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Social Investment - New Power or Trap for the Unwary?

on Thursday, 15 September 2016.

Why charities need to understand what a social investment looks like

Charities can apply expendable funds, however, they can also invest them. A technical doubt arose as to whether charities were allowed to do both at the same time, in the same transaction.

On 31 July 2016, the Charities (Protection and Social Investment) Act 2016 removed this doubt, but brought new burdens and traps for the unwary.

It Applies to Transactions that Charities Won't Recognise as Investments

The root of the danger in the new power is that the use of the word 'investment' bears little relation to the way people really think about investments.

The Act applies to rather widely defined 'acts' of a charity and has  the potential to catch almost any conceivable operation involving expendable property, including giving guarantees.

The acts actually caught are those taken with a view to both directly further the charity's purposes and achieve a financial return. A financial return is anything that leaves the charity better-off financially rather than fully spending-out the property.

That doesn't mean that every operation that could involve a financial return is necessarily caught, only those undertaken with a 'view' to that financial return. The Charity Commission's new, interim guidance talks about having financial return as part of the motive.

In short, a charity that uses its expendable property with the motive or justification of furthering the object, and of not losing all the value applied, will be caught.

It Doesn't Apply to What Charities Think of as Their Investments

This isn't a power for the charity's investment portfolio at large. However, some portfolios include permanent endowment assets and charities cannot  use their permanent endowment investments for the sort of social investments that the Act refers to.

It Doesn't Affect All Charities Equally

It doesn't apply to charities governed by Act of Parliament or Royal Charter,  nor if the power is excluded by the trusts.

The Burden - What Charities Must Do

In addition to the existing duties of  trustees, the first new burden requires trustees to consider in a rather formulaic way, whether they should take advice and,if so, to take that advice and consider it before making the social investment decision.

The second requirement is that trustees must periodically review social investments made after 31 July 2016. Practically, this means that trustees will need a register of social investments and to implement a programme for their review.

Conclusion

Although billed as a new power, the language of traps is apt. Charities can still do what they could do before but the price of the new power is the burden of two new, easily missed, regulatory requirements.


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