Briefing

Charities (Protection and Social Investment) Bill

Posted by: James Maloney | Date posted : 04/08/2015

It has not been straightforward to keep track of the Charities (Protection and Social Investment) Bill (the Bill) over the past few months.

The Bill, which at the time of writing is being debated in the House of Lords, was first published last October as the draft Protection of Charities Bill.  It followed a consultation held in December 2013 on strengthening the powers of the Charity Commission (the Commission).  This consultation and the Bill emerged from concerns about the use of charities to support terrorism and the concern that charities are used to avoid tax, most notoriously in the case of the Cup Trust, which led to criticism of the Commission by the National Audit Office and the Public Accounts Committee.

The Bill seeks to amend the parts of the Charities Act 2011 (the 2011 Act) relating to the Commission’s powers of removal and disqualification of charity trustees, and protection of charity property, most of which can only be exercised after the Commission has opened a formal inquiry.  It now also includes a power for charities to make social investments, and new rules on fundraising.   It applies only to England and Wales.

Following its October 2014 publication, the Bill was scrutinised by a Joint Parliamentary Committee of both the Commons and the Lords (the Joint Committee), and the Joint Committee's Report was published in February 2015.  More recently, in March 2015, the then Coalition Government published its response to the Joint Committee's Report.

An interesting subplot, and one of which charity trustees and their advisers should be aware, is the relationship between the Bill and the latest version of the Charity Commission's publication, The essential trustee: what you need to know, what you need to do (CC3), the Commission's core guidance on what the Commission expects of charity trustees (the Guidance). The central issue here is that it is unclear whether the Commission intends to treat failure to follow specified good practice as evidence of misconduct or mismanagement.  This is important because of the way the changes to the Guidance could interact with the Bill, as the proposed power to remove trustees from office can be applied by the Commission where there is evidence of misconduct or mismanagement.

Main features of the Bill

Official warnings by the Commission

The Bill proposes a new power for the Commission to issue a statutory warning against charities or their trustees. 

This power met with some criticism and the Joint Committee acknowledged that it will not contribute significantly to the Commission's regulatory armoury.  Nevertheless, it was persuaded that the addition would provide the Commission with a power somewhere in between guidance and the opening of an inquiry.

During the evidence to the Joint Committee, concerns were expressed about the lack of clarity as to the circumstances in which a warning could be issued, the lack of guidance on the procedure the Commission should follow, uncertainty as to how and when a warning could be made public and the lack of a right of appeal.

The Joint Committee and the Government agreed that more detail was needed on the face of the Bill, but concluded that a right of appeal would be disproportionate. Additionally, the Government expressed its desire – contrary to the views of the Joint Committee – that the power to issue a warning should extend to the Commission being able to issue a warning for a breach of trust or duty (not just where there is a failure to comply with either a requirement of the 2011 Act or with an order or direction of the Commission).

The power is now more tightly circumscribed. The Commission will have to notify charities that it intends issuing a warning, and trustees will be given an opportunity to make representations to the Commission before it is made. It is still conceivable, however, that failure to follow the Commission's advice on good practice might be interpreted as evidence of misconduct or mismanagement: the Bill is silent on the matter.

Taking into account wider conduct by a charity trustee

The Bill provides that, where the Commission has opened an inquiry into a charity, and has found misconduct or mismanagement by a person, it can take into account not only conduct by that person in relation to another charity, but also any other conduct by that person that appears to the Commission to be damaging to public trust and confidence in charities.

Concerns were raised about the power by a number of bodies. In particular, the Joint Committee on Human Rights expressed concerns that the provision confers "broad and coercive powers on the Charity Commission".  With these concerns presumably in mind, the Government has amended the Bill to reflect the Commission's intention that the provision should only take account of the person's conduct in relation to another charity, or conduct that could damage public trust or confidence in charities.

Automatic disqualification from being a trustee

The Bill adds a new list of offences which will automatically disqualify a person from being a charity trustee (under section 178 of the 2011 Act) to include money-laundering, bribery, perjury, perverting the course of justice, contempt of court and various offences related to terrorism.  This closes existing loopholes in the law and has generally been well-received.

It has been questioned whether it is right to extend section 178 to include "any … officer, agent or employee of a charity", since this would mean that a person who is not a charity trustee but is removed from their position under the power will also be disqualified automatically from acting as a charity trustee.  Nevertheless, this provision has been carried forward from the draft Bill.

The Delegated Powers and Regulatory Reform Committee expressed reservations about the provision, as it could lead to a trustee who has been disqualified under the provision being prosecuted under section 183 of the 2011 Act (which makes it an offence to act as a trustee while disqualified), and may also result in administrative difficulties for the charity. The Government has offered assurances that the use of any such provision would be communicated to charities in advance, allowing trustees time to step down thereby avoiding prosecution.  It remains to be seen how this would work in practice.

The Commission has accepted it could do more to promote the availability of waivers (which can be a useful way to contribute to the rehabilitation of offenders through charity trusteeship).

Power to disqualify someone from being a trustee

This is one of the most important parts of the Bill and gives the Commission a wide discretionary power to disqualify a charity trustee where the Commission is satisfied that (1) the person is unfit to act as such; (2) making an order would be in the public interest in order to protect public trust and confidence in charities, and (3) at least one of a list of conditions is satisfied. The list includes a situation where the trustee concerned has been found by HM Revenue & Customs (HMRC) not to be a "fit and proper person". 

Whilst this has been welcomed in principle, it has been argued that the Bill does not lay down clear criteria to determine what is meant by "unfitness". 

Much of the debate has centred on the third limb, and particularly the application of the "fit and proper person" test from tax law.  The Joint Committee raised concerns about this and called for further discussions between the Commission, HMRC and the Cabinet Office.  Whilst the Government agreed to review these concerns, it is still listed as one of the conditions potentially leading to disqualification.

Provisions not contained in the original Bill

Power to direct charities not to take certain actions

This was proposed in the consultation, but not included in the original Bill. The Joint Committee recommended giving the Commission a power to make a direction to prevent a charity subject to an inquiry from taking any action that would be considered misconduct or mismanagement.  Whilst this was welcomed by the Counter Terrorism Network, there were concerns that it could lead to the Commission over-extending its regulatory reach.

The Bill now contains this power.

Power to prevent a disqualified trustee holding another position of power in a charity

The Joint Committee recommended also including a provision allowing the Commission to prevent a disqualified trustee from holding another position of power in a charity.  Currently, the 2011 Act does not prevent a disqualified trustee from holding another position in a charity. If the Bill is passed in its current form, individuals disqualified from trusteeship will also be barred from "holding an office or employment in the charity with senior management functions".

Social investment

The Bill gives charities a power to make "social investments", that is, investments that are not aimed solely at raising funds, but also at furthering the charity's purposes. Interest in social investment has been growing in recent years, but it is thought that doubts about whether charities have the power to make them has held back their popularity.

Charitable housing associations and the "right to buy"

When the Government announced the revival of "right to buy", concerns were expressed that charitable housing associations may be forced to sell their properties. To address this, the Bill contains a new Clause, obliging the Charity Commission to ensure that charities are not compelled to use or dispose of their assets in a way that is inconsistent with their charitable objects. The emphasis is odd, in that the Clause does not, by itself, restrict the right to buy.  This is probably because it is a charity Bill, rather than a housing Bill. Nevertheless, it is to be hoped that, along with the provisions of any legislation enshrining the right to buy, it will protect charities from being forced to sell in breach of their objects.

Preventing "aggressive" fundraising

In the wake of the furore that erupted following the death of Olive Cooke, the Government pledged to add measures to the Bill to prevent charities from using "aggressive" fundraising tactics. These have now been included.

The law already requires charities to enter into agreements when using professional fundraisers, covering prescribed matters. If the Bill passes in its current form, in future those agreements will also need to set out how the fundraiser will ensure that people are protected from unreasonable intrusions into their privacy, unreasonably persistent approaches for donations, and from undue pressure to donate. They must also specify how the charity is to monitor compliance with these new duties, and refer to any voluntary fundraising standard with which the fundraiser is to comply.

Charities that are required to have their accounts audited will be obliged to cover fundraising matters in their annual reports.

Interaction with CC3

As explained above, the latest version of the Guidance seems to blur the lines between, on the one hand, the law and, on the other, good practice standards that are not legal requirements.  The relationship between the Guidance and the Bill means that trustees who do not follow specified good practice could, in theory, find themselves removed by the Commission.  For more details, see "Bare Essentials: The Charity Commission revises CC3", also in this bulletin.

The Government's response to the Joint Committee's Report was encouraging, stating that "a failure to follow specified good practice per se should not automatically be considered evidence of misconduct or mismanagement".  However, while the Government appears to acknowledge the difference between the law and good practice, the burden will remain on trustees to demonstrate that they have complied with their legal duties.

Timing

As already mentioned, the revised Bill is now back in Parliament.  A revised version of the Guidance was published at the beginning of July 2015.

The explanatory notes to the Bill states that it is intended "to provide stronger protection for charities in England and Wales from individuals who are unfit to be charity trustees" and "equips the Charity Commission with new or strengthened powers to tackle abuse of charity more effectively and efficiently".

The current level of systematic abuse within the charity sector is difficult to quantify, although the Joint Committee concluded that actual abuse (as opposed to persistent mismanagement and honest mistakes) is rare.

Whatever changes are made to the Bill, its powers will provide the Commission with a greater regulatory armoury.  It remains to be seen whether the Commission will have sufficient resources to make use of the tools at its disposal, and how the new powers will affect the Commission's non-regulatory work.

If you require further information on anything covered in this briefing please contact James Maloney (james.maloney@farrer.co.uk); 020 3375 7114) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Charity page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2015