In focus: the risks of lending to councils
There is no denying that some UK councils are facing financial difficulties. Rising costs and increasing demand for the services they provide, as well as cuts in central Government funding, have put their budgets under strain. But investing in councils remains a low risk investment due to the way councils are regulated.
Councils have to repay loans ahead of other obligations
When you lend money to an organisation, you are taking the risk that they won’t be able to pay you back, plus the interest owed. If you lend money to a company or an individual, if they can’t meet the repayment terms of your loan they can be declared bankrupt and you might not get back some or all of what you are owed.
Lending to a council is totally different. They can’t be declared bankrupt and they are required to repay their loans ahead of their other spending obligations, so you are at the front of the queue. This means that, in the history of local government, no council has ever failed to repay a loan.
Councils have strict processes and controls to manage their spending
Councils are the bedrock of our communities. They provide essential social services — such as adult social care and support for the homeless — which they are legally required to perform. Because of this critical role, councils and individual council officers are subject to strict regulations and legal responsibilities to carefully manage their spending and ensure their financial plans are sustainable.
Of course, that doesn’t mean that councils can’t get into financial difficulties, and are sometimes reported as ‘going bankrupt’ in the media, but the reality is that councils in financial difficulties can trigger special measures (by issuing a Section 114 notice) which allows them to take additional steps to balance their budgets, but this is very different from going bankrupt as a company might do. Only a small proportion of councils have ever used this mechanism, and a Section 114 notice cannot be used by councils as a way to avoid paying its debts, or interest owed on loans.
They borrow money to invest in the future, not fund core services
Many councils borrow to invest in the future of their communities. Much of this lending comes from central Government through the Public Works Loan Board — with any borrowing secured against councils’ revenues, including council tax.
Councils are not legally allowed to borrow money to cover shortfalls in the funding for core services. So any money that they borrow from investors must be used to fund long term green projects to improve infrastructure.
We offer investments with councils in a solid financial position
If a council does become financially distressed, it is unlikely this would affect the repayment of your loan, however it could mean the council’s priorities change and it can no longer deliver the green projects they intended. We therefore complete a credit assessment of each council we work with to ensure they are in a solid financial position before offering a loan from that council to investors.
Low risk of capital loss, but there are other risks to consider
When lending money to a council, there is a very low risk of not being repaid, for the reasons given above. If a council did have financial difficulties, it’s possible it may result in a delay to repayment, but this is unlikely to result in any failure to pay the interest owed.
However, as with any savings or investment product, there are other risks to consider. Our council investments are fixed term loans, which means your money is tied up for a number of years and you may not be able to get your money back earlier. There is no protection from the Financial Services Compensation Scheme for our council investments and if Abundance was to go out of business this could disrupt the administration of your investments (we have plans in place to minimise any disruption in this scenario).
RISK WARNING
As with any investment, there are risks when investing on Abundance. Your invested capital is at risk and any return on your investment depends on the ability of the company or council you have invested in to pay your returns. Investments on Abundance are generally long term and you should be prepared to hold them to maturity. The investments are illiquid and you may not be able to sell them if you need your money back earlier, and their value can rise or fall. Some investments may be secured, but this does not guarantee repayment or your return.
Quoted returns are no guarantee of future returns and past performance is not a guide to future performance. Specific risks will apply in relation to each investment. Please consider all risks before investing. The investments on Abundance include debentures or bonds and peer to peer loans — Abundance’s service in relation to loans is not covered by the Financial Services Compensation Scheme (FSCS).
