The Charity Commission has published draft guidance, in which it explains how it intends exercising the new power to issue official warnings. This is intended to be a regulatory tool that is stronger than mere advice but less severe than a formal inquiry.
The power, in s.1 of the Charities (Protection and Social Investment) Act (the Act) allows the Commission to issue a warning if there has been a breach of trust or duty or other misconduct or mismanagement in the charity. In the paper, a "breach of trust or duty" is (correctly) said to include acting inconsistently with:
- trustees' duties;
- the charity's governing document; and
- other legal duties of the charity or its trustees.
'Mismanagement' will include an act (or failure to act) that may result in:
- charity resources being lost or misused;
- a charity's reputation being harmed; and
- beneficiaries being put at risk.
'Misconduct' is defined in vague terms – it includes any act (or failure to act) that the person committing it knew (or ought to have known) was criminal, unlawful or improper.
The paper does not say that failure to abide by the Commission's good practice recommendations will not, per se, constitute misconduct or mismanagement. Given the "comply or explain" approach adopted by the Commission in its recent publications, this was a concern when the Act was being discussed in Parliament. At the time, the Minister gave assurances, pointing to paragraph 36 of the Act's Explanatory Notes, which states: "Failure to follow good practice could not automatically be considered to constitute misconduct or mismanagement". It is to be hoped that the final version of the guidance will be as explicit as the Explanatory Notes on this point.
The Commission is unlikely to issue warnings for minor faults that cause minimal damage (whether financial or reputational) and it will assess risks by reference to its own risk framework, which is linked in the text. The draft guidance provides non-exhaustive lists of (1) factors the Commission will take into account when deciding whether to exercise the power, and (2) examples of when the Commission might issue warnings. The factors include:
- the level of financial loss to the charity;
- the risk of harm to beneficiaries;
- whether the misconduct/mismanagement was an isolated or repeated incident;
- whether the misconduct/mismanagement concerned was an honest mistake or involved reckless, negligent or dishonest behaviour.
The examples of when the Commission might use the power are:
- where the trustees have received unauthorised benefits, but the amounts involved are small;
- repeated failure to comply with accounting and reporting requirements (according to the draft, the Commission may issue warnings automatically in these circumstances);
- poor decision-making, where the resulting financial loss is too small to warrant more serious sanctions;
- repeated breaches of a charity's governing document that causes governance problems (such as failure to follow the correct procedure for appointing trustees).
Before issuing a warning, the Commission must give notice to the intended recipient. The draft guidance states that it will usually give 14 days' notice and will send notices by email, where possible. The Act gives recipients power to make representations before the warning is issued. According to the paper, these will normally need to be in writing.
Another concern, when the Act was passing through Parliament, was that the statutory requirement for the pre-warning notice to specify "any action that the Commission considers should be taken…to rectify the misconduct or mismanagement…" may amount to a power for the Commission to tell trustees what to do. The Minister said that it did not, and the draft guidance states:
"The trustees remain responsible for directing and governing the charity, complying with the law and the governing document and making decisions in the charity’s best interests. The commission can’t substitute its judgement for that of the trustees. It may, as part of its regulatory remit, ask the trustees to explain and justify their decisions."
Once the Commission has considered representations, it will not normally conduct a further review of the warning's contents under its decision review process. The paper notes (at the end) that warnings are not appealable to the Tribunal and that the normal procedure for challenging them will be by making representations during the notice period.
The Commission will have power to vary or withdraw a warning but, according to the draft guidance, it will not automatically withdraw a warning just because the specified misconduct or mismanagement has been remedied.
Yet another concern was that the Act allows the Commission to publish warnings publicly. In Parliament, the Minister intimated that publication would be the default option. The paper confirms this – the Commission will usually publish warnings on its website unless it would:
- be detrimental to a particular individual or group of individuals;
- contravene or prejudice requirements for confidentiality or commercial sensitivity;
- cause severe prejudice to the charity or its beneficiaries;
- contravene the Commission's duty to use its resources in the most efficient, effective and economic way; or
- not be in the public interest for some other reason.
It will be up to the trustees to tell the Commission if there are reasons why a warning should not be published. Published official warnings will remain on the Commission's website for up to two years.
In addition to publishing, the Commission will highlight current official warnings on a charity's register entry. Given that a warning may remain in force even if the issue that prompted it has been rectified, there are reasons to be concerned about the fairness of this proposal.
After issuing a warning, the Commission may ask charities or trustees to confirm or demonstrate that they have taken appropriate action in response. The draft guidance points out that failure to remedy a breach identified in an official warning may be used as evidence of misconduct or mismanagement, enabling the Commission to open an inquiry and use its stronger regulatory powers.
The draft guidance is here. The consultation closes on 23 September 2016.