Why lending to councils is low risk

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 low risk due to the way they are regulated.

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Councils have to repay loans ahead of other obligations

When you lend money to an organisation, you are taking a risk that they won’t be able to pay you back, or the interest owed. If you lend money to a company or an individual and they can’t meet the repayment terms of your loan, they can be declared bankrupt (and you likely won’t 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  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.

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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 and child social care and support for the homeless - which they are legally required to do. 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 don’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 what’s called a Section 114 notice) which allow them to take additional steps to balance their budgets. 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.

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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 - which lent £7.8 billion to UK councils in 2022/23. All council borrowing is secured against their revenues, including council tax.

Councils are not legally allowed to borrow money to cover shortfalls in the funding for core services. So any money they borrow using our council loans must go to fund long term green projects to improve infrastructure.

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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.

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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.

As with any savings or investment product, there are a range of 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.

There are two levels of protection for investors in this situation. We maintain a level of capital, as we are required to by the Financial Conduct Authority, to support an orderly wind down of our company in the event it’s required (in simple terms, this means we can continue to administer existing investments even if we decide to not to offer new ones). In addition, we have an alternative service provider which is contracted to step in in the event that we are no longer able to offer our own investment platform.