Blog

Governance, regulation and compliance

13 July 2012, 14:15

Banking reform shouldn't put charities at risk

Apart from the respite provided by expense-fiddling MPs and phone hacking journalists, banks have dominated the headlines as the UK’s biggest villains for the past few years. Even now they’re ...

Post byMelora Jezierska

Where next?

Events »

Tuesday, 31 December 2019
Finance Count 2019/20 More »

News »

Wednesday, 18 September 2019
Charities still virtually unprepared for a no-deal Brexit, finds survey More »

Apart from the respite provided by expense-fiddling MPs and phone hacking journalists, banks have dominated the headlines as the UK’s biggest villains for the past few years. Even now they’re back in the news for the wrong reasons. While individuals’ heads have rolled, since 2008 the Government has been under huge pressure to do more - to detoxify the banks and make our banking system safer and more stable. In June, following recommendations from the Independent Commission on Banking, the Government laid out its plans for fundamental change in its banking reform white paper. Unfortunately, lurking in the white paper amongst the Government’s technical solutions and good intentions is a measure which is set to have a nasty impact on charities – a classic case of the sector ending up the victim of unintended consequences. To summarise (our briefing has further detail), the paper introduces the principle of ‘depositor preference’, which means that Financial Services Compensation Scheme (FSCS) liabilities will be prioritised over other creditors – including charities – and paid out first in the event of a bank failing (at present all creditors rank equally). Since there’ll be little cash left after the FSCS is paid off, in practice this means that those charities ineligible for FSCS protection will lose most, if not all, of their deposits in a failed bank. Charities eligible for FSCS protection but with more than £85,000 – the compensation limit – in one bank could also lose out. Despite the drama of the last few years bank failure is in fact extremely rare – but, crucially, the impact of this measure is not restricted to the exceptional event of a bank collapsing. Banking arrangements will automatically be riskier under the new rules, and so to mitigate this additional risk (as we imagine most prudent charities will do over time – Charity Commission investment guidance stresses the need for active cash risk management), charities will need to be more conservative. This means depositing in ‘safer’ banks which typically pay a lower rate of return. The difference between, for example, a safe bank and a slightly safer bank, might be small in percentage terms but if aggregated across the sector, which holds £18bn in cash deposits according to Charity Commission returns, the amounts are huge. There is, however, a solution: We will be campaigning for Government to grant charities preferred creditor status, so that charity liabilities will be prioritised alongside those of the FSCS. This won’t necessarily mean charities get all their money back when a bank fails, but the likelihood of getting a substantial portion is massively increased. We think there is a clear case for singling charities out and elevating them to preferred creditor status: Firstly, the new arrangements lump charities together with big business and the financial sector, which is inappropriate. The rationale for these changes to creditor hierarchy is that the new rules protect those who need protecting (individuals, small businesses, the taxpayer), leaving those best able to understand the risk and absorb any losses to fend for themselves. The vast majority of charities manage their finances excellently and employ highly skilled people to do this. But can charities really be expected to monitor the markets, banks’ credit risk and manage deposits accordingly as effectively as big business? Yes they can buy in additional expertise (which’ll come at beneficiary and donor expense) but in all likelihood they won’t be able to keep up. If a bank’s heading for the cliff edge the banks, and then business, will be the first to know and to act accordingly, before most charities and the public even have a sniff of anything going wrong. Another reason is that charity cash deposits are different from business cash deposits. The money charities could potentially lose is donor or funder money, effectively in transit for the ultimate benefit of beneficiaries. If the Government’s ultimate goal is to protect the taxpayer, surely its right to assume that taxpayers’ own money as well as money they have donated on the grounds it’s going to a particular cause be protected? Unlike businesses, which generally borrow and have a more fluid cash flow, charities hold large amounts as cash deposits (to ensure future commitments can be met, or due to a gap between raising, planning and spending money, amongst other reasons) and so are set to lose far more, relative to their size, in the event of a bank collapsing. And ultimately the ones really losing out are those that that charities support. We, along with NCVO and ACEVO, have written to the Chancellor outlining our concerns, but you can help too – write to the Minister on behalf of your charity urging Government to grant charities preferred depositor status. It’s a simple and positive change that won’t cost Government anything. It would be a huge blow if rectifying faith in our banks among the consumer and taxpayer came at the expense of protecting UK civil society - it shouldn’t be either-or. « Back to all blog posts

Blog

Banking reform shouldn't put charities at risk

Related Content

Civil society asks of the Spending Review 2019

Five takeaways from August’s Inflation Report

The lessons for Oxfam and the wider sector

Finance Focus July 2019

BEIS Independent Review of the Financial Reporting Council

CFG Annual Handbook 2019

How the best boards do it, from preparation to meeting execution

Seeing the wood for the trees

CFG responds to the Charity Commission’s consultation on the SORP-making process

What the recent SCOTUS judge controversy can teach us about the Charities’ SORP

Annual Report 2017-18: Empowering Your People

Changes to the CFG Board of Trustees

Finance Focus May 2018

The key to good governance - truly understanding the business

Does your charity follow serious incident reporting guidelines?

Charity finance professionals need to be aware of new automatic disqualification rules

How big a threat is property to your charity?

Money is not the issue when it comes to charging for Charity Commission

How can charity investors perform better in a volatile market?

A stairway to heaven on business rates for the charity sector?

Investing in financial governance is one of the most cost effective ways to help your charity

Sarah Atkinson - Have your say on the annual return for charities

New report raises concerns about complacency on financial governance

Trustee Survey Report

Time to review your risks? An update from the experts...

Where are the ‘automatic stabilisers’ for charities income?

6 simple steps your charity can take to help protect themselves from fundraising fraud

Do I need a fraud response plan?

Fraud and the 3 C's

Three new Charity Finance Group trustees elected

How can charities ensure they work towards gender equality in their organisation?

What can charities learn from the recent fraud cases?

CFG launches Counter Fraud Campaign

Record Management Toolkit Launch Roundup

What can charities learn from the international cyber attack?

NCVO Almanac points to fundamental shifts in the charity operating environment

Better partnerships needed between finance and fundraising teams

Annual Report 2016-17

Essential Charity Finance for Trustees Guide

We must not see a rush to charging charities for regulation – House of Lords report

IFS 2017 Green Budget – the good, the bad, and the worrying?

Responsible Record Keeping: what do voluntary organisations need to know?

Trustee Week: Working to inspire good leadership

Charging charities for regulation isn’t inevitable but it is risky and inefficient

Let's talk about the F-word

Tony Armstrong looks at Devolution: working with local organisations to transform public services

Devolution is our chance to advocate for the most vulnerable

How will the 'devolution revolution' be financed?

Caron asks: 'Why does the voluntary sector need a devolution summit?'

Do charities need to become social enterprises to survive?

Ten things you should know about the new power to make social investments

New report should prompt major re-evaluation of social investment

EU Referendum: Keep watching this space…

CFG's SORP Survey

Guest blog: Stamp duty increase reinforces case for charity investors to invest in stamp-exempt funds

Guest blog: SAVE Financial Planning

Guest blog: Insights into charity investment practices

EU Referendum: What could this mean for charities?

You don’t need to be a charity to do good…but it helps!

Another day, another opportunity for charities to engage in a consultation

Friday Afternoon Fraud

Is the SORP FRS 102 working for you?

ACF, CFG and NCVO raise concerns on draft guidance for funding non-charities

Annual Report 2015-16

Employment Status 2016

Rethinking Risk: Beyond the tick box

Charities need to do the walk, not just the talk and invest in financial leadership

Hunting for the silver lining; the IFS, the economy and charities.

Charging charities for their regulation: A fait accompli?

Affinity Deals: What do you need to know?

Lessons to take away from Kids Company report

New Charity Commission guidance on reserves

What did the Romans ever know about data protection?

Public divided on charging charities for charity regulation, new report finds

What Regulation, Who Pays? Public Opinion and Charity Regulation

Social investment: Government's Windex for civil society

Banking and Payment Systems: Invisible Enables for Charities