The Regulator for Charities in England and Wales
(Version August 2008)
This guidance focuses specifically on Common Investment Funds (CIFs) which are one form of investment. For guidance generally on investments by charities and the duties on trustees when making investments, see our guidance 'Investment of Charitable Funds (CC14)'. In particular, trustees should be familiar with the definition of "investment" (see section B of CC14), trustees’ duties (see section E of CC14), trustees’ general duties on risk management (see paragraph 62-66 of CC14) and the trustees’ approach to diversification and suitability of investments (see paragraph 67-79 of CC14).
Common Investment Funds (CIFs) are collective investment schemes. They are set up by Schemes made by the Charity Commission under section 22 of the Charities Act 1960 (now repealed) or section 24 of the Charities Act 1993. Before the Charities Act 2006 they were open only to charities in England and Wales, but are now also open to “appropriate bodies” (i.e. bodies established as charitable under the law of Scotland or Northern Ireland and eligible for UK tax relief) where the Scheme permits this. They operate as investment vehicles and are deemed by law to be charities themselves. They are therefore eligible for registration as charities in their own right.
CIFs are similar to authorised unit trusts but, unlike unit trusts, they are not authorised by the Financial Services Authority (FSA).
CIFs provide diversification of investment to reduce risk, which is tax efficient, administratively simple and cost efficient. They enjoy the same tax status as other charities.
In establishing CIFs under the provisions of section 22 of the Charities Act 1960 or section 24 of the Charities Act 1993, the Commission is able to provide a legal vehicle which increases the choice of investment facilities available for charities.
The fact that the CIFs are established by the Commission must not be taken as a “kite mark” of quality. The Commission makes no determination or judgment as to whether a CIF provides an acceptable level of risk or an acceptable level of performance. Investing charities must form their own view with regard to these matters.
The Commission is not an investment adviser. It cannot offer trustees advice about the merits of a particular investment or investment strategy. The Commission must emphasise that it is not promoting CIFs as a suitable or safe investment vehicle for charities generally, nor is the Commission suggesting that CIFs are risk free. As with all investment matters, trustees of charities must take investment advice from their own suitably qualified professional investment advisers before they invest, irrespective of whether they are investing with CIFs or other types of investment vehicles.
As of July 2008, the last set of annual accounts submitted to us from the 45 commercial CIFs show total assets under management of just over £8.2 billion.
Unit trusts and common investment funds are examples of collective investment schemes. In each case, money contributed to the scheme by investors is pooled, and the operator of the scheme typically invests the money in a range of investments, in accordance with the published policy of the scheme.
All the money and investments in a unit trust or common investment fund belong jointly to the contributors. The size of each share is determined by the number of "units" each contributor owns. The number of units which each contributor owns is determined by the proportion which the value of his or her contribution bears to the total value of the assets in the scheme at the time when the contribution is made. Investment returns are allocated to unit-holders in the same proportions. The risk of particular investments falling in value is spread across all the holders of units in the fund, as they each are joint owners of all the investments in the scheme.
In technical terms, collective investment schemes are defined by section 235 of Financial Services and Markets Act 2000. They involve arrangements with respect to property of any description, including money and their purpose or effect is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The arrangements must have either or both of the following characteristics:
A Pooling Scheme establishes a particular type of common investment fund whose main characteristic is that the Pooling Scheme and the participating charities must all have exactly the same trustees. A Pooling Scheme allows a body of trustees who administer more than one charity to combine funds from any or all of those charities for investment purposes: this contrasts with the CIFs which are the subject of this guidance and which are open to different trustees of different charities. For further information relating specifically to Pooling Schemes, see OG 49 - Pooling Schemes and Pool Charities.
A Scheme is a legal document made by the Charity Commission which establishes, amends, replaces or amplifies the trusts of a charity. It may set out new objects and purposes or changes to them, constitutional arrangements and powers of the charity. Some of these provisions will be mandatory, others simply enabling. It may be:
The promoters of a new CIF will need to demonstrate how the new CIF will benefit the charity sector and also there is sufficient investment support from the charity sector to ensure the future commercial viability of the new CIF, if it were established.
As part of its deliberation whether it is expedient in the interest of the charity sector that the new CIF should be established and in particular, in the manner requested by the promoters, it is reasonable for the Commission to consider the CIF’s investment objectives and strategies, the risks that are associated with the investment instruments that are intended to be adopted and especially, whether these investment instruments are appropriate for a CIF to adopt.
The Commission’s power to establish new CIFs is discretionary, but it would not normally refuse to make a CIF Scheme simply because there is already an existing CIF with a similar investment policy. That said, the Commission is entitled to have all reasonable and relevant information so that it can be satisfied:
(1) that there is a clear need for the new CIF or that it is appropriate in terms of encouraging competition and providing more choices for charities;
(2) that it will be financially viable and have structural integrity; and
(3) that the arrangements pertaining to a new CIF are:
(a) appropriate for the new CIF as a charity itself, and
(b) appropriate for charities that may invest their funds;
All investments carry inherent risks and CIFs are no different. In their application, promoters should set out the CIF’s investment objectives and strategies and also on what the level of diversification of investment and the degree of associated risks should be. The promoters will need to demonstrate that the level of diversification of investment and the degree of associated risks and also the investment instruments they would use in order to achieve the intended target yields are appropriate and reasonable.
The Commission’s Scheme-making process is not a rubber-stamping exercise either. The Commission needs to be satisfied that it is expedient in the interest of the charity sector that the new CIF should be established. In this connection, the Commission’s policy is that the promoters should satisfy the Commission that establishing the new CIF will benefit the charity sector and that there is sufficient financial support from the charity sector to ensure the future viability of the new CIF, if established.
The Commission provides a legal framework in the form of new and amended Schemes. It requires the CIF to be administered and managed by:
(a) a Manager that is a body corporate which is
(i) authorised by the Financial Services Authority to act either as an operator of a regulated collective investment scheme or as an operator of an unregulated collective investment scheme, and
(ii) independent of the Board (if applicable) and the Trustee;
(b) a Trustee that is a body corporate which is:
(i) authorised by the Financial Services Authority to either act as a Trustee of an authorised unit trust scheme or establish, operate or wind up an unregulated collective investment scheme, and
(ii) independent of the Board (if applicable) and the Manager;
(c) an optional Board that is a body corporate or group of individuals and each member of the Board is independent of the Manager and the Trustee;
Being authorised by the FSA, the Manager and the Trustee will be subject to monitoring by the FSA of their business practices.
The Commission’s approach to the regulation of CIFs is designed to mirror (as far as reasonably possible) the regulation by the FSA of other collective investment schemes and these requirements are set out in the Collective Investment Schemes Sourcebook (COLL).
Although the provisions of COLL do not, strictly speaking, apply to CIFs, the Commission has decided, as a matter of policy, to have regard to COLL in considering relevant issues. The Commission has regard to this information in determining its own regulatory approach with regard to CIFs. In this way, the regulation regime for CIFs is comparable to that for collective investment schemes regulated by the FSA.
The Commission will evaluate COLL and applies those provisions (with appropriate amendments, if any) that are believed to be advisable for protecting the interest of charities investing in CIFs, but where there is a good reason in the particular circumstances for departing from COLL, the Commission may do so.
A CIF is established by a Scheme of the Charity Commission as described above and it is made under section 24 of the Charities Act 1993 (prior to this Act CIFs were made under section 22 of the Charities Act 1960). The Scheme is dealt with by the Commission’s Large Charities Division (see contact details). Because of the complexity of CIFs, it will usually take 6 months to finalise this type of Scheme.
When a promoter (who will usually be a fund manager) wishes to have a new CIF established, he or she should provide us with the information about his or her proposals requested in the questionnaire forms. Based on these and any other information we may need and assuming we agree in principle to make such a Scheme, we will draft the Scheme, the legal instrument creating the CIF. The Scheme Particulars, which are the detailed rules made under powers in the Scheme, will be drafted by the fund manager.
A prospective Manager is advised to seek at the earliest opportunity possible a pre-application meeting to discuss a working draft application with the Commission's staff in order to identify any key policy issues or other matters to which special attention might be given before a finalised application is formally submitted.
The making of a Scheme to establish a new CIF requires support from any two or more charities that are willing and able to invest in the new CIF with funds to provide the necessary initial seeding.
The Commission’s objectives with regard to CIFs can be summarised as follows:-
It cannot be overemphasised that investors’ protection cannot be guaranteed. With a greater degree of transparency through disclosure of expenses, costs and commission fees, and improved quality of the products on sale, trustees of investing charities themselves should be better able to take a closer scrutiny of the performance of their investments.
On investment matters, the individual charity trustees, the Corporate Managers and the advisory committees or advisory boards of CIFs (if applicable) are responsible for setting the performance objectives that are measurable, and determining the investment policy and strategy and the risks that may be associated with such policy and strategy.
The Manager and the Trustee will be regulated and subject to monitoring by the FSA . The Commission does not attempt to duplicate the regulatory functions of the FSA. This means that the Commission does not regulate the efficacy of investment policies or ensure that the investment policies being adopted are necessarily appropriate or meet the expectations of the investing charities.
Trustees of investing charities are ultimately responsible for the investment decisions they make and for reviewing their investments periodically. It is good practice to review their investments at least once a year and more frequently, if necessary, when the stock market is volatile and this is so irrespective of whether the investments are with CIFs or some other types of investments.
Trustees of investing charities must continue to seek investment advice from their own professional advisers as to the suitability and diversification of their investment portfolio. Investing charities are reminded of the "buyer beware" principle and they should exercise a greater degree of caution themselves. The price of units in a CIF can go down as well as up.
Trustees of investing charities must decide for themselves whether the CIFs they consider investing with are suitable or appropriate for their charities and carry an acceptable level of risks or deliver an acceptable level of performance.
Trustees of investing charities should take note there is generally no compensation for under-achieving investment performance. It is a matter for the investing charities to consider and decide whether they should withdraw their money from a particular CIF or a particular type of investment because of its recent poor performance.
Trustees of investing charities may also wish to consider asking fund managers whether the particular CIF they are proposing to invest in is eligible under the terms of the Investors Compensation Scheme.
In summary, trustees should consider each investment decision on its merits. The fact that CIFs are established by the Charity Commission does not mean they are better or appropriate investment vehicles for charities generally. Nor do CIFs carry a “kite mark” of quality simply because they are established by the Commission.
3.1 What is the Financial Services Authority’s role with regards to Common Investment Funds?
The Financial Services Authority (FSA) is an independent body that regulates the financial services industry in the UK. Persons and firms that engage in specific types of activity (called "regulated activity") must be authorised to do so by the FSA. Establishing and/or operating a CIF, if that is done by way of business, may be a regulated activity and therefore need to be authorised by the FSA. Acting as trustee of an authorised unit trust by way of business is also a regulated activity. In practice, this will often mean that the fund manager and corporate trustee of a CIF will be engaging in regulated activity. A fund manager and/or corporate trustee that is authorised to engage in regulated activity will be monitored and supervised by the FSA.
In order to be authorised by the FSA, a person or firm must satisfy the threshold conditions set out in Schedule 6 to the Financial Services and Markets Act 2000 (the Act which establishes the regulatory remit of the FSA). Areas covered by the threshold conditions include:
(i) the legal status of the firm;
(ii) the place in which the firm and/or its head office is located;
(iii) the ownership of the firm and/or any relevant group structure;
(iv) the firm's resources;
(v) whether the firm is fit and proper (i.e. meets criteria as to honesty, competency and financial soundness).
Generally speaking, the FSA monitors and supervises regulated activity by:
The objectives of the FSA are set out in the Financial Services and Markets Act 2000 and are:
As at 31 March 2004, the FSA regulated some 10,712 firms. These ranged from global fund management operations, investment banks, large UK stockbrokers and major networks of independent financial advisers, to the smallest corporate finance boutique operations and one-person financial advisers.
For further information about the Financial Services Authority and their work, please visit their website www.fsa.gov.uk.
|
Names of Common Investment Funds |
Registration numbers with the Charity Commission |
|
COIF Charities Investment Fund |
218,873 |
|
Charinco CIF |
270,540 |
|
Charibond Charities Fixed Interest CIF |
271,815 |
|
Charishare CIF |
295,634 |
|
COIF Charities Fixed Interest Fund |
803,610 |
|
The Bond Fund for Charities |
1,014,756 |
|
The UK Equity Fund for Charities |
1,014,758 |
|
Targeted Return Fund |
1,015,446 |
|
The Alpha Common Investment Fund for Endowments |
1,025,527 |
|
Common Fund for Income |
1,038,265 |
|
Common Fund for Growth |
1,038,267 |
|
The Charity Fixed Interest Fund |
1,038,561 |
|
The Charity Equity Fund |
1,038,563 |
|
Chariguard Fixed Interest Fund |
1,039,352 |
|
Chariguard UK Equity Fund |
1,039,354 |
|
Chariguard Overseas Equity Fund |
1,045,682 |
|
Charishare Tobacco Restricted Fund |
1,062,581 |
|
The Income Trust for Charities |
1,065,732 |
|
The Growth Trust for Charities |
1,065,734 |
|
Diversified Charity Fund |
1,066,827 |
|
ChariTrak Common Investment Fund |
1,077,125 |
|
The Charities Property Fund |
1,080,290 |
|
Affirmative Fixed Interest Fund for Charities |
1,087,227 |
|
Affirmative Equity Fund for Charities |
1,087,228 |
|
Global Growth and Income Fund for Charities |
1,089,229 |
|
COIF Charities Property Fund |
1,093,084 |
|
Armed Forces Common Investment Fund |
1,093,529 |
|
Absolute Return Trust for Charities |
1,094,498 |
|
Equity Income Trust for Charities |
1,094,572 |
|
CAF UK Equitrack Fund |
1,108,291 |
|
The Alpha Common Investment Fund for Income and Reserves |
1,110,710 |
|
Charity Select Global (ex UK) Equity Fund |
1,114,640 |
|
Charity Select UK Bond Fund |
1,114,641 |
|
Charity Select UK Equity Fund |
1,114,643 |
|
Accommodation Investment Fund for Charities |
1,115,363 |
|
Charifaith Common Investment Fund |
1,116,156 |
|
The Multi-Strategy Property Trust for Charities |
1,116,505 |
|
Charity Value and Income |
1,119,289 |
|
The Charity Multi-Asset Fund |
1,119,649 |
|
COIF Charities Global Equity Income Fund |
1,121,433 |
|
Names of Common Investment Funds |
Registration numbers with the CharityCommission |
|
National Association of Almshouses CIF |
223,887 |
|
Charibond Common Investment Fund |
271,815 |
|
CAF UK Equity Growth Fund |
803,287 |
|
CAF Bond Income Fund |
803,288 |
|
Combined Charitable Income Fund |
1,059,272 |
|
Combined Charitable Capital Fund |
1,059,275 |
5.1 Model Scheme A - with a Corporate Manager, a Corporate Trustee and an optional Board (PDF).
5.2 Model Scheme B - with a Corporate Manager and a Corporate Trustee only (PDF).
6.1 CIF-1040 (application to establish a Common Investment Fund - PDF)
6.2 CIF-1040A (costs and expenses questionnaire - PDF)
6.3 CIF-1040B (risk questionnaire - PDF)
Common Investment Funds are dealt with by the Charity Commission’s Large Charities Division, Harmsworth House, 13-15 Bouverie Street, London EC4Y 8DP. All enquiries and correspondence relating to Common Investment Funds should be addressed to this Division.
For further information about these webpages generally, call 0845 300 0218. The number for hearing and speech impaired callers using a minicom is 0845 300 0219.