The Law is an Ass (when it comes to Social Investment)

This piece was written by microfinance guru Paul Blyth and is reproduced with his kind permission, paulblyth.blogspot.com

Chugging*:

“Can’t you spare two minutes to help starving, blind children in Africa?” … the parting shot from an “ambassador of hope” who’d blocked my path at Clapham Junction station. It seems that every time I pass through a train station I’m ambushed by 20-somethings imploring me to sign up for a £25 standing order to support starving children in Africa, breast cancer in the UK, or animals anywhere. My accosters are usually beautiful “resting” actors employed by a marketing agency. They’re not volunteers for the charity (as they would like you to believe). It is simply an emotive “sell”, guilting you into passing over a bunch of your personal financial information and signing up to an indefinite £300/ year commitment. The average standing order lasts 6 years! Importantly, there is no vetting to understand whether you can really afford it.

Synopsis on chugging:

Return on investment = ~negative 80% (you can get a tax break on your donation)
Regulation protecting the buyer = virtually none
Likelihood of pressure/ miss-selling/ incentives to create the wrong behaviours = very very high

State sponsored gambling:

“Please may I have £50 of quick picks for the Wednesday draw, 100 quid’s worth for Saturday, and 10 scratch cards” … Jim Jones (not his real name) has just parted with £170 of cash to gamble on the National Lottery.

Synopsis of state sponsored gambling:

Return on Investment = ~negative 80%
Proper vetting to understand whether Jim’s family, kids, lifestyle can tolerate this kind of risk? = None.
Marketing budget promoting sale of the lottery to the public = £multi-millions.

“Save the world” investment:

If I were to stop someone on the street and tell them a little bit about an organisation that invests in businesses that support the poorest of the poor around the globe, and then suggested that they might want to invest £50, I COULD GO TO JAIL. The investment I have in mind supports a 30+ years old institution, that has ~$1 billion balance sheet, is primarily equity funded by churches (for investment types – the investor will be taking on senior debt risk protected by an equity cushion 8-fold larger than the “ultra-conservative” one being considered by most central bankers at this very moment!), has never defaulted on an investor, and has paid out dividends and interest every year, including the last four. (Need I remind you how traditional investments have done during this time?)
Synopsis on “save the world” investment:

Return on investment = nothing guaranteed but you can pretty safely say that it has a better ROI than charity or gambling!
Regulation protecting the buyer = so much that it’s virtually “impossible” to sell this stuff
Level of retail investment in the UK = very very small

So … hang on a minute … “starving” actors can pressure sell as long as the money goes to charity; the National Lottery spends millions convincing you to gamble, but if someone suggests that you might want to invest for good, they are liable to go to jail.

Conclusion: The law is an ass
What can be done? Charity has its place, the National Lottery has raised millions for good causes, and there are good reasons for the legislation that protects retail investors in the UK (think “boiler-room” share salesman ripping off grannies). But there is certainly room for significant improvement in legislating for Social Investment. The Netherlands has had a great regulatory regime for years that has enabled ~$8billion (yes that’s BILLIONS) from retail investors (yes that’s RETAIL investors) into Social Investment (think green energy, the arts, microfinance, overseas development etc.). Luckily, I’m not alone in my frustration. Some folks have been hard at work trying to shine a light on this problem. This week NESTA and BWB are launching a policy paper “Investing in Civil Society”. It advocates a bespoke regulatory regime for Social Investment in the UK http://www.bwbllp.com/Seminars/Default.aspx?SeminarID=319&Location=1&ID=0– it’s a good start. Hopefully it will encourage the government (and thereby the regulators) to take notice and “fix the plumbing (i.e. rules, regulations, and protocols)” that will enable Social Investment to prosper in the UK. Here’s hoping

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