Charity Commission gets more powers

Q. What do Charity Commission powers, social investment and fundraising have in common? A. They all feature in the Charities Act 2016

The Act

Although it is known as the Charities Act 2016, the full title is The Charities (Protection and Social Investment) Act 2016.

Charity Commission Powers

You may remember the Cup Trust a few years ago.  It was a registered charity which raised £176 million in donations and claimed (but did not receive) £46 million in tax relief, but spent only £152,292 on grants to charitable causes.  There was an investigation in 2013, and the Charity Commission was heavily criticised.  The case was made that if the Charity Commission were to be a more effective regulator, it needed more powers.  The Charities Act 2016 does just that.

So, what powers does the Charities Act 2016 add to the Charity Commission's arsenal?

• An Official Warning Power (from 1 November 2016) – this has been one of the most talked about new powers.  The Charity Commission can issue an Official Warning to a charity or trustee where it considers that there has been a breach of trust, breach of duty, misconduct or mismanagement.  It must give an unspecified amount of notice before issuing an Official Warning (14 days has been suggested, but this is likely to depend on the urgency).  It may publish the warning (which is likely to have reputational consequences for the charity/individuals involved with it).  There is no right of appeal, although the charity/trustee(s) in question can make representations to the Charity Commission during the notice period.

When might the Charity Commission issue an Official Warning?  It is likely to be used for matters which do not warrant going straight to a full inquiry (the most serious form of Charity Commission investigation), but where there is some regulatory concern.  The Charity Commission are considering issuing automatic Official Warnings to those charities which fail to file their accounts/annual returns on time.  Yet another incentive to file on time!

• The Official Warning power is a "gateway" power – trustees who fail to comply with remedial actions required in an Official Warning may be suspended.  The Charity Commission can now suspend trustees for up to two years (previously 12 months).  In deciding whether to suspend a trustee, the Charity Commission can now take into account the wider conduct of the individual (i.e. not just their conduct in relation to the charity in question).
• It is now easier to remove trustees following on from a Charity Commission inquiry, and those who knew of misconduct or mismanagement, but failed to take reasonable steps to oppose it, may be removed, as well as those who were actively responsible for it, or who contributed to it or facilitated it.
• The powers of removal have been widened to include not just trustees, but also officers, agents and employees, and the Charity Commission may remove someone even after they have resigned (this is to get around the issue that people were resigning before they could be removed).
• The list of persons being disqualified from acting as charity trustees or trustees of a charity has been extended to include anyone who has been removed as an officer, agent or employee of a charity, those guilty of certain offences relating to making false statements in contempt of court, those found guilty of disobedience to an order or direction of the Charity Commission on an application to the High Court, anyone who is a "designated person" for the purposes of Part 1 of the Terrorist Asset-Freezing etc Act 2010 or the Al-Qaida (Asset Freezing) Regulations 2011, anyone who is subject to the notification requirements of Part 2 of the Sexual Offences Act 2003, anyone guilty of certain terrorism offences, money laundering offences, bribery offences, misconduct in a public office, perjury, perverting the course of justice, or contravening certain Charity Commission orders.  This is in addition to the existing list.  Anyone who is disqualified from being a charity trustee will not be able to hold an office or employment in a charity with senior management functions either.  These persons are automatically disqualified; the Charity Commission also has the power to disqualify people by order.
• The Charity Commission may issue an order to disqualify someone from being a trustee, etc for up to fifteen years when certain criteria are met.  They must be satisfied that it is in the public interest to do so, that they are unfit to be a trustee and that they meet one of the following conditions: (1) they have been cautioned for a disqualifying offence against a charity or involving the administration of a charity; (2) they have been convicted in respect of an offence against a charity or involving the administration of a charity in a country or territory outside the UK and the act constituting the offence would have been a disqualifying offence if done in the UK; (3) they have been found by HMRC not to be a "fit and proper" person; (4) they were 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 they were responsible for it, or knew of it and failed to take any reasonable step to oppose it, or their conduct contributed to or facilitated it; (5) similar to (4), but where there was a corporate trustee and they were a trustee or employee of the corporate trustee; (6) 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 generally or in the charities or classes of charity specified or described in the order.

Practical steps: consider updating your trustee declarations, and declarations for senior staff to ensure that they include the wider list of automatic disqualification offences.  Ideally, to avoid an uncomfortable situation for everyone, you would find out before you appoint someone if there is likely to be an issue.  In the unlikely event that you have an existing trustee, office holder, or senior manager who is now disqualified as a result of the change in the law, take professional advice and/or contact the Charity Commission as a matter of urgency.  The Charity Commission still has the power to waive disqualification in certain circumstances (e.g. a charity which works to rehabilitate ex-offenders may seek to make the case that it is appropriate to have some ex-offenders on the board).

• Anyone who is disqualified from being a trustee should not act as an officer of a body corporate which is a charity trustee or trustee for a charity either.
• Where there has been an inquiry, the Charity Commission can direct a person not to take specified action.  For example, the Charity Commission may require a charity not to enter into a contract, or not to sell an asset.  This is to add to the existing power to direct someone to take specified action.
• The Charity Commission has the power to direct the winding up of a charity.  In order to use this power, the Charity Commission must first have launched an inquiry, and there must have been misconduct or mismanagement, etc.  The Charity Commission must also be satisfied either that the charity in question does not operate or that its charitable purposes could be promoted more effectively if it did cease to operate, and that it is in the public interest to direct that the charity be wound up.

Should you be worried?  Whilst the Charity Commission does seem to have more powers than it used to, many of them will only be used in extreme cases (e.g. where there has been an inquiry) and will not affect most charities.  The Charity Commission is under-resourced and takes a risk-based approach in targeting its limited resources – those charities who are on top of their compliance should find that it is business as normal.  Senior Charity Commission staff have been quick to reassure charities that they want to support the vast majority of trustees who are aiming to do their best for their charity in good faith.  The most worrying of the new powers is probably the Official Warning power, and it is yet to be seen how it will be used.  In the meantime, make sure that your accounts and annual return are filed on time, and that you are on top of your governance (e.g. managing conflicts of interest, putting appropriate policies in place, ensuring that there are no unauthorised trustee benefits).

Fundraising

Last summer (2015), there was a lot of focus on charity fundraising, and much criticism of poor practice, particularly amongst the larger "household name" charities, but unfortunately marring the reputation of all charities.  Charities which are large enough to require an audit must now include a fundraising statement in their accounts, including the number of fundraising complaints received and what steps have been taken to protect vulnerable people and other members of the public from undue pressure, unreasonable intrusions on their privacy, or unreasonably persistent approaches for donations.  The charity sector is in the "last chance saloon" for self-regulation of fundraising, and the Charities Act 2016 contains reserve powers to enable the government to appoint a fundraising regulator.  Smaller charities would do well to have an eye to the matters expected of larger charities, as part of a process of showing that they are well-governed and well-regarded.  For example, monitoring complaints may provide useful data.  Charities with "commercial participation" arrangements should note that there have been a few changes to what needs to be set out in the commercial participation agreement.  If this is relevant to you, seek legal advice.

Social Investment Powers

The social investment powers enable charities to make investments with a view to both directly furthering the objects and achieving a financial return (this may be a lower rate of return that a traditional financial investment).  The power does not apply to permanent endowment, or charities established by Royal Charter or legislation.  Trustees have certain duties in deciding to make a social investment, including considering whether it is appropriate to take advice, and acting in the best interests of the charity.