BWB's deputy managing partner and joint head of Charity and Social Enterprise, Philip Kirkpatrick, recently delivered the keynote address at the 2014 NCVO / BWB Trustee Conference, asking the question "Is regulation out of hand?".

On 20 August this year, my dear friend and colleague, Stephen Lloyd, died while sailing on holiday in Wales. He left a legacy to the sector that few could match and about which much has since been written. Stephen was an extraordinary man and I am sorry for so many reasons that I am standing here today to deliver this address instead of Stephen. But one very small part of his immense legacy was leaving me with this address.

Stephen left me with only a small clue as to what he wanted to speak about when he chose this topic for this address; that clue emerged when Andrew Hind posthumously published his last article in Charity Finance Magazine, entitled Back to the Future, in which he argued that the structure of the Charity Commission and mode of appointment of its chair had led to perceptions of politicisation of the Commission and he wanted to go back to a time when appointment of the chair of the Commission did not have political overtones. I will pick up that theme later on.

What I would like to do today is consider the validity of complaints that there is too much regulation; talk about the nature of effective regulation; consider the role of the non-profit sector in generating regulation; ask whether the sector is genuinely overburdened; and lastly look at the Charity Commission, how it regulates the charity sector and what affect that has on the sector and public perception generally.

We often hear claims that regulation is out of hand, that red tape is tying organisations in knots. These claims often target a few usual suspects - the Aunt Sallies of the regulatory world - such as the European Union; health and safety; the Human Rights Act. To be frank, most of the claims on rational analysis turn out to be misconceived or derive from political views that ignore the benefits of regulation while bewailing the detriments. On the whole, opposition to things like the Human Rights Act and health and safety regulation is in inverse proportion to knowledge about those things.

On the whole, one person’s red tape is another’s safety barrier, and who would want to live in a world where employers were not required to take special care for the safety of their employees and others with whom they deal? For all the complaining about ‘elf ‘an safety gone mad, the statistics tell the story of the real value of this legislation and the culture it has created. In 1974, when the Health & Safety at Work Act was enacted, there were 651 reportable deaths at work in the UK; in 2012/2013, there were 85. In 1974, there were 336,701 reported non-fatal injuries to employees in the UK; in 2011/2012, there were 77,310.

The way rules are interpreted is sometimes absurd but we should not allow absurdities to cloud our judgement.

But there is nevertheless, a real feeling among some people that there is too much regulation and that people should be left to get on with their lives without quite so much state regulation. I know how that feels as a trustee of three charities and partner in one highly regulated business.

The amount of regulation has always been a cause of concern. Many of you will have heard my former partner, Andrew Phillips - Lord Phillips of Sudbury - complaining that the amount of law added to the statute books each year, much of it the implementation of EU law, is larger than the entire canon of UK statute law when he started practising as a solicitor. His complaint is not a new one; in the mid C16th, Edward VI announced:

“I wish that the superfluous and tedious statutes were brought into one sum together and made plain and short.”

Centuries of law students have thought the same thing. What on earth would Edward VI have made of the Data Protection Act (which Stephen once described to me, rather brilliantly, as “a very long driveway to a very small house”?) I have little doubt he would have been baffled the Companies Act 2006, which, at 1,300 clauses and 16 schedules, is probably many times longer on its own than all statute law in existence in the C16th.

And Edward VI was not the last with this reforming zeal. In January 2013 our present government introduced the principle of ‘one in, two out’ for all new law. You will note, however, that they excluded the implementation of EU Directives from that principle.

The good law initiative states that "good law is necessary, effective, clear, coherent and accessible.” On that basis, probably most of you are wondering when the first such law is going to be written but I’m afraid you just have to accept that “clear, coherent and accessible” are relative concepts.

There is another factor that I think those who devise regulation should always bear in mind - it’s a quote from the radically right wing but generally very witty American commentator, H. L. Mencken:

“For every complex problem there is an answer that is clear, simple, and wrong."

I also think ‘necessary’ is too strong a word here. If we ask ourselves, “what is the function of regulation?” surely it is not only about doing that which is necessary. Law and regulation are about doing that which is good for society and achieving the right balance between, on the one hand, individual liberty and, on the other, individual responsibility for others and society as a whole. And they are also about encouraging society to change in ways that are beneficial.

People say they don’t like regulation but in reality they dislike restriction and compulsion applied to themselves. Good regulation is that which regulates the behaviour of others because our own behaviour does not need to be regulated. We chafe when we are ourselves ‘needlessly’ controlled. Some businesses chafe against the Working Time Directive, consumer rights legislation, environmental protection, for example. All of that regulation is designed, in the words of Jeremy Bentham, to deliver “the greatest happiness of the greatest number”. It must do so at the cost of someone.

So, we moan about regulation and red tape, forgetting that this is used to fashion someone’s safety barrier, until we see something new that we dislike. And then we call for our politicians to do something about it. And we create a hullabaloo (now known as a Twitterstorm) and the newspapers ramp it up until we persuade our politicians to engage. And they look to the existing laws and find that this particular aspect of the complex tapestry of our society is not provided for. So, what happens? New law. Always to regulate others. Which is a good thing, unlike law to regulate ourselves.

Charities and other non-profit groups are particularly adept at calling for new regulation. Put the phrase ‘charity calls for tougher regulation’ into your search engine. You may or may not be surprised by the number of hits but certainly you will not be able to say after you have looked at your search results that charities think there is too much regulation.

So let’s look at what we find when we really try to analyse whether there is too much regulation in the charity sector. In 2011, the Civil Society Organisations Red Tape Task Force produced its report ‘Unshackling Good Neighbours’. It considered responses from over 600 civil society organisations and in the end, while it made some excellent recommendations, it did not come up with any demands for major changes. Perhaps the most significant recommendation is that which has led to the SARAH Bill - Social Action, Responsibility and Heroism Bill. That is a bill which is at least blissfully short at only 26 lines and 5 clauses. But what does it do? It says that if someone is accused of negligence or breach of a statutory duty then the court in assessing that person’s fault must have regard to whether:

• the alleged negligence or breach of statutory duty occurred when the person was acting for the benefit of society or any of its members;
• the person, in carrying out the activity, demonstrated a generally responsible approach towards protecting the safety or other interests of others;
• the person was acting heroically by intervening in an emergency to assist an individual in danger and without regard to the person’s own safety or other interests.

That’s very comforting to all volunteers, which includes most of the people in this room, but I can tell you, as indeed the writer of that bill and its promoter, the Minister for Justice, well know, the Court will already take those matters into account when reaching its decision. In effect, we as a sector, in trying to reduce red tape, have called for and look likely to be given some new legislation that explains what the current law is. Thankfully, it is short.

I do not in fact think the bill is useless; I think it may have social value in helping people to overcome anxiety about volunteering, when we are told that in a poll 47% of those who said they did not volunteer cited fear of being sued as the reason.

But it is ironic that the most significant and eye-catching recommendation from the task force to reduce regulation in the sector should be a new law to tell us what the current law says. It does not speak loudly of a sector overburdened by regulation.

Speaking of the SARAH Bill and negligence, I will digress for just a moment. I’m going to ask for some more audience participation because I would like you to tell me how old the law of negligence is. I’ll start with what the law of negligence says. It’s quite appropriate, given that we are considering a report called ‘Unshackling Good Neighbours’ that the law of negligence is sometimes called the ‘neighbour principle’. Anyhow, its first formulation goes like this:

“You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being affected when I am directing my mind to the acts or omissions which are called in question.”

Got that? That’s what I meant by ‘clear’ and ‘accessible’ being relative concepts. But you get the drift.

So, now I am going to ask you to name the year and century. Lawyers in the room have to keep their hands down I’m afraid. Was it 1632; 1732; 1832; or 1932?

It was 1932. It seems amazing that we could have gone for so many centuries without it.

And what do you think the case that established this fine principle was about? Barely believable, but it was about carelessly leaving a snail in a bottle of ginger beer.

Anyhow, back to unshackling those good neighbours. Another interesting point about the report is how little it said about the regulation of the charity sector by the Charity Commission itself. Apart from recommending a streamlined reporting arrangement for charitable companies and asking the Commission to be clearer about what constituted guidance and what constituted legal requirements, very little was said. So can we assume that the sector is happy with how it is regulated by the Commission? I bet that if the sector, rather than the public, was polled on the question, the Commission would have high ratings. When the public was asked by Ipsos MORI for the Commission’s 2014 trust and confidence poll, 68% agreed that charities are regulated fairly or very effectively.

Will that continue? Is the public view of effective regulation the right one, and do we have the right kind of regulation for the sector? These are the questions I would like to finish with.

That Ipsos MORI survey has some very interesting statistics in it. Among them are the following:

• Charities overall have a 6.7/10 trust rating, consistent with surveys in 2010 and 2012 and only bettered by doctors (7.6) and the police (7.0)
• The Charity Commission’s own trust rating is 6.1 while newspapers and government ministers are at 4.1
• 96% believe that charities play an essential or very important role in society
• 71% agree that most charities are trustworthy (down from 74% in 2012 and 75% in 2010)
• 1/5 of those who say their trust has decreased say it is because of negative media coverage of how charities spend donations
• The most important factor in determining trust in charities was ensuring that a reasonable amount of donations reach the end cause. Charities were given only a 6.1/10 rating for that
• 58% say that charities spend too much on salaries and administration
• BUT 56% agree that they know very little about how charities are run
• Social groups AB and C1 are more likely to trust charities than social groups DE
• People who have been involved with charities and identify as knowing more about them are more likely to trust charities
• People are more likely to trust charities if they agree with or have experienced what they do
• People are more likely to trust health charities than international charities

One of the stories this tells me is that there is a slightly declining sense of trust and confidence in charities, and that this is influenced to some extent by ignorance and newspaper reporting (how often those go hand in hand) and by an anxiety that not enough money reaches the end causes.

The sector itself has always understood the importance of the factors that affect the public’s trust and confidence in it, and the well-governed and well-managed parts of the sector strive to improve themselves in relation to those factors. The sector, as a whole, knows what it needs to do and gets on with doing it.

But the sector also knows that in fact its approval rating is exceptionally high; that politicians, regulators, businesses, lawyers indeed, can only dream of approval ratings at that level; that it is almost impossible, given the range of causes and charities, that approval ratings could get much higher; that some people will always object to the way charities do things, the causes they espouse and the way they raise money; that public disapproval is not the same as supporter disapproval; that charities are at the cutting edge of social reform and they will therefore naturally upset some people as they upset the social order; and upsetting a few people might just mean that they are doing a truly splendid job. Which reminds me, I came across a rather nice quote yesterday:

“If you are not annoying anyone [at least that was the gist of the phrase], you are dead but just haven’t noticed yet.”

Does the Charity Commission have a role to play in putting across a view of the sector largely doing a splendid job and in supporting the sector generally? I think it does and it may be that some of you agree with me. But if you do, we are alone. The government doesn’t want the Commission to do that. The Public Administration Select Committee made it absolutely plain that it should not do that. Lord Hodgson in his report thought the Commission should focus more tightly on regulation. Apparently, what everyone wants to see is a less compromising face of the Commission and robust regulation, and that is what they are going to get because that is what the Charity Commission, under some considerable political pressure, has said it is going to deliver.

But there is nothing new in these Ipsos MORI statistics. The types of concern expressed are ancient history in the charity world. So what is new? At least one thing that is new is the Charity Commission, understandably, I guess, bowing to the political pressure it has faced, accepting the criticism of it as having been an inadequate regulator and, in its public announcements, assisting in spreading the sense that all is not well in the world of charities and that, tub-thumpingly, something must be done.

The very first function of the Charity Commission in the Charities Act 2011, which the Commission rightly regards as its ‘overarching function’ is “to increase public trust and confidence in charities”. There are various ways in which that can be done but the Charity Commission, under sustained political pressure, has determined that this will best be done by “enhancing the rigour with which [it] hold[s] charities accountable”. It says it is “becoming a more robust regulator and “will be exercising [its] regulatory powers more frequently”.

The chief executive of the Charity Commission, Paula Sussex, has said that charities are facing greater scrutiny from the media and that members of the public (for which read members of the press, in my view) are less likely to give charities the benefit of the doubt, and that the Commission will not give charities the benefit of the doubt either.

And in its 2013 report, 'Tackling Abuse and Mismanagement in Charities', the Commission stated that “All mismanagement in charities is unacceptable, regardless of what caused it.” That’s a strong line but it is simply wrong, in my view, as an approach to regulating a sector that depends on the good will of volunteers as its lifeblood, and it flies in the face of ancient legal principles about the duty of care owed by volunteer trustees.

Things go wrong in charities for all sorts of reasons and the courts, when considering volunteer trustees, take a lenient view. They have, and in practice they exercise, an inherent power to excuse people from breach of duty when they have acted honestly, reasonably and in all the circumstances they ought fairly to be excused. It was rather wonderfully put as follows by one High Court judge:

“The court will be slow to find fault with charitable trustees who, while doing their best, make honest, even stupid, mistakes.”

We pushed for the Charity Commission to be given the same powers to relieve trustees from breach of duty in the Charities Act 2006. I worry, however, when I hear about muscle flexing and Rambo regulation, that we may have wasted our time.

What is the evidence of need for this tough new approach? The Charity Commission has announced four strategic regulatory priorities and, largely because it has adopted this approach, it has been granted extra funding which it so badly needs. But £8 million of that extra funding is ring-fenced for its monitoring enforcement work. The priorities are:

• Fraud and financial crime and abuse
• Failure to safeguard vulnerable beneficiaries
• Links to terrorism and extremism
• Inappropriate politicisation

The last priority - inappropriate politicisation - appears to have been recently tacked on to the previous list and hardly sits well there alongside such other serious concerns. Perhaps this was in recognition that we have a general election coming up but perhaps it is also a response to political pressure which seems to come most volubly from the political right. It certainly has not been an issue raised by the public, 56% of which regard lobbying of government and other bodies as a worthwhile activity for charities and 67% of whom agreed that charities should be able to campaign to change laws and government policies relevant to their work (nfpsynergy report for NCVO).

So, again, what of the evidence of need?

In 2012/2013, the Commission opened 1,913 operational compliance cases and closed 1,232. From those cases:

• 45 featured concerns about fraud and theft
• 64 featured concerns about financial mismanagement or maladministration or concerns about misapplication of funds
• 17 featured concerns about safeguarding

Of the 15 statutory inquiries opened and five closed (statutory inquiries are the strongest form of Charity Commission intervention and would generally arise from an operational compliance case in the first place), four featured concerns about abuse of charities for terrorist purposes.

I am not aware of statistics on inappropriate politicisation but by the Commission’s own admission, it barely features.

So, roughly 7% of the caseload featured concerns about the the Commission’s priorities. And I stress the phrase ‘featured concerns’ because that does not mean that fraud, abuse of vulnerable people, terrorism etc. were actually found - and the Commission’s published documents refer to cases where concerns were found not to be warranted.

What are the most common issues that the Commission has to deal with in its operational compliance cases? They are:

• Accounting issues, including failure to prepare or submit accounts
• Trusteeship issues
• Trustee benefit and conflict of interest issues

In essence, basic governance failings. It’s not surprising. It doesn’t make eye-catching news either. Not like a message that the Commission is taking powerful action to combat extremism and keep us safe in our beds at night. Which I’m really not sure is the Commission’s role anyway.

The Commission has also said that “weaknesses in [its] current legal powers are undermining [its] ability to be an effective regulator” and that it therefore needs new powers. These new powers are going to be granted to it under a new Protection of Charities Bill announced in the Queen’s Speech and published a couple of weeks ago.

There is only limited truth in the statement that the Commission’s effectiveness has been undermined by a lack of powers. Yes, there are some minor gaps in its powers that are well worth fixing but it already has a tremendous array of powers that it can use in appropriate cases if it wishes. I just do not accept that it has been hamstrung by a lack of powers; it has in the past simply taken a proportionate, and in my view wholly appropriate, approach to use of its powers and now wishes to be seen to be more robust.

To give you a sense of the importance of these powers, one of them, clause 1 of the Draft Protection of Charities Bill, is a power to issue warnings to charities and charity trustees. Bearing in mind that the Commission can issue a warning now, it is difficult to see that a statutory power to issue a warning is very significant.

I wholeheartedly agree that pursuing every one of the Commission’s strategic objectives is hugely important. Clearly there is abuse and clearly this needs to be dealt with by the sector and the Charity Commission. Clearly, also, the public, politicians and the press have to have faith in the work the Charity Commission does. But the public would have more faith in charities, which they would be right to do, if a public authority like the Charity Commission stood up to the political pressure on it, stood up for the sector and gave the lie to the idea that charities are riddled with abuse, unacceptable mismanagement, fraud and inappropriate politicking.

Instead, the message from government and the Charity Commission ramps up concern about the sector. In the Prime Minister’s press release about the new Commission funding he announced that this funding was “to tackle abuse, including extremist activity, in the sector”. And when did he announce this? According to the press release, “as he chairs a further meeting of the Extremism Task Force to discuss progress on delivering the government’s counter-extemism strategy”.

And these sorts of statement were backed up in the Commission’s public statement in the same press release.

Of course, the Commission’s means of promoting trust and confidence in the sector is a valid one; the public will have more confidence if it knows the Commission is preventing abuse among those we trust most in society. But I think it is misconceived without a counterbalancing message that talks the sector up a bit more. A Charity Commission that stood up for the sector and lauded the sector’s achievements more would give the right message to the people who matter most.

Who are those people? The politicians? I think you know my answer to that. The press? Ditto. The general public? They are hugely important. They fund charities; they are the people whom charities exist to benefit. But they are not the people the Commission most needs to speak to or indeed the people who are actually listening.

You are those people. You, the army of trustees and others who tirelessly volunteer, and the workers, paid or otherwise, who make charities what they are and deliver what they do, without whom our society would be a very much poorer place. Poorer in spirit and poorer financially.

So, is regulation out of hand? I don’t think so. But I would like to see a subtle change that, in the current political climate and with a sense in some quarters of the sector that the Charity Commission is becoming politicised, I do not think I am going to see.

I would like the public to be given the message that there will always be some abuse in charities but it is at a fairly low and manageable scale and that the public should continue to trust them and value their work.

And, at the start of Trustees’ Week, I would like trustees not to be given the message that no mismanagement is acceptable and that no quarter will be given, but rather to be given a much stronger message that the Commission is on their side, on your side, and will be understanding of honest, perhaps even stupid mistakes.

Posted on 13/11/2014 in Legal Updates

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