Following recent market developments such as social investor Allia’s launch of a social impact bond aimed at retail investors on 4 February 2013, the Financial Services Authority (FSA) has clarified its position on advising on social investment within the final Retail Distribution Review Newsletter, published in February.

It states: “As with ‘ethical investments’ or ‘environmental investments’, we accept that, perhaps for part of a portfolio, making a financial return may need not be a client’s only or primary objective.”

Social investment opportunities that are designated investments, such as unlisted shares or debt securities, fall within the scope of FSA/Financial Conduct Authority (FCA) regulation. This means that the conduct of business (COBS) rules, such as the financial promotion regime and suitability requirements, apply to firms who undertake regulated activities in relation to social investment. 

The notes continues: “As with any investment, when determining whether social investments are suitable for their client, advisers will need to consider and record all relevant factors and explain any disadvantages, such as the risk to capital invested and poor liquidity due to a weak secondary market, to the client.”

The clarification is good news for socially-minded investors, their advisers, and crucially those impacted by programmes funded through social investment.