Supplementary memorandum from Charities
Aid Foundation (CAF)
1.1 This information is given to support
evidence given to the Treasury Committee by John Low, Chief Executive
of Charities Aid Foundation on 3 February 2009.
1.2 The Charities Aid Foundation (CAF) is
a registered charity that aims to help charities and social enterprises
make the most of their money. CAF provides financial, investment
and fundraising services and works directly with tens of thousands
of charitable organisations across the UK and internationally.
1.3 CAF has a strong history of campaigning
for changes in policy and legislation in order to improve the
giving environment and to secure supportive legal, fiscal and
regulatory conditions for donors, charities and social enterprises.
Our knowledge and understandinggained through direct experience
and researchmakes us a trusted voice on giving and the
effective use of charitable funds.
1.4 This evidence relates in part to the
collapse of Icelandic banks in October 2008 and the impact upon
charitable organisations. However, the issues raised and proposals
for future action have wider relevance.
2. IMPACT OF
2.1 Extent of potential loss
2.1.1 Following the collapse of Icelandic
banks in early October 2008, it became clear that charitable funds
were in jeopardy. CAF, together with the National Council for
Voluntary Organisations (NCVO), Charity Finance Director's Group
(CFDG) and The Association of Chief Executives of Voluntary Organisations
(ACEVO) were asked by the Financial Services Secretary, Lord Myners,
to collect data about the extent of exposure. Fourty-eight charities
came forward with a combined total of £86.6 million deposited
2.1.2 Subsequently, Naomi House Hospice
and Cats Protection have spearheaded a coalition "Save our
Savings" to lobby the government for assurances that their
savings will be returned in full. The 30 charities involved with
the coalition have stated that they have collective potential
losses of £50 million.
2.1.3 The organisation with largest amount
at risk is Cats Protection, who held £11.2 million with KSF.
However the greatest proportionate impact has been reported by
Naomi House Hospice, with £5.7 million which equated to a
third of its total assets.
2.1.4 We believe that the full extent of
the exposure is likely to be considerably higher than £86
million. Some depositors who would have qualified for compensation
as retail depositors would be unlikely to come forward and other
potentially large amounts may be missing due to fear of reputational
2.1.5 Prior to entering administration,
the website of KSF claimed to hold £230 million of charitable
funds on deposit.
2.2 Impact of potential loss
2.2.1 The amount of charitable funds tied
up in failed Icelandic banks is relatively small compared to the
estimated £12 billion total funds banked by UK charities.
2.2.2 The relative impact varies across
these organisations, dependent upon the amount deposited by the
charity as a proportion of total assets. Many organisations will
have diversified their deposits across a number of separate authorized
entities and managed their funds so that this loss does not immediately
jeopardise their sustainability.
2.2.3 Three months after the failure of
the Icelandic banks the real impact is beginning to be felt by
some charities. On 25 November, Naomi House was forced to suspend
services. Its hospice-at-home service, which provides carers for
families with terminally ill children in emergency situations,
will not be resumed until the charity has had its money returned.
2.2.4 The administration process could take
years and this could present very real problems for these charities
especially as they try to weather the current economic storm with
stretched resources and increasing demands on their services.
2.2.5 The impact of the lack of these funds
is exacerbated by additional difficulties including falling interest
rates and the decreasing value of Stirling.
3. KEY ISSUES
3.1 UK/Non-UK Jurisdiction
3.1.1 Most of those charities that we know
to have been caught in the Icelandic crisis were depositors with
Kaupthing Singer & Friedlander, a UK-based banking subsidiary
of Kaupthing bank. This is therefore within UK jurisdiction and
regulated by the FSA.
3.1.2 We are led to understand that, prior
to being bought by Kaupthing, Singer and Friedlander actively
marketed services to charities. This meant that charities were
disproportionately impacted by the failure of this bank.
3.1.3 By placing KSF and Heritable (the
UK subsidiary of Landsbanki) into administration, the UK Government
have acted very differently than has been the case with other
UK banks such as Northern Rock, Bradford and Bingley, Lloyds TSB/HBOS
and RBS, which similarly failed to meet the FSA's threshold conditions
on capital, but received Government support to continue.
3.1.4 Furthermore on 9 October, Treasury
announced that retail depositors in Heritable and KSF (Edge depositors
and Private Banking clients) would receive a 100% deposit guarantee.
This was also extended to retail depositors in Landsbanki (Icesave)
which is not a UK, FSA regulated bank. It can be contended that
while the Government provided deposit protection to some extremely
wealthy and financially sophisticated private investors, some
of whom had money in offshore banks such as Landsbanki, they have
taken no steps to provide protection for charities which placed
charitable funds, held in trust for public good, in a UK regulated
3.2 Credit rating agencies/advice
3.2.1 Charities, along with other organisations
including Local Authorities, deposited funds in Icelandic banks
on the basis of credit ratings.
3.2.2 The best information available to
charities rated the Icelandic banks as AA up until very soon before
3.2.3 These ratings reveal only limited
somewhat misleading information, rather than giving a deeper more
accurate picture of security and liquidity.
3.3 Eligibility for compensation through Financial
Services Compensation Scheme (FSCS)
3.3.1 Currently some charities fall under
the definition of retail depositors and are therefore eligible
for compensation up to £50k. However the criteria for eligibility,
established by the FSA, is based on the Companies Acts 1985 and
2006 and equates charities to small businesses.
3.3.2 The current framework does not recognise
charities as having distinct charitable purpose.
3.3.3 The compensation level of £50k
for those who would be eligible (if Government did not intervene
to guarantee all deposits) would not be sufficient to sustain
services in many cases, thus placing organisations in jeopardy.
3.3.4 Many larger charities will fall outside
of the criteria for the FSCS, as they are deemed "wholesale
depositors" and will therefore not be entitled to any compensation,
should a bank fail. This can place vital services at risk.
3.3.5 Unlike businesses, which more routinely
rely on equity and debt finance, it is important for charities
to maintain sufficient levels of reserves and unrestricted funds
to ensure sustainability and survival, especially in difficult
3.4 Lack of clarity and poor communication
3.4.1 The eligibility criteria for compensation
under the FSCS is opaque and it is difficult for some charities
to assess their own eligibility or to seek reassurance.
3.4.2 In early October, after the collapse
of the Icelandic banks, clarity was sought from the Charity Commission
and the FSA on how the compensation scheme applied to charities.
As a result of lobbying from CAF, information was subsequently
placed on their websites.
3.4.3 Those affected, including the coalition,
"Save our Savings", have pushed for clear information
from Government on their position, but this has not been forthcoming.
3.4.4 There is also very little clarity
on how banks are authorised and which banks are part of a larger
group or parent company, where the FSCS would pay compensation
up to the limit of £50,000 only once, irrespective of how
many different institutions a person held accounts with.
3.4.5 This poor communication leads to increased
insecurity in the sector and lack of confidence in the banking
3.5 Need for improved financial acumen in
the third sector
3.5.1 We recognise that third sector organisations
do, of course, have an obligation to make sound investment and
financial decisions on the basis of risk and return, and must
be accountable for how funds are managed. However, in reality,
some organisations and their boards of trustees contain limited
financial expertise. Financial management may be carried out by
volunteers or by workers with little knowledge of these areas.
We want to see this situation improved.
3.5.2 Independent financial advice can be
very costly for organisations with very limited resources.
3.5.3 The level of complexity in the market
and the contamination of deposits and investments has created
an environment that is incredibly difficult to understand. With
sophisticated and well-resourced organisations such as Local Authorities,
the Audit Commission and others placing funds in Icelandic banks,
it is unrealistic to expect the third sector to demonstrate higher
levels of insight.
4.1 Improved financial information
4.1.1 We would call for improved comprehensive
and reliable credit rating information. We would suggest that
a separate rating based on true security and resilience of deposit
takers could be developed. Information available to financial
managers must go beyond interest league tables and clearly show
security and liquidity.
4.1.2 Tailored or accessible financial information
could be made available to charities through the Charity Commission,
perhaps in partnership with the Institute of Credit Management
4.1.3 Greater clarity about risk and compensation
eligibility should be made available with financial products,
perhaps through a "traffic-lights" system or health-warnings
available at account-opening. This would alert customers to issues
such as country risk and how individual institutions are authorised
and relate to others, as well as the financial security of the
4.2 Increasing the financial acumen in the
4.2.1 In order to strengthen the sector
and levels of accountability, Government should invest in capacity
building of financial acumen across the sector.
4.2.2 The valuable work of the Finance Hub
(part of the Capacity Builders pilot programme) has unfortunately
been allowed to decay since funding was withdrawn and we would
see real value in taking forward some of the projectsparticularly
the Funding Advisors National Network (FANN), which Government
chose not to take forward.
4.3 Role of the regulators
4.3.1 The FSA and Charity Commission should
work more closely together to ensure that issues for charities
are effectively taken into account by the FSA.
4.3.2 Closer working would also enable the
Charity Commission to interpret and effectively communicate financial
regulatory issues for the sector.
4.4 Charitable organisations to be treated
as a separate depositor class for the purpose of the Financial
Services Compensation Scheme (FSCS)
4.4.1 Currently the rules governing eligibility
are based on organisational form rather than organisational purpose.
4.4.2 Charitable organisations should be
classified as a separate depositor class which would be automatically
eligible for compensation, irrespective of organisational structure.
This would recognise the nature of how these funds are both raised
and used, and the unique and vital role played by the third sector
4.4.3 It is, we believe, unpalatable for
such organisations to be placed in jeopardy through failure of
the banking system, especially where the organisation has taken
every reasonable step to act responsibly. The immense social return
generated by charitable organisations and the potential long term
costs to society resulting from loss of charitable services should
be considered a priority.
4.4.4 It is the assumption that compared
to small retail depositors, wholesale depositors have a greater
ability to access and mitigate financial risk. Although we would
agree that there should be strong requirements for charities to
act responsibly and accountably, we would assert that charities
often behave more like individuals than commercial operators,
irrespective of the size of their assets.
4.4.5 Angela Eagle (Dec 4th Debate on the
case of Naomi House Hospice) stated that additional protection
for Naomi House was problematic as it was deemed a wholesale depositor
and "there are no easy answers available, short of guaranteeing
all the wholesale depositors as well as the retail depositors.
That is a large amount of money and we would be criticised for
using it in this way" and went on to state that it would
be equally undesirable for Government to make judgements about
which charity was "worthy" and which were not. We believe
that a separate depositor classification, based on definitions
of charitable purpose, would address these understandable difficulties
and enable the Government to demonstrate support to the sector.
4.4.6 The classification of charities as
a separate depositor class would also allow for greater clarity
of communication and increase understanding and confidence across
84 CAF estimated based on NCVO Almanac (2007) Back