The Charities (Protection and Social Investment) Act 2016 introduced two new powers for the Charity Commission, and on 3 July 2017 the Commission published its first official warning using one of its new powers.

The official warning was issued to the National Hereditary Breast Cancer Helpline, after the Charity Commission’s interest in the charity was sparked by proactive analysis of a group of charities identified as being at risk of financial distress: the charity was “randomly selected from the group of 94 charities whose accounts signalled they may be in financial difficulty”.

The two new powers are the ‘official warning power’ and the ‘discretionary disqualification power’, both of which came into force on 1 October 2016. In December 2016, the Commission published guidance on the new powers, but there has been speculation as to how the powers will be used in practice. This case is therefore of significant interest, as it provides a practical example of the use of these new powers.

On 3 July 2017, the Commission issued an official warning to the National Hereditary Breast Cancer Helpline (and published a case report on its regulatory intervention in the charity). The official warning was issued on the grounds that “the Charity Commission considers that the charity trustees have committed a breach of trust or duty or misconduct or mismanagement in the administration of the charity in relation to making unauthorised payments to a connected person, entering into an informal loan agreement with a connected person, improperly delegating the administration and management of the charity, failing to keep proper minutes and other records of decision making, and failing to properly implement and manage financial controls”.

The official warning followed a failure by the charity to implement an Action Plan issued by the Commission on 26 August 2016 in respect of the above identified issues. The Commission carried out a follow up inspection on 18 October 2016 and was “concerned to find that although the trustees had made some progress, they had failed to fully comply with the terms of the Action Plan”.

The official warning sets out specific action to be taken by the charity trustees to rectify the issues, and failure to comply with the terms of the official warning could result in the Charity Commission opening a formal s46 statutory inquiry and making use of its full suite of temporary protective powers during the investigation (including the suspension of trustees, officers, agents or staff; appointment of additional trustees; vesting property in the official custodian for charities; freezing bank accounts; and restricting transactions), and permanent protective measures at the end of the inquiry (which include the power to remove trustees, which results in those individuals being disqualified from acting as charity trustees). The Commission only opens s46 inquiries in the most serious cases of regulatory concern, and (since June 2014), publicly announces them when they are opened, so there are significant reputational implications for charities that find themselves the subject of an inquiry.

This case provides a helpful insight into how the Commission is likely to make use of its new powers, and emphasises the increased scrutiny by the Commission on governance and proper management by charity trustees. During its investigation, the Commission found that unauthorised payments had been made to the chair of trustees for work undertaken in running the day-to-day operations of the charity, and that the chair (as sole authorised signatory on the charity's bank account) had authorised the payments themselves. The Commission also identified that the trustees had failed to meet regularly, and that the chair made decisions following discussions with individual trustees, with no records kept of those discussions. The third serious issue identified was that a trustee had made interest-free loans to the charity without putting a formal agreement or repayment schedule in place.

Following receipt of the Action Plan, the chair resigned as a trustee, but continued to run the charity’s operations without any formal role and continued to receive payments. The trustees held one meeting, but in its follow up inspection the Commission found little evidence that the trustees were taking decisions collectively; in practice they continued to allow the former chair to make key decisions. The trustees had added additional bank account signatories, but failed to implement other measures to protect the charity's assets with appropriate financial controls. They also failed to formalise the loan arrangements.

The case serves as a reminder to charity trustees that once the Commission has intervened and issued an action plan for rectifying issues of mismanagement or misconduct, it is essential to take it seriously and act promptly. The Commission will continue to monitor the charity and might intervene further and escalate its enforcement action if non-compliance continues. In this case, the Commission's involvement arose as a result of proactive analysis by the Commission of a group of charities that it had identified as having signs that they might be at risk of financial distress. In its case report, the Commission comments that “this is part of our work to proactively monitor charities that fall into certain risk categories”.

After being randomly selected from a group of 94 charities, the Commission carried out a detailed investigation into the charity's accounts, during which a number of additional concerns were raised regarding the management of the charity's finances. This provides a reminder of the implications of being investigated by the Commission, and the importance of keeping your house in order: the Commission is extremely thorough and will look at everything, not just the specific issue that initially raises a flag for concern.

The Commission concludes its case report with a note that “this case demonstrates the importance of trustees being fully aware of their role and responsibilities”. Birketts offers a rolling programme of Charity Trustee Induction and Refresher Training, as well as a programme of in-house training for trustees and senior managers within charities via our Shaping Excellence programme [http://www.birketts.co.uk/our-services/services-for-businesses/training-shaping-excellence/shaping-excellence-charities].