OPERATIONAL GUIDANCE

CHARITY INCOME AND RESERVES

THE USE OF OUR REGULATORY POWERS AND CHARITIES JUDGED TO HAVE RESERVES INCONSISTENT WITH OUR GUIDELINES

OG 43 C2 – 15 May 2009

Purpose

Functional responsibility

For action

Charity Services Compliance

For information

Contents

1. Liaison with trustees
2. Amendment of charity's governing document
3. Requests from charities for us to intercede with a third party
4. Risk factors as triggers for regulatory intervention
5. Mitigating factors that may mean our intervention would not be proportionate
6. Referral for regulatory intervention
7. Publicity
Glossary of Terms used in this Guidance

Index to further related information

The Law	Refer to a lawyer	Refer to an accountant

1. Liaison with trustees
	If professional advice confirms that the charity's policy or practice on reserves is inconsistent with our published guidelines, you should attempt to secure the trustees' agreement that they will comply with those principles in future. For many charities, the fact that we have noticed the level of reserves and asked for something to be done about them will be sufficient to persuade the trustees to rectify the position.
	If this is not the case, you may need to consider offering to meet the trustees and/or their professional advisers to discuss our concerns in detail - this will often be the most effective way to deal with the issue. In this case, be careful not to give the impression that we are satisfied with explanations if we are not. You should always follow up the visit with a letter explaining our post-meeting position.
	If such liaison has proven unfruitful or the charity has a history of ignoring our advice on reserves and/or has failed to adequately disclose and discuss its retained reserves and reserves policy in the trustees’ annual report, then our intervention may be a proportionate response.

2. Amendment of charity's governing document
	You may need to help the charity widen its objects or otherwise change its constitutional arrangements in order to help the trustees to spend resources that are excessive. Alternatively, we could advise trustees if they are considering transferring resources to another charity with similar purposes.

3. Requests from charities for us to intercede with a third party
	You may receive a request from a charity to intercede on their behalf with a third party who considers their level of reserves to be inappropriate. For example, the charity may have been refused a grant by a funding institution on the grounds that their reserves are so high that they do not ‘need’ extra funding, or that they are so low that the charity is unstable. Alternatively, the charity itself may be being pressed to fund a project by reducing its reserves to a level the trustees consider imprudent.
	We cannot intercede in any individual case. However, there may be instances where some general advice or guidance from us could be warranted – perhaps where a large funding institution, such as a local authority, was taking a line very much at odds with our policy. You should always seek accountancy advice before responding to a request of this sort.

4. Risk factors as triggers for regulatory intervention
	Exceptionally, where advice and encouragement have failed to persuade trustees to modify their policy in line with the principles set out in CC19 Charities’ Reserves, we may need to consider whether there are grounds for intervention into its affairs.
	Such cases are likely to be rare and you should always seek legal and accountancy advice at as early a stage as possible.
	You will need to consider all the circumstances of the case along with the following risk factors:
	the charity has declined our previous request to explain its reserves policy and justify the level of reserves held in spite of our encouragement;
	from the evidence available, the charity appears to have misused designated funds or altered its target for reserves to conceal a growing accumulation of funds without providing a satisfactory explanation to justify any fund designations or any change made to the target reserves level;
	the level of reserves in the context of the charity’s recent activities currently appears, based on the latest information filed with us, excessive and is not satisfactorily explained;
	complaint or complaints received about the charity’s fundraising literature and campaigns provide evidence that the charity has misrepresented the charity’s financial position concerning its reserves and this misrepresentation can reasonably be construed as deliberate (as opposed to accidental) deception of donors and potential donors;
	the charity has a history (demonstrated by annual accounts or Annual Return data for more than three years) of accumulating unrestricted funds without a power, the accumulated funds are material, and are not satisfactorily explained and justified by its reserves policy;
	there are no mitigating factors that mean that intervention would not be helpful and in the charity’s interest or the interests of the public or the charity’s beneficiaries.
	Having considered the risk factors, now consider the mitigating factors. It is a question of judgement and, central to your decision, is the potential damage to the reputation of the charity and public confidence in the sector if the situation continues unchanged. A subsidiary question is the implication for our regulatory role if trustees continue to disregard and ignore our advice but this should not be the conclusive or deciding factor in reserves cases. Having considered the reserves issue, the information available, your analysis and findings, any communication with trustees and the presence of one or more of both risk factors and mitigating factors, decide whether to;
	close the case;
	refer the case to the Assessment Unit, or;
	continue the dialogue with trustees.
	We will normally intervene and a referral to the Assessment Unit is appropriate where two or more of the risk factors are present and there are no mitigating factors present.

5. Mitigating factors that may mean our intervention would not be proportionate
	Mitigating factors may be in place where reserve levels, which might otherwise appear disproportionate and merit our intervention, would not justify an intervention because the intervention would either be disproportionate or would not promote a beneficial outcome. These mitigating factors are:
	the charity is not of sufficient size or public profile to justify regulatory intervention and its non disclosure or its reserves position will not have significantly detrimental impact to public confidence in charity;
	the excess reserves are fairly presented without distortion and the charity is transparent about its financial position to its donors and financial supporters and other stakeholders in all its communications and the annual report;
	the charitable objects of the charity are so specific and constrained that the application of our cy-pres powers is unlikely to materially affect the situation; and
	the trustees are aware of the excess reserves and are reasonably attempting to address this through a review of the charity’s operations and activities.

6. Referral for regulatory intervention
	Where advice and encouragement have failed to persuade trustees to modify their policy in line with the principles set out in CC19, and two or more of the regulatory risk factors are present (and there are no mitigating factors present), or where on balance Charity Services consider the case merits attention by Compliance and cannot be progressed in any other way, then a referral to the Assessment Unit is justified with a view to Compliance action. Compliance action need not necessarily involve a formal section 8 inquiry.
	Such cases are likely to be exceptional and you should always seek legal and accountancy advice at the time of making the referral to the Assessment Unit.
	The likely effectiveness of a range of sanctions will need to be considered. Depending on the circumstances, these might include:
	an Order under section 19A directing the creation of a reserve or an Order under section 19B to secure a proper application of charity property;
	suspension or removal of trustees;
	vesting of property in the Official Custodian;
	the appointment of an interim manager; or
	new constitutional arrangements.

7. Publicity
	The effectiveness of public criticism as a sanction (with or without the support of other sanctions) should not be overlooked. This might involve liaison with Press Office to consider suitable options - you will need the approval of your Head of Division before exploring this possibility.

Glossary of Terms used in this Guidance
	governing document
	Official Custodian
	reserves
	trustees

Index to further related information