Kids Company's Demise - How it is Changing Government Grant Making and Charity Commission Guidance

In particular, the extent of the government's grant funding was revealed. According to reports, the charity received at least £42m since 1996 from central government departments, including £7.3m within the 16 weeks leading up to the charity's collapse. The government has now responded to proposals for reform by the Committee of Public Accounts.

At the same time, the Charity Commission has urged trustees to engage with its finance guidance, which has been updated to reflect the current challenging funding environment.

The Findings of the Committee of Public Accounts (the Committee)

Following a report by the National Audit Office, the Committee took evidence from the Cabinet Office and the Department for Education and published a report on 13 November 2015. The Committee's conclusions revealed that:

• by treating Kids Company as a special case, the government missed opportunities to help other children
• there was insufficient scrutiny of what Kids Company was delivering for tax payers' money
• the government ignored the charity's serious cash flow problems and continued to fund the charity to keep it afloat
• funding decisions were not based on evidence nor did they follow due process
• the government failed to learn lessons from Kids Company until the end

The Government's Response

In the light of these conclusions, the Committee recommended that the government undertake a fundamental review of how it makes direct and non-competitive grants to the voluntary sector, with a view to ensuring grant making processes are fair and equitable.

Published on 21 January 2016, the government's response to the Committee's report accepted this recommendation. The government confirmed that the Cabinet Office has now launched 'a detailed review of how it makes grants under s.70 of the Charities Act', which 'is considering the criteria used to assess risk and is developing a proposal for a new, more rigorous and probing approval process.'

The Committee also recommended that the government develop a register of grants to the voluntary sector so that it can:

• easily identify charities receiving large amounts of government funding from single or multiple sources
• share intelligence on charities' past performance

The government has also accepted this recommendation and stated that the Grants Efficiency Programme is developing the government Grants Information System, which will enable it to record grant information 'in a simple, standardised and scalable way, [to] …improve transparency and provide insight into government spend.'

The government also accepted the Committee's three further recommendations, including:

• that the government should monitor and evaluate the performance of grant-funded organisations
• that the government should refer funding requests to the appropriate funding department before providing, or appearing to provide, funding commitments
• that the government should provide a transparent case for any decisions to use special powers to grant funding and report regularly on the use of these powers

What this Means for the Future

It is unfortunate that it took the demise of Kids Company, a charity which was close to the hearts of many, to trigger a much-needed review of the government's grant-making processes.

Whilst improved fairness of government grant-making is to be welcomed, well managed charities will hope that a 'more rigorous and probing approval process' will not mean a future in which they have to jump through hoops to receive government grants.

At least the creation of a register of grants appears to be a simple, yet effective mechanism to improve transparency and ensure tax payers' money is distributed more fairly.

PACAC's Report

In addition, the Public Administration and Constitutional Affairs Committee (PACAC) published a report on the collapse of Kids Company on 1 February 2016. The report, entitled 'The collapse of Kids Company: lessons for charity trustees, professional firms, the Charity Commission, and Whitehall', identifies an array of mismanagement and states that 'the Board failed to protect the interests of the charity and its beneficiaries, despite its statutory responsibility to do so'.

The report refers to Kids Company's connections with No 10 and concludes that the government allowed an 'unconventional relationship and funding process' to develop with the charity, which led to Kids Company being expectant of the level of support it would receive in the future.

PACAC's report, therefore, concurs with some of the Committee's recommendations, including that the government should undertake a review of how it makes direct and non-competitive grants to the voluntary sector, and that it should also provide a transparent case when deciding to use special powers to grant funding.

Charity Commission Financial Guidance

These are not the only recent announcements to flow from the demise of Kids Company. The Charity Commission has also revised its key finance guidance to show clearly that trustees are ultimately responsible for their charities’ finances.

The guidance includes the importance of having a good reserves policy and how trustees can manage their charities in challenging circumstances. The guidance which has been revised is:

• Managing a charity’s finances: planning, managing difficulties and insolvency (CC12)
• Charity reserves: building resilience (CC19)
• Charity governance, finance and resilience: 15 questions trustees should ask

We suggest that all charities should ensure their trustees are familiar with the revised guidance and their financial responsibilities, both in terms of legal requirements and good practice.

For more information, please contact Paul Ridout in our Charity Law Team on 020 7665 0869.

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