Charities (Protection and Social Investment) Bill [HL]

Commentary on provisions of Bill

31 The Charities Act 2011 and the Bill refer to the terms "charity trustees" and "trustees of a charity". "Trustees of a charity" are people who hold property for a charity established as a trust. These people are usually, but not necessarily always, the charity trustees, and are treated in the same way by the legislation whether or not they are. In these notes we use the term "charity trustees" to refer to both for simplicity.

Clause 1: Official warnings by the Commission

32 Clause 1 inserts into the Charities Act 2011 new section 75A, which provides the Commission with a power to issue an official warning to a charity or charity trustee. Subsection (1) specifies when the Commission may issue a warning. A warning may be issued where there is a breach of trust or duty by a charity or trustee, or other misconduct or mismanagement in the charity. A breach of duty would include non-compliance with a Commission order or direction. Subsection (2) enables the Commission to publish a warning. The Commission is required to give notice of a warning (subsection 3), and the means by which it may do so (subsection 4). Subsection (5) requires the warning notice to specify certain matters, including the grounds for the warning, and any remedial action that could address the warning. Subsection (6) requires the Commission to take account of any representations on the content of the warning made to it within the period set out in the notice.

33 There is no right of appeal to the Charity Tribunal against an official warning, as is currently the case with non-statutory warnings issued by the Commission. However in addition to the representations process described above, an official warning could be challenged through judicial review.

34 The official warning will be similar to powers already available to many other regulators. It is intended to be a more reasonable and proportionate way of dealing with breaches of statutory provisions of the Charities Act 2011, breaches of fiduciary duty or other mismanagement where the risks and impact on charitable assets and services are relatively low. Sometimes this may be as a more proportionate alternative to use of remedial powers such as suspensions, or removal of trustees or restitution action against trustees. In such cases the Commission will make clear that continuing or repeating the breach will lead to tougher action being taken straight away next time. In other cases, a warning might be used alongside or with reference to other powers to increase the incentive to comply.

35 The Commission would be able, but not required, to publish official warnings. If it does publish it can do so in any form. The Commission will publish its policy for when and how this will be done and expects to apply a similar process to the way it currently deals with its discretion to publish the results of inquiries under the Charities Act 2011.

36 The Commission has provided the following examples of when the warning power could be used:

Clause 2: Investigations and power to suspend

37 Clause 2 amends section 76 of the Charities Act 2011, which deals with the exercise of the Commission’s temporary protective powers. It puts beyond doubt that failure to comply with an order of the Commission, or failure to remedy a breach specified in an official warning constitutes misconduct or mismanagement (clause 2(2)).

38 It also enables the Commission to extend a suspension pending removal by up to one year, subject to a two year overall limit. The Commission asked for this change because in some cases it must await the outcome of a criminal prosecution before it can proceed with its regulatory action.

Clause 3: Range of conduct to be considered when exercising powers

39 Clause 3 inserts into the Charities Act 2011 new section 76A. Where the Commission has opened an inquiry into charity A, provided there has been misconduct/mismanagement in charity A and the Commission can link it to a person, this provision enables the Commission to take into account any other evidence of that person’s conduct for example in charity B or outside of charity but which may damage public trust and confidence in charity, for the purpose of deciding what protective power(s) it would be proportionate/appropriate to exercise in relation to charity A. In effect, once misconduct or mismanagement has been established this provision enables the Commission to consider whether there is other evidence of misconduct or mismanagement in other charities, or conduct outside of charities which could undermine public trust and confidence in charities before determining how to act.

Clause 4: Power to remove trustees etc following an inquiry

40 Clause 4 inserts into the Charities Act 2011 a substitute section 79 which deals with removal of charity trustees following an inquiry, and makes several consequential amendments. The revised section 79 makes it clear that the Commission can make a scheme in relation to a charity when there is an inquiry open and the Commission is satisfied that there is either misconduct or mismanagement or there is risk to charity property. The test for the Commission to exercise its power to remove a charity trustee, or other office holder, remains that there must be both misconduct or mismanagement and risk to charity property.

41 The difference between the two tests is because it is considered that there must always be misconduct or mismanagement in order to remove a person from their position in the charity. However there are cases where the Commission considers it may need to make a scheme where only one limb of the test is met.

42 Substitute section 79(5) and (6) enable the Commission to continue the removal process (and consequent automatic disqualification) where a person ceases to hold office. This is to enable the Commission to deal with cases where the person they have been seeking to remove resigns their position in order to avoid removal and consequent disqualification.

Clause 5: Power to remove disqualified trustee

13. Clause 5 inserts into the Charities Act 2011 a new section 79A which enables the Commission to remove a disqualified charity trustee if they continue to remain in their position once disqualified. The Commission is required to give notice to each of the charity’s trustees, but is not required to give public notice of the order, and is not required to provide a particular period of notice or a mechanism for representations as this is not considered necessary where an already disqualified trustee is being removed. The power does not extend to removing disqualified persons from senior management positions, as this would be for the charity’s trustees to enforce (their failure to do so could result in the Commission taking action against the charity’s trustees).

Clause 6: Power to direct specified action not to be taken

43 The Commission already has the power (in section 84 of the Charities Act 2011) to direct that a charity (or trustees) take certain actions in the context of a statutory inquiry. Clause 6 gives the Commission a new power to direct a charity not to take certain actions in the context of a statutory inquiry.

44 Clause 6 inserts into the Charities Act 2011 a new section 84A which enables the Commission, once a statutory inquiry has been opened into a charity, and the Commission considers that any action if taken or continued by the charity or its trustees would constitute misconduct or mismanagement, may direct the charity or its trustees not to take it or continue it. In addition to specifying the action that must not be taken or continued, the order must set out the Commission’s reasons for making it.

45 In addition to requiring its use only under a statutory inquiry, a further safeguard to the use of this power is that the Commission must formally review such orders at least every six months.

Clause 7: Power to direct winding up

46 Clause 7 inserts into the Charities Act 2011 a new section 84B which enables the Commission to direct a charity to wind up in certain circumstances.

47 The Commission’s usual practice is to attempt to restore a charity to health following a statutory inquiry. However there are rare cases where it would be more appropriate for any remaining assets to be transferred to another charity with the same or similar purposes (something the Commission can already do under existing powers) and the shell of the charity to then be wound up (which this new power would enable). The Commission itself cannot wind up the charity, as to do so would be acting in the charity’s administration, so this new power enables the Commission to direct the trustees (or if necessary other persons in the charity such as any remaining employees or members) to take the necessary steps to wind it up (new section 84A(2)).

48 The power would only be available in the context of a statutory inquiry, the Commission must be satisfied that the charity does not operate or that its purposes could be more effectively promoted if it were to cease to operate, and that the exercise of this power is expedient in the public interest (new section 84B(1).

49 New section 84B(3) enables an order to give the recipient(s) of the order powers that they may not have, in particular powers that normally only the members of the charity would be able to exercise in the context of winding up the charity. New section 84B(3) also prevents the order from requiring action to be taken that is prohibited by statute. Similar provision already exists in sections 84(3) (Power to direct specified action to be taken) and 85(3) (Power to direct application of charity property) of the Charities Act 2011. The Commission is required to give public notice of its intention to make a winding up order (new section 84B(4) and must consider any representations made (new section 84B(5)) before making the order. The Commission must give at least 60 days public notice of intention to make a winding up order unless there is a particular need for less notice to be given (new section 84B(6). Action taken under such an order is treated as properly done (new section 84B(7)) but existing contractual rights are protected (new section 84A(8)).

50 Clause 7(5) provides for a right of appeal to the Tribunal, both for the recipient(s) of a winding-up order and where the order displaces members’ rights or powers, the members of the charity.

Clause 8: Power to direct property to be applied to another charity

51 Clause 8 amends section 85 of the Charities Act 2011 so that compliance with a Commission order to apply charity property properly does not result in a breach of contractual obligations to the charity (e.g. banks who act on client instruction). This is intended to address circumstances where the person holding the charity property is "unable" to transfer the charity property because it owes a contractual duty to the charity or charity trustees. The Commission asked for this provision following several cases where financial institutions holding charity property were contractually unable to transfer it to secure its proper charitable application but would have been willing to do so.

Clause 9: Automatic disqualification from being a trustee

52 Clause 8 amends section 178 of the Charities Act 2011 and inserts new section 178A into the Act to extend the criteria that automatically disqualify a person from being a charity trustee.

53 The existing criteria for automatic disqualification remain unchanged. So, for example, a person with an unspent conviction for an offence involving deception or dishonesty is automatically disqualified until the conviction is spent or a waiver is granted by the Commission.

54 Cases "H" to "J" are new criteria for automatic disqualification which are not criminal offences.

a. Case "H" is where a person has been found guilty of contempt of court in civil proceedings where a false statement or disclosure is made.

b. Case "I" is where a person has been found guilty in the High Court of disobedience to a Commission order or direction.

c. Case "J" is designation under terrorist asset-freezing legislation. Designation under terrorist asset-freezing legislation can be made only on the basis of reasonable belief of involvement in terrorism, and only if it is necessary for purposes connected with protecting the public from terrorism. There is a right of appeal against such a designation. Under Case J the disqualification would last until the designation is removed.

55 Subsection (6) inserts new subsections (3) and (4) into section 178. These provide that where a person is disqualified under section 178 from charity trusteeship they are also to be disqualified from positions with senior management functions. A senior management function is defined in new subsection (4). In effect it is the most senior executive position in a charity, and where control of the charity’s finances has been delegated, the person (other than the most senior executive) who controls the finances.

56 New section 178A (inserted by subsection (7)) introduces convictions for several criminal offences as new criteria which would automatically disqualify a person from acting as a charity trustee until the conviction is spent or a waiver granted by the Commission. There is the potential for an overlap with the current "offences involving dishonesty or deception" criteria, which is dealt with by clause 9(3).

57 Offences that have been superseded by those listed are also caught by new section 178A(2), and ancillary or inchoate offences are caught by new section 178A(3).

58 New section 178A(4) provides a power for the Minister for the Cabinet Office to make regulations to amend the list of criteria (the Minister is required to consult if the regulations add a new offence). Such regulations would be subject to Parliamentary debate and approval before they could be made.

59 The existing regime of waiver under section 181 Charities Act 2011 would also apply to persons disqualified under these new criteria, enabling such persons to apply for their disqualification to be waived in relation to a particular charity, class of charities, or any charity.

60 The civil and criminal consequences of acting whilst disqualified (sections 183 and 184 Charities Act 2011) are extended to disqualified persons holding an office or employment from which they are disqualified under new subsections (3) and (4) of section 178 Charities Act 2011.

Clause 10: Power to disqualify from being a trustee

61 Clause 10 inserts four new sections (181A, 181B, 181C and 181D) into the Charities Act 2011, and makes some other consequential changes.

62 New section 181A provides the Commission with a power to disqualify a person from being a charity trustee or in a senior management position in a charity. It sets out the criteria that must be met for the Commission to make a disqualification order. To make a disqualification order the Commission must be satisfied that one or more of the listed conditions A to F is met, that the person is unfit to be a charity trustee (either in relation to charities generally or a particular class of charity to be specified in the disqualification order), and that making the order is desirable in the public interest to protect public trust and confidence in charities.

63 The Minister for the Cabinet Office may vary the list of conditions by regulations (new section 181A(8)) which would be subject to Parliamentary debate and approval before they could be made (clause 10(5) to (8)). The Minister is required to consult if the regulations add a new condition.

64 New section 181B inserted by clause 10 provides that a disqualification order must specify the period of disqualification, which can be up to 15 years, but must be proportionate having regard to certain matters. It also provides that a disqualification order can only take effect after the period for lodging an appeal to the Charity Tribunal has expired without an appeal being lodged, or where an appeal is lodged when it is either withdrawn or finally determined by the Tribunal. The right of appeal against the decision to make a disqualification order is provided in clause 9(9).

65 New section 181B also provides the Commission with a power to suspend a person from being a charity trustee once it has served notice of its intention to make a disqualification order against that person. The suspension would be for up to one year, extendable for up to a further year. The suspension would be subject to periodic review by the Commission (new section 181B(7)). Whilst suspended the person must obtain the Commission’s approval before taking up any charity trustee position (new section 181B(10)). The suspension lasts until either the Commission makes a disqualification order, it gives notice of its intention not to make such an order, the period of the suspension expires, or on review the Commission considers the suspension should be discharged.

66 A person subject to a disqualification order would be subject to the same criminal consequences (clause 10(3)) and civil consequences (clause 10(4)) as a person disqualified under section 178 Charities Act 2011.

67 New section 181C sets out the process for making a disqualification order. The Commission must give a person at least one month’s notice of its intention to make a disqualification order, and invite the person to make representations. If the person is known or believed to be a serving charity trustee, the Commission must also give notice of its proposals to the other trustees of the charity, and must give public notice of its proposals unless it considers doing so is unnecessary. The Commission must take into account any representations received during the specified period. Where a charity for which the person is a charity trustee comes to light after the specified period, the Commission need not specify a further period for representations, but would still be required to notify the other trustees of the charity. Where the Commission makes a disqualification order in respect of a person it knows or believes is a serving charity trustee, it must send a copy of the order and statement of reasons to the charity (in the case of a corporate structure) or its trustees (if unincorporated).

68 New section 181D provides for the variation or revocation of disqualification orders. It enables a person who is the subject of a disqualification order to apply to the Commission for the order to be varied or revoked, and provides a right of appeal to the Tribunal against a decision of the Commission not to vary or revoke a disqualification order.

69 The flow chart at Annex A, which has been developed with the Commission, sets out how it the disqualification process would operate.

Clause 11: Records of disqualification and removal

70 Clause 11 amends section 182 of the Charities Act 2011. Section 182 of the Charities Act 2011 provides that the Commission must maintain a publicly accessible register of persons who have been removed from office by the Commission or the High Court. Clause 11 extends that register to include details of persons subject to a disqualification order.

Clause 12: Participation in corporate decisions while disqualified

71 Clause 12 inserts into the Charities Act 2011 new section 184A. Where a person is disqualified (either under section 178 or new section 181A of the Charities Act 2011) and is an officer of a corporate body that is a charity trustee, this provision prohibits that person from participating in decisions relating to the charity’s administration. New section 184A extends the existing criminal (section 183) and civil (section 184) sanctions to apply to officers who participate in decisions relating to a charity’s administration when they are disqualified from being charity trustees.

Clause 13: Power to make social investments

72 Clause 13 amends the Charities Act 2011 by inserting Part 14A, which contains three sections: section 292A (meaning of "social investment"); section 292B (general power to make social investments); and section 292C (charity trustees’ duties in relation to social investments).

Section 292A: Meaning of "social investment"

73 Section 292A defines "social investment" for the purposes of Part 14A. Subsection (2) defines a social investment by reference to the objectives that are sought to be achieved by entering into the transaction. A relevant act of a charity is a social investment if it is done with a view to both (a) directly furthering the charity’s purposes and (b) achieving a financial return for the charity.

74 Traditionally, charities have either applied their funds in direct furtherance of their purposes – for example by making grants to beneficiaries – or invested their funds – for example by purchasing government bonds – to yield a financial return which can then be applied in direct furtherance of the charity’s purposes. A social investment is an act done with the objective of achieving both of these outcomes.

75 Any valid act done by a charity (or its charity trustees) can be said to be done in furtherance of the charity’s purposes; the powers of the charity cannot be exercised for any other purpose. The requirement in subsection (2)(a) that an act must be done with a view to "directly" furthering the charity’s purposes means that there must be a sufficiently close causal connection between the act done and the charitable good achieved. The purchase by a charity of government bonds with the sole objective of providing an income for the charity would not directly further the purposes of the charity within subsection (2)(a) since the investment has little proximity to the charitable good achieved by spending the income. The purchase, by contrast, of shares in a medical research company by a charity for the advancement of medicine could directly further the purposes of the charity because it brings about a charitable good in the form of the work of the company.

76 The word "directly" should not be read as excluding the possibility of the achievement of the charity’s purposes in effect being done by a third party, as in the example above.

77 Examples of acts that might constitute social investments include:

a. a charity for the support of homeless people lets out housing at a low rent;

b. an overseas development charity invests in a fair trade tea production enterprise that is expected to yield a low financial return;

c. a charity for the advancement of medicine makes a high-risk investment in a medical research company which is in the early stages of developing a potential new treatment; and

d. a charity for the reduction of reoffending invests in a social impact bond to fund a project which provides support to those leaving prison.

78 A relevant act of a charity is defined by subsection (4). An application or use of funds or other property (subsection (4)(a)) includes purchasing an asset such as land or shares, advancing money by way of loan and granting permission to use or occupy land (for example by lease or by licence). Taking on a commitment in relation to the liability of another person (subsection (4)(b)) includes guaranteeing the liability of another person and providing security for such a liability. An act of the charity is, in the case of an unincorporated charity, an act of the charity trustees (subsection (3)) since an unincorporated charity has no legal personality.

79 A charity may wish to make a social investment out of funds or other property held on special trust. Property held on special trust is property which is held and administered for any special purposes of the charity on separate trusts relating only to that property: Charities Act 2011, section 287(1). The reference to the charity’s purposes in subsection (2)(a) is, in the case of a social investment out of funds or other property held on special trust, to the special purposes of the special trust.

80 Subsection (5) makes clear that funds or other property do not have to be applied or used with a view to generating a financial profit (whether in the form of income or capital growth), or even to be neutral from a financial perspective, in order for the act to qualify as a social investment. A social investment may be loss-making. But an application or use of funds that is expected to result in a total loss of those funds is not a social investment; it is in effect a grant. So a social investment (a) may increase in value and/or yield an income, (b) may be financially neutral (for example, an interest-free loan or a rent-free lease), or (c) may decrease in value (for example, if only part of the initial outlay is recovered).

81 A guarantee or other commitment can qualify as a social investment. Subsection (6) provides that such a guarantee or commitment will be made with a view to a financial return (under subsection (2)(b)) where the charity trustees expect that it will not be called upon in full or at all.

82 A social investment might also amount to an investment for other purposes, such as under the Trustee Act 2000 and under accounting rules, but subsection (7) makes clear that a transaction can be a social investment without also being an investment for such other purposes.

Section 292B: General power to make social investments

83 A general power to make social investments is conferred by subsection (1).

84 Subsection (2) imposes a condition on the exercise of the power in relation to permanent endowment. Permanent endowment is property held subject to a restriction on its being spent for the purposes of the charity. A charity is to be treated for the purposes of the Charities Act 2011 as having permanent endowment unless all property held for the purposes of the charity may be spent for those purposes without distinction between capital and income: Charities Act 2011, s 353(3). Subsection (2) provides that the power is not to be used to make a social investment using permanent endowment unless the charity trustees expect that any restriction on spending the permanent endowment will be complied with; in most cases this means that the charity trustees must expect the value of the permanent endowment to be maintained. This is in contrast to other funds, which may be used to make a social investment provided that a financial return is expected, where a financial return is anything short of total loss of the funds.

85 Subsection (3)(a) provides that the power may be restricted or excluded by the trusts of the charity. The trusts of a charity are the provisions establishing it as a charity and regulating its purposes and administration, whether those provisions take effect by way of trust or not: Charities Act 2011, s 353(1). This may include, for example, statutory provisions in the case of a body established by statute.

86 Subsection (3)(b) provides that the power is, subject to subsection (3)(a), in addition to any other power that the charity or charity trustees have to make a social investment. The power supplements rather than replaces other social investment powers.

87 Subsection (4) makes clear that the power applies to charities in existence when Part 14A comes into force (that is, the date on which the Bill comes into force) as well as to charities established after that date.

Section 292C: Charity trustees’ duties in relation to social investments

88 The duties set out in this section apply whenever a social investment is made after the commencement of Part 14A, whether or not making the social investment in question involves the exercise of the power conferred by section 292B(1). In other words, the duties apply whether or not the new power conferred by this Bill is the power used to make the social investment in question.

89 The duties cover steps to be taken before a social investment is made (subsection (2)) and a duty to review the charity’s social investments from time to time (subsection (3)).

90 The duties may not be restricted or excluded by the trusts of the charity (subsection (5)).

91 Some social investments will also be investments for the purposes of Part 2 of the Trustee Act 2000. In such cases, the duties in this section replace the duties in section 4 (standard investment criteria) and section 5 (advice) of that Act; this is the effect of subsections (6) and (7).

92 A social investment made before the commencement of Part 14A is not subject to the duty to review under subsection (3). That is the effect of subsection (1). Where such a social investment made by a charitable trust is also an investment for the purposes of Part 2 of the Trustee Act 2000, the corresponding duties of that Act will apply.

93 Subsections (2) to (4) make consequential amendments to the Trustee Act 2000 which reflect section 292C(6) of the Charities Act 2011. The amendments insert words into sections 4 and 5 of the Trustee Act 2000 to refer to the effect of section 292C(6) in disapplying the duties in those sections in the case of investments that are also social investments to which section 292C applies.

Clause 14: Reviews of the operation of this Act

94 Clause 14 makes provision for the operation of the Act to be reviewed by the Minister at least every five years, in line with Government policy on reviewing legislation that imposes a regulatory burden. It specifies the matters that must be considered in the review, and for a report of the review to be laid in Parliament.

Clause 15: Short title, extent and commencement

95 Clause 15 makes provision for the commencement of the Bill, and extends its provisions to England and Wales only.