Charity Commission consults on its policy paper: 'Power to disqualify from acting as a trustee'

Insight

27.07.2016

The Charities (Protection and Social Investment) Act 2016 gives the Charity Commission a number of new powers, including a discretionary power to disqualify individuals from acting as charity trustees or holding senior management posts in charities.

When the Act was passing through Parliament, a number of amendments were tabled to this power, due to concerns that aspects of it were unduly wide or ambiguous. These amendments failed to garner sufficient support, and the Government sought to allay anxieties by pointing out that the Commission had published a draft policy paper describing the way it intended exercising the power, and that the Commission would consult on that paper before issuing it as formal policy.

That consultation is now underway. So what exactly is the scope of the power and what are the Commission's intentions?

The discretionary power to disqualify

The power is set out in section 10 of the Act. The section is not yet in force but is due to be implemented this year.

Before the Commission can exercise the power, three criteria must be fulfilled:

At least one of six 'conditions' applies;
The person is unfit to be a trustee; and
The order is desirable in the public interest in order to protect public trust and confidence in charities.

The six conditions are:

the person has been cautioned for an offence that would result in automatic disqualification from trusteeship[1];
the person has been convicted overseas of an offence that would have disqualified them from trusteeship had they been convicted of it in the United Kingdom;
the person has been found by HMRC not to be a 'fit and proper person' to be a manager of a body or a trust;
the person was a trustee, charity trustee, officer, agent or employee of a charity at a time when there was misconduct or mismanagement in the administration of the charity, and (a) the person was responsible for the misconduct or mismanagement, (b) the person knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it, or (c) the person's conduct contributed to or facilitated the misconduct or mismanagement;
the person was an officer or employee of a body that was the corporate trustee of a charity when there was misconduct or mismanagement by the body in the administration of the charity, and criteria (a) to (c) of condition D apply;
that any other past or continuing conduct by the person, whether or not in relation to a charity, is damaging or likely to be damaging to public trust and confidence in charities.

The Act sets out a procedure for the Commission to follow before making a disqualification order, but once it has decided to make an order, it may disqualify a person for up to 15 years. Disqualification may be in relation to all charities, or to such charities or classes of charities as the Commission sees fit. While disqualified, a person will also be unable to hold a position with 'senior management functions' in any charity from which they are banned from acting as trustees (unless the disqualification order says otherwise).

It will be possible to appeal against an order, or to ask the Commission to vary or discharge it.

The Commission's intentions – the draft policy paper

The paper states that, in exercising the power, the Commission will be bound by its statutory duties, including the need to have regard to the principles of best regulatory practice, such as by taking action that is proportionate. As part of this, the Commission will consider each case in the context of its own risk framework and other regulatory guidance. It will be more likely to take action where there has been negligent, reckless or deliberate misconduct.

The paper considers each aspect of the power in turn.

One or more of the conditions applies

There is a table in the paper, with the first column citing the six conditions and the second offering commentary/examples of when the Commission would consider each condition to have been fulfilled.

When the Act was a draft Bill, the Committee that scrutinised the Bill expressed concerns about condition B, pointing out that judicial standards vary across the globe. In the relevant section of the table, the Commission states that it will take this into account when deciding whether or not to exercise the power in reliance on that condition.

When the Act was being debated in Parliament, the most controversial item on the list was condition F, partly due to its vagueness but also because it allows the Commission to take account of a person's conduct outside the charity sphere. The largest section of the table is devoted to this condition.

According to the paper, relevant factors will include:

whether, if the conduct in question had been by a trustee, it would be considered misconduct/mismanagement or would put charity property at risk;
whether there was misconduct in another position of trust or responsibility.

Conduct likely to damage public confidence in charities includes:

convictions for offences that do not result in automatic disqualification but are relevant to certain types of charity (such as animal cruelty offences by the trustee of an animal welfare charity);
regulatory breaches that have been punished by another regulator;
a finding of misconduct by a professional body or regulator;
an adverse finding by a charity self-regulatory or umbrella body;
dismissal from employment or from another fiduciary or public appointment.

The person is unfit to be a trustee

This, too, was criticised for vagueness when the Act was making its way through Parliament.

According to the paper, the Commission will assess fitness by reference to (1) the legal obligations and good practice requirements of trustees, and (2) the Commission's own duty to ensure that charitable trusts are properly executed.

Unfitness will generally result from a failure of honesty/integrity, competence or credibility. The paper goes into some detail on what these three categories mean and the type of behaviour that would indicate a failure in each case. Examples of behaviour that the Commission considers will undermine a trustee's credibility are: participation in discredited avoidance schemes; poor standards in fundraising; and using positions similar to trusteeship to procure benefits for themselves, their family or their friends.

Disqualification is desirable in the public interest in order to protect public trust and confidence

Relevant matters here include:

the nature, seriousness and impact of the conduct;
any adverse or positive public reaction;
the impact on the charity if the person is free to become, or continue as, a trustee.

The Commission will also use survey data to understand what underlies public trust and confidence in charities, and use that knowledge when making assessments under this limb of the test.

The scope of disqualification

As mentioned earlier, the Commission may disqualify a person in relation to all charities, or only to certain charities or classes of charity. The Commission's default position will be to disqualify a person from acting as a trustee of all charities. It will be up to the individual concerned to demonstrate why their disqualification should be narrower.

Length of disqualification

In deciding this, the Commission will take various issues into account:

the circumstances which led to the three tests for disqualification being met;
the seriousness of the risk to the charity or to charities generally;
whether the risk is sustained and ongoing;
whether the risks are likely to be permanent or temporary; and
the principles of rehabilitation.

The paper points out that the same 'offence' may not warrant the same period of disqualification – the length will vary according to whether there are aggravating or mitigating factors.

Aggravating factors include:

the misconduct resulted in serious financial or reputational damage;
the misconduct took place over a sustained period;
persistent disregard of the charity's governing document or of charity law;
the individual meets more than one of the six 'conditions'.

Mitigating factors include:

the individual attempted to remedy any breaches;
the misconduct had no (or minimal) financial or reputational impact;
evidence of previous good conduct;
the individual brought the issue to the Commission's attention;
the individual cooperated with the Commission.

The consultation closes on 22 August 2016. You can find the policy paper and a consultation summary here.

If you require further information on anything covered in this briefing please contact Rachel Holmes ([email protected]; 020 3375 7561) or your usual contact at the firm on 020 3375 7000. Further information can also be found on our Schools page.

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

[1] At the moment, this means an offence involving dishonesty and deception. Section 9 of the Act has added a number of specific offences to this general description, such as terrorism and money laundering offences. However, the Government does not plan bringing section 9 into force until April 2017.