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Farrer & Co | Summary of recent Charity Commission Inquiry Reports

Kingsway International Christian Centre

Background

Kingsway International Christian Centre (Kingsway) is a large evangelical church that operates a number of places of worship.

Between June 2009 and June 2010 the trustees of Kingsway invested £5 million of charity funds with a trustee (the ex-trustee) who identified himself as a 'qualified independent trader' licensed to invest in financial markets on behalf of family and friends. Following investigation into the status of the ex-trustee by the Commission it became apparent that he was not, and had never been, authorised to carry on these investment activities. The Commission was therefore prompted to open a statutory inquiry into Kingsway. In light of the inquiry's findings, the Commission appointed an interim manager in January 2014 to review the decision-making of the trustees in relation to the £5 million of charitable funds invested with the ex-trustee.

The Commission's Conclusions

Mismanagement of investment decision-making

Before deciding whether to make the initial investment, the 'decision-making trustees' (the Commission used this term to refer to the trustees who were in office at the time[1]) carried out some due diligence. For example, they considered a written proposal from the ex-trustee, asked the senior management team to prepare a written report regarding the investments, and questioned the ex-trustee on his methodology.

However, their actions fell short in a number of ways. For instance, they did not seek to verify the qualification of the ex-trustee and did not seek professional advice in relation to the proposed investments. In the Commission's opinion, professional advice should have been sought in light of the high proposed rate of return of 55% per annum, the large sum of money being invested and the potential for fraud. After the investment agreement was executed, the decision-making trustees only reviewed the investments by checking monthly payments. Until February 2011 they understood that they were receiving a proportion of their investment return as a payment each month, but were under the impression that the balance of their return was being reinvested. It only became clear some time later that the majority of the investment had been lost. This demonstrated a clear failure by the decision-making trustees to properly examine the investments being made on behalf of Kingsway.

Conflicts of interest were not properly managed

The Commission found that the decision-making trustees placed too much reliance on the ex-trustee when he was personally interested in the investment and therefore conflicted.

Personal liability of the decision-making trustees

The interim manager reached the view that Kingsway had a strong legal claim against the decision-making trustees for breach of their legal duties as trustees, and that it was proportionate and in the best interests of Kingsway to bring a claim against them . An out of court confidential settlement was reached with the decision-making trustees on 3 September 2015.

Lessons

Two of the lessons offered by this case are:

  • Be willing to challenge your co-trustees. Checking that a trustee who has volunteered for a task genuinely has the necessary expertise may involve an awkward conversation, but trustees need to carry out proportionate due diligence before committing their charity (and its funds) to any project. In this case, substantial sums were at stake;
  • Know when you need advice. The decision-making trustees took the view that they did not need to take investment advice, even though none of them had direct investment experience. Had they sought advice, they would have been in a better position to assess the ex-trustee's proposal, including whether the promised returns were realistic.

Hospice Aid UK

Background

The Commission began investigating Hospice Aid UK (Hospice Aid) due to concerns about its high fundraising costs and limited charitable expenditure. In 2012 Hospice Aid entered into a seven-year direct mailing agreement (the Fundraising Agreement) with a specialist marketing agency (the Agency). The Agency was appointed to carry out a range of functions, including developing the charity's direct mail campaigns, drafting the letters and artwork, populating mailing lists and dealing with the administrative minutiae of the campaigns. The Fundraising Agreement with the Agency was unfavourable to Hospice Aid. For example, there was no way for Hospice Aid to terminate it before the end of the seven-year term, and the Agency's administration costs were unduly high.

The nature of the Fundraising Agreement and the actions of the trustees of Hospice Aid at the time it was entered into (the Former Trustees) raised serious regulatory concerns. The Commission opened a statutory inquiry into Hospice Aid on 28 August 2014.

The Commission's Conclusions

Mismanagement and misconduct

The Commission found that between April 2008 and March 2012, Hospice Aid applied an average of just 15.6% of its income on directly furthering its charitable purposes, with the remainder being consumed by fundraising, support and governance costs. The trustees did not take adequate steps to address the reputational risks and issues arising from the consistently low proportion of funds applied directly for charitable purposes, which in turn led to significant reputational damage and a 46% reduction in donated income from the public in 2011 and 2012. After March 2012 (and having entered into the Fundraising Agreement), the percentage of funds applied to grants for hospices fell even further to an average of 5.5%.

There were no formal procedures in place by which the CEO provided the trustees with management information, meaning that the Former Trustees were not sufficiently informed about Hospice Aid's financial situation. The trustees also failed to exercise proper supervision over the CEO, whose role, performance and remuneration were not regularly reviewed. Because of this, it was not possible for the Former Trustees to demonstrate that the costs associated with this position were in the best interests of the charity.

Poor decision-making in relation to the Fundraising Agreement

The Former Trustees claimed that they felt compelled to enter into the Fundraising Agreement because of the deteriorating financial circumstances of Hospice Aid. However, the Commission did not find any evidence to suggest that the Former Trustees considered the range of reasonable alternatives available at the time or gave adequate consideration to the risks, issues and potential liabilities arising from the terms of the Fundraising Agreement. This was in clear breach of their duties as trustees.

Insufficient transparency

The inquiry found that the Agency was acting as a 'professional fundraiser' for Hospice Aid and so should have complied with the rules that apply to professional fundraisers. In particular, the fundraising material used by Hospice Aid did not contain the required statements about the proportion of donations that would be received by the Agency. The Commission found that the fundraising materials issued by the Agency lacked sufficient transparency to allow members of the public to make an informed decision about whether to donate, and that they were misleading because they implied that all donations would go to the charity. The inquiry criticised the trustees for doing nothing to correct this misleading impression.

Lessons

There were a lot of missteps here, but perhaps the main lesson is: if in trouble, consider your options and – again – know when to seek advice. The Former Trustees were right to want to address Hospice Aid's ailing financial position but would have been wise to investigate alternative courses of action and to seek advice on the merits of the Agency's offering, rather than stumbling into the highly unfavourable Fundraising Agreement.

Conclusion

Although the specific circumstances of Kingsway and Hospice Aid may seem extreme, the underlying issues – from conflicts of interest, to failure to challenge fellow trustees, to making decisions on the basis of inadequate information – can easily arise in charity governance. Charity Commission guidance (available on GOV.UK) can help steer trustees in the right direction and, of course, we will be happy to advise you on legal matters.

 If you require further information on anything covered in this briefing please contact Emma James(emma.james@farrer.co.uk) or your usual contact at the firm on 020 3375 7000.

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

© Farrer & Co LLP, March 2017


 

[1] This reflects the fact that the 'decision-making trustees' were responsible in these circumstances but be aware that new trustees who inherit problems created by their predecessors will not escape censure if they are aware of and fail to deal with the issues once in office.

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