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Farrer & Co | Universities, exempt charity status and reporting: An update

The Memorandum of Understanding (MoU) between the Office for Students (OfS) and the Charity Commission (the Commission) has recently been published.  It describes how the OfS and the Commission will work in promoting compliance with charity law.  In many instances it (unsurprisingly) echoes the guidance published last year by the OfS in its Regulatory advice 5: Exempt charities Guidance for higher education providers that are exempt charities (regulatory advice), which I covered in an article here.

Most universities are exempt charities and the MoU lists the exempt charities for which the OfS is principal regulator (referred to as HE Exempt Charities in the MoU and this article).  A change to the Charities Act 2011 that takes effect on 1 August 2019 will increase the number of charities registered with OfS that are able to become exempt charities through obtaining an Order in Council.    

Exempt charity status and the role of the Principal Regulator

To recap on what it means to be an exempt charity, the starting point for HE Exempt Charities is that they are not required to register with the Commission.  Exemption from registration frees HE Exempt Charities from some of the obligations placed on registered charities (such as the requirement to file accounts and reports with the Commission, and some of the duties associated with disposing of land), but HE Exempt Charities providers must, nevertheless, comply with charity law.

The Principal Regulator of an exempt charity has a duty to promote compliance with charity law by the charity trustees of those charities it oversees.  A Principal Regulator, however, is not able to grant consents in place of the Commission or make Orders or Schemes for exempt charities and these enabling functions remain with the Commission.  For this reason, HE Exempt Charities may find their path crosses with the Commission periodically, where an authorisation is required by charity law that only the Commission can give.  For example, authorisation of an ex gratia payment. The Commission would, however, consult with OfS prior to exercising an enabling power.  The Commission is also entitled to exercise its protective powers where there is evidence of misconduct or mismanagement within an HE Exempt Charity, but it has indicated it would only intervene after consulting the OfS.  The MoU notes the OfS and Commission may also carry out joint investigations.   

The Commission and OfS’s MoU

The MoU puts some meat on the bones of the statutorily-prescribed relationship between the two bodies. It is considerably longer and more detailed than the 2010 Memorandum of Understanding between the Commission and HEFCE (the Old MoU), with several new sections. Beyond the rather dry description of how they will handle the flow of information between them, it offers some sense of how they will interact, and how their relationship might differ from the arrangement the Commission had with HEFCE under the Old MoU.

Under the Old MoU, the regulators agreed to work together to determine what additional monitoring HEFCE might need to fulfil its duties as principal charity law regulator of HE Exempt Charities.  The MoU states that it is up to the OfS to decide what monitoring is necessary.  OfS has indicated its intention to remove some of the previous reporting requirements imposed by HEFCE and minimise these in future and this is evident in the approach to serious incident reporting. 

Charity Commission serious incident reporting

One monitoring issue where which we have seen some confusion is whether HE Exempt Charities should report serious incidents to the Commission, in line with the Commission’s serious incident reporting guidance

The MoU mentions the duty of charities to report serious incidents to the Commission. It then refers to the obligation for HE Exempt Charities to notify the OfS of certain reportable events, in line with the OfS's regulatory framework and stating that the OfS will forward details about the reports it receives to the Commission, on an annual basis.  This phrasing could be clearer, but we understand it reflects the obligation on registered charities to report serious incidents and does not extend this to HE Exempt Charities. 

There is no mandatory requirement on HE Exempt Charities to follow the serious incident reporting regime, because the obligation to report serious incidents is linked to the obligation to file annual returns with the Commission – an obligation that does not apply to exempt charities.  Furthermore, our view is there is no expectation on HE Exempt Charities to file serious incident reports with the Commission and we would not recommend that HE Exempt Charities do so.  In the event of a serious incident within an HE Exempt Charity, we would expect that the OfS would liaise with the Commission in relation to the incident if it considered this necessary.

This contrasts with the previous regime operated by HEFCE where it operated a serious incident reporting regime that largely mirrored the Commission’s regime.  OfS, in its commitment to minimising red tape, has not replicated that approach. 

Other reactive reporting by HE Exempt Charities to OfS

Of course, the OfS's responsibilities – and the regulatory duties imposed on HE providers – extend beyond the charity law sphere.

The OfS’s regulatory framework sets out at paragraph 494 reportable events.  The definition of reportable event is “any event or circumstance that, in the judgment of the OfS, materially affects or could materially affect the provider’s legal form or business model, and/or its willingness or ability to comply with its conditions of registration.

Reportable events include (although this is not an exhaustive list):

  1. Merger
  2. Material change in business model, alteration to legal status, changes in ownership and other structural changes
  3. Fraud or court action
  4. Regulatory investigation by other regulators (including the Commission)
  5. Opening a new campus
  6. Material adverse financial changes

While there is some overlap with what the Commission considers a serious incident and reportable events, there are key differences.  Notably, there is no obligation to report under paragraph 494 serious safeguarding issues, large anonymous donations, fundraising issues, data breaches, major governance issues or significant reputational risks.  This demonstrates the more hands-off approach of the OfS and its willingness to depart from the expectations the Commission has of charities.   

There are also duties to report under the Prevent Duty and those reports are, slightly confusingly, called serious incident reports.  The OfS has published Prevent-related serious incident guidance notes on these reporting requirements.

Increase in number of higher education providers entitled to exempt charity status from 1 August 2019

At present, some universities and other higher education providers remain registered charities.  Some of these institutions will be entitled to apply for an Order of Council to make them exempt charities from 1 August 2019, pursuant to changes to the Charities Act 2011 made by the Higher Education and Research Act 2017 (Further Implementation) Regulations 2019.  OfS will become principal regulator for the providers obtaining an Order of Council and the Charity Commission will thereafter remove them from the Register of Charities.      

Conclusion

The MoU paves the way for a slightly modified relationship between the Commission and the principal regulator for HE Exempt Charities. This may, in turn, entail a shift in how the two bodies deal with the HE sector on charity law matters. Whether there is a shift will, of course, depend on how the regulators decide to implement their new agreement. However, with a commitment to minimising the regulatory burden from the OfS and a Commission that is struggling under much-reduced funding, it would be surprising if HE Exempt Charities were to find themselves subject to a higher level of scrutiny in future in relation to charity law compliance.  What HE Exempt Charities need to do, however, is make sure they are aware of what charity law requires of them, and which regulator to approach where necessary.

If you require further information about anything covered in this briefing, please contact Elizabeth Jones, or your usual contact at the firm on +44 (0)20 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, July 2019

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