Big Society Capital

Big Society Capital Limited (BSC) is an independent social investment institution in the United Kingdom, which provides finance to organizations that support front-line social sector entities to help them grow.

Synopsis

Social investment is about lending or investing money to achieve a social, as well as, financial return. BSC was the world's first social investment institution of its kind, established in April 2012 by the Cabinet Office of the Cameron-Clegg ministry. It launched as an independent organisation with a £600m investment fund.[1] The investment fund comes from dormant bank accounts via an independent Reclaim Fund and four leading UK high street banks. The institution was set up as part of the Dormant Bank and Building Society Accounts Act 2008, which defined BSC as an organization that exists "to enable other bodies to give financial or other support to third sector organisations". A third sector or a social sector organisation is "a body that exists to assist wholly or mainly for society or the environment".

Big Society Capital is a "social investment wholesaler". This means that BSC does not directly invest in frontline organisations, but in Social Investment Finance Intermediaries (SIFIs). In turn SIFIs provide finance and support to social sector organisations.[2] BSC receives funding from two sources:[3] Four of the main UK banks (Barclays, HSBC, Lloyds Banking Group and RBS) have each agreed to invest up to £50 million in Big Society Capital.

Banks and building societies in the UK pay money from dormant accounts into the Reclaim Fund Limited. The Reclaim Fund keeps sufficient funds to meet reclaims from any account holders and passes surplus funds to the Big Lottery Fund. The Big Lottery Fund releases the English portion of these funds to the Big Society Trust to invest in Big Society Capital. BSC expects to receive up to £400 million from dormant accounts.

Mission

Big Society Capital aims to make a transformative impact on the social investment market by supporting SIFIs to become financially robust and effectively channel capital to the social sector.[3] Moreover, it aims to increase awareness of, and confidence in, social investment by promoting best practice and sharing information; improving links between the social investment and mainstream financial markets; and working with other investors to embed social impact assessment into the investment decision-making process.

Formation
  • In 2000, Labour Chancellor Gordon Brown set up the Social Investment Task Force (SITF) [4] to look at ways to create wealth and promote enterprise to support economic regeneration and community cohesion. The first report of the SITF highlighted the need for "wholesale intermediaries" to provide new sources of capital to help the community finance sector grow.[2]
  • In 2005, an independent body, the Commission on Unclaimed Assets, was set up to consider how money left unclaimed in dormant bank accounts for over 15 years could be used to benefit society.
  • In a consultation paper published in July 2006, the Government recommended the establishment of a Social Investment Wholesale Bank.[5]
  • In March 2007 the Commission published its report "Social Investment Bank – its organisation and role in driving development of the third sector", which provided a blueprint for the institution's funding, goals and governance. The Commission's final report concluded that: ‘the third sector urgently needs greater investment and professional support and suitable capital should be available for organisations at all stages of development.’[6]
  • In 2008, the UK Government introduced legislation to enable unclaimed money in dormant bank accounts to be used for youth facilities, financial inclusion and social investment.[7]
  • In 2008, the Dormant Bank and Building Society Accounts Act 2008 passed with cross-party support. It stated that money from dormant accounts available for spending in England could be used for three specified purposes, one of which was creating a ‘Social Investment Wholesaler’.
  • In July 2009, Office of the Third Sector in the Cabinet Office consulted on the functions and design of this organisation.[8] The idea of a Social Investment Wholesale Bank has generated significant interest from across the political spectrum.[9]

As a wholesaler of social investment, it would support the long-term growth of a thriving third sector by working with investors and lenders at the ‘retail’ level. For example, it could:

  • finance Charity Bank’s expansion into new areas which mainstream markets do not reach;
  • support a grant-making trust interested in investing in social enterprises; or
  • provide financial backing to a social enterprise lender (i.e. a credit union) offering fair finance to people unable to access affordable credit.[8]
  • In March 2010, the Labour Government's Budget announced up to £75 million from the dormant accounts would be committed to a social investment fund.
  • On 31 March 2010 David Cameron announced that a Conservative government would set up a "Big Society Bank" funded by unclaimed bank assets as part of a Big Society initiative.[10] A Conservative policy document said the proposed Big Society Bank would not be restricted to lending but would also invest in innovative products such as Social impact bonds.[11]
  • In July the same year, the incoming Coalition Prime Minister, David Cameron, pledged: "We will create a Big Society Bank to help finance social enterprises, charities and volunteering groups through intermediaries… using every penny of dormant bank and building society account money allocated to England."
  • In 2011, the Merlin Agreement between the Government and the major UK high street banks included a commitment for the four largest banks to put £200 million into setting up the Big Society Bank. After consulting with key social sector organisations, Ronald Cohen (BCS's founder Chair) and Nick O’Donohoe (now BSC's CEO) offered the Government an Outline Proposal for the Big Society Bank. The proposal was accepted by the Cabinet Office subject to certain conditions, including regulatory approvals from both the EU Commission and the Financial Services Authority (FSA). An interim "Big Society Investment Fund" was set up under the auspices of the Big Lottery Fund to make investments before the new institution was launched.
  • In April 2012, Big Society Capital was launched by the Prime Minister at an event hosted by the London Stock Exchange.[12]

Reactions

The principle of Big Society Capital has met with criticism from diverse groups including banks and charities. Giving evidence to the Public Administration Select Committee, Thomas Hughes-Hallett, chief executive of the Marie Curie Cancer Care charity said: "it is potentially setting up a system to encourage vulnerable charities to borrow money."[13] In January 2011 Banco Santander, who have major retail banking interests in the UK, withdrew from Project Merlin negotiations with the Government and is expected not to make any direct payments to the BSB.[14]

The FT suggested that it was "a tiny acorn from which it is far from certain that a giant oak will grow. But there are some very exciting ideas ...which could help society and government tackle issues that have always struggled to obtain funding in the past"[15]

Management Today said that "There's nothing wrong with the idea, or the model, or even the pot. But this plan still seems to lack some hard-headed commercial nous".[16]

A heavier involvement with front line social sector organisations is something that others agree Big Society Capital needs to focus on. Others are equally worried about the direction of the social investment market overall, as they say that a lot of the noise around social investment has been from the perspective of investors rather than front line social organisations. Others point out that social finance will never be applicable to all of the social sector and Big Society Capital was established to make loans and not grants, a type of finance that will not necessarily be suitable for all.[17]

Corporate governance

Big Society Capital is an independent financial institution authorised by the Financial Conduct Authority. Independence is ensured by a structure which involves the Big Society Trust on whose board one Government representative serves. Big Society Capital is accountable to the Big Society Trust whose responsibility it is to ensure that Big Society Capital fulfills its mission.[3]

Big Society Trust

The Big Society Trust is the majority shareholder in Big Society Capital, controlling 80% of the voting rights at shareholders’ meetings. Its role is to ensure that Big Society Capital remains true to its mission. For important issues such as a change to the company's objects or removal of a Big Society Capital director, the consent of at least 75% of the Big Society Trust board is required. Big Society Capital reports regularly to the Big Society Trust on its financial performance, its investments and board and senior manager appointments. The Big Society Capital CEO is invited to attend the Big Society Trust board meetings as an observer. A Governance Agreement between the Big Society Trust and Big Society Capital details the operating and reporting arrangements.[3]

Shareholder banks

Barclays, HSBC, Lloyds Banking Group and RBS are shareholder banks.[3] Each shareholder bank has committed to subscribe to up to £50 million of Big Society Capital's shares; their individual shareholding will always be less than 10% of the outstanding paid-in capital. The banks can vote at shareholders’ meetings. Their votes are in proportion to their shareholding, but each is capped at 5% of the overall voting rights. The banks are represented on the Big Society Capital board by a bank-nominated director. In addition to information provided to them by the BSC Director, the banks receive all Big Society Capital board papers and quarterly and half yearly reports. In certain circumstances the banks have the right to request a meeting with the senior management of Big Society Capital to discuss its performance.[3]

Investment categories

The investments made by Big Society Capital fall into these broad categories:[2]

  1. Specialised funds – These funds have "themes", for example, they might be for investing in specific social outcomes such as health and social care or a particular geographical area. Alternatively, they could invest in supporting specific types of contracts won by social sector organisations.
  2. General funds – These funds increase the supply of capital available to a wide range of frontline organisations.
  3. Social Impact Bonds (SIBs) – SIBs are a way of raising finance to deliver payment-by-results (PbR) contracts. Big Society Capital can invest directly in entities that are set up to take responsibility for funding and the delivery of outcomes detailed by PbR contracts.
  4. Operating intermediaries – These are organisations that provide support for the social sector, such as performance measurement and capital raising.

Investment activity

Big Society Capital was set up to receive equity capital from dormant bank accounts of up to £400m and £200m from the shareholder banks (Barclays, HSBC, Lloyds Banking Group and RBS). During:

  • 2012, £119.4 million of equity capital was received, £71.7 million from the dormant bank accounts via the Reclaim Fund Limited and £47.7 million from the shareholder banks.[2]
  • 2013, £106.0 million of equity capital was received, £63.7 million from the dormant bank accounts via the Reclaim Fund Limited and £42.3 million from the shareholder banks.[3]
  • 2014, £24.6 million equity capital was received, £14.8 million from the dormant bank accounts via the Reclaim Fund Limited and £9.8 million from the shareholder banks,[3] taking total equity capital to £250.0 million. The balance of equity capital was due to be received over the next four years.

Big Society Capital has made allocations to charities and social enterprises. During:

  • 2016, £893 million was allocated by BSC and its co-investors, £340 million of which was funding from BSC.[18]
  • 2017, £764 million of the £1.1 billion BSC and its co-investors allocated was drawn down. BSC made 19 investments with a combined value of £94 million and it made a net profit of £800,000, the first time it had recorded a surplus.[18]
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References
  1. Big Society fund launches with £600m to invest BBC News 4 April 2012.
  2. Big Society Capital First Annual Report, 2012.
  3. Social Investment from ambition to action, Big Society Capital Annual Review 2013.
  4. Social Investment Task Force, 2000 Archived 29 August 2010 at the Wayback Machine.
  5. The Commission on Unclaimed Assets (2006) A Social Investment Bank - Consultation Paper
  6. The Commission on Unclaimed Assets (2007) The Social Investment Bank - Its organisation and role in driving development of the third sector
  7. "Commission on Unclaimed Assets". socialfinance.org.uk. Archived from the original on 1 September 2010. Retrieved 20 September 2015.
  8. Office of the Third Sector (2009), Social Investment Wholesale Bank: a consultation on the functions and design
  9. "Civil Society and the Third Sector". The Labour Party. Archived from the original on 14 April 2010.
  10. Nicholas Timmins (31 March 2010). "Cameron outlines 'big society' plans". Financial Times.
  11. "Share The Facts". Conservatives.com. Archived from the original on 17 November 2013. Retrieved 7 September 2015.
  12. Launch of Big Society Capital – the world’s first ever social investment market builder, Cabinet Office April 2012.
  13. Philanthropy Review chair slams Big Society Bank Civil Society 19 January 2011
  14. David Ainsworth (17 January 2011). "Santander quits talks affecting the Big Society Bank". Third Sector. Retrieved 13 February 2011.
  15. Big Society Bank: Just the facts Financial Times 14 February 2011
  16. Big Society Bank faces awkward commercial questions Management Today 14 February 2011
  17. UK's social bank turns two: Has it met expectations Pioneers Post 22 January 2014
  18. Liam Kay (24 July 2018). "Big Society Capital records first profit". Third Sector.
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