A New Collective Investment Opportunity For Charities

How best to invest charity funds has always been one of the more difficult and technically challenging issues for trustees. One particular challenge has been how a charity with a modest amount of money to invest can find investment opportunities that are suitably diversified as well as cost-effective.

A private investor faced with this challenge might look to pooled investments such as unit trusts as a way of taking advantage of the spreading of investment risk. For charities, however, the creation by the Charity Commission, originally under the Charities Act 1960, of common investment funds (“CIFs”) has offered an attractive way to dip their toes in collective investment. One of the key attractions of CIFs is the fact that, having been established as a charity in its own right, each CIF is able to take advantage of the various tax exemptions available to charities. Other advantages of the CIF structure have included:

• the ability to appoint an independent advisory board to represent the interests of investing charities and to oversee the management of the fund;
• a sense of being looked after alongside other like-minded charities, particularly where a CIF operates within a particular ethical investment policy.

CIFs account for around £13 billion of charity funds, with about 13,000 different charities investing in 45 CIFs. The regulation of CIFs has historically been by the Charity Commission alone, with charities in effect being treated as operating as more sophisticated investors outside the retail investment world. The Commission has been at pains to make it clear that its regulation relates to compliance with charity law and governance standards, and that this is not a substitute for regulation by the Financial Conduct Authority (or its predecessors).

However, the implementation in 2013 of the Alternative Investment Fund Managers Directive (“AIFMD”) has required the modification of CIF schemes, and has also raised the bigger question of whether CIFs were appropriately regulated. While the Charity Commission had already incorporated into new CIF schemes provisions that reflect the content of the Collective Investment Schemes Sourcebook and the requirements of AIFMD, CIFs continued to be unregulated investment funds, and there was therefore still a question mark over whether charity investors needed the clearer level of regulation that would be provided if CIFs were to be brought within the scope of direct FCA regulation.

At the same time, other opportunities for collective investment through non-charitable structures (including OEICs) were offering VAT savings on management fees which rivalled the tax exemptions enjoyed by CIFs, and there seemed to be a definite move away from CIFs. The Charities Aid Foundation had, as early as 2011, closed down two of its three CIFs, replacing them with OEICs. Alongside the fact the VAT issue, there was increasing doubt as to whether regulation by the Charity Commission was the right arrangement and the Commission itself carried out a consultation in 2013 on the future regulation of CIFs.

The proposal for a new type of collective investment vehicle, the Charity Authorised Investment Fund (or “CAIF”) was announced in the March 2015 Budget, and there then followed a fairly long gestation period. That came to fruition in October 2016 with the launch of the CAIF structure and in particular the publication of a model trust deed developed by the Investment Association and the Charity Law Association that has been approved for use where a CAIF is to be established as an authorised unit trust. Guidance on the use of the model trust deed and on the procedure for registration by the Commission and approval by the FCA can be seen at http://www.theinvestmentassociation.org/assets/files/industry-guidance/2….

A CAIF will itself be a registered charity, with the object of furthering the charitable objects of charities investing in the structure. It will be possible for a new CAIF to be set up to replace an existing CIF, although no direct conversion process is being offered – it would be a case of arranging for investing charities to transfer their investments from the CIF to the new CAIF.

In summary, the key advantages of CIFs will be retained in the new CAIF, including:

• charitable tax exemptions;
• the ability to smooth income flow;
• the option for independent advisory committees to oversee trustees and managers and to control their remuneration; and
• a distinctive charity-specific constitution,

but the new structure now offers exemption from VAT on management fees as well as direct regulation by the FCA.

Contact our specialist charity law team

IBB Solicitors’ specialist Charities team has over 50 years’ combined experience in delivering practical commercial advice to charities and not for profit organisations and those who work with them. For advice please call us today on 01895 207862 or email charities@ibblaw.co.uk.

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