The government has approved proposals for the Big Society Bank drawn up by the venture capitalist Sir Ronald Cohen and the investment banker Nick O'Donohoe.
In a letter to the two men, Francis Maude, Minister for the Cabinet Office, said he would back their proposals, subject to further development work, agreement from four high-street banks that will provide £200m of initial capital, and approvals from the Financial Services Authority and the European Commission, which must agree that the bank does not break its rules on state aid.
"Sir Ronald Cohen and Nick O’Donohoe have developed a robust proposal for the Big Society Bank drawing on experience in the social sector," Maude said in a statement. "It will be the first institution of its kind anywhere in the world dedicated to growing the market for investments that blend financial and social returns."
The Cabinet Office had previously announced that the bank would be set up with £400m of money from unclaimed assets in dormant bank accounts, plus £200m from four of the country’s largest retail banks, and offer capital to the social investment market. It is expected to make its first loans later this year.
In Cohen's and O’Donohoe’s proposal, the bank will provide equity and loan capital to social enterprise funds and other intermediaries, equity finance for infrastructure organisations and underwriting for experimental products. It will not give grants and will not have a banking licence, meaning that it will technically not be a bank.
The proposal says the bank is likely to suffer "some attrition of the value of its capital" over the first five years, but will be self-sustaining thereafter.
The bank will also act as a champion of social investment, the document says, by providing events, data, research and links between investors and investees. It will advise on and promote social investment to government and regulators, and promote best practice in areas such as "governance, finance, risk control, social performance metrics and the use of innovative financial instruments".
The bank will receive unclaimed assets money over the next five years and money from high-street banks over the next two, the document predicts. The exact terms under which cash is provided by the high-street banks are still under debate. According to the proposal, however, it is likely to be "long-term permanent capital".
The Cabinet Office has confirmed that a reclaim fund to channel money from unclaimed assets into the bank has already been set up.It says the first money is likely to be available to lend later this year.
The bank’s "operating entity" will be a company limited by shares. This will be owned by a company limited by guarantee, which will provide monitoring and oversight. The bank will also have a charitable arm in order to accept donations and redistribute profits.
The bank will have about 40 employees and will have separate governing boards at both company levels, made up of both finance experts and representatives from the social sector.
While the bank is being set up, an interim investment committee will make recommendations on how cash can be channelled into the sector. The initial members will be Cohen, O’Donohoe, John Kingston, director of social lender Venturesome, Dawn Austwick, chief executive of the Esmée Fairbairn Foundation, Anna Southall, interim chair of the Big Lottery Fund, and one other BLF representative.