Submission to HM Treasury


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Submission to HM Treasury

  1. 1. Submission to HM Treasury & Office of the Third Sector Unclaimed Assets distribution mechanism: a consultation The cdfa The cdfa is the trade association for the UK’s CDFIs (Community Development Finance Institutions). Launched in 2002 as a result of a recommendation made to the Chancellor by the Social Investment Task Force, it now represents over 95% of the UK’s CDFIs. The cdfa is currently introducing a Code of Practice and a performance framework to drive up standards throughout the sector and increase stakeholder confidence in its activities. The cdfa has 81 member organisations from across the country and over 30 affiliated organisations and individuals who support and promote the work of the CDFI sector. Please see Appendix A for a full list of our members and supporters. The CDFI sector The CDFI sector is new and emerging in the UK. CDFIs provide finance to people who, and businesses which, cannot access it from mainstream sources. They work to fill gaps in, and complement, existing provision by giving their clients a track record which will enable them to move into the mainstream sector. CDFIs provide finance for individuals, micro-enterprises, small to medium size businesses and social enterprises based in, or serving, disadvantaged areas and communities. They tend to specialise in one or two of these markets. Some CDFIs target their services at communities of interest such as BME groups, women, over 50’s etc. On 30 September 2005 (the latest date for which figures are available), CDFIs had £181m on loan. They had financed nearly 18,000 businesses and households. They have created 11,000 jobs and sustained 88,000 more. They have also levered an extra £285m into the businesses and households they serve. They had also used Community Investment Tax Relief to raise over £38 million of private finance. Early analysis from 2007 survey returns suggests the community development finance sector has seen significant growth again. Results from available figures show that portfolios have increased sharply with some CDFIs achieving more than 300% growth between September 2005 and March 2007. With a sector average of more the 50%, this suggests the community development finance will have grown to more than £270 million when analysis is completed. Early analysis also suggests that CDFIs are deploying more of the capital they have available than ever before and an increasingly significant proportion of their capital for lending is raised from investments rather than grants. Analysis of a subset of the membership suggests that for every £1 raised in grant in the 12 months to March 2007, CDFIs raised £2 in investment from social and commercial sources.
  2. 2. Response to Treasury consultation questions 1. Are the principles underpinning the distribution of the available surplus assets the right ones? The Commission on Unclaimed Assets, an independent body which was set up to examine the issue of releasing funds from dormant bank and building society accounts to be re-invested in society, produced a report in March 2007 which called for a Social Investment Bank to be established. A Social Investment Bank would be an independent and entrepreneurial institution which could use the funding from unclaimed assets to invest in the third sector and thereby invest in communities across the country. The report from the Commission, entitled ‘The Social Investment Bank: Its organisation and role in driving development of the third sector’ was published earlier this year and has been widely consulted upon. There has been widespread support and agreement regarding the conclusions and proposals of this report; that the third sector could be transformed by a large scale investment of capital to strengthen its systems and infrastructure. The cdfa and its members strongly support the concept of a development bank that can deploy and grow a variety of third sector lenders. The cdfa and its members believe that social investment should be on at least an equal footing with the other priorities identified in the consultation. CDFIs are ideally placed to handle capital from a Social Investment Bank due to their existing experience and ability in providing financial services to communities across the country. There is also a link between unclaimed assets being released from the country’s banking system and then re-use to provide inclusive financial services to communities that are excluded from mainstream banking services. Loan finance would be the ideal method to distribute and re-invest unclaimed assets in the community because of its ability to be re-cycled and used numerous times to assist a greater number of people and organisations. With the majority of capital being provided as loans and investments, not as grants, there is the additional incentive for third sector lenders to be entrepreneurial and enterprising in their use of the funds. With the release of the current unclaimed assets from the banking system, and then subsequent amounts released each year as accounts reach the agreed age of dormancy, this funding pattern would enable continuing growth and coverage and support increasing levels of self-sustainability. A diverse, strong and effective third sector would be able to work with more people living in a range of communities across the country and assist in the transformation of those communities to flourishing and vibrant places. For this to occur, the third sector needs an investment of capital to build internal capacity, develop systems and procedures, buy in professional support, and design and develop new services and products. Funding from unclaimed assets would suit this need for large scale capital investment which could then be recycled to be invested in more community and voluntary groups thus multiplying the impact of the funding. 2. Where is the greatest need for finance and funding for third sector organisations that is currently not being met in the market?
  3. 3. Within the community and voluntary sector there is a lack of understanding about investment and finance, in addition to a gap in suitable financial products. Without access to suitable financial products, the third sector remains dependent on short term grant funding, which stifles the sector’s ability to grow and invest in new ways of working and delivering services. If funding from unclaimed assets were to be released as capital to invest in the third sector, then there would need to be a concomitant responsibility to build the knowledge and capacity of community and voluntary groups and social enterprises to understand investment products and services. This would ensure that any funding from unclaimed assets invested in the third sector would be utilised effectively to seek maximum return, both financially and socially. At present there is a need for third sector organisations to invest in their scale, impact and sustainability – areas that grant funding does not usually cover as the focus for this type of funding is normally on delivering specific, ring fenced projects. Third sector groups and social enterprises which need to invest in capacity building, professional development and strengthening systems could access financial services, advice and products, via a Social Investment Bank, and develop programmes and projects to strengthen their organisation according to their needs and requirements, rather than fit the funding profile of a grant application. A stronger and more effective third sector could then develop greater capacity and scale to grow, which in turn could have a larger positive impact on the people and communities that they work with. 3. Is there a need for a specialist social investment wholesale institution? The cdfa and its members believe that there is a need for a specialised institution, like a Social Investment Bank. The SIB could operate as a de novo organisation or under the umbrella of an existing organisation with a track record such as the cdfa. An SIB should operate as a wholesaler of funds to existing finance intermediaries, such as CDFIs. A banking wholesaler provides capital to a variety of retail institutions (such as CDFIs) that then directly on-lend the money received to their clients and customers. Wholesale capital deals tend to be large and at a lower cost than the retailer then lends at. Deals can be structured as debt, equity, quasi-equity, returnable grants or grants. They rely on the wholesaler being able to make credible judgements about the risk/return profile represented by the retail institutions they lend to. In turn, wholesale capital allows retail providers to access appropriately designed and priced capital to help increase the scale of lending and investing. The creation of a wholesale SIB would enable CDFIs to extend the market by on- lending the money to third sector groups and social enterprises for organisational investment. They would also serve micro and small businesses that drive local economies and householders that are currently reliant on high-cost lenders. An institution such as a Social Investment Bank would need to be an independent, risk taking body with the ability to make strategic decisions and shape the market. A Social Investment Bank would be able to work with current finance intermediaries to build their knowledge, market share and sustainability. 4. Is this the best means of increasing the investment available to sustainable third sector organisations?
  4. 4. Yes, we believe that a Social Investment Bank would be the best means of increasing the supply of finance to third sector organisations, and consequently increasing the scale of investment in local communities, by; • working with existing financial intermediaries, like CDFIs, to build their capacity to lend, business support systems, and market position; • assisting financial intermediaries to raise additional funds from private sector finance; • helping to develop and shape the market, i.e. assisting in the design of new financial products and services that are required by third sector organisations; • enabling the growth of investment readiness support by providing finance for this function to intermediaries; • and ensuring that any gaps in the market for finance are filled by innovative new products. A wholesale provider of funds, such as a Social Investment Bank, would be a key protagonist in developing the social investment market, stimulating demand for finance and working with both financial intermediaries and third sector organisations to develop and grow the sector. 5. If so, what kind of activities should the wholesaler focus on? The wholesaler should focus on developing and shaping the market, assisting financial intermediaries to increase their capacity and market share, and assist in the design and innovation of new products. A Social Investment Bank would need to grow delivery vehicles and capacity in the sector, as well as drive financial engineering. Some of the products for consideration could include the following, as well as more commercially orientated loans and investments; • Capacity building and technical support grants • Investment readiness and market support programme • Grants to meet shortfalls from generated income • Products to develop CDFI balance sheets, including product diversification and asset acquisition • Guarantee funds • Long term, subordinated and/or unsecured lending • Equity and equity-like products structured as bullet (a single final payment, in contrast to payment in instalments) and balloons (a large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments) with elements that can share risk as well as upside such as turnover or profitability shares. The cdfa can provide further detail on the likely balance needed between these types of products and the risk/return yield they represent. Currently there are market gaps in the provision of financial products to third sector organisations, including the availability of equity, quasi-equity, patient capital and debt products. These different types of financial product need to be available to community and voluntary sector organisations so that they can receive the right type of funding package, and also additional support in investment readiness and financial systems.
  5. 5. 6. Is the proposal to use the Big Lottery Fund as the primary UK-wide distribution vehicle for the available surplus assets the right one, based on the principles for distribution outline in this document? The consultation document, at 6.12 Powers to delegate to specialist bodies, specifies that the Big Lottery Fund will be able to delegate its distribution functions to other specialist bodies and ‘should enough assets be available to deliver this and other priorities in England, BIG would be able to use the proposed powers of delegation to select a body to manage the distribution of a proportion of assets for the purposes of boosting the social investment market’. The Big Lottery Fund is not equipped to conduct financial services and product provision; therefore we believe strongly that a specialist institution, like the Social Investment Bank – working with a consortium of specialists from the financial and community sectors - is best placed to ensure that unclaimed assets which it receives are invested wisely in the community via CDFIs and other financial intermediaries. However, a governance relationship between the SIB and BIG should and could be maintained through, for instance, representation on the board. The SIB will also need to work with current financial intermediaries and experts from the fields of social investment, finance, third sector and community development to ensure that a key range of skills and abilities is available for the Social Investment Bank to utilise when establishing and developing itself as an investment institution. 7. What are the different approaches that the Big Lottery Fund could take to the distribution of the available assets to ensure they deliver maximum benefit to communities? How should BIG best work with other intermediaries and delivery partners to ensure the best outcomes? We believe that the Big Lottery Fund should; delegate part of its distributive function to an autonomous Social Investment Bank that can act as a wholesale provider of social investment funds; work with the Social Investment Bank to make sure that available assets are utilised as investment finance, not revenue funding; and ensure that the supply of capital to the Social Investment Bank is replenished each year as more accounts in the banking system attain dormancy status. 8. Do you agree with the proposals for how legislation will work in relation to the distribution of these assets? A Social Investment Bank could report to the Big Lottery Fund, or to parliament, to provide a direct line of accountable and transparency in relation to its policies and procedures. The Social Investment Bank could be regulated by an existing authority, i.e. the Financial Services Authority, to ensure that its finance investment work adheres to all current relevant legislation and best practice. cdfa Room 101 Hatton Square Business Centre 16/16a Baldwins Gardens London EC1N 7RJ 020 7430 0222
  6. 6. Appendix A Members ABI Associates - Faith in Business Ltd Aspire Micro Loans for Business Limited Aston Reinvestment Trust (ART) Bees Knees BIGInvest Birmingham Community Loan Fund Black Business in Birmingham (3b) Black Country Reinvestment Society Ltd Blackpool Moneyline (IPS) Limited Bradford Enterprise Agency Ltd. Bridges Community Ventures Bristol Enterprise Development Fund Business Finance North West Capitalise Business Support Limited Centre for Employment and Enterprise Development (CEED) Change - London and Quadrant Housing Trust Charity Bank Ltd Community Money CIC Co-operative and Community Finance Coventry & Warwickshire Reinvestment Trust (CWRT) Cumbria Community Asset and Reinvestment Trust Ltd (CART) derbyloans DSL East Lancashire Moneyline (IPS) Ltd (ELM) East London Small Business Centre (ELSBC) EBDC - Ethnic Mutual Enterprise Loan Fund Ltd Fair Finance First Enterprise Business Agency (FEBA) Foundation East Fredericks Foundation Futurebuilders England Ltd Gloucestershire Development Loan Fund Goole Development Trust HBV Enterprise Impetus Incredit Innovative Finance (Hastings Turst) Key Fund (South Yorkshire) Lincolnshire Development Local Investment Fund (LIF) London Rebuilding Society Merseyside Special Investment Fund Ltd Moneyline Yorkshire (IPS) Ltd Norfolk & Waveney Enterprise Services (NWES) North London Enterprise Credit Union North Staffordshire Risk Capital Fund plc oneLondon
  7. 7. Pembrokeshire Lottery Fund Plymouth Small Business Fund Preston MoneyLine Project North East (PNE) Rootstock Ltd Sahara Communities Abroad (SACOMA) Salford Money Line (IPS) Ltd Sandwell Advice & Moneylink Trust Scotcash C.I.C. SENET Shoreline Housing Partnership Social Investment Scotland (SIS) South Coast Money Line South West Investment Group (SWIG) Spirit of Enterprise Loan Fund Street (UK) Street NE The Enterprise Fund Ltd The Five Lamps Organisation The Isle of Wight Lottery The Prime Initiative The Prince's Trust The West Yorkshire Enterprise Agency Limited Train 2000 Limited Triodos Bank UK Steel Enterprise Ulster Community Investment Trust (UCIT) URBAN Partnership Group WEETU - Full Circle Fund Wessex Reinvestment Trust Group Supporters (organisations only) Advantage West Midlands Bank of Scotland Community Banking Barclays Bank plc CapitaliSE Community Enterprise in Strathclyde - CEiS Community Finance Solutions Cylch - Wales CRN Deutsche Bank East Midlands Development Agency (emda) Esmee Fairbairn Foundation Finance Wales plc Forth Sector Global Finance Research Group Harley Reed Consulting ltd Head for Business Finance Limited HURT Ltd Inclusive Finance Community Interest Company Micro-Finance and Community Development Organisation NatWest & The Royal Bank of Scotland (RBS) New Economics Foundation (NEF)
  8. 8. Prowess Red Ochre Shorebank International Ltd Street Cred Venturesome Wrigleys Solicitors