Protecting charitable funds is the one of the fundamental responsibilities for trustees, and effective creditworthiness monitoring and treasury policy development play an important role in managing the risk of loss. However, where investors are eligible for the Financial Services Compensation Scheme (FSCS) it does take much of the stress out of picking creditworthy counterparties. The FSCS allows eligible investors to deposit with certain banks and benefit from protection under the UK’s deposit compensation scheme. While this reduces the risk of loss on default, charities still need to be aware of the eligibility criteria for the scheme and should carefully consider other factors beyond creditworthiness alone.
The first and foremost step before investing with banks is to ensure your charity is eligible for FSCS protection. The FSCS will determine eligibility based on the legal structure of the charity claiming the protection and the good news is that the majority of structures are eligible. Eligibility is proven by the charity’s legal structure being eligible under the rules in the PRA Depositor Protection handbook which generally only excludes some ineligible charitable trusts, charities classified as certain undertakings such as investment or insurance firms, entities under collective investment schemes or public authorities. Most other charitable legal structures can claim FSCS protection and can guarantee their deposits up to the new limit of £120,000 per PRA authorised bank.
The bank that you deposit with will be able to confirm your eligibility for protection so when in doubt the first port of call should be to confirm with the bank.
Once you are confident your deposit is protected, there are still areas of concern which should be understood and monitored. The first is that the protection applies across bank accounts with the same institution so if your charity has a deposit and a saver account with the same eligible bank, both will use up part of your £120,000 allowance. This is an important distinction in order to maximise your protection and to avoid accidentally exposing your cash to unprotected credit risk.
Charities with larger investment portfolios will also have to factor in how much of the £120,000 FSCS protection they are feasibly able to take advantage of without taking on a significant administrative burden. On a portfolio of millions of pounds there will have to be many bank deposits in place to maximise the protection which is a positive for diversification but can create a fragmented network of bank accounts that can reduce visibility and make cashflow forecasting more challenging. In these cases, it may be worth moving up resolution hierarchy and exploring covered bank debt which ranks above deposits in the event of a default. Of course, there are separate risks associated with these instruments such as market price movements and interest rate risk.
Operational resilience and liquidity are equally important considerations. Even with FSCS protection on your deposits, if a bank encounters issues in processing payments such as a failure of a downstream systems supplier or through an external event like a cyber-attack, you may still be unable to withdraw funds when required. This is why spreading your money across at least two different banking institutions is prudent to limit the impact of any liquidity issues beyond just in the event of default.
Selecting a banking provider also involves considerations beyond financial strength. Charities may wish to ensure their banking relationships reflect their charitable objectives, environmental, social and governance (ESG) policies and reputational expectations. Trustees should consider whether a banking partner's activities or governance practices could conflict with the charity's purposes or undermine stakeholder confidence.
Practical banking requirements must also be considered, such as the ability to send money overseas or what services are provided beyond just deposit taking. Charities operating internationally may place particular value on efficient overseas payments and access to markets with less developed banking infrastructure. Others may benefit from banks with specialist knowledge of the charity sector, particularly where funding arrangements are complex or cashflows fluctuate. These services can provide genuine value, but should be assessed alongside the institution's financial strength, operational resilience and creditworthiness.
Ultimately, FSCS protection is a valuable safeguard, but it is not a substitute for a robust treasury management strategy. Understanding eligibility, monitoring banking exposures and assessing the wider risks of financial institutions remain essential to protecting charitable funds.
Arlingclose monitors the creditworthiness of banking institutions and provides independent investment due diligence and treasury advice to charities. If you would like to know more about our investment due diligence or banking creditworthiness services, please contact jscottsoane@arlingclose.com.
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