BD Giving Notes – #21 ‘A Reality Check’

The question is, do we need to consider ‘professionalising’ our Board or our Community Steering Group to access more of the impact investing market?.... Our challenge ahead is in managing this tension and achieving a fine balance between the two. 

Last week a colleague and I had an enlightening meeting with a fund manager to discuss a potential opportunity for our first round of investments. This fund, which I won’t name here, is attractive in terms of its ambition for impact, it provides decent returns and, we feel, aligns well with the priorities that our Community Steering Group has set out for our investments. A match made in heaven as they say. 
Not quite. 
As we were about to begin the meeting, we were joined by their Compliance Lead who asked me a series of questions meant to ascertain whether we, at BD Giving, could be categorised under the UK’s financial regulatory body’s rules – the Financial Conduct Authority (FCA) – as ‘elective professional’ investors. We were told the questions must preempt any discussion about the specifics of the fund. 

The market for investors is broadly divided between offers for professional investors or elective professional investors on one hand, and retail investors on the other hand.

Quick Definitions:

  • A ‘professional client’ is a client who possesses the experience, knowledge and expertise to make investment decisions and properly assess the risks that accompany all investment services, activities and financial instruments.
  • An ‘elective professional client’ states in writing that they wish to be treated as a professional client for the purposes of making investments.
  • A ‘retail client’ is most likely to have limited investment knowledge and so receives a greater level of regulatory protection.
So there we were, trumpeting our admittedly limited investment experience with resolve and determination. But like a boxer that sees victory slip away, strike after strike, I got back on my feet, even as my fists got shakier and my vision blurrier: “Look how aligned our values are, we’ve got so much in common, wouldn’t it be great to work together?”, “We’ve been working with this or that external adviser who brings considerable experience to our decision-making process”. 
But to no avail, the knock-out blow hit me right on the chin and we had to throw in the towel. 
This was a frustrating conversation. However, as a new investor, it gave us insights into the conversations and challenges that we are increasingly likely to be faced with as we seek to deploy the Community-led Investment Fund. It also raised questions about the kind of investor we are or should be, and the inadequacy of existing categories of investors and products for our community-led model, which doesn’t neatly fit the definitions of a professional or a retail client. 
The compliance regulations (covered by the FCA) ask fund managers to assess the financial situation, risk appetite and investment objectives of prospective investors. Failing the tests to be considered an ‘elective professional’ investor (as we did), means you’re automatically classified as a retail investors, which greatly limits the opportunities on offer, and in our case cost us this investment opportunity. 
Now, let us be clear, the existence of such regulation designed to help investors and fund managers to better manage risk is undoubtedly a good thing. In the end, we will be accountable for any decision to invest and we must demonstrate it was a considered and weighed risk, and that we had the right amount of information and expertise before investing. 
The question is, do we need to consider ‘professionalising’ our Board or our Community Steering Group to access more of the impact investing market? If we do, that won’t come without trade-offs. What makes our model unique is that the hand of the Community is all over it, from the design of the Investment Policy to decisions about investments. They are the reason why we weigh the social and environmental impacts of potential investments as highly as their returns.
Developing our expertise and credentials as investors must not come at the expense of this model. Our challenge ahead is in managing this tension and achieving a fine balance between the two.

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