Charity Bank is to relinquish its charitable status in order to comply with new European banking regulations and allow it to attract more capital.
The decision has the support of the Charity Commission, Financial Services Authority and Charity Bank's major shareholder, Charities Aid Foundation.
For several months now the bank has been trying to find a way to comply with the new banking rules, but also with charity law. Provisions in charity law around asset distribution and dividend payments were at odds with the new banking regulations, which are aimed at improving banks' financial profile and behaviour.
The solution devised by the bank will mean that while it will cease to be a registered charity, it will retain its existing mission and charitable purpose and these will be enshrined in proposed new articles of association. It will continue to make loans to charities and social enterprises.
This will include a ‘mission lock’ requiring at least 90 per cent of the bank’s ordinary shareholders to agree to any changes to the existing charitable purpose.
Staying as a charity would have meant that Charity Bank could only grow its balance sheet by obtaining grants from charitable foundations – a difficult ask in the current economic climate.
Changing its constitution to a for-profit bank will have the effect of attracting capital from social investors happy to accept a more modest financial return as long as it also delivered a social return, according to Charity Bank’s chief executive Patrick Crawford.
“In future most of our capital will come from investors rather than grantmakers but these shareholders are likely to be foundations, social investors and charities that are attracted to the self-sustaining model created by Charity Bank,” he said.
Charity Bank hopes to grow its balance sheet from £93m to around £250m over the next five years, he said. Its income for the last financial year was £4.9m.
In order to comply with charity law, certain property owned by Charity Bank must continue to be used to further the charitable purposes of the former charity. Therefore, its capital is to be transferred to Charities Aid Foundation, the principal shareholder in Charity Bank, to be held on trust for the current charitable purposes. In return, CAF will make a capital grant to the Bank as a social investment to further the charitable purposes for which the property is held.
Next Monday, 25 March, the Charity Commission will publish details of the proposals that are required to effect the change. Responses will be invited and subject to the results of this consultation and the approval of the bank’s shareholders, the change will take effect by 30 April 2013.
Malcolm Hayday, the founder and former chief executive of Charity Bank, said it was “sad” that the Charity Commission and FSA could not find a way to accommodate the bank’s unique structure within the changed regulatory framework, but added: “the mission of Charity Bank must be able to thrive regardless of legal form”.
Crawford added that the Charity Bank name would be retained.
He denied that today’s announcement was a precursor to a merger between Charity Bank and CAF Bank, which was considered but ruled out by the two banks last year.
He said merger talks might be reopened if that was deemed to be in the best interests of the charity sector, but at the moment that didn't seem to be the case.