Background

On 1 November 2016 the Charity Commission (“the Commission”) gained the power to issue official warnings. Official warnings are warnings to charities, or to trustees, if there has been a breach of trust or duty, or other misconduct or mismanagement. This power was given by the Charities (Protection and Social Investment) Act 2016 (“the Act”).

On 1 July 2016, the Commission published a consultation on its draft guidance and its proposed approach to using the new power. It has now published Q and A guidance on official warnings, along with more detailed Operational Guidance in light of the consultation responses.

This new power has led to a great deal of unease in the charity sector as to how the Commission intends to use it.

Responses to the consultation

A number of common issues were raised in consultation. A summary of the key issues together with the Commission’s response to them are set out below:

More details were requested as to how warnings would work in practice. Some respondents felt that the draft guidance was too ‘high level’. The Q and A guidance and Operational Guidance aim to address many of the practical issues related to warnings.

A concern was raised that the Commission may use official warnings as a quick way of responding to complaints, to ‘gag’ campaigning by charities or in response to political or media pressure to take action. The Commission confirmed that it is not intending to use warnings in these ways, but will use the warning power in the context of its risk framework. It may consider issuing a warning where:

• the harm, or risk of harm, to charity assets (including reputation) or beneficiaries is sufficient to require the Commission to take targeted action; or

• regulatory advice and guidance alone would not be sufficient to deal with the misconduct or mismanagement, or has not been acted upon; or

• it would not be proportionate in the circumstances to use other temporary or permanent protective powers (such as removing trustees) or to open a statutory inquiry to take further action, or to seek recovery through litigation.

The analysis of the consultation responses considers the difficulty of using examples to explain when it would be appropriate to use official warnings, and the new guidance sets out a more principle-based approach. Examples of use are provided and include when trustee(s):

• have acted recklessly or without due care, resulting in a breach of trust, misconduct or mismanagement; or

• have committed deliberate or wilful wrongdoing resulting in a breach but it would not be proportionate in the circumstances for the Commission to use other powers.

It also sets out examples of when the Commission is unlikely to issue an official warning. It sets out that the Operational Guidance links the use of warnings to the Commission’s statutory duties, and that this will usually be to promote compliance with trustees’ duties, or to promote accountability or public confidence by highlighting regulatory action that the Commission has taken. Although the analysis mentions that official warnings are not statutory directions and the Commission cannot use an official warning to direct trustees to take specific action, the Act requires that in its notice of intention to issue a warning, the Commission must specify any action it considers that the trustees or the charity should take, and the failure to rectify a breach specified in a warning can be treated as misconduct or mismanagement.

The Commission’s analysis also stated that it is willing to consider representations on a range of issues including any actions taken by the trustees to put matters right, and in relation to publication proposals, as well as on the ‘content of the proposed warning’ which it must consider by law, and that it will follow and apply the principles of its decision review procedure when considering representations to ensure that consideration of representations is objective and timely.

The notice period for an official warning was dealt with. The original proposed period was 14 days, however after concerns that this was too short, the Commission proposed a 28 day notice period to be the typical starting point (subject to a longer or shorter period being deemed appropriate taking into account all the circumstances). Although concerns were raised in the consultation that a charity may only be first contacted by the Commission about misconduct or mismanagement by the issuance of a notice of the intention to issue a warning, the analysis document states that in practice it is more likely that the Commission will have already contacted the charity. It is anticipated that issuing a notice of warning will often be an escalation upon failure to respond or lack of action to remedy the situation.

The respondents to the consultation expressed concern about warnings being published, because of the potential reputational damage to charities. Although the Commission stated that they cannot accept this as a reason not to publish warnings, they have agreed to consider each case on its own merits. They state that they are unlikely to issue warnings where trustees have made honest mistakes and take prompt action to remedy them themselves.

As part of the consultation the Commission asked for view or comments on the action the Commission might take following an official warning. It does not appear that the responders had strong views on this, and the Commission confirmed that it is satisfied that the possible outcomes outlined in the consultation are appropriate and proportionate.

The future of official warnings

The outcome of the consultation has brought more clarity on how official warnings may work in practice. However, as the Commission will have discretion to take appropriate action, it is unlikely that the charity sector will have a clear understanding of how official warnings will work until they begin to be issued by the Commission.