Joint Committee on the Draft Charities Bill

Joint Committee on the Draft Charities Bill First Report

4 Regulation by the Charity Commission

106. The draft Bill, building on previous legislation, sets out regulatory objectives, general functions, general duties and incidental powers for the Charity Commission. Much of the evidence we have received about how the Bill will work in practice is based on our witnesses' experience of how the Charity Commission has operated in the past. One concern which has emerged in particular is how the Commission functions as a regulator. In this section we deal first with the different thresholds at which charities are subject to regulation by the Commission and then move on to the issue of whether different types or sizes of charity should be subject to different levels of regulation. The Commission's general functions, under the draft Bill, are set out in the box below.

General functions of the Charity Commission
a)  Determining whether institutions are, or are not, charities;
b)  Encouraging and facilitating the better administration of charities;
c)  Identifying and investigating apparent misconduct or mismanagement in the administration of charities and taking remedial or protective action in connection with misconduct or mismanagement therein;
d)  Obtaining, evaluating and disseminating information in connection with the performance of any of the Commission's functions or meeting any of its regulatory objectives; and
e)  Giving information or advice, or making proposals, to any Minister of the Crown on matters relating to any of the Commission's functions or meeting any of its regulatory objectives.

Source: Draft Bill Clause 4 (1c)

Thresholds

107. The first determinant of what charities have to do to comply with the law is the level of income they receive each year. There are thresholds above which they have to register and higher ones above which they have to satisfy various accounting requirements.

Current position

108. Currently, charities with an annual income of more than £1,000 or permanent endowment or occupation of land are required to register with the Charity Commission. They are subject to regulation by the Commission in accordance with the Charities Acts 1992 and 1993.

109. The extent to which the accounts of a charity are subject to external scrutiny depends both on income levels and legal structure. The accounts of unincorporated charities have to be audited if the gross income or total expenditure exceeds £250,000 in the present or the two preceding financial years.[127] If gross income exceeds £10,000 but does not exceed £250,000 a charity can elect to have its accounts examined by an independent examiner.[128] Charitable companies have to have their accounts audited if their gross income exceeds £250,000 or assets are above £1.4m. A charitable company with gross income exceeding £90,000 but not £250,000 can opt for an audit exemption report from a reporting accountant.[129]

Draft Bill changes

110. Clause 7 of the draft Bill (amending section 3 of the 1993 Act) raises the threshold for compulsory registration to annual income of £5,000, with no reference to permanent endowment or occupation of land. Charities with incomes below the new threshold may still choose to register.

111. Clause 22 of the Bill will increase the audit threshold for unincorporated charities to a gross income of £500,000. There will be an additional trigger for audit of the holding of assets in excess of £2.8m if a charity's income exceeds £100,000. The changes will come about by relevant amendments to section 43 of the Charities Act 1993. Where a charity's income falls between £250,000 and £500,000 the accounts will be subject to independent examination, but the examiner will have to be a member of one of the specified bodies.

112. Clause 25 of the Bill amends section 249A of the Companies Act 1985 to raise the audit threshold for charitable companies to income of £500,000 or assets of £2.8m. The lower limit for an accountant's report remains at £90,000. Commensurate changes are made in the audit thresholds for charitable companies which are parent companies or subsidiary undertakings.

Evidence

113. The majority of evidence supported the proposal to raise the threshold for registration to £5,000 annual income. The British Trust for Conservation Volunteers (BTCV), however, did propose that the threshold be raised further to £10,000, as recommended in the Strategy Unit's Report.[130]

114. There was general welcome for the raising of the audit threshold to £500,000.[131] The comment of the Charity Law Association that £500,000 appears to be an appropriate level at present is representative.[132] Some concern at the raising of the audit limit was expressed on behalf of grant-making trusts that rely on audited accounts.

115. A number of organisations voiced concerns about the introduction of an asset trigger for the imposition of an audit. Cardiff Further Education Trust, for example, pointed out that presently they have their accounts independently examined, but as they hold assets of £20.4 million they would in future be required to have their accounts audited, with a resultant increase in costs.[133] The Committee note, however, the Home Office's response to these concerns was that the proposed asset threshold is in reaction to feedback to the Strategy Unit report and that it is consistent with the asset threshold for charitable companies under the Companies Act.[134]

116. Michael Gwinnell, a trustee of four charities, was one of a number of witnesses who pointed out the different audit requirements applying to unincorporated charities and charitable companies.[135] In particular, charitable companies with income below £90,000 are not required to have an audit exemption report, whereas other charities with income over £10,000 are required to have their accounts independently examined.

117. The Committee recognises the dangers to public confidence in raising the income limit for the independent examination of accounts for the majority of charities. The alternative route to removing the anomaly, by lowering the £90,000 limit for charitable companies, would impose additional regulatory burdens on those charities. We also note that CIOs will be subject to the accounting regime under section 43 of the Charities Act 1993 and not the regime for companies.

118. Several organisations pointed out that the Association of Charity Independent Examiners would not be a recognised body for the purposes of examining accounts where the gross income was above £250,000. The Committee is pleased to note that the Home Office are considering the possibility of specifying further bodies in section 43(3A) of the 1993 Act.[136]

Regulation of smaller charities: could it be lighter?

Evidence

119. We received much evidence telling us that charities - particularly small charities - are over-regulated under the current law and working practices of the Charity Commission. The Royal National Institute for Deaf People (RNID) told us:

"You asked about the small charities and I think at the moment they are over-regulated. They have this sense that the Charity Commission is looking at them very closely and they say to each other, 'Are we permitted to do that? Will the Charity Commission allow us?' They kind of have this restriction in their outlook which is out of all proportion to an organisation like mine where frankly the regulation is very, very light indeed and I would advocate more regulation…"[137]

120. BTCV (the British Trust for Conservation Volunteers) told us:

"Over-regulation of the sector comes primarily from the Charity Commission rather than from Parliament and providing effective statutory redress against occasional over-zealous, bullying and unforgiving behaviour by the Regulator will be the most effective way Parliament can avoid over-regulation… In the Charity Commission series of advisory publications the Commission uses the word 'must' with precision to indicate what they require of charity trustees if they are to avoid the wrath of the Regulator. They use this word six hundred times in that series of publications alone… We do not believe that there is a small or large charity in the land which is always in compliance with all these requirements or a single trustee who knows them all".[138]

121. The Charity Commission themselves told us they thought the last sentence was probably true and that the sector was over-regulated.[139] The Minister, when we asked her whether smaller charities were over-regulated, replied: "I think at present they theoretically are," although she said in practice this was slightly less so because the Commission was trying to apply a more proportionate approach.[140]

122. We asked witnesses whether the draft Bill should require the Charity Commission to regulate small charities with a lighter touch. NCVO told us that the way to deal with this problem, in the Bill, was to include a requirement that the Commission exercise its powers "proportionately", a question we discuss more fully in (paragraphs 161 to 169).

123. We have, however, also received evidence pointing in a very different direction. The representative of the National Association of Councils for Voluntary Service (NACVS), which supports local Councils of Voluntary Service (the key umbrella organisation for small charities) told us:

"…wearing a different hat, I chair a family charity which provides free holidays for disadvantaged families mostly in Yorkshire in close association with Headway, and I have to say that I am surprised by the kind of debate which has gone on around this because we think that the Charity Commission's regulatory impact on what we do is very, very light touch at the moment… Our sole dealing with the Commission is one exchange of correspondence once a year when we make a return and a return these days is largely printed for us when it arrives and all we have to do is delete if a trustee has changed, which is very rare, and we are not obliged…to get the accounts audited, so we see it as very light touch at the moment…

"… the problems that tax us, the barriers that get in the way of us doing a simple task effectively with minimum input of labour are not to do with charity regulation, but to do with health and safety, food hygiene, the Criminal Records Bureau, the demands of local authorities who give you £2,000 a year and want £2,000 of reporting on it and so on, so it is that kind of problem, not to do with the Charity Commission".[141]

"most registered charities in this country, will receive three pieces of written correspondence each year from the Charity Commission. Two of those are newsletters and one is a short return, most of which is pre-printed for you and I just do not see what the concern is about the level of regulation for most small charities".[142]

124. The Charity Commission told us that they did not think that the draft Bill should contain restrictions on their role in relation to smaller charities; how regulation operated in practice "should be done in consultation with the public and with charities themselves rather than prescribed on the face of the legislation".[143] They pointed out that the draft Bill "set out a raft of measures which will obviate the need for smaller charities to come to the Commission with various consents, regulation, changes to objects, powers and things of that nature. It already moves in that direction". [144] They said:

"Our approach to regulation is to follow the better regulation principles by focusing our priorities and resources where we believe that we can make most difference to charities and their beneficiaries and where there is greatest risk".[145]

Conclusion

125. The Committee believes that the actual impact of the draft Bill on small charities will be marginal. We received evidence, however, of concern about the performance of the Charity Commission and the impact that has on smaller charities. Poor performance by the Commission has a disproportionate effect on such charities. We accept that some of the evidence we have received may be based on experience of the Charity Commission going back over many years to a time when its performance was far from satisfactory - as reported on by the Public Accounts Committee (see paragraphs 182-3).[146]Equally, we accept in good faith the commitment of the new chairman of the Charity Commission to improve performance in future. With the exception of grant-making charities (see paragraphs 128-139) we do not see a practical way of setting out in the legislation different levels of regulation based on the size or nature of the charities concerned. But we do think the Bill needs to contain some safeguard against over-regulation. We think this will be provided by the recommendation we make later in this Report to adopt the idea of NCVO's and others (paragraphs 61-9) of a duty on the Commission to act proportionately. We were reassured by NCVO's evidence that this would satisfactorily address the problem.

126. The Committee was struck by the evidence that small charities consider the major barrier to their effective working as not relating to charity regulation but to the combined effect of a raft of regulations.

127. We recommend that the Government commissions an independent review of the burden of regulation that charities face more generally, to ensure that regulation is fair and proportionate, especially to smaller charities.

Grant-making charities

Current Position

128. There can be said to be a distinction between grant-making charities (or foundations) and other charities such as those that provide services. Grant-making foundations generally have secure funding, provided through an endowment or otherwise and do not actively engage in public fund-raising. Their activity consists of funding other charities or causes. Most do not raise money from the public or provide services directly. They are supported through private funds - generally the income from an endowment created by a rich individual or family and/or company profits. Other charities will, in many cases, have to raise funds and will provide direct services to carry out their purposes. No distinction is made in the treatment of grant-making foundations either in the law or in regulation.

Draft Bill Changes

129. The draft Bill, like previous legislation, contains no provisions distinguishing between grant-making and other charities.

In favour of the Bill providing for lighter regulation of grant-making charities

130. The Association of Charitable Foundations (ACF) and a number of other bodies argued that the draft Bill should include provisions making a distinction between grant-making and other charities and reducing the regulation of the former. Their grounds were, essentially, that there is a risk that increased regulation will deter wealthy donors from setting up or contributing further to grant-making charities. This would be a serious blow to the charity sector because the top 500 grant-making charities made grants of £2.2 billion in 2003 and because the flexibility of grant-making charities meant they addressed issues and situations that are untouched by other funders.[147]

131. ACF told us they had conducted a three year project looking at the reasons for philanthropy, as part of which they had conducted a large number of interviews with people of substantial means. The interviews revealed that "a fifth of those who had set up grant-making charities had serious reservations about one or more aspect of doing so, the majority of which were related to the burden of bureaucratic regulation".[148]

132. The Sainsbury Family Trust gave us, as an example of the increasing burden of regulation, the requirements imposed by the Statement of Recommended Practice (SORP) on accounting practice, which, they said, had increased from 240 paragraphs in 1995 to 439 paragraphs in 2004. This was a "largely unnecessary overhead and diversion for sizeable grant making charities which often have relatively few transactions to report in any given year".[149]

133. ACF told us:

"We support a regulatory and advisory regime that goes no further than ensuring that grant-making charities make grants within the scope of their objects, that they don't persistently fund poor quality projects, and that their objects reflect the public good".[150]

134. The Rayne Foundation gave evidence in very similar terms. They said the problem was that Charity Commission guidance was developed from the perspective of service-providing charities and was not always appropriate to grant givers.[151]

Against the Bill providing for lighter regulation of grant-making charities

135. The Charity Commission told us that they had given thought to the question of whether the Bill should recognise the distinction between grant-making charities and others. However, they said, the sector divided in a much more diverse and sophisticated way than this dichotomy. They told us that they would adopt a more sophisticated approach to regulation than "one size fits all" and that they had agreed a model form of governing document for cases where rich people might be deterred from making grants and setting up foundations by the nature of the regulatory regime.[152]

136. We asked the Minister whether grant-making charities should be subject to lighter regulation. The response was:

"No, I do not think I think they should. I think it is true that grant-making charities are different in character from many other charities. Often they are quite substantially resourced. They benefit substantially from the public purse because they benefit from the tax breaks which we, as the citizen, put into the charitable sector. It seems to me that the need for regulation actually comes fundamentally from the fact that the sector is invested in by the people of Britain through the contributions which it makes through forgoing taxation, so I do think that all charities, particularly those which have most benefited, should properly be regulated."[153]

"There are already significant differences in the regulatory regimes….grant-making charities have no donors, so there is no requirement to subject them to measures designed to give accountability to the donors … Therefore, if you are a charity which does not do any public fund-raising of any sort, then none of that [regulation] applies to you …. Another point was the distinction between grant-receivers and grant-makers. If you are a grant-receiver and you receive funds either from the Government or from other charities, if you are a service-providing charity, which very many grant-receivers are, then you are very likely to be subject to regulation in respect of your service-providing activities ….. none of that applies either to grant-receiving charities, so there are already, I think, significant differences in the nature and level of regulation."[154]

137. We put it to the Minister that there was evidence that 20% of potential starters of foundations had been put off by the regulatory regime; the Minister said that, if this was so, she would be in favour of changing the regime. She said further:

"I think the point you are making is important, but I am trying to make the argument that the best way to achieve that is not to say, 'We're going to have this kind of way of dealing with a village hall, this kind of way of dealing with foundations', but it is actually creating a clarity about what are the objectives of regulation…

"Can I suggest a way that you could recommend that… if you look at clause 5, subsection (2) gives the objectives which are for the regulatory objective and the public confidence objective is to increase public confidence and trust in charities, and one could actually perhaps put in that objective quite properly 'to increase the willingness to give', and I think that would be actually a good objective to give to the Charity Commission and I think doing that might meet your concern".[155]

Conclusion

138. From the evidence we have received, we conclude that the draft Bill should include provision to ensure that the regulatory burden on grant-making charities does not discourage philanthropy. There are two ways in which this can be tackled. A number of submissions to us suggested, like the Minister, that the Charity Commission should be given a general duty to encourage philanthropy.[156] Secondly, as we mention in paragraphs 161-9 below, the exercise of the regulatory role should be proportionate.

139. We recommend that the Government amend the public confidence objective in the proposed section 1B(3) 1 of the Charities Act 1993 to be inserted by clause 5 of the draft Bill to read: "The public confidence objective is to increase public trust and confidence in charities and to stimulate philanthropy".

140. We also recommend that the Government commissions an independent review of the burden of regulation that grant-making charities face more generally, to ensure that regulation is fair and proportionate.

The Charity Commission's objectives

Current position

141. Clause 1(3) and (4) of the Charities Act 1993 set out the general objects and functions of the Charity Commission as follows:

"The Commissioners shall (without prejudice to their specific powers and duties under other enactments) have the general function of promoting the effective use of charitable resources by encouraging the development of better methods of administration, by giving charity trustees information or advice on any matter affecting the charity and by investigating and checking abuses.

"It shall be the general object of the Commissioners so to act in the case of any charity (unless it is a matter of altering its purposes) as best to promote and make effective the work of the charity in meeting the needs designated by its trusts; but the Commissioners shall not themselves have power to act in the administration of a charity".

Draft Bill changes

142. Clause 5 of the draft Bill sets the Charity Commission a number of regulatory objectives:

a) the public confidence objective is to increase public trust and confidence in charities;

b) the compliance objective is to increase compliance by charity trustees with their legal obligations in exercising control and management of the administration of their charities;

c) the social and economic impact objective is to enable and encourage charities to maximise their social and economic impact; and

d) the accountability objective is to enhance the accountability of charities to donors, beneficiaries and the general public.

The social and economic impact objective

Evidence

143. The proposed social and economic impact objective was criticised by some of our witnesses and not supported by any witnesses from the charity and voluntary sector. The RNID told us:

"We are appalled at its inclusion. Do we really expect a charity to prove that it is going to have an economic impact? It is not in the objectives of my charity or any that I know of and it does not even say in the Bill that it has to be a positive economic impact. We could go to some of our environmental friends who might feel that a negative economic impact is appropriate. There are other, so-called charities which might wish to seek registration which would desire a negative social impact as well and they would see that as their objective, so this is clearly inappropriate, in our view".[157]

144. Mr Lloyd of the Charity Law Association told us:

"The social and economic impact objective I am deeply worried about. That seems to be implying some form of social utility test. It reminds me of Oscar Wilde's line about knowing the price of everything and the value of nothing. The whole notion of charities is that many of them start off, for example, by taking up deeply unpopular causes, many of which seem to have an adverse social and economic impact. To take one good example, abolishing slavery in the 19th century had a very adverse social and economic impact on a lot of people but was a profound charitable purpose. Retaining bits of virgin rainforest - does that have any social and economic benefit? I doubt it, although you can see that it has huge ecological benefit, let alone if you then try and apply these things to religions which remain as charities. I would want the social and economic impact objective excised from this Bill. I want the Charity Commission instead to be under an obligation to advance public benefit… That should be one of their objectives…"[158]

145. NCVO pointed out that the objective constituted a back-door redefinition of public benefit, in conflict with the current understanding of the term and going beyond the current legal requirement placed on charities.[159] In addition, they were concerned at the reference to social and economic impact at clause 15 of the draft Bill in regard to cy-près.

146. Other bodies which expressed opposition to the objective, or were uneasy about it, included the Association of Charitable Foundations, Hubert Picarda QC, Stone King (solicitors), Kingston Smith (chartered accountants) and the Wellcome Trust.[160] The one body which gave evidence on the question in terms which were not negative was the Chartered Institute of Public Finance and Accountancy (CIPFA):

"We note that a new objective of the Commission will be to 'encourage charities to maximise their social and economic impact'. CIPFA recognises the challenge of measuring such an impact elsewhere in the public sector and believes that the Charity Commission will need to carefully consider this experience if this objective is to be meaningfully addressed. CIPFA would be interested to assist in this area".[161]

147. The Charity Commission told us that they "were a bit surprised at some of the fuss about this because we saw it simply as a modern reworking of the existing legislation which talks about promoting the effective use of charitable resources… we also thought it would pave the way towards a more facilitating approach to regulation".[162] They thought that it was important to have the objective in the Bill:

"We do need something in place which turns on prompting the effective use of charitable resources, which is the Commission's remit. We see social and economic impact as a modern interpretation of promoting the effective use of charitable resource. That is how it has been seen".[163]

148. Ms Geraldine Peacock, the new Chief Commissioner, told us that she did not think it was vital to keep the objective in the Bill: "I would not die a death over it but I think there is a use in it being there because it helps people see there are different measures of efficacy and impact that are important in society".[164] The Minister told us:

"I think that it is effective and efficient in achieving its public benefit and charitable purposes. Therefore, I think this wording …is very clearly a way of trying to express that it is not just how you manage yourself internally….. It is the aim of….trying to make sure that those goals of charity which has a social and economic impact actually changes the world, because that is what charities do, they build a better world, they have a benefit for the public, it is to do with their purpose as well as the way in which they operate, and they have an impact which is social and economic. It is trying to get at that. The difficulty of saying "effectiveness and efficiency" is that it could be interpreted …as the way [the Charity Commission] manage themselves rather than the way they achieve their ends."[165]

Conclusion

149. The weight of evidence received by the Committee is clearly against including the social and economic impact objective in the draft Bill.

150. We recommend that in clause 5 the words "social and economic impact" be left out and the wording of the 1993 Act be retained, namely "promoting the effective use of charitable resources".

New powers given to the Charity Commission

Current position

151. The Commission already have wide powers to conduct inquiries under the Charities Act 1993 and other legislation to regulate the sector through, inter alia, registering and de-registering charities, conducting inquiries and giving advice.

Draft Bill changes

152. The draft Bill extends the Charity Commission's powers in a number of respects. The main new powers in the Bill are:

a) Existing Commission powers are extended to cover exempt charities, which they did not before.[166]

b) The Commission are given wider powers to give advice and guidance (see paragraph 193 below).[167]

c) The Commission are given new powers to enter premises. They must obtain a warrant before doing so; they can only do so as part of an inquiry under Section 8 of the Charities Act 1993; and they must be able to show that there is a document or information on the premises which is relevant to the inquiry (this is a higher requirement than applies to the Financial Services Agency or the Office of Fair Trading, which only have to show reasonable grounds for suspecting information is on the premises).[168]

d) The Commission can give directions to trustees and employees (if an inquiry into the charity is in train) to take specific action.[169] They can also direct the application of charitable property where they are satisfied that this is required in the interests of the charity concerned.[170]

e) The Commission are given powers to approve the formation or amalgamation of Charitable Incorporated Organisations (CIOs).[171]

153. The Bill also gives the Commission greater powers in relation to cy-pres.[172] The removal of the presumption of public benefit and plans for the Commission to carry out public character tests also place more emphasis on the Commission's powers of registering charities and removing them from the register.

Evidence

154. Many respondents considered that the Commission's new powers should be accompanied by greater accountability to the sector. A range of mechanisms were proposed, including:

a) a provision in the Bill requiring the Commission to act proportionately and fairly;

b) an improved appeal mechanism;

c) better distinction between advice and regulation; and

d) improved consultation and representation.

155. Respondents who took this view included the NCVO and we discuss their ideas later on (paragraphs 161-9). A second group of respondents welcomed the increase in the Commission's powers and, in some cases, thought the Commission should have greater powers still. Cancer Research UK, for example, told us:

"We do not consider that the 'Public Confidence' objective has been adequately met by the powers which have been bestowed upon the Charity Commission".[173]

156. They thought that the Commission should be given further powers to deal with fraudulent fund-raising and to stop people using the term "charity" for non-charitable purposes.[174] The Myasthenia Gravis Association told us:

"… we welcome the strengthening of the regulatory function as it affects the issue of public confidence in charities which is very important to us as a fund-raising charity… the powers which are given to the Commission in the Bill are reasonable… and… there seems to be in the Bill… sufficient protection".[175]

157. A third group opposed some of the Commission's new powers. The Thalidomide Trust expressed concern about the Bill's proposals to allow the Commission to give directions to trustees and to direct the appropriation of property:

"It is unclear what situations are envisaged that would justify giving such draconian powers to the Commission and especially what their effects may be when taken in conjunction with the Commission objectives …these provisions could result in the award of unconfined, undefined and apparently arbitrary power to the Commission and we consider they should be reviewed".[176]

158. BTCV also opposed these powers and complained that they had been introduced to the Bill without any previous consultation.[177] In addition, BTCV opposed the proposed power to enter premises:

"This proposed section is premature. It is not many years since the Charity Commission investigated Iran Aid, a case in which we believe that had the Commission been successful in their attempt to seize the records then sixteen thousand beneficiaries of that charity would have been arrested and suffered the most inhumane punishments. We do not yet have sufficient confidence in the Charity Commission, the Commissioners or their investigations staff to wish to see them trusted with this important power, and we recommend that this section be omitted".[178]

159. The Charity Law Association told us that the Bill presents an opportunity to amend Section 8 of the 1993 Act to stipulate that the Charity Commission can only open enquiries where it has reasonable grounds to do so and is obliged to give the charity a statement of those reasonable grounds.[179]

160. We recommend that, when exercising its powers to conduct inquiries under section 8 of the Charities Act 1993, the Commission should be required to tell the charity concerned why it is doing so, subject to any safeguards necessary to protect sources of information or to prevent delay in the inquiry.

Objective for the Charity Commission to act proportionately

Current position

161. Under current charities legislation, there is no specific objective set out for the Charity Commission to act proportionately and reasonably, but such a requirement is placed on all public bodies by common law.

Draft Bill changes

162. The draft Bill lays down a number of regulatory objectives for the Charity Commission at clause 5, but these do not include such an objective.

Evidence

163. NCVO, in oral evidence to us, expressed concern that the powers of the Commission were being extended in the Bill and yet there was no constraint on the exercise of those powers:

"Our concern is that there is no way in which a charity has redress against a decision by the Commission which is stifling citizen engagement by advice being interpreted as regulation. There is nothing in the Bill which gives a charity the right, if you like, to appeal against the behaviour of the regulator".[180]

164. To address this problem, NCVO advocated that the Bill should include a clause saying that the Charity Commission should exercise its powers "in a reasonable, proportionate and judicious manner",[181] although they made it clear that it was important that such a clause should be backed up by an appeals tribunal which could enforce it.[182] If such a clause were included in the Bill, with an appropriate appeals mechanism, then, said NCVO, "that would satisfy us",[183] meaning, we took it, that it would satisfy their concerns for proper redress by charities against the Commission. ACEVO supported this proposal, although they emphasised that they saw the Commission as being a powerful tool to aid the sector and thought that it was probably not helpful to be very prescriptive about the exercise of the Commission's powers.[184]

165. We also received written evidence from the Charity Law Association making a similar proposal. "In our view," they told us, "the Bill must contain a provision obliging the Charity Commission to use its powers proportionately, fairly and in accordance with the principles of natural justice (particularly in view of its new powers in part 2 Chapter 5 of the Bill)".[185]

166. The Association for Charities and BTCV also favoured a provision to this effect in the Bill.[186] The Institute of Chartered Secretaries & Administrators said that they would expect the Commission to "be encouraged to act proportionately and fairly" in the regulation of charities.[187]

167. We questioned the Minister about this proposal. She did not accept it, on the grounds that "[it] is a duty of all public bodies at all times, to act proportionately and fairly, and if you put that in one kind of legislation, it would imply that in other bits of legislation you were expecting people to be disproportionate and unfair".[188] It would in fact "imply that public bodies could do things which were unreasonable in other circumstances, which is not true".[189] She told us that she had "been extensively advised about this on many occasions, not merely in relation to this Bill".[190]

Conclusion

168. We are not persuaded by the Minister's advice that if such a provision were included in the Bill it would cast doubts about whether other public bodies were still under an obligation to act proportionately. As for the argument that the provision would not change the existing position in law, we conclude that the provision would at least provide clarification and reassurance to charities. We believe it essential for the health and vitality of the charitable sector as a cornerstone of a modern civil society to be free from unnecessary and potentially harmful regulation.

169. We therefore recommend that the Bill should include a provision obliging the Charity Commission to use its powers proportionately, fairly and reasonably.

Membership Charities

170. The Charity Commission has no specific powers in relation to the members of charities; their powers are restricted to the trustees. The Charity Law Association told us that their members often found themselves in the position of advising charities that need to make changes requiring resolutions of the membership but which have no up to date list of members. The situation would be eased if the Charity Commission had power to determine, on the application of a charity, who are the members of the charity.[191] It is the experience of the Charity Commission that many charity disputes have their origins in conflicts about membership.[192]

171. We recommend that the Charity Commission be given the power to determine, either on the application of the charity or after the opening of a section 8 inquiry into the running of a charity, who the members of a charity are.

Accountability of the Charity Commission

Current position

172. The Charity Commission is a Non-Ministerial Government Department. This means that Ministers have no legal power to give directions to the Commission. Only the courts can overturn decisions taken by the Commission.[193] The Commission is accountable to Parliament in the following ways:

a) under the Charities Act 1993, it must report annually to the Secretary of State and lay a copy of the report before Parliament;[194]

b) its accounts are annually audited by the National Audit Office (NAO);

c) it is subject to periodic Value for Money examinations by the NAO and Public Accounts Committee, which lead to published reports;[195] and

d) it can be called to give oral or written evidence to the departmental select committee responsible for monitoring the expenditure, policy and administration of the parent department, the Home Office.

Draft Bill changes

173. Clause 5 of the draft Bill sets the Commission a number of regulatory objectives, general functions and duties. These are more detailed than the Commission's general function and general objects under the current position, but are still broadly drawn. The Commission will remain a Non-Ministerial Government Department, but clause 4(1) of the draft Bill says that its functions are to be performed "on behalf of the Crown". Under clause 5, the Commission must comply, so far as is reasonably practicable, with any request made by a Minister for information or advice on any matter relating to any of its functions.

Evidence

174. We have considered whether the Charity Commission should communicate more effectively with the public and be more accountable. The evidence we received raised three key questions on accountability:

a) Is the Charity Commission sufficiently independent of the Government?

b) Is the Commission adequately accountable to Parliament?

c) Is it adequately accountable to the sector?

Independence from Government

175. The Strategy Unit review, speaking of the Commission's present status as a Non-Ministerial Government Department, said:

"… only the court can overturn the Commission's decisions in exercise of its statutory powers. Ministers have no capacity to direct or reverse any of the Commission's decisions. This insulation from political interests is a strength of the current system and is greatly valued by charities. They see it as a safeguard against charity and the advantages attached to it, becoming a political football".[196]

176. A number of respondents, however, were concerned that the Commission's independence would be seriously compromised by the clause in the Bill saying that the Commission would perform its functions "on behalf of the Crown". The Charity Law Association saw this as giving the appearance, at least, of turning the Commission into a Government Department and they objected to the clause on the following grounds:

"If the Charity Commission is a Government Department, then it is likely to lessen, rather than increase, public confidence in charities. It will be seen as susceptible to being used by the Government to further its own policies. Indeed, it is conceivable that this is in fact what the relationship between the Commission and the Government would develop into; it may not only be a matter of perception. To avoid this, the Commission needs to be - and to be seen as - an entity established to serve the public benefit and uphold the law, not beholden to the Government and outside the sphere of governmental policy considerations.

"In some aspects of its work (such as making schemes and orders for charities and, under the Bill, relieving trustees of personal liability), the Commission has judicial functions. If the Commission is a Government Department, then the Commission's role will include both executive and judicial functions, contrary to the principle of the separation of powers".[197]

177. The Charities Finance Directors Group (CFDG) wanted reassurance that the clause did not "represent a risk of greater political interference".[198] The solicitors, Bircham Dyson Bell, said "there is a risk that making the Commission an incorporated Crown body will prejudice its quasi-judicial functions, a potentially dangerous position".[199] NCVO asked what the implications of the clause would be for judicial acts (such as scheme-making) undertaken by the Commission on behalf of the High Court, since the Crown has no functions in these areas.[200]

178. We put these concerns to the Minister and suggested that a statement be made on the face of the Bill saying that the Charity Commission is an independent regulator and making clear what the relationship between the Commission and Ministers would be. The Minister told us that she was open-minded about this suggestion and that if the matter was not already sufficiently clear - although she believed it was - then "we will take the view of the Committee".[201]

179. We share the unease of the respondents who expressed concern about this question. We are unclear about what the expression "on behalf of the Crown" means in this context and are concerned that it might be used to infringe on the Commission's (and charities') independence.

180. We recommend that clause 4(1) (insertion 1A(3)), containing the phrase "on behalf of the Crown", should be removed and replaced by a clear statement that the Commission shall be a body independent of Government.

Accountability to Parliament

181. The other side of independence from Government is that the Commission should be accountable to Parliament. We were concerned that more needs to be done in this regard. There seems to us to be an 'accountability gap'.

182. The Commission submits its annual report to Parliament through the Secretary of State and its accounts are audited annually by the NAO, but the annual report is not systematically examined, and the audit of the accounts only scrutinises financial propriety and regularity. The main form of scrutiny of the Commission's overall performance - its efficiency and effectiveness - is through periodic value for money examinations of the Commission by the NAO and the Public Accounts Committee (PAC), but these are relatively infrequent: the PAC has examined the Commission on four occasions over the past 17 years, in 1988, 1991, 1998 and 2002.[202]

183. On the first three occasions the Committee found severe short-comings.[203] On the last occasion, the PAC found that there had been significant improvement but that much remained to be done. For example, the Commission had previously met only 10 out of 26 targets covering their core activities; in 2000-01, they met 23 out of 32 targets.[204] Since that date improvement had continued with 9 out of 11 targets met in 2001-2002[205], 15 out of 17 met in 2002-2003[206] and 16 out of 19 met in 2003-2004.[207]

184. We are concerned that, since the Commission have sometimes struggled to meet their current responsibilities, they might not be equal to the new ones the draft Bill would give them, particularly the public character checks. When taking evidence from the Home Office, we asked whether the Commission were equal to their new responsibilities. The Minister told us, "I do not think we are there yet but with the changes the Bill sets out… we will be there".[208]

185. In taking oral evidence from the Charity Commission, we gained the impression that this was a body - unlike many others in receipt of public funds - which was unaccustomed to explaining its workings in public. We have come to the view that more regular appearances before parliamentary committees might be mutually beneficial. This could take a variety of forms - the Public Accounts Committee, the Home Affairs Committee or a temporary Committee in the Lords - but the important factor would be a regular evidence session on the Commission's annual report.

186. We therefore recommend that the Home Affairs Select Committee have an annual evidence session with the Charity Commission. We recommend that the annual report of the Charity Commission be debated in each House every year.

187. Accountability to Parliament is a means of securing accountability to the public. The Committee noted recommendations in the Strategy Unit report that the Charity Commission should open its Board meetings to the general public and, in order to demonstrate responsiveness to public views, should signpost on its website other appropriate bodies that members of the public should contact if they wish to complain about a particular aspect of a charity's work or mode of conduct.[209] It understands that the Charity Commission has already implemented the first of these recommendations and that they are working on the second. This is very welcome.

Accountability to the sector

188. Several respondents told us that, since the Commission was acquiring new regulatory powers, it was important that the charity sector should be more listened to about the exercise of those powers: "No more regulation without representation" might have been their motto. Governance Works told us:

"Because the Bill does give the Charity Commission very wide-ranging powers - and I do not have a problem with that, but it does have wide-ranging powers - it does feel as if the sector should have an opportunity at some point to comment on the extent to which the Commission has met its obligations as a regulatory body and has fulfilled its function as a regulatory body".[210]

189. In response to a question on whether this could be achieved through representation on the Commission's Board, Governance Works replied:

"That would be one route for it, but it may be that it did not necessarily go that far. I had assumed that people who were appointed to that board would have some charitable background and, in that sense, would be representing the sector or would have some contacts with the sector. It may be more to do with the Charity Commission being obliged to consult on some sort of regulatory basis with the sector on their own performance and effectiveness".[211]

190. Volunteering England told us they agreed with this: "I am not sure exactly of the mechanisms, but I think to try to build in the notion of both consultation with the sector and accountability to the sector would be a very good move".[212]

191. We had sympathy with these ideas, although the Committee were aware they could be taken too far. There is a risk of "agency capture"; in the words of the Strategy Unit review, "The regulator should be independent both of day-to-day interference and of the charitable sector itself".[213] A reasonable compromise, we believe, would be limited sector representation on the Commission's Board.

192. We recommend that there should be a greater number of people on the Charity Commission board with experience and knowledge of the charitable sector, in order to reflect its great diversity, particularly at grass roots level. This should be accompanied by adequate safeguards against conflicts of interest.

Advice and regulation

Current position

193. Section 29(1) of the Charities Act 1993 says the Charity Commission "may on the written application of any charity trustee give him their opinion or advice on any matter affecting the performance of his duties as such". With some special exceptions, a trustee who follows such advice is deemed to be acting in accordance with his trust,[214] but the advice is quite distinct from the exercise of the Commission's regulatory powers and trustees are at liberty not to follow it.

194. The Strategy Unit review in 2002 found that:

"… the blurring of boundaries between the Commission's advisory and regulatory roles continues to cause confusion among charities and other key stakeholders.

"The Commission's primary function is, and should be, a regulatory one… Nor does the Commission have the resources to sustain an advisory capacity as extensive as the statutory phrasing… suggests. It should retain an advisory role but this should be more precisely defined and focused on the issues over which it has regulatory responsibility".[215]

195. The review's recommendation, which was accepted by the Government,[216] stated that

"The Charity Commission's advisory role should be defined in statute to give a clearer focus on regulatory issues".[217]

Draft Bill changes

196. Clause 20 of the draft Bill, contrary to the Strategy Unit's recommendation, clarifies and legitimises the wide power of the Commission to give advice as follows:

a) They are allowed to give advice not just to trustees, but to any employee of a charity.

b) They are also allowed to give whatever advice or guidance they think appropriate on the administration of charities (that is, they do not need to be asked) to a particular charity or a group of charities or charities generally. And they can give this advice in whatever way they think is appropriate.

Evidence

197. A large number of witnesses told us that they were concerned that there was an inadequate distinction between advice and regulation issued by the Charity Commission. Charities - particularly small charities - were unclear whether they were being advised to do something by the Commission or directed. The result was that, to be on the safe side, they treated advice as if it was direction. This was significantly eroding the autonomy of the sector and increasing the degree of regulation. NCVO told us:

"[The Charity Commission] need to make it clear to charities, particularly the smaller charities, when they are giving advice and when it is a must-do because if you are not clear about that, the smaller charities will interpret advice by the Commission as a must-do and the potential creep if that is not always clear is enormous… the Commission need to be absolutely crystal clear when they are advising trustees of when it is a must-do and when it is a good practice should-do… we would not want to see spontaneous, citizen-led activity stifled by a regulatory regime which actually, when it gave advice, implied that you could or could not do certain things which had the force of statute when it did not…"[218]

198. There was also concern about the way that the draft Bill proposed to define the Commission's advisory powers. The Association of Charitable Foundations told us that they feared these very wide powers might "end up blurring the boundaries between the Charity Commission's advisory and regulatory roles even more than to date".[219]

199. NCVO said that, while the Commission's role of giving advice on regulation should be retained and even strengthened, wider advice to charities should be independent of the Commission and would more appropriately be carried out by umbrella and resource bodies owned by the sector,[220] a view supported by Volunteering England.[221] Six of the eight witnesses whom we heard from the small charity sector also thought that the functions of advice and regulation should be separated, either by having two different organisations delivering advice and regulation, or two very clearly segregated arms of the Commission separately responsible for each function.[222]

200. However, NACVS, which supports local Councils for Voluntary Service, (a key small charities umbrella) and Minority Rights Group International thought the solution to the blurred line between advice and regulation lay in the Commission's making a clearer differentiation between the two categories - through the use of different letterheads, for example - and that separation of the Commission's advice function was not necessary.

201. The Charity Commission itself acknowledged that its power to give advice and guidance was a concern in the sector and that the power was too widely drawn. It said it had worked with the Home Office to devise a formula to confine the power within acceptable limits but this had proved difficult.[223] They told us:

"In the past the Commission has been rather indiscriminate in terms of its publications between specific legal requirements and matters which go towards carrying out those requirements which might be called at one end best practice. It is something which we will attend to in the future. It is not only the publications of course, it is the way our Commission staff [m]ay approach their work. Clearly, for the Commission to distinguish between those two areas is very important for a Regulator and it is something which we can do better…"[224]

202. The Commission, however, thought that it was best to retain the two functions within the same organisation because they complemented each other and provided the best framework for assisting trustees.[225] They said they had no objection to the Bill being strengthened to clarify the relationship between the regulatory and advisory roles.[226]

203. The Charity Commission and other witnesses proposed colour coding as a simple but effective method of ensuring that charities can distinguish between advice and instruction. In oral evidence the Charity Commission highlighted this as one way of helping to alleviate confusion:

"I think there are practical things we could do in terms of the way we present our advice indeed on our website and in our direct dealings with charities, even things that sound perhaps a little frilly but would be useful, for instance colour coding what is advice and what is mandatory".[227]

204. The idea was also put forward by the National Association of Councils for Voluntary Service (NACVS):

"I almost feel that if the Charity Commission are writing to you, they should have two different colours of letterhead, one being advice and the other being, 'You must do this'. In other situations you get told, 'These are instructions which you must comply with and this is guidance on what you might choose to do', and I am thinking of Ofsted inspections and the reports to school governors, where they say, 'You must do these things', or, 'We would suggest that you look at these areas in order to improve your practice'."[228]

205. NACVS said that 87% of its members valued the Commission's advisory role,[229] a view echoed by ACEVO, who told us that the Commission's role in giving advice and guidance was a part of the Commission's important strategic and enabling function in the sector.[230] The usefulness of the Commission's advice was conceded even by critics such as NCVO and the Association of Charitable Foundations.[231] The Public Accounts Committee, when it examined the Commission's performance in 2002, found "the Commission's advice and support activities are well regarded by charities overall".[232]

Conclusion

206. The Committee is concerned that the draft Bill proposes to give clear statutory recognition to the Charity Commission's wide advisory role, contrary to the Strategy Unit review's recommendation, which the Government had accepted. However, the evidence, though conflicting, does lend support to the claim that the Commission's advice function is widely regarded as useful and important. The principal problem seems to be that advice is not clearly differentiated from regulatory directives, a problem which can be addressed through less drastic and disruptive means than the suggestion of moving the advice function out of house: for example, all communications can be clearly headed to show whether they give advice or directives, advisory documents could carry clear notifications that trustees were free not to comply with the advice shown, and so on. Colour coding will not be the only means by which the Charity Commission should seek to ensure that the distinction between advice and regulation is clear. However, we consider that it is an easily implemented, cost-efficient and effective tool in helping to do so. If this problem can be solved, then the risk attendant on the Commission's wide power to give advice would be acceptable.

207. We recommend that the Charity Commission should take steps to differentiate between its advisory and regulatory functions and make clear in all its communications the distinction between advice and instructions.

Adequacy of Commission's resources

208. The draft Bill, if enacted, would impose heavy additional responsibilities on the Charity Commission. These would include:

a) registering excepted charities with incomes above £100,000;

b) registering exempt charities;

c) carrying out the programme of public character checks; and

d) defending appeals to the independent Tribunal.

209. The draft Bill contains a Regulatory Impact Assessment (RIA) which estimates the costs it would give rise to. This is deficient in certain respects: it contains no estimate for the cost of the public character checks the Commission will be carrying out or for the cost of the Commission's enhanced advice function under the Bill. The Commission updated these estimates in evidence to the Committee. The updated estimates are shown in the table on the next page.[233]

One-off costs Continuing costs (cost per year)

Independent tribunal £0.200m £0.200m

Excepted charities: registration £0.500m

Excepted charities: regulation and monitoring £0.225m

Exempt charities: registration £0.750m

Exempt charities: regulation and monitoring £0.345m

Public character checks £0.250m £0.250m

TOTAL £1.700m £1.020m

Data Source: Supplementary Memorandum from the Charity Commission, Ev 224, paras 2-4

210. The Commission also told us that £0.3m is already being applied to meeting the costs of the Bill - this has been met from efficiency savings or previously identified Spending Review 2002 funding. Further funding from the Spending Review 2002 has been allocated for pre-legislative changes (such as new governance arrangements for the Commission): £0.61m already implemented and £0.95m to be implemented.

211. These estimates would be vulnerable to changes in certain assumptions:

a) The Commission has estimated the costs of the Tribunal on the basis of 50 cases a year being brought to the Tribunal. However, the RIA notes that estimates of the number of cases vary between 35 and 2,500. While a caseload in the thousands would be improbable, if 100 or 150 cases went to the Tribunal a year, the cost estimates above would be disturbed. Additionally, the estimates assume cases before the Tribunal will last on average seven days at most. But the RIA concedes: "In terms of the length of each case, there is little evidence to work upon… there is no established time-scale for cases".[234]

b) The number of exempt and excepted charities the Commission would have to register and monitor under the draft Bill.

212. The Home Office told us that the Charity Commission's budget for the current year and the Commission's 2004 Spending Review settlement were as shown in the following table.[235]

Year Cash budget (£m) Annual Increase

2004-05 29 0%

2005-06 31 6%

2006-07 31 0%

2007-08 31 0%

213. The Home Office added that they were "confident that the Commission has sufficient resources to implement the Bill effectively".[236] They also told us that:

"The Charity Commission will absorb the costs of implementing the Charities Bill within its resource allocation, prioritising its use of resources as necessary to ensure effective implementation…

"The recently appointed Chair and Chief Executive will shortly conduct a strategic review of the organisation, to determine its strategic direction and equip it effectively to implement the measures of the Charities Bill and to discharge its future responsibilities. This will be a challenging period for the Commission, but it does provide opportunities for it to develop innovative solutions and improve its focus on frontline delivery".[237]

214. We have seen a paper, prepared for the Charity Law Association by Dr Julia Black of the London School of Economics, comparing the legal structures, powers and accountability of the Charity Commission with three other regulatory bodies: the Office of the Scottish Charities Regulator (OSCR), the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). In general, this comparison did not show the Charity Commission to a disadvantage, but there were some key differences. The Charity Commission has less flexibility in the appointment of staff (Ministers approve numbers and terms of staff) than the FSA; unlike the OFT, the Commission is not statutorily required to have a management statement or to have regard to guidance for public bodies or to follow the principles of good regulation; unlike the FSA, the Commission is not required to conduct cost benefit analyses for all rules and guidance.

215. The evidence we have heard has given us reason to question whether the Charity Commission is properly organised and properly resourced to make it effective in its new tasks. We recommend that professional advice be sought to review the ability of the Charity Commission to meet its new responsibilities under the draft Bill and in particular the quality of the processes, methods and organisation; the calibre of its staff; its resources; and whether the Commission should, like other regulators, be able to determine the number and conditions of its own staff.

127 Charities Act 1993, s. 43(1) Back

128 Ibid, s.43(3) Back

129 Companies Act 1985, ss. 249A-249E Back

130 Ev 430, para 1.4 Back

131 Ev 352, para 3, Ev 126, section 2.4; Ev 594, para 3(vi) Back

132 Ev 78, para 42 Back

133 Ev 358, para 3 Back

134 See p132 of Schedule (points made about the draft Bill) clause 22(2)(1) Back

135 Ev 514, para 5 Back

136 See p133 of Schedule (points made about the draft Bill) clause 22(5)(3A) Back

137 Q10 (Dr Low) Back

138 Ev 430, para 1.3 Back