House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Supplementary memorandum by the Community Development Finance Association (CDFA)

FOLLOW-UP TO EVIDENCE SESSION ON 28 FEBRUARY 2006[91]

This submission was developed at the request of the Treasury Select Committee which asked the cdfa what measures the government could take to support the emerging CDFI sector in the UK. The cdfa thanks the TSC for the opportunity to submit the paper and hopes that this is the start of a constructive dialogue.

The issues covered in this paper are:

— Improving the design and coverage of Community Investment Tax Relief

— Rewarding the engagement of mainstream banks in disadvantaged areas and underserved markets

— Supporting the RDAs in their continued work with CDFIs

— Supporting the cdfa

— Continuing to develop an enabling policy framework

— Creating a long term source of funding for the CDFI sector

COMMUNITY INVESTMENT TAX RELIEF

There are a number of interpretation and design issues which are currently stifling greater use and applicability of the Community Investment Tax Relief (CITR) as an effective tool for increasing investment into disadvantaged communities and underserved markets. If these issues were dealt with swiftly and effectively the reach and use of the CITR, both now and in future years, would be substantially accelerated.

ENSURING THE CITR CONTINUES TO BE AN EFFECTIVE TOOL TO SECURE LONG TERM INVESTMENT

There is currently some confusion over whether investors who are currently investing under CITR can continue to receive the benefit of the tax relief if they retain their investment in the same CDFI for a second period of 5 years.

It is clear from CDFI practice and investment strategies that any interpretation that requires investors to liquidate their investment, reinvest and move their investment to another CDFI or liquidate their investment and re-invest at a later date threaten the effectiveness of the CITR to secure long term capital. An interpretation which allows investors to retain their capital in an existing investment vehicle will ensure that current investment levels under CITR are maintained and built upon.

CDFIs who are currently using CITR have pointed to a number of positive outcomes to this interpretation:

— Investment in the sector will be maintained rather than lost as investment options are currently relatively narrow and there are not sufficient alternative options to absorb capital if investors in the largest users of CITR are forced to liquidate their investment and place elsewhere.

— For many CDFIs, the portfolio of loans which comprise the pool of onward lending from the CITR investment pool are for longer than five years. Allowing CITR investments to be maintained would ensure that capital availability was in step with portfolio commitments.

— CDFIs also suggest that while the CITR has been helpful in raising investment it is currently missing it's target of securing long term investment in CDFIs. Allowing the CITR to be rolled over into consecutive periods would effectively incentivise longer term and larger volumes of capital for CDFIs.

TACKLING DESIGN ISSUES

There are a number of design issues with the current use of CITR that have been isolated by the cdfa membership and prioritised into two key topics:

Extending qualifying loans and investments

Including increasing the current caps on individual qualifying loans and investments, extending the CITR to include equity investments in for-profit businesses and widening the interpretation of the level and type of property backed investments that can be included in the portfolio.

Ensuring CDFIs can maintain accredited status

Focusing on the treatment of commitments, particularly for those CDFIs who specialise in serving social enterprises and not-for-profits and the potential for extending the lead in for on-ward investment from three to five years.

Extending CITR to personal lending

Currently CDFIs which lend for personal needs are excluded from raising investment under CITR. We believe that these CDFIs need equal access to CITR and that an extension should be put into place.

PROMOTING CITR

We believe that more resources need to be placed into promoting the benefits of CITR to individual and corporate investors. This will help raise its profile and lever more funds into disadvantaged communities.

REWARDING BANK ENGAGEMENT

In the US, much of the investment into disadvantaged communities has come about because of legislation, namely the Community Reinvestment Act. A similar act does not exist in the UK.

The cdfa believes that banks in the UK should be recognised for the work they do in disadvantaged communities and that such recognition could lead to an even greater engagement by banks in this area, thereby avoiding the need for US-type legislation.

We suggest the funding of an annual, high profile, award ceremony for five consecutive years. Awards could be made for (amongst others):

— Small business outreach

— Products for low income households

— Increase in number and usage of basic bank accounts

— Supporting third sector lenders

SUPPORTING THE RDAS

From 1 April 2006, the RDAs will be taking over responsibility for the support of CDFIs. We would ask the government to continue to work with RDAs and ensure that they will make provision for CDFIs in their activities, especially from April 2008 when a new budget will be in place. This would mean encouraging all RDAs and devolved administrations to use the forthcoming Comprehensive Spending Review and other tools to ensure support continues.

SUPPORTING THE CDFA

As the trade association for the CDFI sector, the cdfa has proved itself an effective and efficient trade association with a credible voice and an enviable track record. It has, however, no clarity on funding beyond March 2008. It needs support from central government and the TSC backing in securing this would be most helpful.

CREATING AN ENABLING POLICY FRAMEWORK

The government has been creating an enabling policy framework since 1997. This has proved very effective indeed. However, this framework needs to continue, not just at UK level but at European level as well.

A LONG TERM SOURCE OF FUNDING FOR THE CDFI SECTOR

The CDFI sector is having a real impact in disadvantaged communities in the UK. However, as an emerging sector it will need support for a number of years before it can become sustainable. There is, therefore, a need for long term support for the sector and a national fund with this remit will provide an enduring legacy for the government. The cdfa has done some work on the shape of this fund and is happy to share it with TSC if they wish to take this idea forward.

SUMMARY OF IDEAS

1. Community Investment Tax Relief

— Allow investors to retain their capital in an existing investment vehicle

— Extend qualifying loans and investments

— Ensure CDFIs can maintain accredited status

— Extend CITR to personal lending

— Promote CITR more fully

2. Rewarding bank engagement

— An annual high profile, award ceremony which rewards banks for their work in disadvantaged areas and underserved communities

3. Supporting RDAs work with CDFIs

— Continue to encourage RDAs and devolved administrations to work with CDFIs and make provision for them from April 2008

4. Ensuring there is a source of support in central government for the cdfa from 2008