Regulation of the Charitable Sector and the Charities Act 2006

Written evidence submitted by a Working Party of the Charity Law Association (CH 24)

The members of the working party are:

Chris Priestley – Withers LLP (Chair)

Richard Corden – formerly of the Home Office; Cabinet Office; and Charity Commission

Jessica Cumming – Walker Morris

Greyham Dawes – Crowe Clark Whitehill LLP

Darren Hooker – Stone King LLP

Sylvie Nunn – Wrigleys Solicitors LLP

Question 1: To what extent has the Charities Act 2006 achieved its intended effects of:

(a) enabling charities to administer themselves more efficiently and be more effective?

We think this objective has been achieved in some areas but not others. The Register of Mergers is a good idea but fails to protect legacy-entitlements of a merged charity in every case. A larger number of small charities can now expend permanent endowment but more could be helped by setting higher financial thresholds. More charities would be able to rely on the Act in paying a minority of their trustees for providing goods or services if the Act were to override pre-existing constitutional provisions to the contrary.

The continuing delay in making the CIO Regulations must be hurting many small charities. We think the Act’s CIO provisions can answer trustees’ anxieties about personal liability. The SCIO option seems to be highly popular with new Scottish charities.

(b) improving the regulation of charity fundraising, and reducing regulation on the sector, especially for smaller charities?

We think the objective has not been achieved here and that the Act’s regulatory impact may even have been negative. The Act’s only substantive change was making disclosure of the ‘notifiable amount’ by professional fundraisers and commercial participators mandatory. The complexity of some of their arrangements and the impracticality of displaying such information mitigate against charities being able to provide sufficiently detailed and accurate ‘solicitation statements’. Moreover, there is no policing of compliance.

The work of the Fundraising Standards Board (‘FRSB’) has done much to encourage responsible self-regulation of fundraising (see Question 9) and we therefore think that increasing the role and responsibility of the FRSB would be preferable to legislating for direct regulation.

(c) providing a clear definition of charity, with an emphasis on public benefit?

We think the Act has achieved its objective here. The requirement for the Commission to publish statutory guidance on the meaning of Public Benefit and for trustees to give that guidance due consideration has certainly raised awareness of the concept and how best to satisfy it among charities and the public.

Practitioners have found the Charity Commission's approach in applying the law - particularly in relation to the use of the descriptions of charitable purposes  - unhelpful at times.  A more serious issue is the differing approach taken by the separate legal jurisdictions within the United Kingdom as to what may or may not be regarded as a charitable purpose.  This is inconsistent with the approach taken by HMRC for tax purposes and can cause difficulties for those who wish to establish or operate a charity throughout the UK. 

(d) modernising the Charity Commission's functions and powers as a regulator, increasing its accountability and preserving its independence from ministers?

We think this objective was achieved judging by the conditions and expectations that prevailed in 2006. What was not then foreseen was that five years later the Commission would endure substantial funding cuts such that its ability to discharge effectively all of the functions Parliament intended in 2006 is compromised.

Increasing the Commission's accountability – principally by creating the Tribunal and amending the Commission's governance and its public and Parliamentary reporting obligations – achieved what was intended by generally making the Commission a properly accountable regulator. The Commission does appear to operate independently from Ministers: its continuing status as a Non-Ministerial Department, with the 2006 Act protecting it from Ministerial direction, gives it access to the workings of Government without allowing it to be controlled by Government.

Question 2: What should be the key functions of the Charity Commission?

In summary, these should be:

· determining charitable status and registering charities;

· ensuring that charities comply with charity law generally and the provisions of their constitutions in particular. (This involves two aspects: firstly to authorise actions beyond charity trustees’ powers where this is in the charity's best interests, eg, certain charity land dispositions; trustee remuneration; and secondly to deal with maladministration or misconduct within charities);

· providing general guidance and particular advice on best practice in charity administration and governance. This function can reduce the incidence of charities getting into difficulties to the detriment of their beneficiaries and/or requiring intervention and supervisory action by the Commission.

We think it is crucial that the Commission is adequately resourced to perform these functions effectively. They cannot safely be pruned by arbitrary funding cuts. We see these as the minimum needed for sustaining public confidence in charities.

We think the Commission's name is best left unchanged. A similar name-change (to "Charity Regulatory Authority") proposed by the Strategy Unit in 2001 was rejected by the sector at that time, and would in any case need expensive publicity to rebuild public recognition. "Charity Authority", as now proposed, would not (for those not yet unaware of the Commission) describe its functions any more accurately than its current name. Name changes are costly.

Question 3: How should the Charity Commission be funded?

Lord Hodgson's report promotes levying charges to resource the Commission’s registration procedures, albeit as non-recurring income. That might also encourage intending charity founders to work instead through an existing charity in the same field, in time reducing the present proliferation of charities. But against that benefit the detriment could be the stifling of would-be founders’ charitable impulses. Company registration fees offer no precedent here, as most companies are formed for private profit rather than public benefit. The idea of private citizens paying fees to the State in setting up an exclusively public benefit organisation is anathema to many.

Were the Commission to charge for giving specific advice , charities with their own professional advisers might not be affected – unlike most smalle r charities, wh ich do not have the resources to retain professional advi sers . However, for charities large and small , advice from the regulator is invaluable precisely because it can safely be follow ed without risk of regulatory intervention . Such an advice function may well pay for itself many times over in the hidden savings of regulatory interventions thereby obviate d . But a hidden danger may be the risk of the Commission becoming too dependent o n significant funding from the very constituency it should be regulat ing without fear or favour.

P enal i s ing late filing by charities has also been mooted . T hat might de creas e the currently small percentage of late filing , but could deter many from charity trusteeship, in case they might become personal ly liabl e for such penalties .

A nother problem with levying charges of any kind for the Commission’s services is that donors give their money to a charity for the benefit of its beneficiaries and expect other ‘stakeholders’ in charity to be similarly altruistic. In the public mind, charities spend too much on "administration", which would include fees levied t o make them contribut e to the costs (wholly S tate-funded since 1853) of the regulator. We therefore think donors w ould react un favourably to such charges , seeing them as an extra tax caused by the Government's unwillingness to fund the regulator adequately.

In summary, we strongly believe that the Commission should continue to be wholly funded by the taxpayer.

Q4. Is the current threshold for registration with the Charity Commission set at an appropriate level?

For resource reasons, the Charity Commission currently declines to register charities below the £5,000 gross income threshold, pending implementation of the Act’s provision for their voluntary registration. Lord Hodgson recommended the thresholds increase to £25,000 in reporting on his review of the Act. Whilst the change would significantly reduce the Commission’s administrative costs, for reasons of credibility with funders, with the banking sector and with HMRC it would benefit small charities only if voluntary registration is made available to them, by bringing into force section 30(3) of the Charities Act 2011, and we think this would then justify the increase.

Voluntary registration would avoid 'start-up' charities being prejudiced by having to fundraise for a further £20,000 before being eligible for registration. It would also reduce the number of unregistered charities below the new threshold, of which there would otherwise be some 96,000 – whose aggregate annual gross income, however, is immaterial for regulatory purposes.

Question 5: How valid are concerns that there are too many charities?

Lord Hodgson reports concerns in the sector that charitable resources may be wasted if too many charities are allowed to operate in similar areas. We think that risk cannot be mitigated by externally imposed regulation without harming the charitable impulse itself. People have differing views on how best to further a charitable cause and often prefer to fund/support a charity they can be actively involved with. ‘Political’ reasons can lead to a new charity where the existing charity’s trustees are perceived as ineffective or pursuing an approach not favoured by the intending donor or are perhaps too ‘cliquey’. Subtle but important differences in charities’ activities in the same field can increase effectiveness and donor-appeal.

Funding-competition continually increases the pressure that drives the weakest to the wall, allowing only the fittest charities to survive. That is more acceptable than regulating their numbers. It allows for the enthusiasm and involvement of committed people taking action on their own initiative and at their own risk. Some family ‘foundations’ exemplify an ‘inefficiency’ that is not against the public interest: their levels of funding is hard to achieve by most other charities.

The current economic climate of funding cuts could precipitate the closure of many worthy charities unable to collaborate with each other for a successful charity merger, but it could do more harm than good to accelerate this natural streamlining by enforcing mergers or closures or inhibiting start-ups. We think a regulatory stance that promotes strict compliance with charity law is the best way to maintain public confidence in the sector, not controlling charity numbers.

Q6. Exempt charities, such as academy schools, are regulated by principal regulators, rather than the Charity Commission. How well is this system working?

We think a ‘blanket’ application of the registration threshold for all charities could be considered, as in Scotland, or else exempt status should entail more active liaison between the regulators than at present, so that all charities are treated consistently. In our experience, the principal regulator’s obligation to ensure due compliance with charity law for non-government funding is not taken seriously enough. Some exempt charities still await confirmation of their principal regulator, so their compliance with charity law is not yet being regulated.

The regulatory procedures between the Charity Commission and principal regulator are protracted and cumbersome, hindering effective enforcement action. The Commission can only investigate an exempt charity upon request from its principal regulator, which must also be consulted before the Commission’s supervisory powers can be used. Too much hangs on the principal regulator understanding the charity law compliance issues arising and being vigilant in recognising them whilst regulating the use of the government funding it provides.

It is unclear how much training in charity law the principal regulators receive. The Commission’s memorandum of understanding with the DfE says appropriate staff visits to each others' offices 'may' be offered and that they may 'explore' the possibility of providing joint training and development initiatives and 'where practical' offer places to each others' staff on training courses. For the regime to work properly a much more stringent, rigorous and clearly defined approach to training is needed than the arrangements currently in place.

A more fundamental problem is the principal regulators’ lack of independence from government. They must regulate charity law compliance alongside their departmental relationship as principal funding body. Where a charity’s regulator is also its funder a conflict of interest may result. This conflict would not arise if all charities were regulated by the Commission for their charity law compliance, within which government funding would be governed by an appropriate funding agreement in much the same way as with grants from other charities, including ‘clawback’ terms and conditions to protect the proper use of that funding for its intended purpose as determined by Parliament.

Question 7: There has been an increase in the number of organisations that operate for the public good, such as social enterprises and mutuals, which are not charities, and are not regulated by the Charity Commission. What impact may this have on the public perception of what a charity is, and how charities are regulated?

As long as different types of not-for-profit entities exist, with different levels of Government support in terms of grants and/or tax benefits, there will continue to be confusion about the distinctions between them in the public mind. The term ‘social enterprise’ is understood in different ways and is frequently confused with ‘charity’, both by those in the not-for-profit sector and by the wider public. It is difficult to see how this can be avoided. Many entities calling themselves ‘social enterprises’ operate for some sort of profit or private benefit as well as for what should at least be their main aim of providing public benefit and so are far from operating as charities.

Structures which are not charities (or alternatively community amateur sports clubs) do not benefit from the same preferential tax treatment. It is our view that the area which needs most regulation is where tax benefits are given, but that even in their absence the existing high level of public trust and confidence in charities must not be undermined. There is a need to educate the public about the distinction between charities and non-charities within the not-for-profit sector. Having a ‘registered charity number’ is generally perceived as beneficial to the credibility of charities. Making it compulsory for all charities above a de minimis level of income to register (i.e. including those currently exempted from registration) would facilitate this, but the Commission would have to be properly funded first, as it might then have to regulate more than double the current number of registered charities. Such additional registrations would have to be phased in gradually.

Some members of the working party suggested that the Commission should be given statutory power to be able to prevent non-charities representing themselves as charities (i.e. in addition to the present restriction on companies seeking to include ‘charity’ or ‘charitable’ in their name), akin to the powers of OSCR. This would be easier to administer if all charities had to be registered, as the public would become accustomed to looking for a charity number. Some also suggested that there should be criteria which organisations must meet if they are to be allowed to represent themselves as ‘public benefit’ organisations within the meaning of that term in financial reporting standards. The question of what those criteria would be and whether the Financial Reporting Council (within its responsibility for the standards) or some other public body should regulate the use of the term ‘public benefit’ to describe an organisation would require some thought, as this would be outside the Commission’s jurisdiction.

The mutual model is extremely useful to the not-for-profit sector but is not well understood. In this connection we think the Government should now expedite the registration of charitable Industrial & Provident Societies by implementing the Act’s removal of their exempt status. We would note here that Lord Hodgson’s suggestion that unregistered charities should be required to label themselves as such does not resolve the problem of distinguishing charities from social enterprises.

The failure to bring into force the relevant sections of the 2006 Act is symptomatic of a more general problem with the IPS legal form, which suffers from HM Treasury being the lead ministry instead of the Department for Business, Innovation and Skills, when BIS would be a more competent ministry for these. HM Treasury has shown itself to be ineffective in modernising the law. Companies House would be a better regulator for mutuals. This could be done by having a combined CIC/Mutuals regulator. The current situation where the FSA acts as regulator is an anachronism for most mutuals.

Question 8: How successful has the introduction of the Charity Tribunal and its replacement, the First Tier Tribunal (Charity), been in making it easier to challenge decisions of the Charity Commission?

The Tribunal has had some success in holding the Charity Commission to account in relation to its decision-making functions, but we think the Tribunal's jurisdiction is too narrowly defined in Schedule 6 to the Act, in a prescriptive and complicated table.

We think it would be more helpful and would assist in the aim of making it easier for decisions to be challenged were Schedule 6 to be augmented by giving the Tribunal an additional general supervisory role. It is acknowledged that the Tribunal suffers from a public misperception that it is still expensive to bring proceedings and that full legal representation is always required, although self-representation is encouraged. It may need explicit guidance from perhaps the Commission to overcome this problem.

Question 9: How successful is the self-regulation of fundraising through the Fundraising Standards Board?

We recognise the important role played by the FRSB’s regulation of fundraising by charities and the prestige attaching to their use of its kitemark, the ‘tick’ logo. This is a specialised area in which, for resource reasons, the Charity Commission is unable to regulate effectively. We therefore take the view that the FRSB should be more fully empowered to be able to act more effectively as the regulator for charity fundraising.

Whilst applauding the establishment of the FRSB and its achievements to date, we think greater public awareness of the role of the FRSB is needed. We note that the FRSB’s authority is limited: the only sanctions it can impose are withdrawal of the right to use its ‘tick’ logo and ultimately the expulsion of a recalcitrant charity from FRSB membership. Thereafter the expelled member remains free to continue the fundraising that generated the complaints upheld by the FRSB and is no longer susceptible to FRSB influence. The loss of the FRSB’s ‘tick’ logo on its fundraising literature will not currently make it unlawful for the charity to fundraise from the public nor perhaps make that fundraising significantly less successful, as there is not yet enough public awareness of the FRSB’s role and the meaning of the ‘tick’ logo. We therefore think FRSB membership should be made compulsory for all charities fundraising directly from the public, so that expulsion from membership would then be an effective deterrent.

We also think that such empowerment of the FRSB would need to be made subject to external appeal against FRSB decisions. Currently, the appeals process is only internal.

Question 10: Are the rules around political activity by charities reasonable and proportionate?

We believe that the rules on political activity by charities derived from case law rather than statute, are apt and well-balanced. The Charity Commission’s current guidance explaining the rules - including guidance on elections and on political donations is very helpful and is clear on what the Commission considers that the rules allow. However, we believe that there is a need for specific guidance on charitable think tanks.

It is both reasonable and important that a charity’s main purpose is not political and that its activities do not stray into party politics. Political activity undertaken or supported by a charity must only be a means of supporting the achievement of a charitable purpose or purposes.

September 2012

Prepared 17th October 2012