The Charities (Protection and Social Investment) Act 2016 (“the Act”) received Royal Assent on 16 March 2016. Most of the provisions in the Act do not take effect immediately, but will be implemented over time.
What does the Act mean for charities?
The Act will change the law in four areas. In summary:
Charities’ powers to make social investments will be confirmed in statute. Social investment means investing the charity’s money in a way which does not just seek to make a financial return for the charity, but also aims in some way to further the charity’s objects. These new provisions will be particularly helpful for charities wishing to make social investments, or to benefit from social investment by other charities.
The Act imposes more controls over the relationship between charities and commercial organisations that raise funds on their behalf. All charities that have relationships with professional fundraisers and/or commercial participators will need to make sure that their fundraising agreements are compliant. Larger charities will be required to include a new statement about their fundraising practices in their annual reports. The Act also includes new powers for the Government to support and intervene in the regulation of fundraising.
Disqualification of charity trustees
More people will be automatically disqualified from acting as charity trustees. The Charity Commission will have a new power to disqualify people from serving as trustees. Disqualified trustees will not be permitted to serve in a senior management position in a charity nor to be actively involved in the management of a corporate charity trustee. While the new provisions will apply to all charities, in practice a relatively small number are likely to be affected.
Charity Commission powers
The Charity Commission will have more regulatory powers over charities, including a new power to give official warnings to charities. These are potentially relevant to all charities, but in practice will only apply where the Commission has regulatory concerns about a charity.
When will the Act come into force?
Government has committed to waiting at least a year before some of the provisions about the disqualification of trustees are brought into force. The other parts of the legislation may well be implemented soon, although the Charity Commission is due to issue guidance on some provisions before they take effect. We understand that the Cabinet Office is working on an implementation plan for the legislation. Our "Is it in force?" page will be updated as the various provisions come into force.
In more detail
The Act has its origins in a draft Protection of Charities Bill, published in 2014, which was designed to give the Charity Commission more powers to tackle abuse in charities. When the legislation which became the Act was formally introduced into Parliament in 2015, it also contained a new statutory power for charities to make social investments. Further amendments relating to charity fundraising were made to the legislation in the course of its journey through Parliament in 2015.
The Act will change the Charities Act 2011 and the Charities Act 1992 in the following ways:
Prompted by Lord Hodgson’s review of charity law in 2012, and in line with recommendations made by the Law Commission in its 2014 report on social investment, the Act will give all charities (except statutory charities and Royal Charter bodies) a statutory power to make social investments. A social investment is an investment which is carried out with a view to both directly furthering the charity’s purposes and achieving a financial return for the charity.
The statutory power is supplementary to any powers that charities may already have to make social investments. The statutory power may be excluded or restricted in a charity’s constitution. It does not allow social investment of permanent endowment, unless the trustees expect that making the social investment will not contravene any restrictions on spending the permanent endowment.
When making any social investments, whether or not under the statutory power, the Act will require trustees to:
(a) consider whether in all the circumstances they should obtain any advice about the proposed social investment;
(b) obtain and consider any advice they decide ought to be obtained; and
(b) satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect to achieve for the charity (by directly furthering the charity’s purposes and achieving a financial return).
The trustees will be under an obligation to review the social investments from time to time. At that stage they must consider whether they should obtain any advice about the social investments (or any particular social investment), and if they do, obtain and consider the advice.
The Charity Commission has confirmed that it will revise its guidance on investments (known as “CC14”) in light of the new power, though no timetable for this has yet been set.
BWB originally proposed the idea of a statutory power to Lord Hodgson, which he recommended to Government in his review.
The Act includes three new controls on charity fundraising, prompted by concerns raised in the media about charity fundraising practices.
New terms will need to be added to agreements between charities and professional fundraisers or so-called “commercial participators”. Commercial participators are businesses which represent, in the course of their day-to-day business, that donations are being made to charity: for example where they publicise their sponsorship of a charity or say that part of the profit from a sale of a product will be donated to a charity. There are already legal requirements about what the agreement between a professional fundraiser or commercial participator and the charity must include: under the Act the agreement will also need to cover the following:
- details of any voluntary fundraising scheme or standard that the commercial organisation undertakes to be bound by;
- details of how the commercial organisation will protect vulnerable people and others from unreasonable intrusion on a person’s privacy, unreasonably persistent fundraising and undue pressure to donate; and
- arrangements enabling the charity to monitor compliance with the requirements in the agreement.
Failure to comply will affect the ability of the professional fundraiser or commercial participator to enforce the agreement, and may also mean that the charity is in breach of the Code of Fundraising Practice.
It is not yet clear whether the new requirements will apply to existing agreements with fundraisers, or only agreements entered into after these provisions of the Act come into force.
Information about fundraising
Charities which are required to have their accounts audited will have to include a statement about the following in their trustees’ annual report.
- The charity’s approach to fundraising, and in particular whether a professional fundraiser or commercial participator was used.
- The details of any voluntary fundraising schemes or standards which the charity or anyone fundraising on its behalf has agreed to, and any failure to comply.
- Whether and how the charity monitored fundraising activities carried out on its behalf.
- How many complaints the charity or anyone acting on its behalf has received about fundraising for the charity.
- What the charity has done to protect vulnerable people and others from unreasonable intrusion on a person’s privacy, unreasonably persistent approaches or undue pressure to give, in connection with fundraising for the charity.
Regulation of fundraising
The Government’s existing powers to make regulations about fundraising will be supplemented with further provisions making it clear that Government may give statutory backing to self-regulation of fundraising by the sector, by requiring charities to:
- comply with requirements imposed by a fundraising regulator;
- have regard to guidance issued by a regulator;
- be registered with a regulator for the purpose of its regulation of charity fundraising; and
- pay fees to a regulator (the regulations or the regulator itself may determine the amount of the fees).
The Government may also provide further support to the Charity Commission in relation to the regulation of fundraising.
Government has said that it will only resort to these reserve powers if self-regulation, via the new Fundraising Regulator, fails, but that if it does Government will not hesitate to intervene.
Disqualification of charity trustees
A person is currently disqualified from acting as a charity trustee if they have been convicted of an offence involving dishonesty or deception, are bankrupt or involved in an arrangement with their creditors, or have been disqualified from acting as a company director.
The Act will extend the circumstances in which a person is disqualified from acting to include:
- conviction for:
- various offences under counter-terrorism legislation;
- certain money laundering offences;
- offences under the Bribery Act 2010;
- the offences of misconduct in public office, perjury and perverting the course of justice;
- attempting, aiding or abetting these offences;
- contempt of court;
- being designated under terrorist asset-freezing legislation; and
- being on the sex offenders register.
As with offences which currently lead to disqualification, spent convictions will not count, and there will be scope to apply for a waiver from disqualification.
These new provisions will not be brought into force for at least 12 months, so that the Charity Commission can discuss their impact with rehabilitation charities.
Once they are in force, charities may need to change the declarations which they ask new trustees to sign confirming that they are eligible to act.
Power to disqualify
The Charity Commission will have a new power to actively disqualify a person from serving as a charity trustee. It may only exercise this power if it is satisfied that the person is unfit to be a charity trustee, that disqualification is desirable in the public interest in order to protect public trust and confidence in charities and that one or more of a list of conditions has been satisfied. The conditions include:
- being cautioned for certain offences which would trigger automatic disqualification if convicted;
- being convicted overseas for certain offences which would trigger automatic disqualification if convicted in the United Kingdom;
- HMRC has decided they are not a “fit and proper person” to be manager of a charity under tax legislation;
- being involved in misconduct or mismanagement of a charity; or
- any other past or continuing conduct, whether in relation to a charity or not, which the Commission considers may be damaging to public trust and confidence in charities.
While the Charity Commission originally estimated that this power would only be used in a handful of cases each year, it is drafted in extraordinarily broad terms, especially the final condition. The Charity Commission will consult on and publish guidance on how it will use the new power before it is brought into force: it published an initial policy paper in May 2015.
The Act contains detailed provisions about the disqualification process. The Commission will be able to suspend a trustee while it is considering whether to make an order. Disqualification can last for up to 15 years.
Implications of disqualification
The Act also alters the implications of disqualification. A person who is disqualified as a charity trustee will also be disqualified from holding a senior management position in a charity. If a person has been disqualified as a trustee, and they are involved in controlling or managing a corporate trustee which is itself the trustee of a charity, they will not be able to be involved in decisions about the charity’s administration.
Charity Commission powers
This is one of the most significant of the Charity Commission’s new powers. The Commission will be able to issue an “official warning” to charities or charity trustees where it believes there has been misconduct or mismanagement, or a breach of trust or duty. The Commission must give prior notice of its intention to issue a warning to the charity or its trustees, allowing them to make representations. While there is no minimum notice period on the face of the Act, in Parliament the Government Minister said that the Commission would normally give at least 14 days notice. The notice must specify what the Commission considers should be done to rectify the position, although the power cannot be used to issue directions to a charity.
Once a warning has been issued, the Commission is able to publicise it, and may well choose to do so. This means that a warning carries a clear risk of adverse publicity for the charity.
While a warning can be amended or withdrawn there will be no right of appeal to the Charity Tribunal.
The new power is intended to allow the Commission to deal with low or medium level concerns about charities failing to comply with their responsibilities, which would not warrant more serious regulatory action.
Charities should always take correspondence from the Charity Commission seriously and a notice of a warning is no exception. Publication of a warning is likely to mean bad publicity, and a further sting in the tail is that failure to remedy a breach specified in a warning can automatically trigger a range of further regulatory action by the Commission, if it decides to go further and open a statutory inquiry into the charity.
BWB, and others in the sector, lobbied for more stringent safeguards to be attached to the warning power, but regrettably most of these were resisted by Government.
The Charity Commission has indicated that it will consult on and publish guidance on how it will use the new warning power.
Regulatory action after opening a statutory inquiry
The Act also amends and supplements the powers which the Charity Commission has once it has taken the significant step of opening a formal statutory inquiry into a charity. By definition, these provisions will only affect charities that are subject to an inquiry (just over 100 inquiries were opened in 2014/15). Once these provisions come into force:
- When the Charity Commission is considering what further action to take once an inquiry has been opened, it will be able to take into account not only misconduct or mismanagement but also failure to comply with an order or direction of the Commission and, as mentioned above, failure to remedy a breach specified in an official warning.
- In some circumstances, the Commission will also be able to take into account not only conduct in relation to the charity itself, but also wider conduct which does not necessarily relate to the charity concerned.
- The Commission’s powers to suspend a charity trustee, agent or employee for up to 12 months following the opening of a statutory inquiry will be amended to allow the Commission to extend the suspension for a further period of up to 12 months.
- The Commission will be able to remove a trustee following a statutory inquiry, even if the trustee resigns before the removal takes effect. This deals with a loophole in the existing law.
- The Commission will have wider powers to make a scheme following a statutory inquiry: it will only need to be satisfied either that there has been inappropriate conduct or that charity property is at risk, rather than being satisfied on both counts.
- The Commission’s existing powers to give directions to charities to take specific action once it has opened an inquiry will be extended so that the Commission will also be able to direct a charity not to take specified action.
- The Commission will be able to wind up a charity following a statutory inquiry.
Other regulatory action
The Act makes two changes to the powers which the Commission can exercise without opening an inquiry:
- The Commission will be able to remove a trustee who is disqualified from office. This, again, closes an existing loophole.
- The Commission’s powers to direct that charity property be used in a certain way (without opening an inquiry) will be extended so that they can be used where the person controlling the property is unable to apply it properly, as well as where they are unwilling to apply it properly.
The Minister for the Cabinet Office will be required to report on the impact of the legislation at five yearly intervals: the first review must be published within four years of the Act being passed.
For more information on the detailed provisions of the Act and its implications for your organisation, please ask your usual BWB contact or contact:
Oliver Hunt in relation to social investment - +44(0)20 7551 7629, email@example.com
Victoria Schneider in relation to fundraising - +44(0)20 7551 7796, firstname.lastname@example.org
Alice Faure Walker in relation to disqualification of charity trustees and Charity Commission powers - +44(0)20 7551 7813, email@example.com
Charities Acts Handbook
A new edition of the Charities Acts Handbook, written by the BWB team and updated to take account of the 2016 Act, will be available from Jordans in May 2016 – more details will follow shortly.
Posted on 17/03/2016 in Legal UpdatesBack to Knowledge