This paper reviews the current regulatory framework for community development financial institutions (CDFIs), which aim to enable ‘socially excluded’ people and enterprises to access finance. Its focus is primarily on the UK, though account is taken of developments in other EU member countries and at the EU level. In the UK the most developed regulations relate to industrial and provident societies, which are essentially financial cooperatives lending to small enterprises and not for profit organisations, and credit unions, which tend to concentrate on personal savings and finance. CDFIs lie on the boundary of what is currently understood to be charitable status, but the Charity Commission announced a new charitable purpose, ‘community capacity building’, in December 2000 and committed to developing clear guidelines on the charitability of CDFIs by the end of 2001. Current regulatory arrangements are assessed and it is found that, apart from credit unions, which have been brought under the supervisory wing of the Financial Services Authority, CDFIs tend to operate in a context of ‘benign neglect’. While recognising that heavy‐handed regulation might stifle growth, it is argued that the downside of neglect could be uncertainty, which might also blight the development of the sector. An alternative, relatively liberal, regulatory framework is proposed, including self‐regulation for the smaller institutions via associations. It is concluded that the type of regulation should vary with the size, status (mutual vs non mutual), and source of finance (deposits vs risk capital).