07 December 2018 - Article
Our Local Heroes Foundation (the 'Charity') was set up to relieve the financial hardship of people who have served in the armed forces and are in need by making grants. Following complaints that only 20% of funds raised went to the Charity and that the public were being misled and not properly informed, the Charity Commission spoke to the trustees and reviewed the Charity's books and records.
The Charity Commission identified a very low level of charitable expenditure (£10,000 against an income of £500,000), substantial spending outside the Charity's objects, poor governance, conflicts of interest and an insufficient focus on providing grants to beneficiaries – these were serious regulatory concerns.
The Charity Commission also identified that the Charity had entered into contracts and agreements without due diligence or poor records and there were poor financial controls. In particular, the Charity had signed a 5 year funding agreement with Targeted Management Limited ('TML') under which TML invoiced the Charity for 80% of all funds raised. TML argued that as it managed the fundraising, it did not bring them within the regulations for commercial participators or professional fundraisers.
Although it is impossible to comment conclusively without seeing the scope of the contract, we consider that charities should be extremely careful about agreements where a third party will raise funds or advise on fundraising on behalf of the charity and should seek legal advice on the application of the Charities Act 1992 and the 1994 fundraising regulations.
The Charity Commission concluded that there was likely to be justifiable public concern and damage to the Charity's reputation, but, given the open and responsible approach taken by the trustees, it was not necessary to open a statutory inquiry. Instead, the Charity Commission agreed an action plan with the trustees which sought to:
- ensure that fundraising was open and transparent with donors clearly informed of how much of their donation went to the Charity;
- maximise income given as grants and minimise administration costs; and
- ensure money is not spent outside the charity's objects.
Steps taken by the trustees included reviewing the contract with TML and ensuring that a fundraising statement clearly shows how much the Charity receives; working with other organisations to identify potential recipients of charitable grants; reducing costs by over £100,000 a year; and recruiting new trustees and putting in place new governance and financial controls.
The Charity Commission was concerned at the high fundraising costs (80%) and issued guidance to the trustees highlighting their continuing duty to:
- ensure that the public sees the information when being asked for a donation;
- ensure that scripts used by fundraisers cover this information;
- ensure that fundraising information explains how Charity funds are used to pursue its objects;
- receive regular reports and actively manage the fundraising process; and
- keep fundraising arrangements under review to ensure that they are in the Charity's best interests.
Key lessons for other charities
Whilst the Charity Commission accepted that working with individuals or businesses to raise money for a charity can bring benefits, it was clear that trustees must ensure that:
- the arrangements comply with the specific legal requirements;
- they can show that the arrangements (and the costs) are in the best interests of the charity, regularly monitored and protect the charity from undue risks to its reputation;
- money is used in an effective and efficient way to advance the charity's objects;
- there is strong management of individuals or businesses the charity works with; and
- they can explain and are transparent about fundraising costs.
In relation to fundraising costs, the Charity Commission accepts that fundraising costs can vary between different forms of fundraising and causes, but trustees must ensure that the overall and specific cost is reasonable. Whilst accepting that there is no set amount a charity should spend or definitive proportion a charity should receive, the Charity Commission notes that if an arrangement involves high fundraising costs, it may not be the best deal for the charity and can create the impression that it is being exploited for private gain. The Charity Commission warned that if it considers that high fundraising costs pose an undue risk to the charity's reputation, it may intervene to ensure that trustees are carrying out their duties properly and that donors are not being misled.
The full case report is available here.