Building Community Wealth in Scotland: consultation analysis

7. Finance Pillar

The finance pillar of CWB aims to increase flows of investment within local economies by harnessing the wealth that exists locally and directing wealth to tackle inequality, including through:

• promoting the development and use of progressive forms of finance including credit unions and Community Development Finance Institutions (CDFIs);
• ensuring micro-businesses and SMEs have access to finance;
• promoting and harnessing social investment;
• value-led responsible investment;
• incorporating clear CWB criteria into public forms of investment and business cases.

Financial regulation is a reserved matter, and the Scottish Government has not made any legislative proposals in relation to financial regulation. The Financial Conduct Authority (FCA) regulates the financial services industry in the UK.

The consultation paper explains that, as part of early engagement on CWB legislation, stakeholders have suggested a focus on the following areas:

• exploring if CWB principles and standard criteria could be built into funding and funding assessment criteria;
• encouraging investment funds including, for example, pension funds, to be directed to build local wealth;
• greater recognition of the role of credit unions and CDFIs and explore the establishment of community banks.

Question 7: Are there ways in which the law could be changed to advance the finance pillar of Community Wealth Building?

Responses to Question 7 by respondent type are set out in Table 10 below.

A small majority of respondents, 56% of those answering the question, thought there are ways in which the law could be changed to advance the finance pillar of CWB. However, 35% of respondents did not know.

Please provide a reason for your answer. In your response you may wish to consider the stakeholder suggestions outlined above which have arisen from early engagement. You may also wish to consider areas that the Scottish Government could work with the UK Government on if you have proposals regarding changes to the law which remain reserved to the UK Parliament.

Around 125 respondents provided a comment at Question 7. Analysis over the following pages first considers some of the general points raised in relation to the finance pillar, and then moves on to consider views on the stakeholder suggestions set out above and other proposals for change.

Views on the finance pillar

A range of respondents expressed specific support for the finance pillar, with some highlighting the important role of finance as a lever for wider social change, and specifically to support CWB priorities. This included a view that finance is the most critical of the five pillars in terms of delivering CWB priorities.

Respondents noted that the consultation paper references a wide range of ongoing activity to support the finance pillar, such as pension fund investment, credit unions, and social investment. Some respondents also referred to their own involvement in activities and projects that support the finance pillar. It was suggested that these activities and structures provide valuable groundwork for development of a more place-based and community-focused financial ecosystem to support CWB.

Views on stakeholder suggestions from early engagement

Exploring if CWB principles and standard criteria could be built into funding and funding assessment criteria

In support of the use of funding criteria and conditionality of public funding, respondents referred to the potential for this approach to create community wealth and deliver wider benefits for communities. In this context, it was suggested that all public funding applications should be required to evidence positive impacts across the five CWB pillars. Integration of CWB principles was suggested as a means of strengthening government regeneration funds. It was also suggested that CWB principles should be embedded across other funding streams such as agricultural payments and subsidies.

Respondents also suggested a range of specific criteria that could be used in public funding to further support CWB. These included:

• Local procurement.
• Local recruitment of staff and contracts as part of a Fair Work approach.
• Creation of opportunities for local and social enterprise.
• Creation of opportunities for community ownership and/or management of local assets.
• Requiring delivery of CWB projects to be designed and delivered in partnership with local communities, including community and third sector organisations.
• Embedding of circular economy principles and ensuring wealth generated (directly or indirectly) through investment in natural capital contributes to community benefits.

Changes were also proposed to decision-making tools used to support funding decisions, to better reflect CWB principles. Cost Benefit Analysis was identified as an example of decision-making tools struggling to take full account of CWB and other community benefits.

Encouraging investment funds including, for example, pension funds, to be directed to build local wealth

Comments on the use of investment funds to support local wealth and CWB sometimes reflected the concerns noted above around limited access to low interest finance for CWB activities. Respondents proposed a range of ways in which pension funds, other public funds and social investment could better support CWB.

More local investment and reinvestment by public sector pension funds was described as a potential source of long-term funding for commercially viable CWB initiatives. This included reference to examples of how pension funds have been used to support CWB across the UK. However, it was also noted that any change to further the use of pension funds to support CWB would need to fit within funds' primary goals in terms of yield and security for current pensioners, and future pensioners' funds. It was also suggested that the approach to the use of pension funds must address concerns around potential conflicts of interest associated with investment in significant local projects.

In terms of changes to enable a stronger role for pension funds in supporting CWB activities, respondents made the following suggestions.

• Ensuring suitable 'architecture' is in place to connect local and regional pension funds with local investment opportunities, including access to investment advice based on a sound understanding of the local economy and investment opportunities.
• Guidance around the options available to pension funds, and how to best use direct investment opportunities to support CWB.
• Further guidance or legislation to support divesting from fossil fuels.
• Scottish Government engagement with local authority pension funds to encourage more local investment, including potential for co-investment with the Scottish Government, the SNIB or other public bodies to help address any concerns around fiduciary duty.
• A duty on public sector pension schemes to direct a minimum proportion of investment to local projects and initiatives.
• Local clearing houses for investment projects, hosted by pension funds.

Respondents also noted other public investment funds which it was suggested could make a greater contribution to CWB. For example, further development of Scotland's Catalyst Fund was proposed as a means of providing businesses with loaned investment that can be repaid on the basis of turnover rather than interest rates.

There was also reference to the consultation proposal for a statutory duty to advance CWB, and calls for this to explicitly require public bodies involved in the flow of finance (including the SNIB) to support growth of inclusive-ownership. It was noted that inclusive businesses such as co-operatives (and CWB-focused businesses more widely) have distinct capital raising requirements that are not currently being met in the market, nor by public bodies such as the SNIB.

Discussion around the potential for investment funds to support CWB included specific reference to the role of social investment. It was suggested that a revised approach to social investment – including a replacement for Social Investment Tax Relief - should incorporate CWB principles. Policy changes to reduce the cost of social investment capital were also suggested, although it was noted that subsidy consequences may mean that this change would not address the fundamental issue of affordability.

Greater recognition of the role of credit unions and CDFIs and explore the establishment of community banks

Comments in favour of the role of progressive finance in supporting CWB included a number of respondents for whom this was their primary focus. These respondents referred to a range of potential areas where local credit unions and progressive finance could support CWB, including support for SMEs and local third sector organisations, investment in community-based projects, investment in green projects, investment in financial inclusion services, and support for training and employability support for disadvantaged workers.^[11]

Most of those discussing the role of progressive finance referred to community banking and credit unions specifically. This included several who noted that community banking – and credit unions in particular – has had a long-standing role in their area, generating significant social value for communities. Community banking was identified as helping to address poverty and inequality in local communities and to reduce pay-day lending, and there was reference to credit unions as the last remaining 'counter services' for some communities. Community banking was seen as particularly relevant in the context of recent cost of living increases, and some suggested a specific focus on improving access to community banks in deprived communities.

However, a number of respondents noted that Bank of England data indicates a decline in the role of credit unions in the UK, and it was suggested that the FCA is moving away from supporting small community banks. There was also reference to significant legal and financial limitations on the level of support that public bodies can provide to community banks.

While acknowledging these trends and potential constraints, respondents wished to see further support for the role of community banks, including credit unions specifically. This included calls for legislative change to allow credit unions to lend to organisations and individuals that can struggle to access mainstream financing – including micro and SMEs, social enterprises and community organisations. It was also suggested that the Scottish Government should take a more active role in supporting community banks as a resource for communities, and to ensure these remain part of the financial services landscape. Specific suggestions here included increasing financial support to credit unions, and developing innovative credit union models for employees within businesses. There was also support for local authorities to work more closely with credit unions, for example in the administration of business support grants and to use credit unions as a business lender.

Other specific proposals for how community banks and credit unions can be enabled to support the finance pillar of CWB are summarised below.

• Widening of allowable local funding schemes and associated thresholds to support micro and SMEs.
• Development of a shared credit union service organisation to support the sector, and ensure there is sufficient expertise in underwriting business lending.
• Creation of credit union forums.
• Supporting wider access to payroll deduction for credit unions.
• Supporting wider engagement in professional learning opportunities for credit union staff. This included a proposal for a 'volunteer toolkit' to support credit unions to recruit and retain suitable volunteers.
• Consideration of scope to replicate the US model for credit unions to be supported by capital from local banks.
• Tax relief for credit union investors, similar to the Community Investment Tax Relief or Enterprise Investment Relief available to CDFI investors.
• Enabling credit unions to issue tradeable debt instruments similar to Core Capital Deferred Shares for building societies.
• Extension of the maximum interest rate that credit unions can charge to maximise the reach of credit unions, for example including those with lower credit scores.
• Legislation to allow credit unions and CDFI to work more closely in joint ventures or mergers.
• Legislation allowing credit unions to manage and hedge their risk profile via the derivatives market.

Challenges and scope for change

The number and diversity of activities supporting the finance pillar was also highlighted by some as a potential barrier to access for SMEs and community organisations. It was suggested that this complexity can make it difficult to navigate, and that there is a need to simplify the landscape. It was also suggested that community organisations can lack the capacity to consider the full range of available options.

In this context, some wished to see additional support and capacity building to enable organisations to make best use of available funding options. This included reference to providing better advice and support for organisations assessing social investment options, and building capacity in financial management and forecasting across community and social organisations. There were calls for sector-specific finance training, for example targeting community shops, multi-purpose hubs, housing, energy, cafes, and pubs.

There was also thought to be a need to improve understanding of community benefits and social investment. It was suggested that further clarity is required around the extent to which organisations' legal structures, and constitution or articles, would allow use of this kind of investment. CWB was described as an opportunity to work directly with communities to improve their understanding of sources of wealth, and to enable greater community control over how wealth is used.

Discussion around understanding of CWB and finance included a view that Business Gateway, Scottish Enterprise and other economic development bodies may require a better understanding of the potential role of democratic finance. There were also calls for changes to make it easier for anchor organisations to offer small investor guarantee funds to support democratic finance investment, and to offer match funding through purchase of community bonds or shares. It was suggested that economic development organisations could use grant income to cover small-scale costs incurred by enterprises undertaking a democratic finance offer.

A number of respondents also referred to challenges accessing finance for SMEs, social enterprises, third sector organisations and other CWB-related projects. This was highlighted both in terms of start-up funding and ongoing revenue funding to support development. Access to finance was identified as particularly challenging for organisations operating where there is market failure and/or to provide services to low income households. Specific gaps in available financing included multi-year funding for social enterprises and community organisations, bridging finance options, options for higher risk start-up funding, more up-front development grants to minimise the need for loans to support cash flow, and long-term secure funding for staff to manage projects and enterprises.

In terms of factors contributing to these challenges, respondents highlighted risk aversion in the finance sector, and noted that the SNIB typically focuses on national-level projects and larger businesses. There was reference to removal of the Social Investment Tax Relief as potentially further limiting access to finance, and the extent to which lower value schemes can be impacted by financial regulation. This was linked to wider concern around the extent to which current tax structures have the potential to create barriers to the creation and growth of community-based organisations.

It was suggested that delivering CWB fully will require very significant changes to governance structures to devolve the powers and budgets of national and regional bodies to a more local level. This included a perceived need for the creation of new locally constituted bodies to manage these funds.

In terms of potential to achieve the required degree of change, respondents acknowledged that financial regulation is reserved to the UK Government, thus limiting scope for legislation to support the finance pillar. It was also noted that any changes must fit within financial regulations, and give due consideration to risk management. The SNIB's loss-making first year of operation was highlighted as illustrative of the challenges and risks involved in aspects of the finance pillar. It was suggested that these requirements are likely to limit the range of options to increase flows of investment within local economies.

However, respondents saw scope for use of available policy, regulation and governance powers to increase flows of investment within local economies. In this context, it was suggested that mapping of existing policy, guidance and legislation would be a valuable first step in identifying how these can further support the finance pillar of CWB.

Suggested changes relating to reserved powers

Reflecting comments on credit unions and CDFI (above), as well as in relation to the inclusive ownership pillar, some respondents noted that the scope for change is constrained by relevant powers being reserved to the UK Government, and there were again calls for the Scottish Government to work with the UK Government to achieve taxation-related changes. These issues are covered in greater detail under the inclusive ownership pillar, but specific issues raised here included reference to:

• Exploring options for taxation to further support CWB, for example exempting credit unions from corporation tax, creating tax incentives for saving with credit unions, and consideration of the issue of VAT in housing development costs for housing co-operatives.
• Updating legislation to enable employee-owned businesses to raise capital through permanent shares, using a similar model to Core Capital Deferred Shares.
• Establishing a CWB-focused funding mechanism from the British Business Bank, and considering how the British Business Bank's forthcoming Investment Fund for Scotland could be aligned with CWB principles.
• Improving access to banking and financial services for third sector organisations.
• Supporting the current private members' bill (Co-operatives, Mutuals and Friendly Societies Bill) as a potential means of providing further protection for co-operatives and other inclusive ownership models.

Other suggested changes

In addition to support for stakeholder suggestions, and discussion of the above reserved matters, respondents made a range of other suggestions to further support the finance pillar of CWB.

Review current instruments and approaches

Some suggested that a first step should be to review existing financial instruments and resources to identify where these can be better used to support the finance pillar – for example through repurposing or ringfencing. Respondents referred to potentially relevant intervention areas such as regeneration, empowerment, community asset transfer, and specific programmes such as the Regeneration Capital Grant Fund, the UK Levelling Up Fund and City & Region Growth Deals. It was also noted that local authorities and other anchor organisations hold valuable knowledge and skills around weaknesses in the current system, and could help identify how these might be addressed.

There were calls for greater clarity for anchor organisations around how they can – and should – best use finance to support CWB. This included specific reference to clarification around the level of income that local authorities can generate through trading activity outwith the public sector, under the amended Goods and Services Act. It was noted that Ministers have the power to set a statutory limit, and to allow it to be exceeded.

Taxation-related suggestions

A range of suggestions were made around the potential for taxation to further support the finance pillar of CWB. As in relation to reserved matters, a number of the issues raised reflected those highlighted in relation to the inclusive ownership pillar. There was reference to the potential benefits of providing local authorities with greater scope to make changes to local taxation, and specific proposals included:

• Use of place-based incentives, similar to the Enterprise Zone model, whereby businesses within designated areas would benefit from business rate discounts.
• Business rate relief for organisations adopting inclusive ownership models, especially where these provide key local services.
• Use of other tax reliefs, for example to support Research & Development and recruitment.
• Specific support for the role of housing co-operatives and trusts as a means of increasing local investment flows. Relief from the Land and Buildings Transaction Tax (LBTT) was proposed for housing co-operatives, including partial relief from LBTT (and specific exemption from the Additional Dwelling Supplement) for co-operatives buying property, and full relief from LBTT where co-operatives are buying from a community land/development trust.
• Ensuring income from any Visitor Levy is retained within the respective geographic area, and that decisions on use of income are made in partnership with communities.
• A proposed discretionary Carbon Emissions Land Tax to be levied by local authorities on large landowners, with potential to support local carbon reduction and CWB initiatives.

A right to invest

Removing barriers and simplifying the process for communities to take ownership of community assets was also proposed. This included reference to the potential for community acquisition of revenue generating assets to create sustainable income for communities, and a specific proposal for a Community Right to Invest. This was proposed in relation to supporting investment in the green economy, through compulsory rights for communities to acquire investment in local renewable and natural capital schemes. It was suggested that this could be supported by a Community Wealth Fund (funded through developer contributions from renewable and natural capital schemes) and/or the SNIB.

The role of SNIB

Respondents saw scope for the SNIB to play a stronger role in supporting CWB as a provider of low-cost debt financing. This included call for the SNIB to engage with a broader range of organisations and investors to support CWB and, specifically, to direct more investment to community initiatives. Indeed, it was argued that some of the SNIB's larger investments in land purchase by large corporate bodies may have undermined CWB approaches in Scotland.

It was suggested that a more proactive CWB approach to investment for the SNIB could include direct investment in place-based CWB initiatives, and provision of accessible finance to support community acquisition and more plural ownership local enterprise. Respondents also proposed the creation of a dedicated SNIB fund to support CWB initiatives, with specific criteria tailored to the needs and context of CWB. In addition to direct support for community projects, it was noted that the presence of the SNIB in the sector could help to de-risk community initiatives for private investors.

Community wealth funds

Discussion of progressive finance included reference to the potential role of community wealth funds, and proposals for a national CWB or Community Wealth Fund, similar to the Scottish Land Fund. It was suggested that this could be supported by a National Advisory Board, as a means of bringing together a range of investment sources to supply grant, loan and equity finance to support scaling-up of CWB across Scotland.

Key benefits identified by respondents included supporting a truly community-led approach to local investment, and potential for a co-ordinated national approach to address geographic inequalities in access to funds. Community wealth funds were also suggested as a fourth priority area for the forthcoming UK Dormant Assets secondary legislation.

In terms of funding sources, several respondents suggested that community wealth funds could provide a vehicle to make more productive use of income from renewable energy developments. As noted earlier, renewables and natural capital, green projects and divestment from fossil fuels were highlighted as potential priorities for the finance pillar. Renewables and natural capital in particular were identified as an example of how investment in revenue generating assets can support the long-term sustainability of communities. The link between CWB and the green economy was also evidence in proposals for community wealth funds to be supported by compulsory developer contributions from renewables and natural capital investments. Respondents also highlighted other potential funding sources for a community wealth fund, including taxation, land value capture, and natural resource windfalls.

Democratic finance models

A number of respondents referred to 'democratic finance' models as a means of providing communities with a more direct say in how funds are used. This included proposals for a national Democratic Finance programme to drive the change required to support the finance pillar of CWB. There was support for existing mechanisms such as community bonds and community shares, but also a perceived need to expand the range of available democratic finance models.

Discussion of specific democratic finance models included reference to community bonds and community shares as vehicles for citizen investment, with potential for these to be topped up by developer contributions. This included some calling for more support for community investment in significant developments such as renewables schemes, although it was noted that the requirement for community bonds and shares to be issued by a Community Benefit Society could limit scope for growth. Piloting of a Scottish Community Shares Booster programme was proposed.

Citizen investors were identified as a potential means of retaining investment within local communities, including a perceived need for a greater focus on and improved understanding of the potential role of citizen investors. Development of a locally-based 'Citizen Investment Networks' was proposed.

Other suggestions for progressive financing

In relation to the Community-led Local Development Funding, previously delivered through the LEADER programme, it was noted that current funding programmes are over-subscribed, indicating potentially considerable unmet need. There were calls for a revised approach with a larger budget allocation, potential for multi-year funding, devolution of decision-making and project management to Local Action Groups, and removal of what were described as excessive current reporting requirements.

Other suggestions around the role of progressive finance are summarised below.

• Use of the Community Investment Enterprise Facility to test models of funding.
• Development of Local Action Groups to enhance local decision-making and distribution of funds.
• Support for organisations to use community lotteries.
• Support for community-based legacy gifting.
• Expansion of donation-based crowdfunding.
• A more co-ordinated system for high-net-worth philanthropic giving at a local level.