CFG, NCVO and Acevo have written to Chancellor George Osborne warning that proposals in the banking reform white paper significantly increase the chances of a charity losing much or all of its deposits in the event of a bank or building society collapsing.
Currently, if a bank goes bust, all creditors who have lost money, including businesses, charities and the government’s Financial Services Compensation Scheme (FSCS) – which compensates individuals and smaller organisations who have lost out up to a value of £85,000 - are ranked equally and get an equal percentage of their deposits back.
But under the proposed 'depositor preference' arrangements, FSCS liabilities would be paid back first by a failed bank or building society to ensure these losses are covered by the bank and don’t become a liability for the taxpayer. Once this is paid all other depositors would share the money which is left.
In the letter, the sector umbrella bodies say that charities should be granted 'preferred creditor' status so they rank equally with the FSCS in the event of a bank failing.
“At the moment the proposals lump charities together with big business and the financial sector which we believe is inappropriate – these organisations are simply bigger and better equipped to manage banking risk,” Melora Jezierska, CFG policy and public affairs officer, told civilsociety.co.uk.
“Unlike commercial organisations that borrow and have a more fluid cashflow, charities have a different business model with fewer liabilities and often hold much larger cash amounts for longer periods of time. Charities would therefore lose huge amounts – of donor money meant for beneficiaries – should a bank fail. And ultimately its beneficiaries who will lose out.”
The letter states that Charity Commission returns show that the charity sector holds £18bn in cash deposits. It warns that the proposed reforms will not only impact charities in the exceptional event of bank failure; they could also lead to charities adopting a more conservative banking approach, which typically results in lower returns, to mitigate the additional risk.
It urges the Chancellor to confer charities with preferred creditor status, so they and those eligible under the FSCS, are compensated first in the event of a banking collapse.
Last month, the government published its white paper Banking reform: delivering stability and supporting a sustainable economy, which sets out the government’s detailed proposals for implementing the recommendations of the Independent Commission on Banking, to fundamentally reform the structure of banking in the UK.
The government is seeking views on the proposals and responses are requested by 6 September 2012.
