03 April 2020 - Article
The Charities (Protection and Social Investment) Act 2016 (the 'Act') received Royal Assent on 16 March 2016. The Charities Act has been amended many times since its first reading in the House of Lords last May and we have set out below the provisions which made it into the Act. At present, the substantive provisions described below have not yet come into effect, although the Cabinet Office is working an implementation plan for these provisions.
Official warnings by the Commission
Perhaps the most significant increase to the Charity Commission's powers is the new power to issue official warnings. The purpose of an official warning is to allow the Charity Commission to take formal but not disproportionately forceful steps with regard to charities about which it has concerns.
The Charity Commission may issue an official warning to a charity (or its trustees) where it considers that there has been a breach of trust or duty or other misconduct or mismanagement.
The Charity Commission must give notice of its intention to make an official warning to the charity and its trustees. The notice must specify:
- the grounds for the warning;
- any action the Charity Commission considers should be taken (or that the Charity Commission is considering taking) to rectify the misconduct or mismanagement (although this power cannot be used to give directions to a charity);
- whether and, if so, how the Charity Commission proposes to publish the warning; and
- a period within which representations may be made to the Commission about the content of the proposed warning.
The Charity Commission must take into account any representations made, but can (without further notice) issue the warning either with or without any modifications.
One of the biggest concerns with official warnings is that the Charity Commission is able to make these public and it is expected that the Charity Commission will do so in all but exceptional cases. Concerns have been raised that there will be no appeal to the Charity Tribunal for official warnings – given that these official warnings can be made public, there is a serious risk of adverse publicity for charities. Challenging official warnings will not be straightforward.
Charities and trustees will need to be alert to any correspondence from the Charity Commission, particularly correspondence relating to a potential official warning.
Reports suggest that the Charity Commission will consult on draft guidance on how it will use this new power.
Other regulatory powers
The Act gives the Charity Commission various other powers, many of which are aimed at closing existing loopholes in the law. These include the power to:
- take into account wider conduct, not just in relation to the charity itself, in certain circumstances when considering whether there is misconduct or mismanagement;
- suspend a trustee, employee or agent following the opening of a statutory inquiry for up to two years;
- remove disqualified trustees and trustees who have already resigned from their offices. These two powers close existing loopholes in the law;
- direct that specified action is not taken;
- direct the winding up of a charity where the charity does not operate or its purposes can be promoted more effectively if it ceases to operate; and
- direct that charity property is used in a particular way.
Disqualification of trustees
The Act extends the circumstances where people are automatically disqualified from being trustees. In addition to the existing convictions for offences involving dishonesty or deceptions, convictions for various terrorism, money laundering, and bribery offences will automatically disqualify someone from acting as a trustee. The Act also disqualifies people who have been found to be in contempt of court, who are designated under terrorist asset-freezing legislation or who are on the sex-offenders register.
Concerns have been raised in relation to the impact of these provisions on rehabilitation charities. The Charity Commission has agreed that these provisions will not come into force for 12 months to allow for impact assessments and has noted that 'spent' convictions will not count and that there is the possibility for waivers.
The Act also gives the Charity Commission the power to make an order which disqualifies an individual from being a charity trustee. Such an order may be made where the Charity Commission is satisfied that the person is unfit to be a charity trustee, the order is in the public interest to protect public trust and confidence in charities; and one of a number of conditions has been met. The conditions include cautions or foreign convictions for offences which would otherwise lead to automatic disqualification, a decision by HMRC that the individual is not a 'fit and proper person' and previous involvement in misconduct or mismanagement of a charity. The very broad condition of any other conduct which the Charity Commission considers may be 'damaging to public trust and confidence in charities'.
Given the discretion given to the Charity Commission, the Charity Commission published an initial policy paper on how this power would be used in May last year. It is expected that this will be updated before the power comes into force.
The Act also makes amendments in relation to the procedure for disqualification and the implications of disqualification.
The Act introduces new requirements for agreements with professional fundraisers/commercial participators. These agreements must specify:
- any voluntary scheme for regulating fundraising that the professional fundraiser/commercial participator agrees to be bound by;
- how, during the course of the agreement, the professional fundraiser/commercial participator will protect the public (and in particular vulnerable people) from:
- an unreasonable intrusion on their privacy;
- unreasonably persistent approaches for the purpose of soliciting donations; and
- placing undue pressure on a person to make a donation; and
- any arrangements by which the charity will monitor compliance with the above.
The Act also requires large charities to include additional information relating to their fundraising standards in their annual reports including:
- the approach taken by the charity to fundraising activities and whether any of those activities are carried out by professional fundraisers or commercial participators;
- whether the charity is bound by any voluntary scheme for regulating fundraising and any failures to comply with such a scheme;
- whether and how the charity monitored any fundraising activities carried out by professional fundraisers or commercial participators;
- the number of complaints received in relation to fundraising;
- the steps the charity has taken to protect the public (and in particular vulnerable people) from the unreasonable fundraising techniques described above.
Two reserve powers have also been included in the Act: one to allow the government to introduce statutory regulation if self-regulation fails and one to require organisations to comply with the rules of the new Fundraising Regulator and contribute towards its cost.
The Law Commission's proposals on social investment have been incorporated into the Charities Act. Social investment is where an investment is made for a financial return (perhaps lower than could otherwise be obtained), but the investment furthers the charity's aims. The Act provides for a general power to conduct social investments and sets out trustees' duties in relation to social investments.
Unfortunately, charities established by statute (such as Royal Charter Bodies and statutory corporations) will be unable to make use of this new power despite the Law Commission's recommendations that all charities should be able to make social investments.