(June 2010)
Is Australia ready to change the way we treat our not-for-profit sector? A view from the UK
Thank you very much for inviting me to this event today.
I am delighted to be here, especially at a time when the future regulation of the not-for-profit sector is a topic of such serious debate in Australia.
Both the Productivity Review and the Henry Report raise fundamental questions about the future of the charitable sector in your country.
I have been asked to provide a UK perspective to your debate. Of course, that is all I can offer: a perspective, some food for thought.
But I hope my contribution will be relevant to your discussions, not least because of the many social and cultural similarities between our two countries.
Before I start, I’d like to extend a quick thank-you to the National Bank for sponsoring and hosting my visit – I’m very grateful.
I’d also like to thank Pilch Connect for organising this event and for all the fantastic work they do….
I thought it would be helpful if I started today by giving you an idea of the charitable sector in England and Wales, and of the work of the Charity Commission.
I hope this will provide some context and help you get a grip of the national and personal prejudices that inform my views on the broader issues I’ve been asked to speak about today.
The UK not-for-profit sector is large.
A few numbers to demonstrate this: we have around 900,000 civil society organisations, with a combined income of nearly 160 billion pounds – that’s about 270 billion Australian dollars.
One of the UK umbrella bodies for charities produces a yearly Civil Society Almanac, packed with lots of wonderful facts and figures.
Its 2010 report shoes that the sector employs over one and a half million people.
It also shows that more than 20 million adults volunteer each year. Just under one in three people volunteer formally at least once a week.
Social enterprises make up by far the largest sub-group in civil society. There are around 600,000 of them.
At this micro level the boundaries between the activities of very small organisations and individual activism or volunteering become blurred.
But I believe that the ability of such organisations to exist is a hallmark of a society that values freedom of association.
Other types of civil society organisations, of course, include trade unions, sports clubs, co-operatives, credit unions, political parties and trade associations.
The second largest type of civil society body is charities. In England and Wales, there are 182,000 registered charities with an annual income of nearly £53 billion (or 70 billion Australian dollars).
£10 billion of that, so around a fifth, is spent overseas. The rest goes on beneficiaries in the UK.
The charitable sector is incredibly diverse in size, activity and structure.
More than a third of our registered charities have an income of less than £10,000.
Most of these are small community-based projects working at a local level.
These include church groups, mosques, temples and Gudwaras, village halls, scouts and girl guides groups and women’s institutes. All of these play a central role in our communities.
Around 60,000 of these small groups have an income below the threshold for registration with the Charity Commission.
Many choose to stay on the register and file annual returns with us, anyway. Often this is simply because having a registration number is of such value to them. It is one of the most recognised public markers of being a genuine charity.
At the other end of the sector, the top 1% of charities account for 67% of the sector’s income. The Welcome Trust has the largest income at £616 million a year and the National Trust has over three and a half million members.
I was struck, when reading the Productivity Commission, by the similar make-up of the sectors here and in the UK.
In both countries we see very high numbers of small unincorporated associations (440,000), and comparatively low numbers of not-for-profits structured as companies limited by guarantee (11,000).
I said the sector was large – it’s also old.
You might be interested to know that the oldest charity in continuing existence on our register is King’s School Canterbury, which dates back to the late 6th century.
That’s the sector – now to the Charity Commission.
Our remit is to promote public trust and confidence in charities by regulating and enabling the sector in England and Wales. Charities in Scotland and Northern Ireland are regulated separately.
The origins of the Commission date right back to the reign of Queen Elizabeth I. Her 1601 Statute of Charitable Uses introduced Commissions of Inquiry and set out what purpose could be defined as charitable.
The Commission itself, however, wasn’t established in statute until 1853. This came in response to concerns about the maladministration and abuse of charitable funds.
Those among you who are familiar with the novels of Anthony Trollope will recognise that his work includes references to concerns about such abuses.
Like the sector that we regulate, the Commission has changed significantly since our formation.
And it’s not just that we’ve stopped touring the country on horseback.
We’re a modern regulator with statutory objectives, functions and duties. We’re also independent from both Government and the sector.
We report directly to Parliament for our work and to the courts for our decision making. This independence is central to the regulatory model in England and Wales.
We are funded directly from the treasury and currently receive just under £30 million a year. We have 460 staff based over 4 sites in England and Wales.
Our role as regulator is broad; in addition to acting as Registrar we provide a wide range of materials to explain trustees’ duties and set out legal requirements and benchmarks of good practice.
There has always been a lively debate about the extent to which the role of the regulator is to provide advice.
But right from our formation the Charity Commissioners were tasked with giving advice to trustees on the administration of charities.
We did this because of the nature of the sector – the numbers of very small organisations, the dependence on voluntary action.
All this lead us to believe that advice and support must be an essential component of effective regulation.
Since the Commission was established in 1853 society has become more complex, meaning that the potential for abuse of and in the sector has grown.
Reasons for the increased risk include the growing levels of public trust in charities, which we measure through regular surveys.
The international nature of many charities is also a factor – many charities are involved in complex global financial operations.
Charities are also relatively easy to set up and have the potential to reach into all areas of society.
Despite this, the Charity Commission is committed to a light-touch approach. This means that we operate according to an established risk and proportionality framework.
We believe this essential to permit the charitable and not for profit sector to remain independent, effective and strong.
However, in high risk areas we have the ability to intervene.
High risk, for us, includes allegations of abuse of vulnerable beneficiaries, of links to terrorism, of fraud and money laundering or of sham charities.
I hope that’s given you a broad idea of the not-for-profit sector in the UK, and of the work of the Charity Commission.
I’d now like to move on to discussing some broader issues. And first of all, I’d like to look at political, constitutional and economic issues associated with the regulation of charities.
All developed countries, and many developing ones too, recognise the value of charitable and not for profit activity and the need to regulate it.
There are strong traditions of voluntary giving to support the least well off in most countries, often with religious origins, but now in part secularised.
In the major economies of the world the voluntary sector sits alongside the state sector and private sector.
Increasingly though, the boundary between the state and not for profit sector is being blurred. Governments of all political persuasions look to the sector to deliver public services.
In the UK for example, the voluntary sector now receives over a third of its total income from statutory funders, a level of support which has increased by 53% in the last decade.
We now also have a new centre right coalition Government that believes in a small state and what it has termed ‘the big society’.
It has already made clear that it envisages the not-for-profit sector moving into areas of social provision as the state withdraws.
I understand that a similar situation exists in Australia. Not-for-profits here are also increasingly being seen as providers of service delivery, especially in areas of social need.
This has two-fold implications. On the one hand, providing such services represents an obvious opportunity for many charities. On the other, relying too heavily on statutory funding can substantially risk a charity’s independence.
I am sure that we all have a shared belief that a strong and vibrant not-for-profit sector is a central component of civil society.
There are a number of key ingredients required to allow the sector to thrive:
- States need to recognise the role and value of charities and not-for-profits
- There need to be basic rights and freedoms for individuals to associate and to form organisations for voluntary, social welfare and religious purposes
- Citizens’ altruism needs to be encouraged – they need to be persuaded to volunteer their time and donate their money.
- States need to support charities in the form of tax benefits are similar exemptions support conferred on bodies in the form of fiscal or other immunities or benefits
What is more controversial is whether there also needs to be some capacity building by the government to enable the development of a strong sector.
In many developing countries government support is a critical component.
I note that the Productivity Commission report believes this should only take place where the Government uses the sector for service delivery.
Personally, I would be more relaxed about capacity building, providing it takes place in the context of a clear legal and regulatory framework that supports independence.
And now to a big question for all of us in this room – what should the role of regulation be?
Regulation of course takes place in all advanced economies in innumerable ways: public health, financial, economic, and price regulation.
It often goes unnoticed until something goes spectacularly wrong.
One obvious example is the failure of many territories to properly regulate their banks and financial markets. In the UK, as many of you will know, this led to the mass nationalisation of a number of large high street banks.
Regulating markets and banks is one thing.
I sometimes think though that I am in the business of regulating good intentions.
The not-for-profit sector is unique and whilst there are some similarities with other forms of regulation there are also stark differences.
I believe that the main purpose of not for profit regulation should be to produce an environment of public trust; a situation where the sector is compliant with the law but has the space it needs to flourish and innovate.
For this to happen, the sector needs certainty about the legal and regulatory framework, about what’s required of it.
The framework needs to be simple and clear to ensure compliance and it needs to be proportionate to the capacity of small organisations.
Let’s not forget than many small charities are run entirely by volunteers. They may have limited understanding of the law and a limited amount of time to get to grips with complex issues.
But they are motivated by a desire to effect positive change for their communities or the causes they believe in.
So the burden must be kept to the absolute minimum level necessary for regulation to be effective.
And smaller organisations, for reasons of capacity, need advice and information to enable them to understand their obligations.
The regulator needs to be careful not to micro manage individual organisations through one to one engagement.
The role of regulators is to understand the big systemic and thematic risks – it’s all too easy for them not to see the wood for the trees.
The failure of regulators to understand the inherent risks of sub prime debt are a lesson to us all.
I believe the core elements of a regulatory framework might be said to be as follows:
- There must be a system of registration – there are different models; in the UK registration is a matter of recognition. But in many jurisdictions registration creates the legal ability to exist and/or operate.
- There must be some sort of regulatory authority. In our experience, unitary models work best – there shouldn’t be a plethora of departments or agencies with overlapping jurisdictions.
- Organisations must be required to submit financial returns – the regulator must have the power to monitor and the public must have the right to view accounts.
- The regulator must have consensual powers of advice, support and guidance
- The regulator must equally have invasive powers of investigation and remedy
- And finally, regulatory bodies must exchange information and evidence – domestically and internationally – with other regulators and law enforcement agencies.
I’d like to talk a bit more now about promoting accountability and transparency among not-for-profit organisations.
Given the benefits and advantages of the charitable sector, including tax breaks and public support, it’s vital that the general public is able to understand what an organisation does – what it contributes to society.
Some of the ways in which this can be achieved include the following:
- Publicly available governing documents and accounts;
- A requirement on charities to register and to submit financial returns and accounts to the authorities;
- The existence of enforceable legal duties on those responsible for managing and controlling a charity;
- The existence of systems for considering complaints or concerns of members of the public;
- Who regulates the regulators? The regulator must be politically or judicially accountable.
It must be easy for the public as consumers, as beneficiaries and as supporters to check that an organisation is genuine.
They must also be able to find out how it raises money, how it spends money and what its impact is.
This needs to be simple and easy to do, and increasingly as the world moves digital best practice requires this to be in one place and on line.
Half of all UK adults in employment have a reading age of under 11.
Before you get too smug, though: Australia ranks joint 21st with the1 UK, on the International scale of adult literacy.
If we are serious about accountability and transparency we cannot assume that the public will understand that there are different legal structures for charities, different registers according to structure and jurisdictional, let alone that they will be able to easily interpret complex financial accounts. Ease of access in one place and easy read materials are essential.
Not only can regulatory structures be difficult for the public to understand.
They can be equally obtuse to the sector being regulated.
When I joined the Charity Commission, there were 54 different ways for charities and the public to contact us. How you went about getting in touch depended on the size and structure of the charity and the geographical address of its registered office.
Moving this to a national structure with a single point of contact has brought about benefits for the sector and the public. The move also led to significant efficiencies for us as a publicly funded body.
I’d now like to look at the issue of devolved power in regulating charities.
Clearly, the respective roles of State and Federal Government need to be addressed in the debate on a future Australian model.
Voluntary and community action is often localised. And almost all large national charities start small. Regulatory burdens on organisations and their capacity to respond to different reporting regimes are often very real issues.
In the UK we have recent experience of jurisdiction debates.
In 2005 the Office of the Scottish Regulator was established and the Northern Ireland regulator is currently in formation.
Both of these nations have moved from quite passive regulation by the Inland Revenue to more pro-active models - similar to the one I have described in England and Wales.
Charities operating across the four nations of the UK are vociferous in their frustration at differences in reporting and interpretation. Perhaps a certain amount of duplication is an inevitable consequence of devolution.
But it’s regrettable if resources intended for charitable purposes are spent dealing with overlapping regulatory requirements.
Ultimately the decision on whether a federal or state model is best is for Australian lawmakers to determine.
In our experience though some of the issues to be considered with a federal model are:
- Which areas absolutely require consistency – for example: do you require consistent registration criteria and appeal systems? How do you ensure this?
- How can you ensure consistency of advice, customer service, and response times etc? Of standards – especially where legal decisions may be made or appealed against?
- How do you handle issues that cross federal borders? For example misconduct/mismanagement. What about not for profits that want to work in several states?
- What issues are there in cross-governmental working? With tax authorities, law enforcement etc…
- How do you ensure that you are not duplicating regulatory effort and increasing the regulatory burden
- If there is no central register of all regulated bodies how can consumers easily have access to information and how can there be clear accountability.
Fundraising
I’d now like to discuss the regulation of public fundraising.
Surveys conducted by the Charity Commission demonstrate that, in the UK, the public place significant importance on the honesty and ethics of fundraisers. I’m sure the situation in Australia is no different.
Unlike regulators in some other countries, the Commission has decided against prescribing a percentage level of funds that must be spent on charitable activities, or a minimum which must go on fundraising and administration. In Canada, I understand, charities are obliged to stick to an 80 / 20 ratio.
In the UK, we’ve taken the view that such restrictions are too crude. Charities often legitimately spend funds differently during different stages in their life cycle.
But we recognise that it’s an area in which public perception is often at odds with the realities on the ground. The public often expect every cent of their donation to go to the beneficiaries or cause.
In England and Wales we have a bit of a hybrid model regarding the regulation of fundraising activity.
This is not necessarily one that I would commend to you. We have a self regulatory body, The Fundraising Standards Board.
This runs a scheme open to charities and bodies raising charitable funds.
It has 1,232 members who have signed a Fundraising Promise. They effectively agree to a code of conduct and accept the authority of the Board to deal with complaints.
In addition to this, the Charity Commission plays a small role with regards to fundraising.
Our jurisdiction extends to charitable collections and other funds managed on an informal basis for charitable purposes.
We have a memorandum of understanding with the FSB setting out how we’ll work together and agreeing our roles.
The Commission continues to use its powers of regulatory intervention where there are significant charitable assets at risk, fundraising or administrative costs are clearly excessive or fundraising material is significantly misleading.
But we apply a high threshold of risk and proportionality to such cases. Last year we dealt with only 17 cases focused on fundraising. These included cases where virtually no sums were going to charitable causes.
One of the difficulties with a self regulatory model is that, by its nature, membership is voluntary.
Until you have a strong brand widely recognised by the public and a critical mass of membership, its effectiveness will always be limited.
In our case the Secretary of State has reserved powers to introduce secondary legislation to regulate fundraising if the self-regulatory model is seen not to deliver.
When the Charities Act 2006 is reviewed by Parliament in 2011 this will no doubt be back on the agenda. It will be interesting to see how the new Government views the regulatory balance here.
Another factor to consider when looking at this issue is the degree of overlap between bodies regulating advertising and fundraising.
Finally, I’d like to look at whether regulation should cover the wider sector, or just charities.
Ultimately, of course, each jurisdiction needs to determine the scope of its regulatory remit.
In some countries for instance, all religious organisations are excluded.
It is also common to have a financial threshold below which registration is not required.
It could also be argued that regulating micro-social enterprises would be disproportionate, ineffective and could stifle basic freedoms.
Other parts of civil society, meanwhile, are already regulated in other ways. For instance, financial mutuals, co-operatives, and social housing providers are all already subject to regulatory frameworks.
If these groups are to be regulated alongside charities, existing regulation should be replaced. Otherwise the organisations will be faced with a double regulatory burden.
In the UK our jurisdiction is limited to charities. For an organisation to be a charity it needs to have exclusively charitable purposes and be established for the public benefit.
There must be clear identifiable benefits, these must be available to the public, people in poverty must not be excluded from the opportunity to benefit, and there must be a sufficiently wide beneficial class.
So you can’t set up a charity aimed at helping a single child, but you can establish one focused on the children of Birmingham.
In conclusion - I realise that I’ve probably raised as many questions as I’ve answered.
But I hope I’ve been able to provide a fresh perspective to your debates.
If I could sum up what I have learnt from my work at the Commission though is that most countries face similar issues, similar dilemmas in the regulation of charities and NGOs.
And while models may vary from country to country, the guiding principles of effective regulation (independence, transparency and accountability) must surely be the same across the globe.
And I personally have come to feel that underlying these principles must be a certain poise and balance on the part of regulators.
Like all of us, the non-profit sector needs oxygen, space, the freedom to create and innovate. But it also needs structure and rules Charities need and benchmarks to judge themselves against.
It’s the role of the regulator to provide both.
Thank-you.
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