As many readers will know, the Charity Law Association (CLA) endeavours to review and comment on all Charity Commission consultations. So great was the concern about the draft guidance that this particular CLA working party attracted a record number of participants.
The multiple concerns of the working party (taking some 36 pages to set out) were both general/thematic and specific and I endorse them, along with my colleagues at Farrers.
The remainder of this article considers some of the general and thematic concerns, but we should, of course, be happy to advise on how the guidance would apply to individual clients.
The first and most significant of the general concerns was the fact that the Commission appeared not to have considered the very large number of organisations which could fall within the scope of the guidance. The CLA working party identified 24 types of arrangements that might be caught, and these are listed at the end of the article. The working party considered that it is probably not possible to draft generic guidance which applies to such a wide range of charity relationships.
The draft guidance is very long and the working party were concerned that, if it is retained in its present form, a reader wanting information about a particular relationship (such as the relationship between a charity and a wholly-owned trading subsidiary) would need to read a large amount of it in order to identify the particular parts of the guidance that may be most relevant to them. This obviously makes the guidance less accessible and increases the risk that it will not be used.
One of the reasons that the draft guidance is so long is that it is very repetitive. It also often paraphrases other Commission guidance. The working party recommended that the guidance be shortened, and that repetition and paraphrasing be avoided by signposting to other Commission guidance.
Another general point of concern to the working party was the Commission’s use of the terms “must”, “should”, “the Commission expects” and “need”. In much of the draft guidance, the Commission continues its practice of distinguishing between “must” and “should” to identify legal obligations and good practice recommendations respectively. However, in some cases “must” is used where there is no corresponding legal duty. There are also several places in the draft guidance where the Commission states that it “expects” trustees to do something, which could mislead trustees into thinking that there is a legal requirement to do something when, in many places in the guidance, this is not the case. Similar problems can be foreseen if the words “the trustees need to” are used.
On a similar theme, the working party noted with concern that in various places in the draft guidance statements are made for which they were unable to identify the underlying legal principles. For example, the draft guidance places considerable weight on the importance of managing the public perception of the charity, suggesting that trustees are legally bound to ensure that the public recognises the separate identities of the charity and the non-charity. We were unaware of any legal duty of transparency or accountability that extends beyond compliance with specific duties of disclosure.
The working party was critical of the treatment of conflicts of interest in the draft guidance. It suggested that the guidance conflates issues of independence, separation and management of conflicts of interest. The guidance also fails to recognise the real possibility that “connected” organisations will often have substantially (or entirely) common purposes, meaning there will often be a confluence of interest not a conflict.
Another area of concern was the treatment of risk in the draft guidance. The word “risk” is used extensively and in many places the use of the word gives the impression that the taking of risk is always bad when this is not the case; it is undue risk that must be avoided.
It is not only the Charity Law Association that is concerned about the draft guidance. NCVO, the Charity Retail Association, the Association for Charitable Foundations and the Charity Finance Group have all submitted responses to the consultation which urge the Commission to change aspects of the guidance, amend its language or consult further.
At the end of May a spokesperson for the Commission said: “We welcome the positive levels of engagement with the consultation and will be considering the responses carefully to inform the final guidance. We aim to publish an analysis of submissions within 3 months.” Now we can do nothing but wait to see if the Commission abandons or revises the draft guidance.
Examples of organisations and relationships to which the draft guidance could apply
1. Charities established by non-charitable organisations:
1.1 Corporate Foundations
1.1.1. Where the Foundation is to provide funding for work that is different from that of the non-charitable organisation.
1.1.2. Where the Foundation is to provide funding for work in the same area or which overlaps with that of the non-charitable organisation e.g. a pharmaceutical company establishing a charity which might fund medical research the results of which could be of interest to, amongst others, the company.
1.2 Charities to which non-commercial but non-charitable organisations direct their philanthropy and/or charitable work (e.g. livery companies, sports governing bodies).
1.3 Charities to fund such parts of the non-charitable organisation's work as are charitable (i.e. supporter charities such as the Amnesty International Charitable Trust).
2. Charities with a non-charitable "parent" e.g. housing associations (a variation on 1 above).
3. Charities with a non-charitable corporate trustee e.g. a professional membership body.4. Charities with subsidiary trading companies.
4. Charities with subsidiary trading companies.
5. Other charities that own all or the majority of shares in a non-charitable organisation – e.g. family foundations or a charity set up under a will where the main asset is shares in the testator’s family company.
6. Charities which are the civil aspect of a religious organisation such as a religious order.
7. NHS charities.8. Local authority charities (including where local authorities are trustees of charities, custodian trustees and landlords).
9. Local authority ‘spin outs’ to charities.
10. Benevolent/poverty funds for a private class (might be defined by organisation and/or profession).
11. Charities working as part of an international network which has non-charitable members.
12. Charities working in a consortium of organisations some of which are not charitable e.g. consortia delivering public sector contracts.
13. Groups of charities where the brand is owned by the lead charity but licensed to independent charities who share the brand and the trading subsidiaries of those charities.
14. Charities working on a campaign in a network of organisations some of which are not charitable, using materials which include the brands of all network members e.g. anti-poverty campaigns
15. Common Investment Funds, Common Deposit Funds and Charity Authorised Investment Funds.
16. Charities having significant and/or substantial contractual relationships with non-charitable organisations e.g.:
16.1. a major sub-contracting relationship e.g. charities to which state services have been fully contracted out (leisure trusts, museums);
16.2. significant outsourcing contracts; and
16.3. charities sharing premises with a non-charitable organisation.
17. Charities whose trustees (or persons connected to them) own shares in the non-charitable organisation.
18. Charities whose trustees are personally connected to individuals at the non-charitable organisation.
19. Organisations in which charities have made a social investment.
20. Central Government departments which may appoint or nominate trustees of a charity and provide it with funding;
21. Activities carried on by non-charitable organisations outside of England and Wales whose activities may be supported through financial contributions from a “Friends of” charity in England and Wales. The trustees of “Friends of” may also be on the board of that organisation and the objects may include expressly the name of that organisation. The same applies in reverse where charities in England & Wales are established by overseas non-charitable organisations which maintain some governance role within the English or Welsh charity. Therefore, this is not just where, for example, Oxford University establishes a Friends of Oxford organisation in the US, but also where, for instance, Harvard University establishes a Friends of Harvard University charity in England or Wales.
22. Charitable schools which have associated non-charitable parents' associations, sports clubs or alumni associations, or set up overseas schools.
23. Charities with overseas subsidiaries.
24. International groups of charities, where not all the charities are charities for the purposes of English law (we have found that some clients in this position do not think the guidance would apply to them as they consider all the entities within the group to be ‘charities’).
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2018