Apart from the respite provided by expense-fiddling MPs and phone hacking journalists, banks have dominated the headlines as the UK’s biggest villains for the past few years. Even now they’re back in the news for the wrong reasons.
While individuals’ heads have rolled, since 2008 the Government has been under huge pressure to do more – to detoxify the banks and make our banking system safer and more stable. In June, following recommendations from the Independent Commission on Banking, the Government laid out its plans for fundamental change in its banking reform white paper.
Unfortunately, lurking in the white paper amongst the Government’s technical solutions and good intentions is a measure which is set to have a nasty impact on charities – a classic case of the sector ending up the victim of unintended consequences.
To summarise (our briefing has further detail), the paper introduces the principle of ‘depositor preference’, which means that Financial Services Compensation Scheme (FSCS) liabilities will be prioritised over other creditors – including charities – and paid out first in the event of a bank failing (at present all creditors rank equally). Since there’ll be little cash left after the FSCS is paid off, in practice this means that those charities ineligible for FSCS protection will lose most, if not all, of their deposits in a failed bank. Charities eligible for FSCS protection but with more than £85,000 – the compensation limit – in one bank could also lose out.
Despite the drama of the last few years bank failure is in fact extremely rare – but, crucially, the impact of this measure is not restricted to the exceptional event of a bank collapsing. Banking arrangements will automatically be riskier under the new rules, and so to mitigate this additional risk (as we imagine most prudent charities will do over time – Charity Commission investment guidance stresses the need for active cash risk management), charities will need to be more conservative. This means depositing in ‘safer’ banks which typically pay a lower rate of return. The difference between, for example, a safe bank and a slightly safer bank, might be small in percentage terms but if aggregated across the sector, which holds £18bn in cash deposits according to Charity Commission returns, the amounts are huge.
There is, however, a solution: We will be campaigning for Government to grant charities preferred creditor status, so that charity liabilities will be prioritised alongside those of the FSCS. This won’t necessarily mean charities get all their money back when a bank fails, but the likelihood of getting a substantial portion is massively increased.
We think there is a clear case for singling charities out and elevating them to preferred creditor status:
Firstly, the new arrangements lump charities together with big business and the financial sector, which is inappropriate. The rationale for these changes to creditor hierarchy is that the new rules protect those who need protecting (individuals, small businesses, the taxpayer), leaving those best able to understand the risk and absorb any losses to fend for themselves. The vast majority of charities manage their finances excellently and employ highly skilled people to do this. But can charities really be expected to monitor the markets, banks’ credit risk and manage deposits accordingly as effectively as big business? Yes they can buy in additional expertise (which’ll come at beneficiary and donor expense) but in all likelihood they won’t be able to keep up. If a bank’s heading for the cliff edge the banks, and then business, will be the first to know and to act accordingly, before most charities and the public even have a sniff of anything going wrong.
Another reason is that charity cash deposits are different from business cash deposits. The money charities could potentially lose is donor or funder money, effectively in transit for the ultimate benefit of beneficiaries. If the Government’s ultimate goal is to protect the taxpayer, surely its right to assume that taxpayers’ own money as well as money they have donated on the grounds it’s going to a particular cause be protected?
Unlike businesses, which generally borrow and have a more fluid cash flow, charities hold large amounts as cash deposits (to ensure future commitments can be met, or due to a gap between raising, planning and spending money, amongst other reasons) and so are set to lose far more, relative to their size, in the event of a bank collapsing. And ultimately the ones really losing out are those that that charities support.
We, along with NCVO and ACEVO, have written to the Chancellor outlining our concerns, but you can help too – write to the Minister on behalf of your charity urging Government to grant charities preferred depositor status. It’s a simple and positive change that won’t cost Government anything. It would be a huge blow if rectifying faith in our banks among the consumer and taxpayer came at the expense of protecting UK civil society – it shouldn’t be either-or.