Analysis: Law review will not tackle the question of 'connected persons'

The waters on conflicts of interest and private benefit are muddied and are unlikely to be cleared by the Law Commission consultation on amendments to the law, writes Sam Burne James

One issue that occurs frequently in statutory inquiry and operational case reports published by the Charity Commission is conflicts of interest that have, deliberately or unwittingly, gone unmanaged and have, in some cases, led to substantial private benefit.

The Charities Act 2011 sets out four areas, including audit requirements and trustee remuneration, where there are legal restrictions on what "connected persons" – typically including trustees, their relatives, business partners and others – can do.

However, these four definitions are far from clear-cut or consistent. Gareth Morgan (right), professor of charity studies at Sheffield Hallam University, says: "Someone who is a member of a charitable incorporated organisation but not a trustee is considered to be a connected person if the CIO wants to change the benefits to members in its constitution, but not if the CIO is disposing of land. On the other hand, a donor might be classed as a connected person when land issues arise, but not when remuneration is being considered." Morgan says this inconsistency causes headaches for trustees and their advisers.

Cecile Gillard (left), legal manager at the business advisers Burton Sweet, says the waters are muddied further by different definitions of connected persons appearing in company law, which applies to those charities registered at Companies House, and in the Sorp accounting standards.

Both Gillard and Morgan say the Law Commission, the independent reviewer of legislation, should examine this problem in its ongoing charity law project, although Gillard is cautious about how much this could achieve. "It is unrealistic to imagine a nice simple set of new rules on all relevant areas could be drawn up," she says.

The Law Commission's consultation on proposed amendments to the law closes on 3 July and does not address this issue. It seems unlikely it will be added; a spokeswoman for the Law Commission says it "does not fall within our terms of reference", and those terms could be changed only after conversation with the government.

This might be disappointing for Gillard, Morgan and others, but less so for the Charity Commission. A spokeswoman for the regulator says it is important to remember that trustees' responsibility for managing conflicts of interest goes beyond simply defining who is a connected person.

"Whether or not a person falls within any statutory definition of 'connected person' would not preclude the transaction in which that person was involved with the charity being challenged," she says. She adds that the commission would rather focus on trustees' understanding of those broader duties than on creating a new global definition of connected persons.

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