The Financial Conduct Authority (FCA) recently announced a new category of authorised funds, known as Charity Authorised Investment Funds, or CAIFs. These were first announced in the March 2015 budget and have been developed by a working group of charity and investment associations. They’re intended to be an improvement on the existing common investment fund (CIF) structure – but are they?
At the moment, CIFs themselves are not regulated, although since the Alternative Investment Management Fund Directive (AIFMD) became applicable in July 2014 their managers and trustees have been required to be FCA authorised (subject to some exceptions for pooling schemes). CIFs are only open to investment from charities and are charities in their own right; they have the same tax status as other charities. More than £12.3bn of assets are currently estimated to be held in CIFs.
The new CAIFs will also be charities in their own right, but will be regulated entities, giving the charities who invest in them the benefit of the protections conferred by FCA regulation. The Charity Commission’s publications indicate they see this as a key advantage. Their status as regulated entities means management fees will be exempt from VAT ( which is not the case with the current CIFs). However, it also means restrictions on borrowing and investment powers, with maximum limits on borrowing / leverage (generally 10%) and particular asset classes (the exact restrictions depend on how the CAIF is set up). By contrast, a CIF’s scheme document can confer very wide borrowing and investment powers with no particular restrictions.
Should CIFs convert to the new structure? Some CIFs operated by large fund managers, such as Cazenove, have already announced their intention to do and for those large CIFs the VAT saving alone is likely to make it worth doing. Smaller CIFs operated directly by charities may also find the VAT saving attractive, and the introduction of the new structure may offer a useful opportunity to regularise the position of the fund, particularly if the scheme documents have not kept pace with regulatory changes. However, those smaller CIFs may also find the increased regulatory burdens a deterrent.