Draft Protection of Charities Bill - Joint Committee on the Draft Protection of Charities Bill Contents


1  Introduction

Background to the Committee's inquiry

Establishment and role of the Committee

1. This is the report of a Joint Committee established by the House of Commons and the House of Lords in November 2014. The Committee was instructed to conduct pre-legislative scrutiny of the Government's Draft Protection of Charities Bill, published on 22 October 2014. We were set a deadline for reporting on the draft Bill by 28 February 2015.

2. The process of pre-legislative scrutiny has evolved and embedded itself under the last two governments. This has been a wholly welcome development, bringing together members from all sides of both Houses to scrutinise the principle and the detail of draft legislation. The process allows interested parties from outside Parliament to engage at the earliest stage with Parliamentary scrutiny and helps to inform members at the outset of the likely consequences of implementing the proposals. It also gives the Government the chance to hear the preliminary views of Parliament at a stage when policy can still be amended before the introduction of a Bill proper.

3. The timetable set for this Committee's scrutiny work was tight, particularly bearing in mind its proximity to the end of the current Parliament. For this reason our timetable of evidence has also been necessarily tight. We were therefore dependent on and are grateful to those who gave evidence in person during the 13 evidence sessions held in November, December and January and for the 35 witnesses who submitted written evidence in response to our Call for Evidence, which is included at Appendix 2. We were assisted in our work by a specialist adviser, Stephanie Biden, to whom we are also grateful. The members of the Joint Committee are listed in the inside cover of this Report and their interests relevant to the inquiry are listed in Appendix 1.

A BRIEF OVERVIEW OF THE CURRENT REGULATORY FRAMEWORK OF THE CHARITY SECTOR

4. The main piece of legislation relating to charities at present is the Charities Act 2011, which came into effect on 14 March 2012. This consolidation Act has replaced much (but not all) of earlier charities legislation, including much of the Charities Act 2006. The draft Bill would exclusively amend the 2011 Act.

5. At the centre of the draft Bill are the role, functions and powers of the Charity Commission ("the Commission"). The Commission's core roles are to register and regulate charities in England and Wales, with separate regimes operating in Scotland (regulated by the Office of the Scottish Charity Regulator) and Northern Ireland (regulated by the Charity Commission for Northern Ireland). Its remit extends to excepted charities (which are unregistered) as well as to registered charities, and to funds raised for charitable purposes such as charitable appeals. The Commission's powers may also impact on exempt charities.[1] The Commission is a non-ministerial department accountable directly to Parliament. It has five core statutory objectives, which are set out in the Charities Act 2011. These objectives are as follows:

·  Objective 1—Public confidence: to increase public trust and confidence in charities;

·  Objective 2—Public benefit: to promote awareness and understanding of the operation of the public benefit requirement;

·  Objective 3—Compliance: to promote compliance by charity trustees with their legal obligations in exercising control and management of the administration of their charities;

·  Objective 4—Charitable resources: to promote the effective use of charitable resources; and

·  Objective 5—Accountability: to enhance the accountability of charities to donors, beneficiaries and the general public.

6. The Commission also has six general functions and six general duties. Its general functions include determining whether institutions are or are not charities; encouraging and facilitating the better administration of charities; identifying and investigating apparent misconduct or mismanagement in the administration of charities; and taking appropriate remedial or protective action in such cases. Its general duties include performing its functions in a way that: is compatible with its objectives and appropriate for meeting those objectives; encourages charitable giving and voluntary participation; is resource efficient and economic; has regard to best regulatory practice, including proportionate, accountable, consistent, transparent and targeted operation; facilitates innovation by or on behalf of charities; and has regard to generally accepted principles of good corporate governance.

7. In fulfilling its role, the Commission provides guidance to charities; performs a registration function requiring charities to provide information; and, where necessary, it resolves governance issues using legal powers to make Schemes or Orders (for example, authorising trustees to carry out particular actions, appointing new trustees and amending governing documents). Its regulatory focus is on promoting compliance by the trustees of charities with their legal obligations. The Commission has a number of ways it can investigate concerns about a charity, including suspected abuse or mismanagement. These investigations can take the form of requests for specified information, monitoring of a charity's activities and, in the most serious cases, statutory inquiries with associated enforcement powers.

8. The Commission is headed by a Chief Executive, currently Paula Sussex, and a Chairman, currently William Shawcross. In 2013-14, the Commission had an annual budget of £22.7m. The National Audit Office has stated that, between 2007-08 and 2013-14, the Commission's budget fell by 40 % in real terms but that over this period the number of main registered charities remained fairly stable as did the annual income of the sector.[2] It employs 323 people, who are spread between four offices in Liverpool, London, Newport and Taunton.[3]

A BRIEF OVERVIEW OF THE EVENTS LEADING UP TO THE DRAFT BILL

9. In July 2012, Lord Hodgson of Astley Abbotts published his statutory post-legislative review of the 2006 Act, Trusted and Independent: Giving Charity Back to Charities—Review of the Charities Act 2006.[4] Lord Hodgson concluded that the Charity Commission should focus on its core regulatory role, arguing that, "In a time of significantly reduced resources, the 'friend' side of the Commission's work can only be seen as an extra, and its regulatory role must come to the fore" and that its priority should be "proactively identifying and tackling fraud". Among other things, the review recommended that the Government consider whether and how to widen the types of criminal offences disqualifying individuals from charity trusteeship, taking into account the need to support rehabilitation of former offenders.

10. In 2013 the Public Administration Select Committee (PASC) carried out post-legislative scrutiny of the 2006 Act. Its report, The role of the Charity Commission and "public benefit": Post-legislative scrutiny of the Charities Act 2006,[5] made wide-ranging recommendations including that, in line with Lord Hodgson's recommendations, the statutory objectives for the Charity Commission should be revised to allow the Commission to concentrate its limited resources on regulation.

11. In its single response[6] to Lord Hodgson's review and the PASC report, the Government supported both reports' calls for the Charity Commission to focus its resources on its core statutory objectives, suggesting that legislation would not be necessary to enable this.

12. The Law Commission has incorporated the more technical aspects of the recommendations of the reviews by Lord Hodgson and PASC into its project on charity law. The first, accelerated, phase of this project began in April 2014 with a consultation on social investment by charities, the findings of which were published on 24 September 2014. The Law Commission is expected to issue a further consultation in February 2015 on other technical aspects of charities law, including the powers of the Charity Tribunal and issues surrounding the mergers of charities.[7]

13. In June 2013, the Public Accounts Committee (PAC) published a report, Charity Commission: the Cup Trust and tax avoidance,[8] which was critical of the Charity Commission's handling of an investigation into the Cup Trust, a fund run by a single corporate trustee registered in the British Virgin Islands. The case led PAC to criticise what it saw as sustained and "severe shortcomings in the Commission's performance, particularly in relation to investigation and enforcement." PAC noted that, despite its calls for more use to be made of the Commission's existing powers, "still the Commission hardly uses these powers at all. In the last four years it has only removed one trustee, only suspended four trustees or officers of charities, and only appointed interim managers of charities on five occasions". Although PAC acknowledged the resource restraints on the Commission, it concluded that it was "not convinced that the Commission is targeting its available resources to best effect."[9]

14. In February 2014, PAC conducted a follow-up hearing with the Commission after which the Chair, the Rt Hon Margaret Hodge MP, remarked that the Commission was "still performing poorly", had "no coherent strategy" and was "not fit for purpose".[10]

15. The 2013 PAC report was followed by a review by the National Audit Office (NAO) of the Commission's Cup Trust investigation[11] as well as a wider review by the NAO of The regulatory effectiveness of the Charity Commission.[12] Both reports were published in December 2013. The main conclusion of the wider report was that the Charity Commission was not taking "tough enough action" to identify and tackle the abuse of charitable status, which "undermines the Commission's ability to meet its statutory objective to increase public trust and confidence in charities".[13] The report suggested that the Commission needed to make greater use of its existing statutory powers in order to maintain public confidence and to develop a more robust approach to identify and deal with wrongdoing by trustees. As well as these operational recommendations, the NAO identified a number of areas where the Commission's existing powers were either deficient or where there were barriers to their effective use. The report recommended that the Cabinet Office should "assist the Commission in securing legislative changes to address gaps and deficiencies in the Commission's powers." On 22 January 2015, the National Audit Office produced a follow-up report on the regulatory effectiveness of the Commission, which is considered in Chapter 2.

16. Also in December 2013, alongside the publication of the NAO reports, the Cabinet Office published its Consultation on Extending the Charity Commission's Powers to Tackle Abuse in Charities.[14] This consultation identified four areas of potential weakness in the Charity Commission's existing compliance powers:

a)  The existing criteria for the automatic disqualification of trustees, picking up on Lord Hodgson's recommendation in this area. The consultation proposed additional offences which might result in automatic disqualification;

b)  The Commission's lack of power to disqualify a person from acting as a trustee where their conduct means that they are not fit to act. The consultation referred to the loophole identified by the Commission and considered by the NAO: that the requirement for the Commission to give notice of its intention to remove a trustee provides that individual with the opportunity to resign (thereby avoiding removal and its consequences). This leaves them free, in future, to act as a trustee for another charity;

c)  The Commission's lack of power to close down a charity which has been involved in abuse, which results from the prohibition on the Commission interfering in the running of charities. Currently, for example, the Commission is unable to direct trustees to transfer any assets to another charity which exists for similar purposes; and

d)  The limitation on some of the Commission's enforcement powers only to cases where there is a combination of misconduct or mismanagement and a risk to the charity's property. In some cases the Commission may only have reliable information on one factor and be unable to act.

17. The Cabinet Office consultation provided a number of case studies designed to highlight these weaknesses and, within the four general areas, seventeen specific proposals were canvassed. The Charity Commission had asked for and supported the proposed measures.

18. On 22 October 2014 the results of the Cabinet Office's consultation were published in a Command Paper[15] which also contained the draft Bill, explanatory notes and an accompanying impact assessment. On the day of the publication of the Command Paper, the Prime Minister announced a further £8m in funding for the Charity Commission over three years "to help re-focus its regulatory activity on proactive monitoring and enforcement in the highest risk areas like abuse of charities for terrorist and other criminal purposes, such as tax avoidance and fraud".[16]

19. In parallel to the reports and reviews described above, concerns over gaps and inadequacies in the Commission's powers in the specific context of tackling extremism have been another driver for reform. In December 2013, a report by the Government's Extremism Task Force recommended "consulting on new legislation to strengthen the powers of the Charity Commission: these powers will help us tackle extremism, as well as other abuses of charitable status such as tax avoidance and fraud."[17] The Home Affairs Select Committee (HAC) subsequently produced its own report, Counter-terrorism, which recommended that the Charity Commission "be granted extra resources and stronger legal powers to counter the abuse of charities by terrorists." HAC said that the Commission should "be able to undertake unannounced inspections in order to audit [charities'] accounts."[18]

The provisions in the draft Bill

20. The draft Bill is short, at twelve operative clauses, and exclusively amends parts of the much larger Charities Act 2011. These amendments relate to the removal and disqualification of charity trustees (section 178 to section 184 of the 2011 Act) and the powers of the Charity Commission to act for the protection of charity (section 76 to section 87). The draft Bill contains a provision for a review of the Act at least once every five years following enactment (Clause 12). The below table shows which of the proposals in the Cabinet Office consultation paper have been reflected in the draft Bill.
Draft Protection of Charities Bill—Summary of proposals and clauses in draft Bill
ThemeProposals consulted on in December 2013 Clause number NotesRelevant chapter of this report
Charity Trustees—disqualification 1. Automatic disqualification from trusteeship 8(a) Amends section 178[19] and inserts section 178A to provide for additional criteria giving rise to automatic disqualification from acting as a charity trustee;

(b) Additional criteria include terrorism, money laundering and bribery offences, a finding of contempt and a finding by the High Court of disobedience of an order or direction of the Commission;

(c) Criteria may be amended by affirmative regulations.

Chapter 5 (paragraphs 164 to 208)
2. New power for Charity Commission to disqualify a person from being charity trustee or trustee for a charity 9 (and 10)(a) Inserts section 181A to provide Commission may by order disqualify person in relation to all or specified charities;

(b) Criteria as to person's behaviour which must be satisfied for disqualification—may be amended by affirmative regulations;

(c) Inserts sections 181B-D addressing disqualification order procedures, duration, impact and variation of disqualification;

(d) Clause 10 makes consequential amendments (dealing with record of disqualification) to section 182 to deal with disqualification and removal pursuant to the new power.

Chapter 5 (paragraphs 209 to 256) and Chapter 6 (paragraphs 272 to 274)
Charity Trustees—additional powers relating to trustee disqualification 3. Removal from trustee body and notification of other trustees of disqualification 5(a) Inserts section 79A providing for removal by order of the Commission;

(b) Amendment of section 82(1) to include obligation on Commission to notify other trustees of intention to exercise section 79A powers;

(c) Amendments to section 89 notice requirements to provide exceptions for removal orders.

Chapter 4 (paragraphs 130 and 131)
4. Dealing with disqualification where only one or two trustees remain. XNot proceeded with—viewed as "rare practical problem" which can't be dealt with by legislation alone. Chapter 5 (paras 257 to 259)
5. Preventing disqualified trustees from acting in another position of power in a charity. XNot proceeded with—may be introduced at a later stage as Commission concerned as to possible loophole but Government concerns as to impact on ability to earn a livelihood and human rights implications. Chapter 5 (paragraphs 260 to 270)
6. Preventing disqualified person who is director of corporate trustee of a charity from participating in decisions about the charity's affairs. 11Inserts section 184A to ensure that, in applying sections 183 and 184 (civil and criminal consequences of acting whilst disqualified), person who is not a charity trustee or trustee of a charity is treated as acting as one where they are a director of a corporate trustee and take part in any decision relating to the charity's administration. Chapter 6 (paragraphs 275 to 277)
7. Extending existing removal powers (re trustees and office holders) to enable their exercise where there is misconduct or mismanagement OR a need to protect charity property. X (but clause 4 makes changes to existing removal powers—see notes (b) and (c) ) (a) Test will remain as provided in existing section 79(1), (i.e. statutory inquiry has been opened and there is misconduct or mismanagement AND a risk to the charity's property) but section 79 will be substituted as additional changes are made by clause 4;

(b) Section 79(1) will become new section 79(3) and (4);

(c) Amended test relating to making of scheme for administration of charity in clause 4 which provides for substituted section 79(1) and (2);

(d) Amended test for making scheme as proposed for removal (i.e. statutory inquiry has been opened and there is misconduct or mismanagement OR a risk to the charity's property).

Chapter 4 (paragraphs 127 to 129)
8. Preventing trustee resignation as a means to avoid disqualification. 4(a) Substituted section 79(5) provides order for removal may be made even if person has resigned or otherwise ceased to hold office;

(b) Substituted section 79(6) provides disqualification powers in section 178(1) apply where trustee resigned or ceased to hold office prior to order for removal.

Chapter 4 (paragraphs 127 to 129)
9. Providing misconduct or mismanagement in any charity can be used as evidence (on removal of a trustee). 3(a) Inserts section 76A which applies where misconduct or mismanagement provisions in section 76 apply;

(b) Where person is involved in misconduct or mismanagement and Commission is satisfied as provided in section 76A(2), account may be taken of their conduct in relation to any other charity or more generally (section 76A(3)).

Chapter 4 (paragraphs 117 to 126)
Proposed changes to other Charity Commission compliance powers 10. Enabling the Commission to use its existing power to direct specific action by trustees or a charity when there is misconduct or mismanagement OR a risk to property so that the power may be exercised without an inquiry being open (as is presently required). XGovernment considers Commission's compliance powers should only be exercisable in the context of a statutory inquiry. Chapter 4 (paragraphs 146 to 150)
11. Extending existing powers to enable directions to be made to prevent acts of misconduct or mismanagement or acts in breach of fiduciary duty. XGovernment noted concerns of significant proportion of responders to consultation as to proportionality, impact on freedom of speech, inquiries being closed without examination of underlying issues and evidential burden required to secure fair use of power. Chapter 4 (paragraphs 151 to 155)
12. Providing power to direct application of charity money to another charity when individuals are unable to apply money properly (present power applies only where they are unwilling). 7Amends section 85. Chapter 4 (paragraphs 141 to 144)
13. Providing the Commission with direction-making powers (where an inquiry has been instigated) to restrict or prevent actions (as well as financial/land transactions) where the actions would amount to misconduct/mismanagement on the part of the trustees. XProposal not included at this stage but may be revisited at a later stage. Government expresses specific interest in any conclusions from pre-legislative scrutiny on this provision. Chapter 4 (paragraphs 151 to 155)
14. Extending existing power to enable Commission to direct a bank to notify it of certain movements on a bank account. XGovernment considers Commission would be unlikely to make use of this provision if it came with safeguards as provided for in the Proceeds of Crime Act 2002. Chapter 4 (paragraphs 156 to 162)
15. Providing that breach of Commission order or direction is an act of misconduct which can result in use of the Commission's other compliance powers including disqualification. 2(a) Amends section 76(1)(a) to make the position clear;

(b) Also provides for extension of duration of a suspension.

Chapter 4 (paragraphs 106 to 116)
16. Providing ability to issue official warnings to a charity, charity trustee or any trustee of a charity which, if not heeded, could result in the Commission using its other powers. 1Amendment to section 15 to include power. Chapter 3 (paragraphs 81 to 105)
New Power to direct a Charity to close down 17. Providing new power for the Commission to direct a charity to wind up and apply all its net assets for charitable purposes by direction or scheme where necessary. 6(a) New section 84A provides power to direct winding up;

(b) Amendments to section 20, 86(2) and Schedule 6 to take account of the new power.

Chapter 4 (paragraphs 132 to 140)

21. The remainder of this report considers the policy context around the draft Bill and then considers each of the provisions of the Bill in turn. If our recommendations were implemented, they would improve the draft Bill significantly. We urge any Government in the new Parliament to include them in any Bill which it decides to introduce.


1   There are around 165,000 registered charities and about 84,000 exempted and excepted charities. The effect of the categorisation of these groups of charities on the regulation of the charity sector is considered in Chapter 2. Back

2   National Audit Office, The Regulatory Effectiveness of the Charity Commission, HC 813, Session 2013-14, (4 December 2013): http://www.nao.org.uk/wp-content/uploads/2013/11/10297-001-Charity-Commission-Book.pdf [accessed 18 February 2015] Back

3   Charity Commission, About us: https://www.gov.uk/government/organisations/charity-commission/about [accessed 2 February 2015] Back

4   Cabinet Office, Trusted and Independent: Giving Charity Back to Charities:Review of the Charities Act 2006 (July 2012): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/79275/Charities-Act-Review-2006-report-Hodgson.pdf [accessed 6 February 2015] Back

5   Public Administration Select Committee, The role of the Charity Commission and "public benefit": Post-legislative scrutiny of the Charities Act 2006 (Third Report, Session 2013-14, HC 76) Back

6   Cabinet Office, Government Responses to: 1) The Public Administration Select Committee's Third Report of 2013-14: The role of the Charity Commission and "public benefit": Post-legislative scrutiny of the Charities Act 2006, 2) Lord Hodgson's statutory review of the Charities Act 2006: Trusted and Independent, Giving charity back to charities, Cm 8700, September 2013: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/237077/ Response-charities-legal-framework.pdf [accessed 6 February 2015] Back

7   For details of this forthcoming work, see the written evidence from Law Commission (PCB0027) Back

8   Public Accounts Committee, Charity Commission: the Cup Trust and tax avoidance (Seventh Report, Session 2013-14, HC 138) Back

9   Ibid. Back

10   Public Accounts Committee, 'Charity Commission not fit for purpose' (5 February 2014): http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/publication-of-report-tax-reliefs-on-charitable-donations/ [accessed 2 February 2015] Back

11   National Audit Office, The Cup Trust, HC 814, Session 2013-14 (4 December 2013): http://www.nao.org.uk/wp-content/uploads/2013/11/10299-001-Cup-Trust-Book1.pdf [accessed 18 February 2015] Back

12   National Audit Office, The Regulatory Effectiveness of the Charity Commission, HC 813, Session 2013-14, (4 December 2013): http://www.nao.org.uk/wp-content/uploads/2013/11/10297-001-Charity-Commission-Book.pdf [accessed 18 February 2015] Back

13   Ibid. Back

14   Cabinet Office, Consultation on extending the Charity Commission's Powers to Tackle Abuse in Charities (December 2013): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/263248/Consultation-on-Extending-the-Charity-Commissions-powers_4-December.pdf [accessed 2 February 2015]  Back

15   Cabinet Office, Draft Protection of Charities Bill, Cm 8954, October 2014: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/365710/43820_Cm_8954_web_accessible_Draft_protection_of_charities_bill.pdf [accessed 18 February 2015] Back

16   Prime Minister's Office, 10 Downing Street, Cabinet Office, New funding and powers to tackle abuse in the charity sector (22 October 2014): https://www.gov.uk/government/news/new-funding-and-powers-to-tackle-abuse-in-the-charity-sector [accessed 28 January 2015] Back

17   HM Government, Tackling extremism in the UK: Report from the Prime Minister's Task Force on Tackling Radicalisation and Extremism (December 2013): https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/263181/ETF_FINAL.pdf [accessed 28 January 2015] Back

18   Home Affairs Committee, Counter-terrorism (Seventeenth Report, Session 2013-14, HC 231) Back

19   References to sections are to sections of the Charities Act 2011. Back


 
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Prepared 25 February 2015