Farewell to CIF's

A year ago I wrote to the Treasury on behalf of the Charity Investors’ Group lamenting the lack of action on the regulation of Common Investment Funds (CIFs). 

This letter was prompted by updated Charity Commission guidance on the regulation of these funds in which it became clear that, despite a consistent message from respondents to an earlier consultation, the opportunity to enhance the regulatory oversight of these funds had not been grasped.

I have long believed in the importance of charity-specific investment funds, reflecting the particular investment characteristics of charity investors, managed by specialists and benefiting from preferential fees.  However, in my opinion, there are three main problems with the current CIF structure.

Problems with CIFs

The first is their financial regulation. There have been substantial changes in the investment landscape since the Charity Commission’s power to make schemes to establish CIFs was first introduced by section 22 of the Charities Act 1960.

Because of their structure, CIFs fall outside the regulated investment universe policed by the Financial Conduct Authority (FCA).  In my view charity investors, the majority of whom are not professional investors, should be protected by the rules and oversight of the FCA.

The second is the anomaly of VAT on investment management fees.  CIFs are subject to VAT on these fees, and charity investors in these vehicles are paying an estimated tax bill of around £13m per year.  By contrast, funds authorised by the FCA are exempt from VAT, meaning that CIFs are at a disadvantage to other investment vehicles, and that charity investors in these funds are being penalised.

My third concern with the current CIF structure is the Charity Commission’s reticence to establish any new funds, saying that it “anticipates the occasions when it will be prepared to create a new CIF will be limited”. 

This is understandable as the Charity Commission is not a financial regulator and needs to focus reduced resources on its key regulatory functions.  However, a lack of new specialist 
investment options does not promote choice and innovation and is not in the interests of charity investors.

So it was clear to me that a new structure needed to be created – something which combined the benefits of charitable status and the regulatory protection and oversight of the FCA.  Fast-forward to yesterday, and I am delighted that the Budget included an announcement on the development of a new Charity Authorised Investment Fund (CAIF) structure. 

This announcement followed 12 months of discussion with the Treasury, the Charity Commission and the FCA, greatly helped by the Charity Law Association and the Investment Association. 

How CAIFs will work

The CAIF structure will be available exclusively to funds established for charitable purposes, enabling participating charities to carry out their purposes more efficiently.  Each fund will be registered as a charity, and regulated as such by the Charity Commission.  As authorised funds, the financial regulation will be carried out by the FCA, offering protection for the investing charities, the majority of whom would be classified as retail investors.

It is intended that CAIFs will replicate the main benefits of the existing Common Investment Fund structure - including the tax benefits of being a registered charity, the ability to smooth income to aid cashflow budgeting for investing charities, and the ability to have an independent advisory committee to represent charity unit holders. 

Existing CIFs, of which there are 45 commercially available with total assets of £13.2bn and with 13,000 charity investors, may choose to convert to the new structure in order to benefit from both an improvement in regulatory oversight and an exemption from VAT on investment management fees. 

There is still work to be completed and technical details of the new Charity Authorised Investment Fund to be finalised. In the meantime, I would like to thank all those who have helped us get to this stage.  I firmly believe this is a positive development for the sector and for the effective management of charity assets. 

Kate Rogers is chair of the Charity Investors’ Group and head of policy at Cazenove Charities

This article was first published in the April 2015 edition of Charity Finance and is reproduced with permission of the publishers, Civil Society Media Ltd (www.civilsociety.co.uk)

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