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Making a success of the new charity fund structure

Making a success of the new charity fund structure
  • United Kingdom
  • Financial services - Asset managers and funds


In the March 2015 budget, the Chancellor of the Exchequer announced that a new category of FCA authorised funds would be introduced exclusively for investment by charities and for charitable purposes.  These funds are to be known as Charity Authorised Investment Funds (or CAIFs) and will also be subject to oversight by the Charity Commission (as each CAIF will itself be a charity).

The Charity Commission already regulates an existing variety of charity funds known as Common Investment Funds (CIFs).  Although the FCA has not had a role in the supervision of CIFs in their own right, CIFs have loosely been managed in accordance with the same rules and requirements as FCA authorised funds and the managers (and trustees) of CIFs are subject to FCA authorisation and supervision.  CIFs are also alternative investment funds (AIFs) for the purposes of AIFMD and, therefore, in the last two years the FCA has had a larger role in relation to them.

Following joint consultations between the Charity Commission and the FCA, CAIFs have been designed as the successor to CIFs and Collective Investment Schemes Sourcebook (Amendment No 9) Instrument 2016 introduces the FCA rules surrounding them (as the new Chapter 14 in the COLL sourcebook). Conversion to CAIF status by CIFs will not be mandatory but rather will be at the discretion of the CIF manager.

Features of CAIFs

CAIFs can in theory take the legal form of any UK authorised fund structure (i.e. open-ended investment companies, unit trusts or contractual schemes). However, unit trusts are expected by the industry and regulators to be the “go to” structure of choice as this most closely replicates the current CIF structure.

CAIFs will be subject to the same rules as other FCA authorised funds depending on whether the fund in question is constituted as a UCITS, NURS or QIS. 

CAIFs will also be permitted to continue to have advisory committees for oversight purposes though their role will be different for CAIFs than for CIFs. CAIFs without an advisory committee will need the Charity Commission’s permission when they want to make certain changes to the scheme.

Irrespective of the structure used, management charges for CAIFs will not be chargeable to VAT unlike management charges for CIFs currently. If all of the existing CIFs converted to CAIFs, this would represent a saving to the underlying charities in the region of £13m a year (according to estimates from the Charities Investors Group). This is considered to be the largest benefit of conversion for existing CIFs.

CAIFs will be constituted by scheme documents consisting of a prospectus and (most likely) a trust deed and, unless constituted as a QIS, will require a pre-contractual disclosure document such as a key investor information document.  The documents will also have to comply with Charity Commission requirements (such as eligibility criteria and constitutional governance controls).  A model unit trust deed has been agreed jointly between the Investment Association, the Charity Commission and the FCA for this purpose. These documents need to comply with the usual rules in the FCA’s COLL, FUND and COBS handbooks.

CIF conversions

CIFs are expected to convert to CAIF status through a scheme of arrangement organised under the CIF’s constitutional documents though there may be other means of carrying out the transfer. Conversion of CIFs will require the approval of the Charity Commission.  A conversion will likely also constitute a material change of an AIF for FCA purposes.

The CAIF itself needs to be established ahead of the actual conversion.

There are four steps to set up a CAIF:

  • First the Charity Commission must give its approval in principle that the proposed CAIF can be a charity;
  • The FCA can then consider the authorisation of the vehicle in the usual way;
  • Following FCA approval, firms will need to seek full and formal Charity Commission approval for registered charity status; and 
  • Firms can then get recognition from HMRC for the charity.

Importantly, some of the existing operational benefits of CIFs will be permitted for CAIFs such as intra-year income smoothing and flexibility around allocation and distribution of income through transfers between the capital and income account.

How can Eversheds assist?

Eversheds is recognised as a leading adviser to the authorised funds sector and acts for a number of CIFs presently. We have converted multiple unauthorised AIFs into authorised funds in the past and believe our clients will benefit from the following areas of assistance:

  • Analysis of the impact of the proposals including the preparation of document lists and project timetables; 
  • Fund tax and structuring advice;
  • Review and mapping of investment objectives, policies, strategies, powers and restrictions against the written and de facto FCA positions; 
  • Review/drafting of scheme documentation including review of compliance with COLL 4.2.5R and FUND 3.2.2R and general modernising and updating; 
  • Drafting FCA applications and liaising with the FCA during the application process; and
  • Assisting with the Charity Commission application and any questions they may ask during the process.