Banking Crisis - Treasury Contents

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 understanding—gained through direct experience and research—makes 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.


2.1  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 funds.

  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 risk.

  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.[84]

  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.


3.1  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 bank.

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 the failures.

  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 times.

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 system.

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 (ICM).

  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 bank itself.

4.2  Increasing the financial acumen in the sector

  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 projects—particularly 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 in society.

  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 the sector.

February 2009

84   CAF estimated based on NCVO Almanac (2007) Back

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