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On Thursday the Bank of England cut the base rate to 2%, matching the lowest level in its 314 year history, according to reports. This is good news for many cash-strapped borrowers, though I suspect that in this financial maelstrom, it will be insufficient to help most struggling companies. One group which is negatively impacted by the recent declines, rather severely so, in my judgment, are the beleaguered investors in Community Interest Companies (CICs as they are more commonly known). For non-British readers, these are a relatively new form of company set up by the Government as a well-meaning intention to give social enterprises an appropriate structiure. They are also gaining interest in other countries, such as Canada, for example. We have argued elsewhere and previously that they are a pretty bad idea. The recent decline in interest rates only adds to this fact. If the Government does not take action they will look increasingly silly. Why is this?

With CICs, a great deal of effort is expended to try to protect the “community’s” interest utilising another well-intentioned device, the venerable “asset lock”. It sounds very serious and air-tight, but frankly, even experts agree they can be circumvented–but this is another matter. One aspect of the asset lock is that the returns to investors are limited to 500 basis poiunts (5%) over the base lending rate. At current rates this is 7%. Now this is a very nice return, but I imagine well-below market for the types of projects and enterprises being funded in CICs. The result is that the availability of such finance, already severely limited, will simply dry up.

I do not think this is what the Government intended–in fact I am sure it is not, but it ought to be fixed AND SOON, especially as rates look as if they may be heading even lower. It is one thing to limit returns in order to prevent expropriatory payments which undermine the asset lock, it is another to allow a crazy circumstance to persist, where the limit is preventing capital from coming into the social enterprise sector.

There is much in the CIC legislation which is badly done and would be difficult to fix. This would be easy. C’mon guys!

Rodney Schwartz

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