The Regulator for Charities in England and Wales
(Version March 2007)
This guidance focuses specifically on Common Deposit Funds (CDFs) which are one form of investment. For guidance generally on investments by charities and the duties on trustees when making investments, see our guidance "Investment of Charitable Funds" (CC14). In particular, trustees should be familiar with the definition of "investment" (see section B of CC14), trustees’ duties (see section E of CC14), trustees’ general duties on risk management (see paragraph 62-66 of CC14) and the trustees’ approach to diversification and suitability of investments (see paragraph 67-79 of CC14).
Contents and Useful Sources of Information
Common Deposit Funds (CDFs) are deposit-taking schemes. Before the Charities Act 2006, they were open only to charities in England and Wales, but are now also open to “appropriate bodies” (i.e. bodies established as charitable under the law of Scotland or Northern Ireland and eligible for UK tax relief) where the Scheme permits this. They are set up by Schemes made by the Charity Commission under section 25 of the Charities Act 1993. They operate as deposit-takers and are deemed by law to be charities themselves. They are therefore eligible for registration as charities in their own right.
CDFs provide a deposit-taking scheme which is tax efficient, administratively simple and cost efficient. They enjoy the same tax status as other charities.
CDFs differ from unit trusts in that they do not offer unitised investments; depositing charities own the capital they have placed on deposit together with the interest earned attributable to that capital. CDFs are exempt from the Financial Services and Markets Act 2000 by virtue of Part IV of the Financial Services and Markets Act 2000 (Exemption) Order 2001 SI number 1201.
CDFs do not fall within the definition of a collective investment scheme. Although the operators of CDFs are not required to be regulated under the Financial Services and Markets Act 2000, the Commission, however, has decided, as a matter of policy, that the Managers and the Corporate Trustees (if applicable) should be authorised by the Financial Services Authority (FSA).
Generally, CDFs accept deposits from depositing charities and place the money they have accepted on deposit in the money market. The pooling of such money in the form of large sums of money (usually for relatively short duration ) on deposit should secure a higher rate of interest for the depositing charities than each charity would otherwise obtain, if undertaken separately.
The Charity Commission is responsible for monitoring and regulating the CDFs. CDFs are required to prepare accounts which comply with Schedule 2 to the Charities (Accounts and Reports) Regulations 2005.
In establishing CDFs under the provisions of section 25 of the Charities Act 1993, the Commission is able to provide a legal vehicle for depositing charities. However, the Commission is not an investment adviser. It cannot offer trustees advice about the merits of a particular investment or investment strategy.
The Commission must emphasise that it is not promoting CDFs as a suitable or safe deposit-taking scheme for charities generally, nor is the Commission suggesting that CDFs are risk free.
As with all investment matters, trustees of depositing charities must take investment advice from their own suitably qualified professional investment advisers before they invest, irrespective of whether they are depositing money with CDFs or other types of deposit-taking schemes.
CDFs are particularly important to the smaller charities because of their relatively smaller fund sizes. The smaller charities, by themselves, cannot achieve the level of interest rate that larger charities can. CDFs will enable the smaller charities to pool their funds for investment and achieve the much needed higher level of interest rate payable.
Deposit accounts operated by banks and building societies are examples of deposit-taking schemes. In each case, money deposited with the scheme by depositors is pooled, and the operator of the scheme typically places the pooled money in a range of investments, in accordance with the published policy of the deposit-taking scheme.
All the money and investments in a CDF belong to the depositors.
A Scheme is a legal document made by the Charity Commission which establishes, amends, replaces or amplifies the trusts of a charity. It may set out new objects and purposes or changes to them, constitutional arrangements and powers of the charity. Some of these provisions will be mandatory, others simply enabling. It may be:
A CDF is established by a Scheme of the Charity Commission as described above and it is made under section 25 of the Charities Act 1993. The Scheme is dealt with by the Commission’s Large Charities Unit (see contact details). Because of the complexity of CDFs, it generally can take 6 months to finalise this type of scheme.
When a promoter (who will usually be a fund manager) wishes to establish a CDF, he or she should provide us with as much information as possible about his or her proposals, taking account of this timescale. Based on this and any other information we may need and assuming we agree in principle to make such a Scheme, the Commission will draft the Scheme, the legal instrument creating the CDF. The Scheme Particulars, which are the detailed rules made under powers in the Scheme, will be drafted by the fund manager.
The making of a Scheme to establish a new CDF requires an application from any two or more sponsoring charities.
The Commission does this, broadly, by providing a legal framework in the form of new and amended Schemes, by giving guidance on standards of governance and by investigating allegations of abuse and mismanagement. In regulating CDFs, the Commission promotes and encourages a greater degree of transparency in their administration and management for the benefit of charities that deposit their money in the CDFs. In order to achieve this, it:
The Commission also has powers to exchange information with the FSA which enable it to work with that Authority to monitor the activities of Managers and the Corporate Trustees who are authorised and regulated by the FSA.
On investment matters, the Managers, the Corporate Trustees and the Advisory Committees / Advisory Boards of CDFs (if applicable) are responsible for setting the performance objectives that are measurable, and determining the investment policy and strategy and the associated risks that may arise from such policy and strategy.
The Commission does not attempt to duplicate the regulatory functions of the FSA. This means that the Commission does not regulate the efficacy of investment policies or ensure that the investment policies being adopted are necessarily appropriate or meet the expectations of the depositing charities, where this is an aspect of FSA regulation.
The Commission’s objectives in monitoring CDFs are currently being reviewed. More information regarding these will follow the review.
Trustees of depositing charities are ultimately responsible for the investment decisions they make and for reviewing their investments periodically. It is good practice to review their investments at least once a year and more frequently, if necessary, when the financial market is volatile and this is so irrespective of whether the deposits are with CDFs or some other types of deposit-taking schemes.
Trustees of depositing charities must continue to seek investment advice from their own professional advisers as to the suitability and diversification of their investment portfolio. Depositing charities are reminded of the "buyer beware" principle and they should exercise a greater degree of caution themselves. The interest rate payable by a CDF can go down as well as up.
Trustees of depositing charities should take note there is generally no compensation for under-achieving investment performance. It is a matter for the depositing charities to consider and decide whether they should withdraw their money from a particular CDF or a particular type of investment because of its recent poor performance.
Trustees of depositing charities may also wish to consider asking fund managers whether the particular CDF they are proposing to deposit money with is eligible under the terms of any compensation schemes.
In summary, trustees should consider each investment decision on its merits. The fact that CDFs are established by the Charity Commission does not mean they are better or more appropriate deposit-taking schemes for charities generally.
There is no statutory investor protection scheme available to clients of CDFs (i.e. the depositing charities). The Commission understands that clients of banks are protected under the Deposit Protection Scheme (i.e. up to a maximum of 90% of £20,000) but this will not be available to clients of CDFs.
It is likely that the services of the Financial Ombudsmen may not be available to depositing charities either.
The Financial Services Authority (FSA) is an independent body that regulates the financial services industry in the UK. Persons and firms that engage in specific types of activity (called "regulated activity") must be authorised to do so by the FSA. Establishing and/or operating a deposit-taking scheme, if that is done by way of business, may be a regulated activity and therefore need to be authorised by the FSA. Acting as trustee of a deposit-taking scheme by way of business is also a regulated activity. In practice, this will often mean that the fund manager and corporate trustee of a CDF will be engaging in regulated activity. A fund manager and/or a corporate trustee that is authorised to engage in regulated activity will be monitored and supervised by the FSA.
In order to be authorised by the FSA, a person or firm must satisfy the threshold conditions set out in Schedule 6 to the Financial Services and Markets Act 2000 (the Act which establishes the regulatory remit of the FSA). Areas covered by the threshold conditions include:
(i) the legal status of the firm;
(ii) the place in which the firm and/or its head office is located;
(iii) the ownership of the firm and/or any relevant group structure;
(iv) the firm's resources;
(v) whether the firm is fit and proper (i.e. meets criteria as to honesty, competency and financial soundness).
Generally speaking, the FSA monitors and supervises regulated activity by:
The objectives of the FSA are set out in the Financial Services and Markets Act 2000 and are:
As at 31 March 2004, the FSA regulated some 10,712 firms. These ranged from global fund management operations, investment banks, large UK stockbrokers and major networks of independent financial advisers, to the smallest corporate finance boutique operations and one-person financial advisers.
For further information about the Financial Services Authority and their work, please visit their website www.fsa.gov.uk
|
Registration number with Commission | |
| COIF Charities Deposit Fund |
1046249 |
| The Affirmative Deposit Fund for Charities |
1115887 |
Common Deposit Funds are dealt with by the Charity Commission’s Large Charities Unit, Harmsworth House, 13-15 Bouverie Street, London EC4Y 8DP. All enquiries and correspondence relating to Common Deposit Funds should be addressed to this Unit.
For further information about these webpages generally, call 0845 300 0218. The number for hearing and speech impaired callers using a minicom is 0845 300 0219.