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Banking reforms put charities at further risk, warn sector leaders

Jane Tully, head of policy, CFG
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Banking reforms put charities at further risk, warn sector leaders

Finance | Niki May Young | 15 Oct 2012

The draft banking reform Bill, which has dismissed the need to protect charities' deposits in the event of banking collapses, has been slammed by charity sector leaders, who warn the proposals could put charities at further risk of going under.

The Independent Commission on Banking, which published the Bill on Friday, said that after considering the need to create a preferred protection for deposits from organisations such as charities and local authorities, "the government deemed that there was not a sufficiently strong case for preferring any of these debts alongside insured deposits", and therefore only insured deposits will be protected. 

Sir Stephen Bubb, chief executive of Acevo warned that "charities risk losing everything if their bank goes under, putting services for the vulnerable at risk".

He continued: "Over recent years we have seen the devastating impacts on beneficiaries and communities of charity closures caused by the financial crisis. The government urgently needs to think again and give charities preferred creditor status, at no cost to the taxpayer, before its inaction sends yet more charities out of business."

Charities' case is not exceptional

In its Bill, the Committee defends its decision not to give charities preferred creditor status: "There are considerable drawbacks in extending the scope of preference to other groups of creditors, such as the dilution of the benefits of preference to the Financial Services Compensation Scheme (FSCS), and the effect of increasing the exposure of other non-preferred groups to losses in the event the bank fails," it said.

"The wider the extension of preference (for example to multiple groups), the greater the impact of these drawbacks will be. The government has carefully considered the arguments made in favour of preferring other groups of depositors, but takes the view that no group or sector stands out as an exceptional case." 

It continues that: "Organisations that channel public or donor funds to deliver societal benefits include, among others, schools, universities, charities, police authorities, and local authorities, and the larger ones will be more likely to have the resources to make multimillion pound  investments on the basis of maximising return for a given level of risk (rather than purely holding funds prior to onward transfer). Such organisations are likely to be at least as well positioned to monitor and manage risk as many other groups of senior unsecured creditors who would stand to be subordinated if preference were extended."

Charity Finance Group (CFG) welcomed an additional degree of protection offered by the Bill in the form of an extension of the FSCS to cover all individuals and most organisations up to the coverage limit of £85,000, but Jane Tully, head of policy at CFG said that for large charities this would be "a drop in the ocean". 

Speaking of the Bill overall, Tully said the government has "missed an opportunity" to provide greater protection to charities. She advised that the failure to do so could mean that charities are could be forced to reduce income by depositing in banks with lower returns, or increase spending by paying advice or training in managing risk.

"Charities will therefore need to be aware of the changes, and ensure that they have the skills and capacity to effectively manage this increased banking risk," said Tully.

CFG had outlined these risks in a joint response with NCVO, Acevo and CAF to the White Paper consultation, which launched in June. 

Next steps

The Bill is now to be scrutinised by the Commission on Banking Standards prior to its formal introduction in Parliament. Government has advised of its commitment to see the Bill enacted in legislation within its term of leadership (by 2015) and come into force by 2019.

 

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