Charity Law Association Draft Charities Bill – the Charity Commission
1. The Joint Committee has asked the Charity Law Association (the CLA) to submit evidence on the proposed structure of the Charity Commission (the CC). This paper will look at the relationship that, in our view, the CC should have with the Government and comment in detail on those parts of the Bill which have particular application to the CC.
General points
Independence from Government
2. The CLA considers that if the public is to have confidence in charities, it must have confidence in their regulator. If the CC is to be a credible regulator, it must be separate from Government. As mentioned later in this report, the Bill currently states (in new Section 1A(3) of the Charities Act 1992 – inserted by Clause 4 of the Bill) that the CC will perform its functions “on behalf of the Crown”. There are issues of both public perception and of constitutional law at stake here:
2.1 If the CC is a Government Department, then it is likely to lessen, rather than increase, public confidence in charities. It will be seen as susceptible to being used by the Government to further its own policies. Indeed, it is conceivable that this is in fact what the relationship between the CC and the Government would develop into; it may not only be a matter of perception. To avoid this, the CC needs to be – and to be seen as – an entity established to serve the public benefit and uphold the law, not beholden to the Government and outside the sphere of governmental policy considerations.
2.2 In some aspects of its work (such as making schemes and orders for charities and, under the Bill, relieving trustees of personal liability), the CC has judicial functions. If the CC is a Government Department, then the CC’s role will include both executive and judicial functions, contrary to the principle of the separation of powers.
These issues are expanded upon in the detailed comments which follow.
Funding
3. The Bill, together with last year’s document “Charities and Not-for-Profits: A Modern Legal Framework”, reconstitutes the Charity Commission (the CC) as a statutory corporation, grants it certain new powers and imposes new duties on it. This raises funding issues. It seems to us that the CC will need significant additional funding if it is to attain the state necessary to discharge its duties (as increased) properly. We estimate, for example, that an additional £250,000 per annum will be needed to enable the Commission to carry out its rolling public character review. We are surprised that the Regulatory Impact Assessment does not appear to address the costs implications of all aspects of the CC’s increased role.
Staffing
4. This is connected both to the question of the CC’s independence and to the question of its funding. At present, top level staff at the CC have a high degree of expertise and experience, but this cannot currently be said of all levels of the CC. However, a degree of expertise and experience will need to be present throughout the CC if the CC is consistently to exercise the subtle legal judgements required of it by the Bill and the “Modern Legal Framework” document and, in turn, inspire public confidence. Currently, many intelligent employees at the lower echelons of the CC seem to leave the CC once they have gained the level of experience that enables them consistently to exercise sound discretion. This is deeply counterproductive.
5. It seems to us that in order to attract the right calibre of staff and retain those with experience, it will be necessary for the CC to be in a position to pay higher salaries. This can only be achieved if the CC is relieved of the restrictions attaching to the levels of pay the Civil Service can offer. Since this could only happen if the CC were not a Government Department, this is a further reason for the independence we have advocated above.
Part 2 of the Bill
Chapter 1 – The CC
6. Broadly, the changes to the constitution and powers of the CC go in the expected (and welcome) direction of making the CC a flexible, self-standing body serving the public interest in the integrity of charity. They do, however, raise a number of important issues, as well as points of detail.
7. In our view, the provisions for the CC should be tested against three thematic criteria:
7.1 the independence they give the CC;
7.2 the breadth of the CC’s regulatory role;
7.3 the balance of the CC’s powers, especially between its advisory and enforcement roles.
8. Whilst the Bill appears, to us, broadly to satisfy these tests, we would like to highlight some concerns and a number of details.
9. The reconstitution of the CC as a body in its own right with a larger membership than the present CC is welcome; but the Bill does not say in specific terms that it is independent of Government. New Section 1A(3) of the 1993 Act provides that the CC’s functions are ‘performed on behalf of the Crown’ – not the public interest – and it will now have to submit its report to the Secretary of State and Parliament separately, in place of the present provision under which the role of the Secretary of State is to present the report to Parliament. New Section 1C of the 1993 Act (inserted by Clause 5) includes provision for the CC to advise Government, in itself a welcome continuation of the role the CC now plays. However, it is of fundamental importance that the CC should be independent of Government interference. One of its key roles is, for example, to uphold the right of charities to criticise Government. As we have already said, it cannot do this if it is a Government Department.
10. We recommend that the phrase “on behalf of the Crown” be removed and replaced with something more suitable, reflecting the CC’s independence and its role as protector of the public interest.
11. We further consider that the CC must be established in a form and with powers appropriate for the sector it regulates. Charity is not, like public utilities, fulfilling a designated service function. It is an independent sphere within which public spirited citizens, individually and collectively, may take action on their own initiative in the public interest. The legal, institutional and regulatory framework must underpin that principle. In particular regulation must enhance the independence of charity, not subordinating charities to external accountability which inhibits public spirited initiative. To assist the Joint Committee in determining whether the CC (as per the Bill) meets these criteria, we have commissioned a report comparing the proposed CC with the FSA and the OFT. We hope to be able to submit this report to you by 15th July.
12. Increasing the size of the CC will helpfully enable membership to be broader. Schedule 1A rightly requires that two members of the CC be legally qualified and that one be from Wales. Given the importance of accountancy skills in the modern CC it is desirable that at least one of the members be a qualified accountant. To ensure that there is a sense of ownership of the CC in the charitable sector it is desirable that the Secretary of State be required to have regard to the need to reflect the charitable sector when appointing members.
13. The restructuring of the CC into a body with a Chief Executive accountable to the larger board will fundamentally change the way in which the CC functions. Everything will depend on the spirit in which board and senior management operate under the new constitution. There is, however, clearly a need for there to be the right degree of oversight and accountability exercised by the board; there is a danger that part-time board members will be too ‘non-executive’ despite carrying ultimate responsibility for the CC. Whilst it is difficult to prescribe relationships in statute, to rest on the requirement in new Section 1D(2)3 of the 1993 Act (inserted by Clause 5) that the CC ‘must have regard to such generally accepted principles of good corporate governance as it is reasonable to regard as applicable to it’ seems altogether inadequate.
14. As anticipated, the Bill replaces the supportive and enhancing general function and object under which the CC currently operates with more detailed regulatory objectives supported by new general functions and duties. Together with the specific advice and guidance powers which the new Section 29 of the 1993 Act (inserted by Clause 20) gives to the CC, the new framework appears generally to meet the tests set out in paragraph 6 above, in particular in ensuring that the CC can continue to interpret its regulatory function broadly by promoting good practice and preventing bad practice without waiting for things to go wrong requiring formal intervention.
15. There are however some detailed points to raise about the objectives:
15.1 whilst we appreciate the need for the public to have confidence in charity, we are not sure that such confidence is currently lacking. In our view, what is lacking is public understanding of charity. Perhaps the CC ought to be tasked with increasing public understanding and maintaining public confidence/trust in charities?
15.2 The compliance objective seems rather limited in being confined to trustees’ legal obligations (and not, for example, generally accepted good practice e.g. in governance and financial matters);
15.3 The “social and economic impact objective” is surprising. Social and economic impact is not a part of charity law: many charities that operate for the public benefit have little or no social or economic impact. Our concern is that this is how the Parliamentary draftsman has sought to translate ‘public benefit’, which is a different concept. We would like to see the reference to social and economic impact removed and for the CC instead to have some obligation relating to public benefit. This could, perhaps, also incorporate a reference to “the effective use of charitable resources”, contained in the 1993 Act;
15.4 The accountability objective creates uncertainties by specifying accountability to donors (first) and beneficiaries (second). Charities owe accountability first and foremost to the public at large in fulfilling their obligation to deliver public benefit. Charities ought to take account of the (different) interests of donors and beneficiaries, but that does not impose any enforceable obligations on charities;
15.5 We note that the CC has not been given an objective of encouraging charitable giving, with the concomitant objective of not discouraging such giving by disproportionate regulation. Such an objective may, we suggest, be useful. To take the example of private charitable foundations: at present, these are sometimes subject to inappropriate regulatory approaches by the CC. For instance, whereas it is perfectly reasonable to expect publicly funded charities to recruit trustee boards in a manner that conforms to public models, it will discourage the establishment of private foundations if donors cannot choose their own trustees. Giving the CC an additional objective of encouraging charitable giving (“the philanthropy objective”) may go some way to addressing this type of difficulty.
16. Given that the CC will be developing the law (e.g. on public benefit and charitable purposes) and issuing guidance with a wide impact on the sector, we consider that the Bill should oblige the CC to consult with all relevant sections of the sector on such matters. This could be done in the same way as the CC currently consults in its ‘Review of the Register’ exercises. Perhaps a new Subsection 1D(2)1.(c) could be added, obliging the CC to perform its functions in a way “which includes open and transparent consultation on developments of charity law”. The term ‘charity law’ could be defined as it is in Clause 2(6). In addition, we consider that the CC should be obliged to publish its decisions when they constitute a development of the law.
17. We consider that the general duty set out in new Section 1D(2)2 of the 1993 Act (inserted by Clause 5) should oblige the CC to have regard to the need to use its resources in the most effective, efficient and economic way.
18. In our view, the Bill must contain a provision obliging the CC to use its powers proportionately, fairly and in accordance with the principles of natural justice (particularly in view of its new powers in Part 2 Chapter 5 of the Bill). Such obligations could be included as proposed new Clause 1D(2)(3) of the Charities Act 1993 (“the 1993 Act”), inserted by Clause 5 of the Bill.
Chapter 5 – Assistance and supervision of charities by court and CC
19. In our view, the Bill presents an opportunity to amend Section 8 of the 1993 Act to stipulate that the CC can only open enquiries where it has reasonable grounds to do so and is obliged to give the charity a statement of those reasonable grounds. We would also like to see an obligation placed on the CC to permit the Trustees of the Charity concerned to add their comments to the face of any published report of such an enquiry.
20. We would like to see a similar obligation placed on the CC to give a charity a statement of its reasons for appointing a Receiver and Manager in exercise of its powers under Section 18(1)(vii) of the 1993 Act.
21. There is an anomaly in the 1993 Act which allows the CC to remove by order charity trustees, officers or staff, but not members where the charity is incorporated. This can lead to a ludicrous situation, where the members are the same individuals as the removed trustees, that they can simply exercise their powers in general meeting to reinstate themselves. We feel the Bill is a good opportunity to remove this anomaly.
22. It has always been axiomatic that the CC should not take over the administration of charities in pursuance of its remedial functions and it is right that this should be reiterated in new Section 1(E)(2) of the 1993 Act (inserted by Clause 5). However, some of the provisions in Chapter 5 run counter to this principle by empowering the CC to direct trustees to act in a particular way or to apply property for particular purposes (new Sections 19A and 19B of the 1993 Act, inserted by Clauses16 and 17 respectively). Perhaps the Bill could specify that these powers (or at least the power in new Section 19B of the 1993 Act) can only be used in cases of necessity rather than expedience?
23. The new advice giving powers in new Section 29 of the 1993 Act (inserted by Clause 20) are in principle welcome, but the power to give opinion or advice to ‘any officer, agent or employee’ over the heads of the trustees conflicts with the legal responsibility which the trustees alone have for the charity. Whilst it is realistic that it is the director and senior managers of large charities with whom the CC will deal on a day to day basis, the overall responsibility of the trustees must not be overridden, especially where formal advice with legal backing is at issue. At the very least, the Bill should require the CC to copy the trustees in on any advice given to non-trustees about their charity. However, we also recognise that this Section may be intended to provide an opportunity for charity employees to seek advice in a “whistle blowing” context. We suggest that, in those circumstances, the CC should advise informally and should not – of course – copy correspondence to the trustees.
24. We consider that the power to enter premises, in new Section 31A of the 1993 Act (inserted by Clause21) is wholly inappropriate for the CC, even though it requires a JP’s warrant. It also seems rather draconian to make it a criminal offence for any representative of the charity to obstruct the CC in the exercise of this power. This could put charity employees in a very difficult position.
25. From the point of view of charities being regulated by the CC, generally the regulatory position has been extended. Not only charity trustees but also officers or employees of a charity can be directed to take action, or can seek advice from the CC. As intimated earlier, the fact that employees can approach the CC directly could override the trustees’ role and potentially cause confusion as to who is ultimately responsible in accordance with general trustees’ duties. It could also create or widen divisions between charity staff and trustees.
26. As an additional power, we would invite the Committee to recommend the inclusion in the Bill of a power for the CC to determine, on the application of a charity, who the members of that charity are. Members of the CLA often find themselves in the position of advising charities that need to make changes requiring resolutions of the membership but which have no up to date list of members. Giving the CC such a power would ease difficulties in these situations.
27. The CLA would be happy to provide the Committee with any further amplification of these points if that would be of assistance.
© Charity Law Association
July 2004
