.
Suitability is a regulatory concept, which involves an assessment of whether an investment is appropriate to meet a client’s needs.
The first of its kind, the report also makes recommendations to European and UK authorities and financial regulators on further steps which can be taken to integrate social investment with financial services regulation, in particular around the regulatory definition of suitability.
The report details the conclusions of a working group convened by Big Society Capital and Worthstone, which included representatives of the two main professional bodies for investment advisers – the Chartered Insurance Institute and the Institute of Financial Planning – as well as thought leaders in financial planning and private wealth management businesses.
Key findings are:
- Investment objectives and social goals – investment advisers need to develop a new set of tools to explore the suitability of investments in light of the social goals of a clients.
- Client discovery – Investment advisers should ask each client whether or not the investment objectives of the client involve the pursuit of positive social impact, as well as financial returns.
- A portfolio approach – Once full provision has been made for a client’s financial needs as well as any legacy, investment advisers should be able to allocate assets either for philanthropy and/or social investment, where this is in fulfillment of a client’s objectives and the client provides informed consent.
- Professional standards and best practice – Further work needs to be done by FSA accredited bodies, in dialogue with the FSA/FCA, and others to encourage the development of best practice standards with respect to social investment, including through the conduct of research, provision of training, raising of awareness, promotion of best practice standards and convening of debate and discussion.
- Regulation and policy – The FSA/FCA should in due course consider taking further action if, as expected, the market develops and grows. The developing nature of social investment should be considered and appropriately acknowledged as part of the current MiFID review process.
Nick O’Donohoe, CEO of Big Society Capital, said: ‘As part of Big Society Capital’s role as a champion of the social investment market, we are committed to social investment becoming an appropriate and viable retail proposition. So we are grateful to the working group and hope their recommendations will spur action in the financial planning community and beyond.’
Luke Fletcher, a lawyer specialising in social investment at Bates Wells & Braithwaite, said: ‘This is a groundbreaking report. A leading group of advisers and professional bodies have set out how investment advisers are able to decide when social investments can be recommended to clients and how social investments can be built into a client’s overall investment portfolio.
‘The report makes the case for a new standard of best practice which involves advisers asking clients about social goals, as well as more traditional financial goals, and shaping investment strategies around both the financial and social goals.’
Gavin Francis, founder of Worthstone, a specialist adviser to financial planners on social investment, said: ‘It is vital for members of the financial advisory and wealth management community that they have confidence in the regulatory status of any product which they are recommending.
‘For social investment to become a recognised asset class we therefore need to see a clear connection between government policy, the stance of the regulator and the actual design of the products on offer.’