The Regulator for Charities in England and Wales
(Version September 2009)
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).
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 (the 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 No. 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 Corporate Managers and the Corporate Trustees (if applicable) should be authorised by the Financial Services Authority (FSA).
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.
CDFs are required to prepare accounts which comply with the Charities (Accounts and Reports) Regulations 2008 SI No.629.
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. 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.
The fact that the CDFs are established by the Commission must not be taken as a “kite mark” of quality. The Commission makes no determination or judgment as to whether a CDF provides an acceptable level of risk or an acceptable level of performance. Depositing charities must form their own view with regard to these matters.
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.
As of September 2009 , the last set of annual accounts submitted to the Commission from the 2 CDFs show total assets under management of just over £1.85 billion.
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:
The Commission has adopted a new Policy Framework for considering applications to establish a CDF. The need for this arose from the new statutory framework provided by the Charities Act 2006. It also recognises the investment climate in which charities are operating.
The Commission is a statutory corporation and can only do what it is authorised to do, either explicitly or implicitly, by statute. The Commission’s specific statutory objectives, statutory functions and statutory duties set parameters and define its role in creating CDFs.
A copy of this Policy Framework can be viewed below.
The Commission provides a legal framework in the form of new and amended Schemes. It requires the CDF to be administered and managed by:
(1) a Manager that is a body corporate which is authorised by the Financial Services Authority to act either as an operator of a regulated collective investment scheme or as an operator of an unregulated collective investment scheme, and independent of the Board or the Trustee (whichever is applicable);
AND
(2) (a) a Trustee that is a body corporate which is:authorised by the Financial Services Authority to either act as a Trustee of an authorised unit trust scheme or establish, operate or wind up an unregulated collective investment scheme, and independent of the Manager; or
(b) a Board consisting of named individuals and each member of the Board is independent of the Manager;
Being authorised by the FSA, the Manager and the Trustee will be subject to monitoring by the FSA of their business practices.
A CDF is established by a Scheme of the 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 Division (see contact details). Because of the complexity of CDFs, it will usually 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. Should we require further information, we will request it. We will then consider the information provided in the light of the Policy Framework for considering applications to establish Common Deposit Funds. If we agree in principle to make such a Scheme, we 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.
A prospective Manager is advised to seek at the earliest opportunity possible a pre-application meeting to discuss a working draft application with the Commission's staff in order to identify any key policy issues or other matters to which special attention might be given before a finalised application is formally submitted.
The making of a Scheme to establish a new CDF requires support from any two or more charities that are willing and able to invest in the new CDF with funds to provide the necessary initial seeding.
The Commission’s objectives with regard to CDFs can be summarised as follows:-
Depositors’ protection cannot be guaranteed. With a greater degree of transparency through disclosure of expenses, costs and commission fees, and improved quality of the products on sale, trustees of depositing charities themselves should be better able to take a closer scrutiny of the performance of their deposits.
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 Manager and the Trustee will be regulated and subject to monitoring by the FSA. 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.
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.
Trustees of depositing charities must decide for themselves whether the CDFs they consider depositing money with are suitable or appropriate for their charities and carry an acceptable level of risks or deliver an acceptable level of performance.
In summary, trustees should consider each depositing decision on its merits. The fact that CDFs are established by the Commission does not mean they are better or more appropriate for charities than deposit-taking schemes which are open to wider categories of depositor. Nor do CDFs carry a “kite mark” of quality simply because they are established by the Commission.
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 £35,000) 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
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Registration number with Commission |
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COIF Charities Deposit Fund |
1046249 |
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The Affirmative Deposit Fund for Charities |
1115887 |
Common Deposit Funds are dealt with by the Charity Commission’s Large Charities Division, 30 Millbank, London SW1P 4DU. All enquiries and correspondence relating to Common Deposit Funds should be addressed to this Division.
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.