05 December 2022 - Article
In a relatively rare move, the Charity Commission issued a regulatory alert on 25 June 2020 to large, ‘complex’ charities and to service providing charities. This alert focuses on the Commission’s concerns about governance and risk to these charities. It makes recommendation and calls for action.
The Commission’s decision to send the alert followed its inquiry into RNIB (Royal National Institute of Blind People), and its findings of governance and safeguarding failures at this charity. CEO Helen Stephenson’s letter accompanying the alert commented; ‘….grave governance failings in some household name charities’ have ‘impacted the sector as a whole’, referencing RNIB as the most recent example. The open letter explained that the Charity Commission’s motivation for sending the alert was; ‘…to ensure you understand and implement adequate and clear lines of accountability in the governance of your charity’.
The alert itself focused on the need for action by charity trustees and management to ensure appropriate governance and safeguarding systems are in place in large and complex charities. Much of what is recommended to trustees relates to ensuring there is clear oversight and effective lines of communication, whether with the executive or in handling risks and complaints. Recommendations include: ensuring the board has regular reports and adequate information about activities and incidents within the charity and its wider group.
The alert concluded by making clear the Commission expects recipients ‘to take steps to mitigate’ against the risks raised in the alert, and directing ‘follow up’ action for those that have not done so in the last twelve months or those who are planning significant changes in the near future. It then warned that the Commission ‘will contact a sample of recipients of this alert later in 2020 to understand what measures are in place to manage identified risks’.
What to take from the alert
The sending of such a regulatory alert to a targeted group of charities is a significant action for the Commission.
The alert was published at the same time as the Commission’s report into RNIB; one would imagine the Commission could have included wider messages for the sector in its commentary on that report. Instead, the Commission chose to issue a separate alert outlining concerns, containing recommended steps and directing ‘follow up’ action for recipients. This indicates firstly that the Commission is alarmed about the state of governance generally (sufficiently so as to justify sending the alert, as a separate action to publishing the RNIB report), and secondly that it wants and expects to see reactive steps from the charities who received it.
In light of this there are some key points for all recipient charities to take from the alert:
• Action needs to be undertaken in response
Action should be taken by recipient charities in response to the alert, not least given the Commission has said it will contact some of them this year in relation to it. The scope of that responsive action will depend on how much relevant analysis/work has recently been undertaken by the charity and the robustness of existing measures. As a bare minimum we would suggest the alert should be specifically considered at a Trustees’ meeting and its recommendations noted and reviewed against the charity’s current systems, to ensure these remain fit for purpose in light of recent developments.
• Risks must be identified and minimised
Identification and management of risk is essential, particularly given the effects of covid-19 and its potential to put a charity in a precarious financial or operational position. A charity’s risk register should be checked (and subjected to a ‘deep-dive’ review ideally) and updated accordingly, if it has not been done so already since the onset of covid-19, and kept under review.
In terms of steps to mitigate risks to a charity’s financial health, we have been noticing recently that some of our larger charity clients have been reviewing their restricted funds, to ensure that no unrestricted designated funds have been misclassified as restricted funds, and to consider whether certain restricted funds could be modified using powers in the Charities Act to widen their use. It may be appropriate for applications to be made to the Commission for permanent endowment restrictions to be lifted in order to allow for use of the underlying capital, or even to consider whether the cy-près doctrine could apply to a restricted fund and merit an application to the Commission for a scheme.
• Safeguarding practices should be reviewed
The RNIB report identified safeguarding failures, echoing other high profile Commission reports in the previous year. The Commission is expecting more of charities in relation to safeguarding, and placing the onus and responsibility on trustees to establish robust safeguarding procedures and practices, and to review these regularly. Unless a sufficiently detailed safeguarding policy has been implemented in the previous year, a charity’s safeguarding processes and policies should be reviewed and updated as necessary. If a charity does not have a formal safeguarding policy at present, unless there is a very good reason for this, one should be adopted as soon as possible.
• A scheme of delegation is virtually a pre-requisite
The RNIB report cited and criticised ‘“superficial” scrutiny’ caused by a ‘corporate culture of reporting by exception’. The Commission concluded that ‘charity trustees must ensure that their corporate governance is fit for purpose to provide robust oversight of their charity’s operations and structure’.
This necessitates not only having appropriate delegated authorities attaching to suitable levels of cost/risk/liability and seniority/experience, but also having the delegated authorities mapped out in sufficient clarity to allow the Board clear supervision of what is being done at what level and by whom and what may be being overlooked. A proper scheme of delegation is an indispensable tool to achieving such oversight, as well as to highlight any areas where controls/safeguards are insufficient at present. Any existing scheme of delegation should be reviewed (ideally by the Board, who are ultimately responsible for it) to ensure it is up-to-date and appropriate, and if no such framework document currently exists, serious consideration should be given to the creation of one.
A Board skills audit is important
The RNIB report cited a ‘lack of expertise on the board’. Analysis is needed as to the mix of skills and expertise on a Board, in the context of the charity’s size, needs and activities – lack of relevant expertise on a Board will not be viewed by the Commission as a mitigating factor should a charity find itself facing complex challenges, but rather as a governance failure. Some charities establish nominations committees, tasked with analysing the current mix of expertise and skills on the Board, identifying gaps and generating appropriate appointment strategies to fill these, and making recommendations to the Board as to the appointment of new trustees. The irony of course is that the increasing regulatory burden on charities and the regulator’s expectation of trustees could in fact be making recruiting trustees (the vast majority being unpaid volunteers) even harder.
Communication lines within a charity need to be effective
Communication issues between not only the Board and its committees, but also between the Board and the executive were highlighted in the RNIB report. Effective systems must be in place to support effective communication throughout the organisation, and there should also be clear and transparent routes for anyone at a charity to be able to communicate concerns. Terms of reference and policies should be reviewed to ensure they are functioning effectively to support communication and information exchange, as well as complaints policies (both internal and external). We suggest Chairs ask their co-trustees if they feel the information and support they are given in order to exercise proper oversight is in a useful form and whether or not any changes are required.
Relations with subsidiaries and third party partners must be monitored
The RNIB report criticised the ‘limited documentation setting out the relationship between RNIB and its subsidiaries’, and in particular that there was no intragroup agreement defining the relationship and reporting arrangements. A charity must keep its relationship with subsidiary entities under careful review, ensuring there is clarity as to the difference between entities, alignment on objectives and sufficiently robust documents are in place to manage the relationship between the entities, as well as relationships with third party partners or delivery organisations (given failings be these will impact the charity itself). Charities could conduct audits of the boards and activities of subsidiaries, testing whether the directors of these are suitably qualified given the activities of the organisation, and considering whether the subsidiary is properly structured and supported in order to be able to effectively deliver its activities.
These are challenging times and we know many charities are struggling. It would be easy to ignore this alert from the Commission but we would strongly advise against doing so. Trustees need to be prepared to explain what they did to address the points raised.