Charities (Protection and Social Investment) Bill

Written evidence submitted by the Charity Law Association Working Party (CHB 08)

About the CLA

1. The Charity Law Association (CLA) has approximately 950 members, mostly lawyers but also accountants and other professionals. It is concerned with all aspects of the law relating to charities and social enterprises.

2. The CLA convened a Working Party in December 2013 to respond to the Government’s consultation. This Working Party provided evidence to the Joint Committee at the pre-legislative scrutiny stage and has continued to review the Bill as amended at Report Stage in the House of Lords and as it now passes through the House of Commons.

3. The members of the Working Party (listed in the Appendix) serve in a personal capacity and the views expressed should not be taken as the formal views of the organisations for which they work, nor of the CLA or its membership as a whole. A separate working party has considered the social investment provisions.

Why are we still concerned?

4. The Charity Commission is the regulator of 163,000 registered charities, which are governed by around 943,000 charity trustees. The most common mistakes that the Commission encounter are "honest mistakes" and "poor management" (eg late filing of accounts). Deliberate abuse of charities has been found to be very rare indeed. The new extended powers of the Commission will not apply only in the cases of rare abuse, but they will apply to all charities and its many hundreds of thousands of well-meaning volunteer trustees. These new powers must be viewed in this context.

5. We support the extensions of the Commission’s powers where there is a genuine demonstrable need to close a loophole or to enable the Commission to act. However, these powers should be balanced by appropriate and proportionate safeguards. We have set out below our views on why this balance has not yet been achieved.

6. We have also highlighted a number of provisions, where it appears to us that they may be drafting irregularities which could helpfully be amended by the Committee.

Additional safeguards are needed in Clause 1 (Official Warning by the Commission)

Include an effective right of appeal

7. There is no right to appeal an official warning to the Charity Tribunal. Supporters of this Clause note that a charity would have a right to judicially review the decision to issue a warning. Judicial review is not an ‘appeal’ by a complex resource-intensive yet limited review process, beyond the means of all but the wealthiest charities. The inadequacy of Judicial Review as an effective remedy for charities is demonstrated by the need to introduce the ability to appeal decisions, orders and directions of the Charity Commission to the Charity Tribunal in the 2006 Act. Without this right being included in the Bill, very few charities will have the ability or the means to challenge a warning.

8. It has been suggested that including a right of appeal would "tie the Commission up in red tape and stop it using the power". We are unaware of evidence to support this assertion and, in any event, an abuse of process could be struck out by the Tribunal. Further, if Judicial Review was, in fact, an adequate remedy, the same concern would arise.

Limit the damage that might be caused by publication of a warning

9. The Commission has indicated that warnings will be used in less serious cases and are something beyond regulatory advice but less serious than the opening of an inquiry. However, official warnings published by other regulators indicate a serious and high level of concern. It is not clear to us that a published warning by the Commission would be correctly perceived by the public as indicative of less serious cases. It looks and sounds very serious and is likely to have reputational consequences for any charity subject to such a warning, with serious consequences for its ability to fundraise and which is out of proportion to the alleged breach. Publication of an official warning has the potential to mislead the public thereby negating the stated desire for transparency. We urge the Committee to limit the unintended consequences and potential damage, by preventing the warning from being published, instead it could be issued to the relevant charity trustees and selected stakeholders.

Include time limits for making representations on the face of the Bill

10. With no effective right of appeal, and the potential negative impact which will follow the issuing of a warning, in our view it is essential that the representation process should be clear. The Bill makes no provision for a minimum notice period in which to make representations. Voluntary trustees need sufficient time to be able to respond properly to notice of a warning and to take relevant corrective action. We recommend a minimum period of 28 days be included on the face of the Bill.

Make it clear that an Official Warning is not a de facto power of direction

11. New Section 75A(5)(b) (in Clause 1) provides that a notice of a warning should specify "any action that the Commission considers should be taken, or that the Commission is considering taking, to rectify the misconduct or mismanagement referred to" in the warning. Currently the Commission cannot direct charity trustees to take a specific course of action unless they have opened a statutory inquiry (which provides them with a suite of additional and extensive powers). The Commission has confirmed that they do not regard this power as providing them with power to direct; yet certain of the examples which they have provided suggest that the official warning power could be used by them in this way. We suggest that the wording of Section 75A(5)(b) be amended to state "such advice or guidance as the Commission considers may assist in remedying the breach specified in the grounds in (a) above". This would make it clear to charity trustees that the action set out by the Charity Commission in its official warning is not a de facto direction.

12. The importance of removing the risk of misinterpretation was demonstrated by the recent judicial review case involving Cage. The case brought to light the high pressure circumstances which can arise and the risks which go along with such pressure situations of a blurring of the lines between "advice" and a "requirement". In court, the Commission submitted that it was providing robust guidance, whereas the charity had understood (supported by the Commission’s subsequent press release) that it was being "required" to make a statement which the charity considered it could not make because to do so would improperly fetter its discretion. If the wording in Section 75A(5)(b) is not clarified, there is a risk of misinterpretation, leading to further costs for the Commission and charities.

Making it clear why decisions have been taken: Clause 3 (Misconduct/mismanagement outside of a charity)

13. We can see the rationale for being able, in cases of abuse, to take into account previous conduct etc. However, in order for charity trustees to be able to defend themselves, they must be able to know what factors have influenced the Commission’s decision-making. In the Working Party’s view it would be helpful if it was made clear in Section 86(2) that the statement of reasons should include the consideration given to "other matters" pursuant to Clause 3.

Can the Commission close a statutory inquiry but leave an Order in place preventing the trustees from taking certain action?

14. Clause 6 introduces new section 84A which is the power (after opening of an inquiry) to direct the trustees not to take certain action or to continue with that action. This Order must be reviewed every 6 months but what is not clear is whether or not the Order can remain in place once a statutory inquiry has been closed.

15. The Commission has a number of powers which relate to the protection of charity property. This new power gives the Commission the ability to direct the actions of trustees. It is an important principle, enshrined in law, that the Commission cannot, save in exceptional defined (and confined) circumstances, exercise the functions of charity trustees or be directly involved in the administration of a charity. If this power to direct the trustees not to take certain action can extend beyond the life of a statutory inquiry, then this important principle will be eroded. We would want to avoid the creation of a class of hybrid charity, where the trustees’ duties to act are fettered by ongoing Commission direction, notwithstanding that the Commission has closed its inquiry.

16. The Bill should make clear that the Order will terminate on the closing of the statutory inquiry to which it relates.

There should be further guidance provided as to what "expedient in the public interest" means in Clause 7 (Power to direct winding up)

17. Clause 7 refers to the power being used where it is "expedient in the public interest". This appears to borrow the language of the Insolvency Act 1986 where the Secretary of State can apply for a company to be wound up on the grounds that its activities are against the public interest. In such cases the court must be satisfied that the public needs protecting from the company and so it is just and equitable that it be wound up. However, in the examples provided by the Commission in support of this power, it does not appear to us that such a need to protect the public from such charities would arise. It would be helpful if the Government would provide clarity as to the intended meaning of this phrase in this context.

18. It may be more effective to mirror the cy-près wording from Section 67 Charities Act 2011, such that exercising the power is expedient "given the desirability of securing that the property is applied for charitable purposes".

19. We also note that the proposed Clause 84B(2) ought to refer to a transfer to a charity with the same "or similar" purposes. Otherwise the ability to use this new power may be severely restricted. This may be an omission.

We agree that Clause 9 (Conduct of Charities: Disposal of Assets) should be removed

20. We consider that if this Clause remains in the Bill it would have a number of serious unintended consequences. We would also respectfully note that reference in legislation to "independent charities" is a misnomer - an organisation cannot be a charity unless it is independent.

Extension of the offences giving rise to Clause 10 (Automatic disqualification from being a trustee) and the need to review the waiver process

21. We are concerned that the power available to the Minister to amend this section to add or remove an offence could be used to add a further list of offences without full and proper consultation with the sector.

22. Automatic disqualification will prevent any person who is disqualified from charity trusteeship under section 178 from holding positions with senior management functions. There appears to us to be an issue with the way in which sub-clause (6) has been drafted. Would new sub-clause (4)(b) serve to prevent a disqualified trustee from holding a senior finance executive post in a charity? For example, if a Finance Director reports directly to the Chief Executive of a charity, and the Chief Executive has oversight for the day to day running of the charity (which generally includes finance), would the Finance Director be considered to be holding a senior management function or not?

23. We also have concerns about the inclusion of new Case K. We did not support the inclusion of sexual offences at the consultation stage, as a wholly separate regime exists in relation to the safeguarding of children and vulnerable persons. We support the extension of the list to offences which go to the honesty of a trustee and their ability to manage safely charity assets, criteria directly relevant to the role of charity trustee. Why should Case K offenders be unfit, whereas, say, others found guilty of murder or arson would not be automatically disqualified? It is also not clear to us how trustees would establish that a fellow trustee fell within Case K.

24. We are aware of the concerns raised by Unlock (registered charity 1079046) that the current formulation of Case K means that individuals whose convictions are spent but who remain subject to the notification requirements of Part 2 Sexual Offence Act 2003 will remain automatically disqualified, even where they wish to hold office in a charity wholly unrelated to children or vulnerable adults. This appears to us to be disproportionate and illogical. It may also have a damaging impact on the ability of charities working in the criminal justice sector to recruit the range of trustees they consider appropriate.

25. The Commission waiver process (which is the mechanism for eliminating any unfairness caused by this Clause) is little understood and seldom used and should be reviewed so that it can work as an effective safeguard..

The discretionary power to disqualify in Clause 11 (Power to disqualify from being a trustee) does not contain sufficient safeguards. The Commission will act as prosecutor, judge and jury.

26. The Joint Committee in its report expressed its concern at the lack of safeguards which accompany this power and considered that there should be a review of the way other disqualification regimes work.

27. In the Bill, a disqualification order can be made if three tests are met:-

· One of the listed Conditions.

· the person is "unfit" to be a charity trustee.

· making the order is desirable in the public interest in order to protect public trust and confidence in charities generally or in the charities or classes of charity specified in the order.

Although this three stage test appears superficially to be robust, it is in fact insufficiently defined and lacks clarity and adequate safeguards.

28. Our significant and material concerns relating to each of the six first-limb conditions have been set out in our Written Evidence to the Joint Committee (paras 43 to 49) which can be found [HERE]. Condition F remains of greatest concern. This Condition is extraordinarily broad. In effect, Conditions A to E are made redundant by Condition F, which enables this power to be used in relation to any past or continuing conduct, whether or not in relation to a charity. If this Condition is needed, as a minimum it should require an element of misconduct and the opening of a statutory inquiry.

29. We also consider that charity trustees would benefit if the criteria for "unfitness" are included on the face of the Bill. It is our view that there should be a list of matters to be taken into account (as in the Company Directors Disqualification Act (CDDA)) which include concepts of materiality, responsibility for the breach, frequency of conduct, the nature and extent of loss or harm caused as criteria by which to assess unfitness. With no definition on the face of the Bill, and the Commission seeking to define unfitness in the widest possible terms in its Policy Paper, the test of unfitness will lack any objective criteria by which to measure the reasonableness of the Commission’s decision on fitness. The Working Party would urge the Committee to consider a more certain and precise definition of unfitness. We have read with concern certain newspaper reports which have revealed how this new power could be used, which appear to support the case for any new test to be more precisely defined. (

30. We are not clear what the phrase "in the public interest" would mean in context. It is essential that this is clarified.

31. The Working Party has advocated for the discretionary power to disqualify to be exercised by the Charity Tribunal, on hearing evidence from the Commission and the individual (akin to the process in the CDDA). We think this would be a better approach to take.

32. The Working Party does not support the inclusion of the power in its current form.

33. On a technical note, the right of appeal against a section 181A Order may need to be extended to include the charity trustees of the charity to which the order relates, the charity itself, or any other person who is affected by the Order. It seems to us that these other categories of persons may well have a substantial interest in the making of such Orders (particularly as they apply to senior staff members of a charity).

Consideration needs to be given to transitional provisions for Clause 14 (Fund-raising)

34. It would be helpful if the transitional provisions make clear that the new additional requirements are to apply only to agreements entered into on or after the date the clause comes into force. There are great many commercial participation agreements in place between companies and charities which benefit charities, and we would not want the companies to withdraw or terminate those agreements because they are concerned that the existing agreements will breach the new law. Likewise, it would be expensive for charities and professional fundraisers to have to amend and renegotiate pre-existing professional fundraising contracts.

35. Since fundraising is currently such a fast developing area, it might be better if the additional requirements were introduced by way of regulation (so that they can be changed and strengthened more easily), which the Minister has the necessary power to do.

December 2015


List of Working Party Members

Paul Bater Wellcome Trust

Jo Coleman IBB Solicitors

Richard Corden Director, Southampton Hospital Charity

Lindsay Driscoll Bates Wells Braithwaite LLP

Nicola Evans Bircham Dyson Bell LLP

Mark Honeywell Bond Dickinson LLP

Reema Mathur Stone King LLP

Rosamund McCarthy Bates Wells Braithwaite LLP

Anne-Marie Piper Farrer & Co

Timothy Rutherford Stone King LLP

Geoffrey Trobridge Lester Aldridge


Prepared 16th December 2015