Charity depositors in banks should have preferred creditor status alongside members of the Financial Services Compensation Scheme, which protects individuals and small organisations in the event of a banking collapse, the leaders of three charity umbrella bodies have said in a letter to George Osborne, the Chancellor of the Exchequer.
An open letter from Sir Stephen Bubb, Sir Stuart Etherington and Caron Bradshaw, the chief executives of Acevo, the National Council for Voluntary Organisations and the Charity Finance Group respectively, said proposals in the banking reform white paper to make members of the FSCS preferred creditors in the event of a bank collapse would cost the charity sector millions of pounds a year because other creditors, including charities, would be at much greater risk if a bank failed.
"As charities tend to hold large deposits for longer periods than other sectors, this means that in the exceptional event of a bank failing charities would lose substantial sums of donor money relative to their size," the letter says.
"In order to mitigate this increased level of risk, they will need to adopt more conservative banking arrangements and deposit in those banks deemed ‘lower risk’, which typically pay a much lower deposit rate. Charities sensibly adapting in response to the changes will therefore face immediate financial loss."
The letter says that charities hold a combined total of about £18bn on deposit, meaning that even if they their interest rates fell only slightly, the effect on the sector could be in the tens of millions of pounds.
About 2,900 charities are ineligible for compensation from the FSCS, because they are deemed to be too large, while many others are eligible, but hold more than £85,000 - the most the FSC will give in compensation.
"We believe that conferring preferred creditor status on charities is a simple and positive change that the government can make without additional risk or expense to the exchequer, but one that would make a tangible financial difference to many charities," the letter says.