Closing a loophole?

One of the key features, and one of the most contentious provisions, of the Charities (Protection and Social Investment) Bill 2015 (“the Bill”) is the new power it will grant the Charity Commission (“the Commission”) to issue official warnings to charities.  It has caused a great deal of concern in the charity sector. The reason for its inclusion has been explained as giving a power to enable the Commission to regulate charities as efficiently as possible and to ensure that the Commission is sufficiently robust to deal with serious abuse and mismanagement within charities. In the words of William Shawcross, Chair of the Commission, “the Bill will close loopholes and enable the Commission to take robust but proportionate action”.  Charity regulation has become a prominent issue in the light of some recent high-profile charity failures reported widely in the media.

What is the Commission’s proposed power to issue official warnings?

The Bill proposes to amend the Charities Act 2011 in order to give the Commission the power to issue an official warning to a charity, or a charity trustee, in certain circumstances.  The circumstances include where there has been a breach of trust or duty or misconduct/mismanagement in the charity.  Also included is a failure to comply with an order or direction issued by the Commission. 

In advance of a warning being issued, the Commission must give notice of the warning to the charity and its trustees by post.  The warning notice must specify (i) the grounds for the warning; (ii) any action the Commission considers should be taken; (iii) whether the Commission proposes to publish the warning; and (iv) a time period in which the charity is permitted to submit representations in response.  The Commission is required to take into account any representations made within the period of time specified. Once this has been done the Commission may then issue the official warning and this can be done without any further notice.  Whilst the Commission can take a charity’s representations into consideration, this is very different to a right of appeal once the Commission makes a decision.

The powers contained in the Bill enable the Commission to publish the warning, although it is not required to do so.  If the Commission chooses to publish a warning, publication can take any form in which the Commission determines and considers appropriate in the circumstances.  The Commission has been increasingly taking the view that publications on its website can be an effective deterrent so do not be surprised if official warnings appear there.

Controversially, there is no right of appeal by a charity to the Charity Tribunal against an official warning issued by the Commission.  The shadow minster for Civil Society withdrew a proposed amendment to the Bill which would have permitted charities to appeal as the Government indicated that it would not support the amendment. The only remaining option would be to challenge a warning through a judicial review process which is time consuming and generally expensive.

When can an official warning be issued?

The Commission considers this proposed new power to be a reasonable and proportionate means of dealing with breaches by charities; it is seen to sit between the Commission issuing guidance and opening an inquiry.  The Commission is of the view that the power to issue an official warning will be used in rare circumstances.  Examples of when the power may be used include:

  • a charity breaching its governing document which subsequently causes governance problems (for example a failure to achieve a quorum at trustee meetings);
  • the making of a poor investment in the absence of professional advice; or
  • the consistent submitting of accounts late by a charity.

The Commission will release guidance on official warnings before it has the power to issue them.

What has the response been?

The response has been mixed with. The Commission has welcomed the proposed new power commenting that it will allow it to take swift and proportionate action in circumstances where it considers that more serious intervention is not appropriate. 

However, the power has also been met with some criticism, raising concerns over reputational damage to charities, particularly as a charity is not afforded a right of appeal against an official warning and as official warnings can be made public.  Indeed the Charity Law Association has warned that the power to issue official warnings affords too much power to the Commission and has proposed amendments to the Bill.  Suggested amendments include lengthening the time from warning a charity and naming the charity publicly from twenty four hours to one month.  Publications of warnings could undermine public confidence in a charity, even in circumstances where the misconduct is not in any way serious.