Charities potentially at risk following the banking reforms

By Patrick Nash

The new draft banking reforms have been met with vast concern from charities and third sector organisations. This is because it seems that in the event of a banking collapse, the Bill as currently drafted will not protect all charities deposits.

The Banking Reform proposes to implement the findings of the Independent Commission on Banking (ICB), published in 2011. The commission essentially suggests that investment banks should be ‘ring-fenced’ and separated from retail banking sectors – in order to:

  • Protect essential banking services i.e. individual, household and SME deposits.
  • Ensure that future taxpayer-funded bailouts are less likely.
  • Enable banks to better fulfil their core purpose of lending to the real economy.
  • Save the UK an estimated £68bn from fewer or less severe future financial crises.

The draft Bill will prioritise retail depositors over other creditors if a bank collapses. However, the majority of retail depositors are already protected by the Financial Services Compensation Scheme. Therefore, businesses without sophisticated finance functions such as charities, schools and Local Authorities could all lose out.

Charities Aid Foundation (CAF) had called for ‘preferred creditor’ status to be extended to all charities – which would ensure charity deposits have priority alongside retail deposits covered by the Financial Services Compensation Scheme. Such a move would protect charity funds from being downgraded in the event of a bank failure, giving some additional protection – without any extra cost to the taxpayer. However, this idea was rejected in the draft Bill.

Banking experts believe that charities will not be able to use supposedly safe ring-fenced banks with confidence, and would risk losing their cash deposits if they continued to bank with them.

Therefore, the big issue for charities is how to protect their deposits in the event of a banking collapse without spending large amounts on complex financial advice.

The draft Bill does state that, subject to EU approval, all charities will be offered similar protection to that given to individual bank customers, which currently guarantee deposits of up to £85,000.

Arguably this will protect smaller charities – ones that are less able to pay out for expensive financial advice.

But charitable organisations have hit back at such claims, declaring that the banking reforms do not protect taxpayers’ money at all.

The Charity Finance Group (CFG), Association of Chief Executives of Voluntary Organisations (ACEVO), National Council for Voluntary Organisations (NCVO) and Charity Aid Foundation (CAF) produced a response to the banking reform, stating:

“Charity funds do not ‘belong’ to the charity. They are funds in transit from donors and other funders, for beneficiaries. A loss to a charity is therefore not a loss for shareholders or private benefit, but for donors – who have chosen to give to a social cause on the grounds it will be spent as intended – and beneficiaries. This undermines the white paper’s aim of protecting the taxpayer from losses in the event of bank failure.”

Charities are continuing to fight the draft Bill, as they will face either having to spend large amounts on financial advice to avoid future losses, or take a risk with their donated incomes at the mercy of the banks.

So, with only smaller charities seemingly protected by ‘ring-fencing’ – does the size of a charity matter, when it is being forced to use generous donations to fund financial planning, instead of helping those that need services the most?

Our roots in the charity sector mean that we’ll be keeping a keen eye on developments in this issue.


What do you think? Is a charity’s money its own, in the way that a company has its own financial reserves, or does its cash reserves belong to taxpaying donors? Should all charities’ cash reserves be protected by the banks?

One thought on “Charities potentially at risk following the banking reforms

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