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Lawyers criticise proposed pooled funds change

Governance | Gareth Jones | 4 Nov 2009

Common investment funds (CIFs) should not be replaced by a new form, but be made exempt charities and regulated by the FSA, a working party of the Charity Law Association has argued.

In its response to the Charity Pooled Funds Consultation, the group outlines a range of criticisms of the proposals for a charity AIF (authorised unit trust), in particular a lack of consideration of the costs and complexity of such a change.

As a result, it suggests primary regulatory responsibility for CIFs and CDFs (Common Deposit Funds) could be given to the FSA by making them exempt charities and making the FSA the ‘principle regulator’ under section 13(5) of the Charities Act 2006.

This, it argues, would mean there would be no need to invent a new tax regime for the charity AIF, the funds would retain their charitable status and the cost of converting existing funds would be reduced.

Costs may be passed to charities

On the issue of the cost of such a change, it says: “The consultation does not review the practicalities of transition from CIF/CDF to charity AIF, and in our view under-estimates the costs of such an exercise”.

It adds: “Estimates of the up-front cost for managers are around £40,000 to £70,000 per fund, and it seems inevitable some of these costs will be passed on to the charity investors through higher management fees”.

It goes on say that fund managers have told the working party that the loss of charitable status could also cause them to review their fees, which are courrently around 0.5 per cent p.a., saying that “some managers treat CIFs and CDFs as their contribution to the charity sector and accordingly keep charges low”.

It adds: “Some managers have suggested they will put in place a two-tier structure, with low charges (around 0.5 per cent p.a.) for larger investors and a retail offering involving higher charges (around 1.5 per cent p.a.)  for smaller investors.”

Issues not addressed

The working party also argues that there are a number of issues that the consultation does not address which should be given consideration, such as what powers to form pooled funds the Charity Commission would retain if the charity AIF was implemented.

Furthermore, the response says that the consultation “does not propose a comprehensive regime for the United Kingdom, even though charity pooled funds can exist in Scotland and Northern Ireland”, and only looks at CIFs and CDFs registered with the Charity Commission, thereby neglecting a range of other charity pooled funds.

The response also admits that there was a “divergence of views” within the working party itself on whether CIFs and CDFs were inherently charitable and whether they should therefore remain under some degree of supervision by the Commission.

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