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Recent Changes in Charity Law and Regulation

on Friday, 20 October 2017.

The Charities (Protection and Social Investment) Act 2016 may have been made back in March 2016, but the impact of some of the changes it made has become clearer more recently.

Apart from the implementation of that Act, the other big trend gathered over the past year has been in the robustness with which the Charity Commission treats financial recovery from charity trustees.

Official Warnings

Perhaps the most visible of the changes in the Charities (Protection and Social Investment) Act has been a power for the Commission to issue official warnings.  Although the Commission has quite extensive regulatory powers to deal with the most serious misconduct, it lacked a formal power to cover circumstances when a warning would be appropriate.

These new official warnings can be issued without an inquiry being open if the Commission considers there has been a breach of trust, duty, misconduct or mismanagement.  Failure to remedy concerns set out in an official warning provides grounds for using other compliance powers like suspending and removing trustees.

The Commission consulted on the circumstances when it might use official warnings.  In response to  consultation, the Commission decided to allow charities more notice of a warning (28 days).  It confirmed the availability of its internal review procedures to challenge warnings and produced more detailed guidance as part of its publicly available staff operational guidance. 

The consultation had implied a low threshold for giving a warning, in part because it had been concerned with distinguishing circumstances for giving warnings from those justifying more serious actions.  Following consultation, the tone of the Commission's threshold for issuing official warnings has been refined.  Words like 'deliberate', 'reckless', 'failed' and 'repeated' describe the circumstances when warnings might be given.  The Commission also offers reassurance that the warnings are unlikely to be used when trustees have acted honestly and reasonably (and are putting things right), or in respect of technical breaches, or where the risk of harm is low.

At the time of writing, the Commission has issued two official warnings.  The first was in respect of a combination of unauthorised trustee payment, improper delegation and issues with record-keeping and financial controls.  Taking the issues together, the regulatory concern is understandable.  The Commission exercised restraint before giving the official warning: it first sought to resolve its concerns more informally by issuing firm regulatory advice in the shape of an action plan.

The second use of the power again related to a number of issues rather than a single cause for concern.  These included  concerns that the trustees were not working collectively or taking decisions in the interests of the charity; that they were not ensuring fair access to charity premises (a place of worship); that there was unauthorised expenditure; that trustees were not doing enough to prevent inappropriate materials from circulating; and that trustees were exposing charity members to risk as a result of repeated disruption at the premises.  Very different circumstances and again, taken together, the regulatory concern is understandable.  Again the warning indicates that it follows earlier regulatory advice.

In the future, there may be cases which are serious enough for the Commission's first substantial compliance move to be an official warning; and the guidance acknowledges that.  But early experience is that, even in the case of cumulative and quite serious difficulties, the Commission is prepared to give trustees the opportunity to resolve matters on a more informal basis first.  If trustees are given this opportunity, they should aim to co-operate with the Commission in agreeing achievable actions, given the Commission is clearly willing to issue warnings when it is not satisfied with the outcome.

The public impact of these warnings can be quite different from the case reports that the Commission publishes at the end of a case.  Case reports are able to recount how the Commission worked with the charity to put things right.  Official Warnings by comparison are sharply focussed on live, defined and particularised shortcomings.  That, combined with their relative novelty, greatly increase the scope for adverse PR impact.

Disqualification of Trustees

Remarkably, there was previously no power for the Commission to disqualify a trustee.  The rationale was that if a trustee was removed by the Charity Commission, that carried an automatic disqualification.  But there was a problem.

In the course of a Charity Commission inquiry, a trustee could initially decide to stay in office. This ensured that he or she had input in managing the response to the Commission.  As evidence of misconduct or mismanagement mounted, the trustee would probably consider resigning, particularly if suspended.  A trustee who has resigned cannot be removed and, as things were, could not be disqualified.  The new power is meant to plug this bizarre loophole. 

How robustly the Commission will use the new power remains to be seen.  One of its first uses was against Mountstar (PTC) Limited, the corporate trustee of the Cup Trust, the charity at the heart of a charity tax avoidance scandal of 2013.  It has obviously been made in the most extreme and uncontroversial of cases, making criticism unlikely. 

As for the position of a trustee in the context of an inquiry?  Resignation probably still makes sense if there's little left to be gained from staying.  Certainly it makes sense if it becomes clear that the Commission is likely to exercise its power of removal.  It may help to mitigate personal regulatory risk, particularly as the Commission hasn't yet demonstrated that it will routinely pursue and secure disqualification in these circumstances.

Putting Information Together

The Commission has shown that it uses information from different sources to carry out thematic reviews or to target particular risk areas, for example audit reports with an 'emphasis of matter'.  It has been involved in new guidance to auditors and independent examiners on their whistleblowing obligations to charity regulators.  In our day to day dealings with the Commission, we have found that they check the latest annual return against information provided, for example following-up if charities working with vulnerable people forget to confirm in the annual return that they have a safeguarding policy. 

This visible, active use of information means it is very important that charities make sure that the information the Commission is given in letters, forms, returns and accounts is accurate.  Charities should be especially cautious of tick-box responses: they make clear and unambiguous statements, but are very easy to click-through and get wrong.  

It seems likely that the Commission will build on this work of matching information about charity operations against regulatory requirements.  Charities may be particularly vulnerable around requirements from the Charities (Protection and Social Investment Act) 2016, given they are relatively new and unfamiliar. 

For example if the charity:

  • If the charity carries out social investments, can it show the Commission that it has followed the statutory procedure for approving and reviewing social investments?
  • If the charity uses professional fundraisers, does it have adequate agreements in place which comply with the specific regulatory rules attaching to these?  Have the agreements been updated for the 2016 changes including reference to a voluntary code and protection of the public from intrusion, persistence and influence?
  • If the charity meets the audit threshold, does the annual report contain the required information about fundraising?

Recovery from Charity Trustees

One of the major themes in the Charity Commission's recently published compliance reports is its use of legal remedies against trustees who benefit from or cause loss to charities.  Over the past year, the Commission's reports have included: 

  • Active consideration of the recovery of unauthorised remuneration;

  • Trustees making-good a grant made in error;

  • Charity Commission taking and settling proceedings for loss to a charity;

  • Interim manager appointed to assess prospects of taking action against trustees and direction for trustees to take advice, leading to settlement of claim.

    The prospect of trustees being called on to make good losses or repay benefits in relation to breaches of trust is no longer remote.  Based on the evidence in its reports, it seems likely that if it becomes involved, the Commission will pursue the question of recovery and will expect trustees to do the same.

Conclusion

The charity sector continues to be actively regulated by the Charity Commission.  To ensure the Commission is receiving the right messages about your charity, it is important to check the quality information provided in returns, correspondence, accounts and reports.  Is information consistent and accurate and are you meeting the most up-to-date requirements for the content of the trustees' annual report?


 For more information, please contact Andrew Wherrett in our Charity Law team on 0117 314 5269

 

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