What happens if your charity's bank or building society fails? Dr Clare Mills shares an update on the work CFG is doing with the Bank of England to identify the issues and reduce the risks.
Much of the material written on insolvency and charities focuses on charities which find themselves heading into insolvency proceedings.
Recent statistics show that a very small number of registered charities actually find themselves in this position: in October 2021, the Charity Commission reported that in the past year, 97 charities had reported insolvency to the Commission.
With around 170,000 charities registered with the Commission in England and Wales, this is a tiny fraction. That is not to downplay the serious impact on a charity’s creditors, donors, staff and, most importantly, beneficiaries. But it’s far more likely that a charity will find its cashflow thrown off course because it is owed money by a business or organisation that itself has become insolvent.
It’s also hugely disruptive if a supplier or funder goes out of operation, meaning the charity needs to find a new provider of goods or services, or a new source of income to keep its operations on track.
Over the last few weeks I’ve been having conversations about a particularly niche area of insolvency: what happens to charities if their bank or building society becomes insolvent? Fortunately, this is an extremely rare situation, but it’s prudent to consider low risk but high impact scenarios.
The first thing to emphasise is that, depending on their structure, charities’ funds held with a bank or building society are covered by the Financial Services Compensation Scheme, which says “FSCS protects eligible deposits with banks, building societies and credit unions that are authorised by the Prudential Regulation Authority (PRA) up to £85,000 per authorised institution. This means that how a charity spreads its money can affect the amount of compensation the charity is entitled to.”
The second thing to say is that there’s nothing in the news right now to suggest that there are specific banks or building societies which are at greater risk of insolvency.
The FSCS has not been needed to protect depositors as a result of bank or building society failure since 2011. However, the Bank of England is considering work to improve the procedures and support in place for depositors – including charities – should a bank or building society become insolvent.
As part of that work, and thanks to an introduction through the Charity Commission, CFG has been talking to the Bank of England about the needs of charities, should such a situation occur. We’ve suggested that issues would include:
1. Finding and opening a new account elsewhere
We know from other work around banking for charities that opening a new account can sometimes feel harder than securing a place in the London Marathon! If a charity has a second account with a separate organisation that is not part of the insolvency, then FSCS compensation can be paid into that account, currently by cheque. But if a charity, voluntary organisation or community group only had the one account with the now insolvent bank or building society, the lack of banking facilities and inability to access funds will be a real problem.
2. Ongoing operations – deposits
Some charities have run successful fundraising campaigns leading to large numbers of donors making regular contributions through standing orders. If the recipient account is frozen due to insolvency, then the charity could quickly lose out on a significant amount. It can take time for another account to be opened, if needed, and payments redirected to that other account. We have discussed automated forwarding, where funds coming into a charity’s account with the insolvent institution could be passed on to a different, designated account with a different financial institution.
3. Ongoing operations – spending the money
There’s a lot to think about here, from ensuring that a different account can be used to make all those payments that have to go out: to keep the staff paid, the lights on and the rent paid – and most importantly, to be able to keep providing support and services to beneficiaries.
4. Other issues
We’ve raised rurality (linked to the availability of face-to-face banking), digital skills and confidence in getting to grips with a new banking provider, the time resource needed to change procedures for cash deposits, payment runs, reconciliations and management accounts.
Some of the issues we have highlighted are specific to the charity sector; others will also affect SMEs and other depositors. We’ve also shared the time constraints on charities, voluntary organisations and community groups and the need to appreciate that many such organisations are entirely run by volunteers.
The Bank of England’s team are talking to a wide range of stakeholders and we’re looking forward to having further conversations with them and providing insight from our members. If you have thoughts or concerns on this issue, please do email me with your comments.
Finally, it’s so important to reiterate that work on improving depositor outcomes is not because there’s any heightened risk. To echo the Crimewatch presenters of the past… “Don’t have nightmares.”