Commission calls on FCA to improve philanthropy advice in financial services sector

by | Nov 23, 2022

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Advisers

Regulator should mandate training for advisors and pursue regulation, says report

  • Philanthropy in the UK worth more than £20bn each year
  • But specialist advice on charitable giving needs to be improved
  • Improving advice would benefit firms and society, as seen in the US
  • If top 1% all donated 1% it would generate £1.4bn a year for charities
  • Commission has identified 8 issues and made 4 recommendations

The Financial Conduct Authority (FCA) should make philanthropy advice training mandatory for financial advisors and introduce regulation to ensure it is discussed with clients, according to a report.

New research for the Law Family Commission on Civil Society, carried out by Pro Bono Economics, has called on the FCA to act to improve “the quality and the quantity of financial advice and guidance on philanthropy” in the UK, making four key recommendations.

Currently, philanthropy in the UK is worth close to £20 billion annually, but there is an opportunity to grow this significantly. Last year, research for the Commission found that the top 1% of earners cut their typical charity donation by a fifth between 2011-12 and 2018-19, despite incomes increasing. Greater action by financial advisors could help turn that decline around.

The Commission, which is chaired by former Cabinet Secretary Lord Gus O’Donnell, found that if every individual in the top 1% of earners who is currently donating below 1% of their income raised their giving to that level, it could generate up to £1.4bn a year for charities.

The new report, titled Giving advice: The case for the FCA to act on philanthropy, notes that aside from a handful of leaders in the field, such as Coutts and C. Hoare and Co., provision of high-quality philanthropy advice to all clients is not widespread. The report puts this down to several factors, including “lack of incentive”, “traditional mindsets and culture” and a “lack of regulatory clarity and leadership”.

In contrast, the report points to the US as an example of what good financial advice on philanthropy can achieve for society and financial services companies alike. It argues that a strong philanthropy offering enables firms to deepen their relationships with clients, meaning they provide better services, and puts them in a more competitive position for attracting new business from younger clients.

According to the report, in improving the quality and quantity of philanthropy advice, the FCA would be “fulfilling its duty to ensure that consumers receive the products, services and advice that they are requesting from the sector”, as well as advancing its own ESG ambitions. The report highlights four key recommendations for the FCA:

  • Review the market for financial advice and guidance on philanthropy. Through desk-based research, data requests to firms and visits to firms, the FCA should build a comprehensive picture of the financial services sector’s philanthropy offering.
  • Demonstrate to the financial services sector the important role that philanthropy can play in unlocking public benefit. This could include a ‘soft leadership’ role, for example with the FCA’s senior team incorporating the topic in their speeches.
  • Mandate education and training on philanthropy for relevant financial advisors. As part of the FCA’s regular reviews of its compulsory qualifications for financial advisors, it should undertake a vigorous effort to ensure philanthropy’s inclusion in relevant courses.
  • Introduce sustainability requirements into suitability assessment, with an emphasis on philanthropy’s role in contributing to sustainability efforts. As is already under consideration, the FCA should pursue regulation to require financial advisors to discuss sustainability intentions with their clients, alongside philanthropy.

In the US, where financial advice on philanthropy is offered to clients as a matter of course, the benefits have been quantified. Research suggests that firms which offer their clients charitable planning have three times the median organic growth of those that do not, 1.3 times the median new money per investor, and significantly higher customer satisfaction scores.

The stronger philanthropy offering in the US has also directly contributed to the dramatic rise in donor-advised funds, which more than tripled between 2015 and 2020, hitting the 1 million mark during the pandemic. From assets of $159.8bn under management in these funds, $34.7bn was paid out in charitable grants in 2020, up from $14.2bn in 2015.

The report identifies eight “systemic, intertwined reasons” for the lack of high-quality financial advice on philanthropy in the UK. In addition to “lack of incentive”, “traditional mindsets and culture” and a “lack of regulatory clarity and leadership”, the report also cites the “organisational structure” of UK firms as a barrier, as well as a “poor understanding of products available”, “limited reporting of impact”, “poor understanding of social impact” and a “poor understanding of and availability of tax incentives”.

Nicole Sykes, Policy and Communications Director at Pro Bono Economics, said:

“Philanthropy is a major source of finance for charities in the UK, contributing £20 billion each year. But there is a real opportunity to grow this.

“With the country’s highest earners shown to be giving less to charity with each year, financial advisors have a huge role to play in turning this around, as the people who the wealthiest talk to about their money.

“As demonstrated in the US, widespread specialist philanthropy advice reaps enormous benefits for society and financial services firms alike, and we need to see the same in the UK.

“This requires leadership and stewardship from the FCA, which has the tools and influence required to help unlock far more of the true potential of philanthropy in the UK.”

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