Should the U.K.’s Charity Bank Be Permitted to Do Unlimited Distribution of Profits to Charitable Shareholders

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November 29, 2011; Source: Civil Society | Charity Bank is a not-for-profit bank in the U.K. that provides loans to charities and social enterprises that have difficulty accessing lending capital from conventional banking sources. Like a regular for-profit British bank, its capital comes from traditional savings accounts and the distinctive British financial instrument, ISAs (individual savings accounts not subject to income or capital gains taxes), among other sources.

It is a bank, but one that limits its distribution of profits to charitable shareholders—except that the managers of the bank, incorporated officially a decade ago—want to change that. According to CEO Malcolm Hayday, regulations proposed by the European Union (EU) are at odds with British charity law, and that puts Charity Bank in a bit of a quandary. The new EU rules limit the bank’s ability to attract capital investment, he says, unless the British Charity Commission allows it to distribute profits to its charitable shareholders.

The new proposed EU banking rule, designed to avoid a repeat of the bank collapses in Greece, Spain, and Ireland, require that surpluses generated by banks be distributed to shareholders on a pro rata basis. British charity law caps the amount available for dividends to investors at 10 percent, among other investor profit limitations. Thus, to comply with the EU regulations, the Charity Bank might, in terms of its shareholders, have to restructure itself so that it is less of a charity or perhaps no charity at all.  While Hayday and his colleagues want to drop the distributions limitation, they say that they have no desire to change the bank’s commitment to investing in communities and social change.

Nonetheless, there are broad implications for the charitable sector in the U.K., and for U.S. nonprofits too, primarily from the perspective of a nonprofit with the desire to  begin distributing profits while maintaining something of a charitable identity and tax status. The decision of the Charity Commission will be precedential on both sides of the Atlantic.—Rick Cohen