The FCA’s journey with social impact investing

March 20, 2019 2:48 pm Published by Leave your thoughts

The FCA is due to finish their consultation on guidance and rule changes relating to ESG, climate change and the ethical concerns of investments soon.

As Q1 comes to a close and we await the FCA’s publication, it seems timely to take a look back on the FCA’s journey with social impact investing and Worthstone over the last 3 years including the:

  • FCA’s call for input
  • reply to UK Advisory Group concerns and
  • intended response to a Law Commission’s report.

A look back to the end of 2015

If we first go back to December 2015. This was when it was agreed that regulation was seen as one of the sticking points for advisers in talking to their clients on this subject as they weren’t convinced it was compatible with current regulatory requirements. To help, the FCA issued a call for input on the regulatory barriers to social investment.

Following the launch of their call for input, the FCA spoke at the Social Investment Academy in March 2016 again reiterating their desire for contributions from advisers and intermediaries on how regulation could be viewed as a barrier.

Watch a video of their presentation here.

Later on, in March 2016, and after collecting both quantitative and qualitative data, Worthstone submitted their consultation response to this call for input calling:

  • for clearer guidance regarding suitability
  • to address regulatory concerns that may be prohibiting advisers from discussing the topic of SII with their clients
  • to alleviate adviser concern regarding professional indemnity insurance
  • for the need for accredited education, training and competence assessment.

Read Worthstone’s full consultation submission here.

The Call for Input – FCA’s response

Come October 2016, the FCA published their feedback statement on the call for input regarding regulatory barriers to social investment. They note, for financial advisers and other intermediaries, that:

“There is nothing in MiFID, MiFID II or our rules which prevents investment advisers from recommending social investments to their clients. These rules require firms to understand the client’s financial situation, investment objectives, and knowledge and experience in the relevant investment field. The financial return might not be a client’s only, or primary, objective so investments which fulfil a non-financial objective such as social impact will be suitable for certain clients. Any risks or disadvantages of these investments must also be clearly explained in the same way as for any other recommendation which might be made.”

Read the FCA’s full feedback statement here.

This was followed by another appearance at the Social Investment Academy in November 2016, where the FCA reiterated that “there is nothing in the current regulation framework that prevents the promotion and recommendation of social investment to suitable investors.”

Watch a video of their presentation here.

From the end of 2016 it was then clear that, from the FCA’s point of view, current regulatory requirements were to be considered compatible with the social impact investing market.

The Advisory Group and their issues for the FCA

Fast forward 12 months to November 2017, when the Advisory Group published its report on “Growing a Culture of Social Impact Investing in the UK”. This was accompanied by a joint open letter from Elizabeth Corley, chair of the Advisory Group, sent to the FCA (and FOS) setting out seven key issues including:

  1. Suitability
  2. Portfolio and liability driven approach with regard to impact considerations & alignment of FOS/FCA
  3. FOS approach to complaints about the social outcome of social investment products
  4. Liquidity
  5. The role of the FCA’s ‘Innovate’ is supporting the growth of the social impact investing market
  6. Shared understanding of the ‘social impact’ concept
  7. Law Commission recommendations on social impact investment and pension funds.

Read the open letter here.

The FCA responded in January 2018, addressing five of the Advisory Group’s concerns and again reiterating that they believe “regulation does not prevent the social investment market from developing.”

Read the FCA’s letter of response here.

Some, however, weren’t so convinced. The compliance team at BWB noted in an article from February 2018 that although “the FCA and FOS have responded warmly to the industry” they are “offering less in the way of meaningful change than might be hoped for.

Read full article here.

The Law Commission’s involvement

Nevertheless, accompanying this latest development came a related exchange in the form of the Law Commission’s Call for Evidence on Pension Funds and Social Investment. After being announced in November 2016, the Law Commission published their collation of responses in January 2017 followed by their full report in June 2017.

Read collation of responses here and full report here.

In the report, they make a number of recommendations to the FCA and Government including advising that the FCA should issue guidance “for contract-based pension providers on financial and non-financial factors and “about the permitted links rules and, in particular, guidance about how pension schemes can manage some element of illiquid investment within their funds and how they can produce unit prices for illiquid assets.”

FCA’s current consultation period

Fast forward again to June 2018 when the FCA responded to the Law Commission’s Call for Evidence by saying:

The Law Commission made several recommendations for us in relation to Independent Governance Committees (IGCs), which we have considered carefully. We intend to consult on rule changes in the first quarter of 2019 requiring IGCs to report on their firm’s policies on:

  • evaluating environmental, social and governance (ESG) considerations, including climate change
  • taking account of members’ ethical concerns
  • stewardship,

At the same time, we will also consult on introducing related guidance for providers of workplace personal pension schemes on considering financial factors (such as ESG risks and climate change) and non-financial factors (such as responding to members’ ethical concerns) when making investment decisions…Consulting in the first quarter of 2019 will allow us to consult on a single package of rule changes, including other possible extensions to the remit of IGCs.”

So, this is currently where we stand, awaiting the results of the FCA’s latest consultations and considerations that were taking place over 2019’s Q1. Let us hope that their resulting guidance and rule changes are forward-thinking and supportive of advisers, and their clients, when it comes to social impact investing!


How do you feel about the regulation around social impact investing? Are you still worried about suitability issues and/or incorporating social impact investments into client portfolios? Perhaps you’re looking for training opportunities in this area?

If yes, please get in touch – we’d love to hear from IFAs and wealth managers interested in this area.

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This post was written by Worthstone

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