Armed Forces Covenant Annual Report 2017 Contents

3Covenant Funding

57.There are various funding arrangements available for the implementation and delivery of the Covenant.85 Our inquiry concentrated on LIBOR funding, including particularly the findings of the National Audit Office’s (NAO) September 2017 report into the management of the LIBOR Fund,86 and the new arrangements for the management and administration of the Covenant Fund.

LIBOR Funding

58.An international investigation by financial regulators in 2012 revealed that several banks in the US and the EU were manipulating the London Interbank Offered Rate (LIBOR)—a benchmark interest rate for inter-bank loans—for profit. The Government announced in 2012 that all proceeds of the fines imposed on the banks would “go to the benefit of the public”. This included a commitment that the LIBOR fines would be used to support the Armed Forces through the introduction of the £35 million, Armed Forces Covenant Grant Scheme. At that stage, the Government did not know how much the Financial Conduct Authority (FCA) would collect in LIBOR fines, as the investigation was ongoing. UK regulators fined eight banks a total of £688 million. In 2015 an additional £284 million fine for manipulating foreign exchange markets was added to the LIBOR Fund, bringing the total amount allocated to the fund to £973 million.87

59.Following concerns raised in Parliament and the media about the use and transparency of LIBOR funds, the NAO undertook an investigation into the management of the LIBOR Fund and reported in September 2017.88 The NAO report set out how the fund had been allocated within Government and how it had distributed this money. Our analysis of the figures in the NAO report found that 71% (£666 million) of the £933 million fund committed at the time had been given to Armed Forces-related and veterans-related projects. The MoD expects to have released all LIBOR funding, including the £40 million that had yet to be committed. The NAO’s key findings on the Government’s management of the LIBOR funding were:

60.While acknowledging the concerns expressed in the NAO’s report, our witnesses (some of whom had received LIBOR funding) were keen to emphasise that the LIBOR funding had achieved positive outcomes for veterans and current Service personnel and thought that some of the criticism of the effectiveness of the way the fund had been used was unfair.90 General McColl of COBSEO told us:

… I am not here to defend or deny the findings of the NAO report, which seems to me to be a very reasonable and pragmatic report …

Not all of that money has gone to defence, of course, and not all of it has gone to the third sector within defence, but that which has has made a significant impact on people’s lives for the better.91

61.Similarly, Rt Hon Tobias Ellwood MP, Parliamentary Under-Secretary of State, MoD, did not agree that LIBOR funding had been wasted:

… These grants are going to some incredible charities that work very hard indeed, and to give the impression that somehow this money has been wasted paints a false picture of what is going on. When you have very small charities with just a handful of people, it is difficult to assess accurately whether or not the money is well spent. That has been expressed in the National Audit Office’s report. When you look at some of the bigger charities that you have invited to speak here that did the work that has been done, they themselves are held to account as to how that money has been spent through the Charities Commission and so forth. I would say that since the 2012 LIBOR funding, this has provided exceptional service—some of the best in the world—to those who have served and indeed to their families and partners.92

62.Our witnesses were also keen to emphasise that since 2015 a more rigorous regime for allocating funds and monitoring the way they were then spent had existed.93 However, there were also concerns that the application process was now too complex, for example the application form consisted of over 80 pages.94

63.In addition to the matters in the NAO’s report, concerns have also been raised in Parliament and the media that LIBOR funds are being used for projects that should be funded by the main MoD core budget.95 In response to these concerns, the Minister told the House that:

It is important to understand that LIBOR grants are there for additional facilities. The MoD has a responsibility to provide core activities. Obviously, there is a grey area between a core activity and an additional facility.96

64.In a written answer, the Minister clarified the differences between MoD core activities and additional facilities:

The Ministry of Defence (MoD) is clear that LIBOR funding should not be used to fund Departmental core responsibilities. The funding application form explicitly states that funds cannot be used to top-up existing grants and aids from Government Departments or for projects, activities or services that the State has a legal obligation to provide. The use of LIBOR fines to support additional facilities and programmes over and above the core activities, support, and infrastructure provided by the MoD is entirely consistent with the scope of the LIBOR fund.97

65.As part of the response to the concerns regarding the use and monitoring of LIBOR funds, and as mentioned in paragraph 59 above, the Treasury commissioned the MoD in January 2017 to carry out a retrospective review of all grants awarded since 2012 to seek assurance on how the grants were spent and provide information for future monitoring. This review was expected to be completed by December 2017.98 The Government made a commitment that the review would be followed by an external evaluation, in order to:

66.Helen Helliwell, MoD, told us that review had been delayed and that it would not come out until later in 2018. This in turn meant a subsequent delay in the external evaluation.100 In its follow-up written evidence the MoD clarified:

In accordance with grant making best practice, HMT (utilising experienced grant making professionals from within the MoD’s Armed Forces Covenant Team) is conducting a review of all grant commitments made from LIBOR fines. This includes grants which have been completed and those still ongoing (note: many of the grants are multi-year and further tranche payments are dependent on an annual review). The review will be completed in Summer 2018 and will be scrutinised by both the National Audit Office and Public Accounts Committee. On completion of the review (2018/2019), a further impact study will commence to examine the impact that LIBOR funds have had; the results of this review will also be made public. With the exception of the £10 million per annum Covenant Fund grant, all LIBOR funds will be expended by 2021.101

67.We acknowledge that LIBOR funding has delivered positive results for veterans and current Service personnel and their families. We are pleased to hear that since 2015 a more rigorous system has been in place to ensure effective monitoring of projects funded under the scheme, although we note concerns that the application process is now too complicated. The MoD should look at ways of simplifying the process while maintaining robust safeguards.

68.We are concerned by the NAO’s findings that the Treasury and the MoD cannot yet confirm that charities spent all LIBOR grants as intended. While we acknowledge that the Government is undertaking a retrospective review of 236 projects, it is disappointing that this review, originally due to report in December 2017, has yet to be completed. This delay is unacceptable and has resulted in heightened concerns around the use of LIBOR funding for Covenant projects. The Department must set out clearly in its response to our report what progress has been made. We expect early sight of the Review. The response to this report should also set out what options, including legal, are available to the Department to recover grants that have not been used as intended. The MoD and Treasury must also set out in detail what measures are in place to monitor any future grants. Grants should not be made without terms and conditions that provide for monitoring the project’s delivery and achievements. The Government must take steps to ensure that there is no further delay to the promised external evaluation of the use LIBOR funds.

69.We are also concerned by suggestions that LIBOR funds have been used for core MoD activities. We note the Minister’s statement that the use of LIBOR fines to support additional facilities and programmes over and above the core activities, support, and infrastructure provided by the MoD is entirely consistent with the scope of the LIBOR fund. In response to our report, the MoD should provide information on the additional facilities and programmes that have been funded from LIBOR. We will be asking the Comptroller and Auditor General for a review of these grants.

Future administration of the Covenant Fund

70.According to the 2017 Covenant Annual Report, the £10 million per annum Covenant Fund continued to support projects and programmes of work across the UK with new awards and through its ongoing monitoring and management of grants committed in previous years.102 It also stated that organisations had been able to apply for grants at any time throughout the year and get a quicker decision than previously.

71.From 1 April 2018, responsibility for the Covenant Fund was transferred to the Armed Forces Covenant Fund Trust Limited, governed by the Corporate Trustee.103 As a charity registered with the Charity Commission, it can use its funding only for charitable purposes in accordance with the spirit of the Armed Forces Covenant. It can do so, in particular (but not exclusively), by providing charitable assistance and support to those who serve in the Armed Forces, whether Regulars or Reservists, and those who have served in the past, their families, dependants and carers.

72.The grant-making experts in the Covenant Fund team at the MoD were transferred to the new Independent Trust “to give it much more independence and to do much more exciting grant-making in the future”.104 Under the previous arrangements, part of the annual £10 million had been used to fund the administrative staff costs of the Covenant Fund.105 This continued following the establishment of the Trust, but the MoD saw the new Trust having freedoms which had been unavailable within the MoD—for example, the ability to bring in temporary staff at short notice when there were a large number of grants to process. Helen Helliwell added:

We will have a new IT system which allows a lot of automation of the grant process, which is difficult on MoD computer systems. We would be able to do things like micro-grants, which we are about to announce, in celebration of the First World War commemorations—up to 5,000 grants. That would be incredibly difficult for the MoD to process in terms of procurement, whereas the automated grant system will just be able to do that for us. It enables us to operate much more flexibly and efficiently in using that £10 million. By having that micro-grants system—it is a much more innovate way of funding. We are a bit constrained in how we do that in the Ministry of Defence at the moment.106

73.Given that the new Trust would be located in new premises and have a new IT system, we were keen to establish whether a larger proportion of the Fund was likely to be used for running costs rather than for grants. The MoD told us that the current salaries for staff running the in-house Covenant Fund team and supporting the administration of the LIBOR team and Aged Veterans Fund team had been no more than £300,000 per annum for the last three years while the premises, IT, finance and HR support had been contributed by the MoD.107 The new Trust was limited to a maximum of £500,000 per annum on salaries, premises, IT, and other support costs, and details of these costs will be published annually on the Charity Commission website.108 This meant that a maximum of 5% of the annual Covenant Fund would be spent on administration; the MoD thought this compared favourably to national benchmarks and would enable the new charity to be more efficient and innovative in its grant giving. The MoD also clarified that the funding of £10 million per annum would be provided by the MoD from the ring-fenced LIBOR funds by means of a grant-in-aid agreement.

74.Ms Helliwell told us that a review would be undertaken by Anglia Ruskin University to develop an Outcomes Framework to be used by Covenant Fund grant holders to show the impact that their grants were having; in a way which could be aggregated upwards to show the impact collectively across a range of grants. The tools developed may also have wider relevance for other projects.109

75.It is a positive step that the Covenant Fund will be governed as an independent trust. However, the MoD must ensure that appropriate safeguards are in place to ensure that the smallest possible proportion of the £10 million annual Covenant Fund will be taken up by the running of the fund. In response to our report, the MoD should clarify whether the Trust’s agreement to limit its spending on running costs to £500,000 per annum is on a voluntary basis, or whether it is part of the Trust’s legal status as a registered charity. The MoD should also set out what safeguards it has in place to prevent an unexpected increase in the Trust’s running costs—for example, due to property repairs—having a detrimental impact in the funding available for Covenant grants. We welcome the initiation of the study by Anglia Ruskin University to develop an Outcomes Framework to be used by Covenant Fund grant holders to show the impact that their grants were having and ask the MoD to keep us informed of the study’s progress.

85 Ministry of Defence, Armed Forces Covenant Annual Report 2017, 18 December 2017, pp 55–59

86 National Audit Office, Investigation into the management of the LIBOR Fund, 8 September 2017, HC 306

87 National Audit Office, Investigation into the management of the LIBOR Fund, 8 September 2017, HC 306, p 5

88 National Audit Office, Investigation into the management of the LIBOR Fund, 8 September 2017, HC 306

89 For the other 493 grants, the Departments believe the monitoring requirements already built into the schemes under which the grants were given are sufficient to complete the review.

95 For example see HC Deb, 5 March 2018, col 12

96 HC Deb, 5 March 2018, col 12

97 PQ 1313 4, 6 March 2018

98 National Audit Office, Investigation into the management of the LIBOR Fund, 8 September 2017, HC 306, para 3.6–3.11

99 National Audit Office, Investigation into the management of the LIBOR Fund, 8 September 2017, HC 306, para 3.16–3.17

101 Ministry of Defence (AFC0001)

102 Ministry of Defence, Armed Forces Covenant Annual Report 2017, 18 December 2017, p 55

103 Ministry of Defence (AFC0001)

104 Q150; Ministry of Defence (AFC0001)

107 Ministry of Defence (AFC0001)

108 Ministry of Defence (AFC0001)

Published: 30 June 2018