charities & credit unions: depositor protection under the FSCS

By Kevin Russell | 9 December 2014

image by 16210667@N02 on Flickr, used under creative commons

The scope of depositor protection under the Financial Services Compensation Scheme (FSCS) is set to change next year. At present, individuals who deposit money with a bank or similar financial institution are protected under the FSCS for up to £85,000 per bank, if that bank collapses and is unable to repay depositors.

 

The FSCS came into the public eye during the banking crisis when depositors in banks such as Northern Rock risked losing their money.

 

What is changing?

 

The Prudential Regulation Authority is now consulting on changes to the FSCS, in order to meet the requirements of a recast European Union ‘Deposit Guarantee Schemes Directive’. There are a number of proposals but for churches and charities, the most significant are that:

 

  • It appears that a wider range of charity depositors will become eligible for protection (see the footnote below, for further detail). In practice, this means that larger charities will be protected for the first time;
  • Credit Unions’ own deposits with banks etc. will no longer be protected. However, those that make deposits with the Credit Union itself will continue to be protected under the FSCS.

 

 

Practical implications

 

  • For larger charities, if the changes progress as anticipated, they will enjoy the benefit of protection for the first time. There is no particular action required to benefit although these charities may wish to spread their deposits across different banks to better take advantage of  the £85,000 ‘individual bank’ compensation limit if they have no already done so as part of their risk management.
  • If your charity runs a Credit Union, you should be aware that your deposits will no longer be protected since Credit Unions, as ‘financial institutions’ will be deemed to have the wherewithal to protect themselves. If you do not already make use of bank rating agencies to monitor the strength of the counter parties with which you invest, it may be prudent to start investigating this as part of your risk management strategy.
  •  

When are these changes being made?

 

Most of the requirements of the relevant European Directive must be implemented by 3 July 2015.

  

Footnotes

1. The current FSCS rules as they apply to charities

Charities can be constituted as limited (usually by guarantee) companies, or as unincorporated associations. FSCS eligibility test is presently as follows:

A limited company has protection in its own right up to the £85,000 limit, if it falls within the definition of a 'small company' under the provisions of section 247 of the Companies Act 1985 (which still applies to any company whose financial year commences before 6 April 2008) if it fulfils two of the following three criteria:

 

  • it has a turnover of not more than £5.6 million;
  • it has a balance sheet total of not more than £2.8 million; and
  • it has not more than 50 employees.

 

A company qualifies as a 'small company' under the provisions of section 382 of the Companies Act 2006 if it fulfils two of the following three criteria:

 

  • it has a turnover of not more than £6.5 million;
  • it has a balance sheet total of not more than £3.26 million; and
  • it has not more than 50 employees.

 

If the charity is an unincorporated association, it has protection of up to £85,000 regardless of size.

 

2. Proposals under the revised Directive

 

Company charities

Under the recast rules most depositors, including companies that are not financial institutions, will be eligible for deposit protection. This differs from the current rules, where the broad position is that only retail deposits and the deposits of small corporates are eligible for deposit protection.

 

FSCS protection for credit unions’ own deposits

Currently, credit unions are eligible depositors under the rules. This means that where they have deposited funds with another deposit-taker, they can claim compensation of up to £85,000 from the FSCS in the event that the deposit-taker fails. The new rules set out that funds deposited by credit unions for their own account with another deposit-taker are no longer eligible for FSCS protection. This does not affect the eligibility of a credit union’s own depositors, who will remain covered by the FSCS in accordance with the proposed rules.


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Posted by Kevin Russell

Our Legal Eagle guru and Stewardship's Technical Director, Kevin constantly has his finger on the pulse of all things tax and charity law-related. His briefing papers for charities, churches and individuals are an invaluable resource on everything from VAT to Gift Aid. 

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