The Regulator for Charities in England and Wales
(September, 2004)
The Charity Commission is established by law as the regulator and registrar for charities in England and Wales. We fulfil this role by:
Our aim is to provide the best possible regulation of charities in England and Wales, in order to increase charities' efficiency and effectiveness and public confidence and trust. We act in the public interest in carrying out our independent role. We work in partnership with charities, umbrella bodies, local and central government bodies and with others to whom we are accountable. We actively support self-regulation by charities where possible for example the recent fundraising initiative.
The Commission fulfils its role as a regulator through a variety of activities. Our work forms part of a regulatory continuum from compliance through to advice. We believe this approach reflects the role of modern regulators as recommended by the Government’s Better Regulation Task Force (Imaginative thinking for better regulation Better Regulation Task Force (September 2003)). In particular, virtually all Commission "support" and "advice" is given in relation to aspects of the legal, financial and governance framework where compliance is an issue. Any attempt to split the Commission's work between "advice" and "compliance" would be based on a misconception, would be less "joined up", would involve duplication and additional costs, would give rise to difficult boundary issues and would be likely to provide less effective and more expensive oversight of the sector.
When providing information to charities, whether through publications or to individual charities, we aim to clearly identify what is required by law and what decisions are within the discretion of the trustees.
We welcome the draft Bill. The proposals included in it are a good reforming and enabling package which supports the needs of the charity sector both in what it does now and to help it develop in the future. We comment below on a number of the key positive elements of the proposals.
(a) The draft Bill provides greater freedom for charities to operate within a more flexible legal framework. It does this by
(b) The proposed descriptions of charitable purposes will greatly increase the clarity of what charity means for all those involved with or affected by charities. Greater clarity will mean greater public trust and confidence. The list forms part of a workable definition of what is charitable balanced with scope for the Commission and the courts to recognise as charitable, other purposes which should be treated as sufficiently similar to them. This flexibility is essential if charity is to be able to keep pace with the changing needs of society.
(c) The Commission welcomes the removal of the presumption of public benefit. We have written separately to the Joint Committee (See paper DCH 13)
The Joint Committee set out a number of themes which it is inquiring into. Our views on these areas are given in Annex 1 to this note.
Two proposals which could usefully be taken forward in the draft Bill are described in Annex 2 to this note.
Charity Commission
June 2004
We think that the balance is right. The draft Bill reflects the recommendations proposed by the Strategy Unit (Private Action, Public Benefit – A review of Charities and the Wider not-for-profit sector. Strategy Unit (September 2002)) which covered a range of issues aimed at modernising and clarifying charity law and status, emphasising the delivery of public benefit and developing greater accountability and transparency to build public trust and confidence in the sector.
Our approach to regulation is to follow better regulation principles by focussing our priorities and resources where we believe that we can make most difference to charities and their beneficiaries and where there is greatest risk. We provide information and advice (We publish information about our decisions on questions of charitable status, our statutory and regulatory requirements, and related advice about best practice, the results of research into governance and finance issues, and the outcome of our investigations) to encourage self-reliance by enabling charity trustees to make decisions and to act in the best interests of the charity and its beneficiaries with the minimum of bureaucracy within the legal framework. We aim to provide the freedom to make decisions and the tools which enable the sector to develop and achieve their aspirations. We act in a way that is proportionate to the issue and to the risk of harm involved and we take account of the capacity of organisations to comply with requirements for change. The draft Bill takes the same approach. It will support what we do now and enable us to develop how we use our legal powers to protect charity assets and to ensure that the charitable sector deserves the confidence of those who support it and those who benefit from it.
Taken as a whole the Bill supports a regulatory environment better fitted to the modern day needs of charities. Some proposals remove unnecessary bureaucracy freeing funds and effort to be focussed directly on the purposes of the charity and helping charities to adapt. Others promote greater transparency and accountability enabling the public to make more informed choices about how they support charities and enabling the Commission to act effectively to ensure that maladministration and abuse is stopped and charity assets are used effectively to achieve the objectives of the charity.
The draft Bill proposes four regulatory objectives for the Commission. The first of these objectives requires us to seek to increase public trust and confidence in charities. One of the recommendations made in the Strategy Unit Review not requiring legislation was to look at what indicators could be used to measure our impact. We are already examining how such indicators can be developed and in particular ways in which we can measure public confidence and monitor changes in public confidence. This may include using other measures of activity within the charitable sector such as Home Office studies of volunteering. We have also commissioned research to examine what drives public trust and confidence in charities and our relationship to that and we hope to be able to use this to enable us to identify and measure changes in public trust and confidence in the future.
We think that the descriptions of charitable purposes set out in the draft Bill are helpful in that they describe the scope of charity more fully and clearly than the existing four heads of charity established in case law. We are pleased that the draft Bill will enable us to continue to consider whether new purposes are charitable. In order for charity to develop in response to social and economic changes it is essential that the law provides flexibility for the Commission or the courts to judge whether purposes which might not have been contemplated at the time the legislation is made are sufficiently similar that they should be accepted as charitable. This is the approach we have taken in recent years and which has enabled us to accept as charitable, purposes such as the promotion of human rights, the promotion of equality and diversity and the promotion of religious tolerance.
In our view the phrase "public benefit" is best left undefined in the Bill. A statutory definition could have unintended consequences and make the law more rigid and less adaptable.
The role of charities in the delivery of public services was not a specific object of the Strategy Unit Review but a number of the recommendations leading to legislation are likely to be helpful.
The draft Bill provides:
The Bill should bring a range of benefits to charities and the public. Many proposals are intended to address issues raised by the sector's experience since the 1992 Charities Act.
The draft bill eases the regulatory and administrative burden, particularly for smaller charities. For example through proposals on
Some proposals are aimed at increasing the accountability and transparency of charities. Potential donors, for example, should be better able to make informed decisions about requests for help. Relevant proposals include those relating to:
This is addressed by the proposals listed above and others including
Funding for the Commission has to be agreed with Treasury. We are currently discussing funding for the next three years as part of the Spending Review process. These discussions have included the costs related to the draft Bill if enacted. A summary of the estimated costs is given below.
There are figures for both first year and continuing annual costs. First year costs to start up new commitments include one-off costs such as the registration of formerly excepted and exempt charities. Continuing costs reflect the annual cost of regulating them once they are on the register.
In total the additional resources we will need are:
In addition, further estimated costs of £390,000 will be met from existing Commission resources.
On balance the Commission supports the proposal as an extension of choice. We are aware that many charities will prefer to retain the safeguards and the transparency in financial relationships that come from operating through trading subsidiaries.
The proposal is in the same liberalising spirit as other recent better regulation developments, such as the changes to investment rules made by the Trustee Act 2000. The Commission has taken an active part in these developments, for example in our approach to trustee remuneration where we look at what is expedient in the interests of the charity. These changes are all designed to give trustees greater freedom – balanced with a duty of care – in deciding how to deploy resources to best advantage. The present proposal would put trading, as a form of income generation, on the same footing as fundraising – an area where the great majority of charities have a record of proportionate and successful investment.
The new freedom would emphasise charities’ ability to identify and control risk. Many charities would need advice and guidance from specialist advisers on how best to structure their trading activities so as both to minimise bureaucracy and mitigate risks to their assets. Measures that charities took to mitigate risk would have their own costs attached. Trustees of unincorporated charities would need to consider the risks of direct trading very carefully indeed, given the personal liabilities involved.
Should the proposal be implemented the Commission would work with charities to build better understanding of the issues and to increase transparency of such trading activities. We envisage that this would include:
The purpose of regulating fundraising is to protect the public, both from poorly managed and executed collections, which could cause nuisance and harassment, and from unscrupulous collectors who abuse public trust.
The legislation for regulating fundraising should therefore be fit for this purpose:
But – even if the legislation is fit for purpose, it will only achieve this purpose if steps are put in place to ensure adequate enforcement.
The draft bill moves fundraising regulation forward from existing legislation. We think there is scope to make technical changes which will improve the clarity of the legislation and we will submit more detailed comments as we work through the detail of how the proposals will work in practice.
Taken overall the draft bill will provide benefits to the sector in a wide range of areas, particularly by enabling charities to choose the structure of a CIO and to develop and adapt to changing social and economic circumstances. The proposals relating to the future structure and role of the Commission support its work in regulating charities in a way which protects the interests of the sector and the wider public.
There are two additional areas which we believe it would be useful to include in the draft bill. These are described in Annex 2.
We also think that there are a number of areas where some minor technical changes are necessary. We will send a further statement to the Joint Committee covering this.
The 1993 Charities Act is based on the premise that charities produce entity or individual accounts. Such accounts reflect the transactions undertaken directly by the charity and the assets that it can control directly.
Charities are becoming increasingly sophisticated in the structures that they adopt to undertake their charitable activities and to generate income. Increasing use is being made of trading subsidiaries to undertake income generating trades. The separation of such trades into a subsidiary undertaking controlled by the charity allows profits to be "distributed" back to the parent charity through gift aid arrangements allowing charities to receive such income free of income or corporation tax. Charities may also hold property or conduct activities of a charitable nature through subsidiaries for VAT reasons e.g. to obtain standard rating under cultural exemption provisions. Other charities will choose to conduct certain of their activities through subsidiaries to help isolate the charity from risk or to enable activities to be undertaken overseas.
The presentation of entity accounts (a statement of accounts) may therefore only reflect part of a charity's wider activities it controls, and resources it deploys. Activities and assets indirectly controlled through subsidiary undertakings are omitted and simply disclosed as investments in the charity's balance sheet. Consolidated or group accounts attempt to present a picture of the charity and its subsidiary undertakings as an economic unit enabling users of accounts to appreciate the wider aspects of a charity's work and assets it deploys indirectly through a group structure.
The need to make provision for group accounts is given increased importance due the inability of charities to undertake significant trading activities within the charitable entity. We anticipate increasing use of group structures to facilitate such activities in the future.
Accounting standards (FRS2) endorse this accounting approach as necessary to present a true and fair view of the group. The Charities SORP, which must be consistent with accounting standards, reflects this and recommends that all charities above the audit threshold with subsidiary undertakings produce group accounts. The preparation of group accounts is now generally accepted sector practice and the Commission accepts the filing of group accounts on a non-statutory basis subject to the group accounts adequately distinguishing the charity's position and results.
The Charities Act 1993 is therefore out of line with UK GAAP, recommendations made in the Charities SORP, sector accounting practice, and development of group structures within the sector. We would suggest that the draft Bill would be an ideal opportunity to address these issues.
Some activities in which individuals are involved in their communities for example as magistrates or as members of local authorities are supported by a statutory right to time off from work in order for them to carry out their duties. This supports the involvement of people who might otherwise be unable to contribute because of their circumstances. We believe that individual charities and society in general can benefit from trustees being drawn more widely from the community and that this right should be extended to include charity trusteeship. This may be an issue which the Joint Committee would like to explore.