Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Wednesday 25th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, this amendment takes us back to social impact investments. In moving Amendment 118AZA, I also very much support Amendment 121A in the name of my noble friend Lord Hodgson; it is also in mine. However, I know that he will speak eloquently to that amendment so I ask noble Lords to assume my support in the interests of the time pressures that we have today, and I will confine myself to speaking to the first amendment in this group.

Again in the interests of time, I will not go through the issues that define why social impact investment is so important and so beneficial, yet it currently feels very constrained. That has been done already, very eloquently, by my noble friends Lord Phillips and Lord Hodgson, both of whom are in their places here today, so I will talk within the narrower terms.

I want to make two points about social impact bonds, which are the primary form of social impact investment under general discussion. These bonds are, by definition, small. If the sector develops as it hopes, the range typically will be £1 million to £5 million. The bonds are small because they deal with very specific, local social problems, which might include building new social housing within a particular community or the resettlement of prisoners from a particular prison. That small size is key to understanding the regulatory environment in which these bonds need to live and thrive.

Secondly, qualified investors are not likely to provide a very large market for social investment bonds. Certainly the one that has been offered in Peterborough for prisoner resettlement is indeed funded by qualified investors, but that will be a less frequent occurrence. The real market for these bonds is people who live in the community and whose primary objective in purchasing the bonds is social good, with a financial return being secondary. That is the market that has to be reached if we are to develop this sector effectively.

That brings me to the problem that is addressed by this amendment, which is Clause 21 of FiSMA on the financial promotions order that sits underneath it. Under these rules a financial instrument cannot, in effect, be marketed except by an authorised person. Under the order there are a few exceptions but they do not apply at present to social impact investments. To become an authorised person requires going through a process that costs some £150,000. We have talked directly with the FSA and the FCA, with independent financial advisers and with others who do structuring, and there is a general consensus around that number. In a traditional investment, which might include a fund for £20 million, £30 million or £40 million, £150,000 is nothing. However, for a bond issue of £1 million, £2 million or £5 million, £150,000 is a very large amount of money and effectively makes it impossible to develop the instrument and market it to the general public. Therefore the rules as they stand make it impossible, in practical terms, for social impact bonds to actually be marketed to their primary would-be buyers, who are the general public.

That strikes all of us, I think, as a real flaw in this legislation and it has to be tackled. We have the irony that a charity could come to any Member of this House and say, “We have a very good cause. Please give us some money to fund this cause”—no problem with that at all. However, if that charity were to go to any of your Lordships and say, “We have a very good cause. Please give us some money and, no promises, but I will try to get you back your original investment and maybe even a small return on it”, that is handcuffs at dawn; it is actually breaking the law. That is an insane situation in which to be placed, but it is where we currently sit.

I say to the Government, to the Minister and even to the Bill team that, since the Government themselves are considering whether they should enter the field of promoting social impact bonds, I would hate to see members of the Civil Service finding themselves serving at Her Majesty’s pleasure as the consequence of having promoted these kinds of investments. It is an anomaly, and we seek to address it by this amendment. I will not pretend that the amendment is brilliantly crafted, but our goal is to get the Government to sort this problem out before the law of unintended consequences has a severe impact. This rule is already inhibiting the development of this market for no good purpose. It needs to be dealt with promptly, and I ask the Government to consider this issue seriously.

[Lord Hodgson of Astley Abbotts]

My Lords, I proposed Amendment 121A in this group. I am grateful to my noble friend Lady Kramer for her support. She has covered some of the ground that I wish to cover, and I will endeavour not to repeat the very powerful arguments that she has made. My amendment proposes inserting into the Bill a new clause with a further consumer protection objective, as stated in its subsection (a), in situations where consumers are,

“engaging in investment activity … to benefit society or the environment”,

so it comes at the problem in a slightly different way.

As some noble Lords will know, I have just completed a review of the Charities Act 2006. My terms of reference, given to me by the Government, were widely drawn. One of them stated:

“Measures to facilitate social investment or ‘mixed purpose’ investment by, and into, charities”.

My report, published a week ago, ran to 159 pages and contained 130 recommendations, a large number of which—15 or 20 or so—were concerned with social investment. I think that there is a great opportunity here, as my noble friend mentioned, and we are in danger of missing it.

So far my noble friend Lord Sassoon’s comments on this, no doubt written for him by the Treasury, are disappointing. As my noble friend Lady Kramer pointed out, we have this counterintuitive situation where you can give money but you cannot invest it. As long as you give it away and cannot possibly get it back, you are fine. However, you cannot say, “I will give you this money. I might lose it but I might get it back, and I might get it back with a small incremental return”, perhaps linked to gilts. You cannot do that, which must be counterintuitive. As the Government seek to develop social impact bonds—covering school exclusion, prisoner reoffending, getting people back into work—where charities and voluntary groups can do better than the state, which is therefore prepared to share some of the savings with these very effective voluntary groups, it must be sensible for us to try to find ways to facilitate the flow of money from the private sector into these sorts of schemes.

As we said in earlier debates, this idea is at an early stage, and there are many challenges. The first, not least, is to find some corporate form that can encompass all the different strands of funding: the charity itself, other funding charities, the Government and the private sector, which subdivides into corporate investors and individual investors. All these have different timescales, different legal requirements, different tax structures and different objectives. It is on the last of these—in particular, the objectives of private individuals—that I think we should focus and that my amendment seeks to focus.

Research suggests that if people could invest relatively modest sums—say, £500 or £1,000—in a social investment proposal with which they sympathised, with the possibility of getting their money back but no certainty, and perhaps with a modest incremental return, it would attract substantial support from across our society. One would hope that successful operators in this field might create a record of success that would enable them to raise larger sums of money and provide increasing services in the future.

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To illustrate the point for the benefit of the Committee, Members may have seen a report in the Guardian just last week of the case of a firm advertising a very high guaranteed return bond, generated through investment in social enterprises. The provider in question is registered with the FSA as an industrial and provident society, but not authorised. It does not appear to have permission to offer bonds with the exact characteristics of those it promotes; operating without such permission is a criminal offence under Section 23 of FiSMA. Any investors in such an operation as is being promoted would be left entirely without protection should it collapse. That particular case is being looked into by the FSA. However, it represents a timely reminder that we have to proceed with great care in this space. So I oppose this amendment and also, for similar reasons, Amendment 121A. However, I think we have an opportunity here. As my noble friends may well be aware, the Red Tape Challenge, which seeks to reduce the burden of regulation right across the entire regulated space, is currently looking at civil society. We do want, under the Red Tape Challenge—which is open to submissions at the moment—to see what specific ideas there may be, to changes to the financial promotions order or other regulations—

[Lord Hodgson of Astley Abbotts]

I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.

[Lord Sassoon]

I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.