Giving advice: The case for the FCA to act on philanthropy

The UK’s financial services sector has the potential to help drive positive change on a scale few other industries can. The rapid movement towards ESG funds and products clearly demonstrates that potential. However, this trend has not been without its challenges. There are widespread concerns over greenwashing. Much of the sector’s action has been focused narrowly on climate change, with comparably less attention on achieving broader social change. And – because much of this area is relatively novel – there has been less work undertaken on more impact-aligned forms of capital such as impact investing and philanthropy, and the potential held by personal finance.

Philanthropy in particular is an under-utilised tool available to the sector to help it achieve positive change. It is not the right option for everyone, but for people who are passionate about having an impact on the world and are willing to accept a partial loss of capital, or lower returns on investment, philanthropy is a powerful way of achieving social outcomes. Charities don’t tend to suffer from the greenwashing concerns that many ESG products do, and charitable giving allows the donor to invest their money in social impact on any conceivable issue – including, but not limited to, climate change.

At present, however, financial advice and guidance on philanthropy is not consistently offered to people who have the capacity to give. And frequently, when advice or guidance is given, it is not of consistently high quality.

This is a missed opportunity to achieve genuine positive change. As the source of around £20 billion – or a third of the charity sector’s income – each year, philanthropic capital plays a vital role in the UK’s economy and society, by encouraging and enabling community action, by supporting relationships and associational life, and by responding to unmet need, often of the most vulnerable. Philanthropic capital is frequently innovative, taking risks on potential solutions to societal problems that businesses and government cannot or will not. And the global philanthropy market is a significant one.

Offering high quality financial guidance on philanthropy also benefits the firms that provide it. They report that a strong philanthropy offering allows them to deepen relationships with both their clients and their clients’ families, which means that they can provide better services to their customers and increase their chances of maintaining custom across the generations. It also puts firms in a more competitive position for attracting new business from millennials and other younger potential investors.

In the US, where financial advice on philanthropy is offered to clients as a matter of course rather than a matter of exception, the benefits of this offering 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 net promoter (or customer satisfaction) scores. This much stronger philanthropy offering has also directly contributed to the dramatic rise in donor advised funds in the US, which more than tripled between 2015 and 2020, hitting the 1 million mark in the middle of the pandemic. From assets of $159.8 billion under management in these vehicles, $34.7 billion in charitable grants was paid out in 2020, up from $14.2 billion in 2015 – showing how quickly and at what scale positive social impact can be achieved through good advice.

The Financial Conduct Authority (FCA) has a responsibility to drive up the provision of high-quality financial advice and guidance on philanthropy. Doing so is well-aligned with its own commitment to support the financial services sector to achieve positive change. It is also part of the FCA’s duty to consumers to ensure that the sector provides the products and services people are demanding.

To achieve this, the FCA should begin by enhancing its own understanding of philanthropy. With that knowledge, the regulator should use its leadership role to begin a sector-wide conversation on philanthropy’s potential and the barriers preventing financial advisors from speaking to their clients about charitable giving, including incentives, culture, approach to risk and lack of understanding and adoption of social impact measurement. As a lack of knowledge of philanthropy in the financial sector is at the root of the vast majority of barriers to the provision of high-quality financial advice and guidance on philanthropy, the FCA should also improve the training of financial advisors on philanthropy by ensuring it is included in the relevant curricula for qualifying advisors and offered by a greater number of accredited bodies as a way to fulfil the requirements for continuous professional development.

In parallel, the FCA should begin to set out a timetable by which it will require relevant financial advisors to discuss philanthropy with their clients as a matter of course. Sustainability intentions, values-based investing and philanthropy all ought to feature in the suitability assessments undertaken with clients, so that advisors have a full understanding of clients’ intentions and can thus deliver services to their customers appropriately.

Undertaking these changes would drive up both the quality and the quantity of financial guidance and advice on philanthropy on offer to consumers, and help to generate greater giving to good causes.