“Trusted and independent: giving charity back to charities”
Lord Hodgson presented his review of the Charities Act 2006 (the “Act”) to Parliament on 16 July 2012. The next step is a review by Government and a consultation with the charity sector.
By way of reminder, the Act was intended by the last government to make major changes to charity law, in particular to ensure a level regulatory playing field for registered, exempt and excepted charities and to introduce the new charitable incorporated organisation (“CIO”) as an alternative legal form for charities. The CIO is still not available as a legal form for charities. The Act required the Minister for the Cabinet Office to appoint a person to undertake a review of the Act within five years of its coming into force.
Lord Hodgson’s review examines the legal basis of charity law and practice and runs to some 113 recommendations across 159 pages.
There is no recommendation for a statutory definition of ‘public benefit’, instead there is a preference to keep the flexibility of a common law definition.
The report suggests that government should stimulate a widespread sector and public debate on the question “what constitutes a charity?” as the sector is so diverse.
There are no plans to ensure that the definition of ‘charity’ applies consistently across the whole of the UK, especially give the recent establishment of the Office for the Scottish Charity Regulator and the Charity Commission for Northern Ireland.
There is a recommendation that large charities (with an income of over £1 million – including all higher education and further education institutions and a great majority of academies) should be able to pay trustees without permission from the Charity Commission provided they disclose all payments in their annual report and accounts. This has already provoked debate in the sector with many seeing a charity trustee’s position as one of a voluntary nature.
Trustees’ term of office
Interestingly, one of the recommendations was around limiting a trustee’s time in office to three terms of three years. The report goes on to recommend that any charity which does not comply with this limit on time in office should explain why it does not do so in its annual report. Practically, this would mean that a number of charities would have to amend their constitutions. Furthermore, it may present difficulties to charities who struggle to recruit trustees.
The general income threshold for compulsory registration with the Charity Commission should be raised from £5,000 to £25,000, but registration should be compulsory for all charities that claim gift aid relief.
Voluntary registration (only available online) will be open to all charities, regardless of income.
All charities not registered with the Charity Commission should include the word “unregistered” on all fundraising materials, letterheads and cheques. This is likely to be met with resistance in the sector.
The Charity Commission
No recommendations have been made to change the structure or functions of the Charity Commission, although Lord Hodgson was keen to point out that the regulator should act more as a “policeman” than a “friend”, particularly given the strain on the Charity Commission’s resources following funding cuts.
The Charity Commission should be renamed, with “the Charity Authority” suggested as a possible alternative.
There is a recommendation that the Charity Commission should charge, on a cost recovery basis, for bespoke legal advice in relation to complicated charity matters such as the development of schemes.
Lord Hodgson recommended throughout his report a “traffic light” system for charities to give potential donors “snapshot” information on certain key indicators about the charity to enable them to take a view about potential funding.
The term “principal regulator” should be changed to “co-regulator”, presumably because the Charity Commission can intervene, in certain circumstances, in the running of, say, exempt charities.
The government and Charity Commission should develop a system of charging charities for filing their annual returns and to register new charities.
The time limit for bringing a case to the Charity Tribunal should be extended from 42 days to four months.
Schedule 6 of the Act, which specifies which Charity Commission decisions can be appealed to the Charity Tribunal, should be removed as it is “over-complicated and too narrowly drawn”.
A Charity Ombudsman?
It was forecasted in March that Lord Hodgson may consider some form of ‘Charity Ombudsman’. However, he concluded that such a move would offer little additional value and it is not recommended by the report.
Local authorities should not be able to ban “chugging” (ie the collections of direct debits or standing orders).
The Cabinet Office and Charity Commission should establish a sector-funded, public-facing, central self regulatory body covering all aspects of fundraising, as this is a complicated area with a myriad of regulations.
The Charity Commission should do more to promote membership of the Fundraising Standards Board (“FRSB”) as there are only 1,400 members (out of an estimated 45,000 fundraising charities).
There are various recommendations for the growing area of social investment (“mixed motive” and “programme related” investment). These include a recommendation that charities should be able to obtain prior clearance from HMRC on the tax treatment of a proposed social investment.
In particular, there should be a modification to the investment duties charities trustees have to abide by so that trustees are entitled to consider “the totality of benefit that an investment is expected to provide” from both a financial and social benefit perspective. f this is enacted it will be quite a radical change and could well change the basis for decision-making in relation to investments.
Industrial and Provident Societies
The report essentially regards charitable industrial and provident societies as operating in an unregulated manner given the lack of regulatory zeal displayed by their regulator, the Financial Services Authority. The report recommends that charitable industrial and provident societies either register with the Charity Commission or lose charitable status.
Removing expense and bureaucracy
The Act’s merger provisions should be modified so that registration of mergers picks up all future legacies for the benefit of the merged charity. This should mean that charities will no longer need to keep the old pre-transfer charity in existence as a shell, simply to collect future legacies due to a technical defect in the Act.
The disposals of and mortgages of charity land should be deregulated so that charities can dispose of land in the same way as other investments or assets without having to go through the formal process of getting an independent valuation that complies with statutory requirements.
There is a recommendation in the report that Housing and Communities Agency should be considered for the role of principal regulator for housing associations going forward.
Trusted and Independent: Giving charity back to charities – Review of the Charities Act 2006
Public perceptions of charity – A report for the Charities Act 2006 review