Lawyers fear guidance on 'warnings' could have a chilling effect on charities' attitude to risk

The Charity Commission has issued draft guidance on its new power to issue official warnings to charities, but some fear the draft is misleading

Charity lawyers have expressed serious concerns about the Charity Commission’s draft guidance on its new power to issue official warnings, published last week.

Rosamund McCarthy, partner at Bates Wells Braithwaite, said she believed the guidance was misleading and could lead to a rise in the number of charities seeking judicial review, while Tom Murdoch, a partner at Stone King, said warnings could have a chilling effect on charities’ attitudes to risk and could be used to direct charities.

The National Council for Voluntary Organisations also voiced concerns that the way in which the guidance was worded suggested the power would be used to give the commission a high degree of discretion.

The new power, granted through the Charities (Protection and Social Investment) Act, will enable the regulator to issue a warning to a charity trustee or a charity itself when it considers there has been a breach of trust or duty, misconduct or mismanagement that represents a mid or low-level concern but is not serious enough to warrant a statutory inquiry.

The warning would contain advice on what the charity should do to remedy the issue. It would not be appealable at the charity tribunal, so charities would have to seek judicial review to appeal.

McCarthy told Third Sector:  "I am very concerned that  the draft guidance is misleading in a number of respects and does not contain a number of the key assurances given by the Minister for Civil Society during the report stage of the bill, namely that the Charity Commission can provide only ‘advice and guidance to the charity on how it can remedy a breach that has been identified in the warning’ and, crucially, that ‘failure to follow good practice could not automatically be considered to constitute misconduct or mismanagement’."

The draft guidance says the commission will "usually publish" warnings on its website and they will remain on a charity’s record for two years.

McCarthy said a presumption in favour of publication was not proportionate for many of the low-level breaches that the power purported to deal with and was not consistent with the understanding of the committee of MPs that scrutinised the bill during its passage through parliament.

"As lawyers we will be forced to advise clients in receipt of an official warning that, if they do not comply, they will run the risk of significant regulatory action by the commission. Since a warning carries no right to appeal to the charity tribunal, this is a significant concern.

"Depending on how the power is exercised, notwithstanding the expense and difficulty, I predict that there is going to be an increase in the number of judicial reviews against the Charity Commission."

She said it was likely that the public issuing of an official warning would carry far more stigma than an operational compliance case and risk damaging a charity’s reputation and affecting its funding.

She said she would therefore be advocating that the guidance be materially revised.

Murdoch said he was concerned the warning power would make charities more averse to risk if any loss of charity funds or risk of loss was seen as evidence of mismanagement.

"Risk is an acceptable and even necessary part of many charities’ operations," he said.

"This new power, if used, could have a chilling effect on charities’ attitudes to risk – but loss can be perfectly acceptable and can happen even though everyone involved with the charity has taken all steps to prevent it."

Murdoch said it was a "worrying" possibility that warnings and the threat of publication could be used to direct charities in a way that would not be appealable to tribunal.

Elizabeth Chamberlain, policy manager at the NCVO, said: "Our concern has never been with the existence of a warning power but rather the lack of safeguards attached to it.

"The proposals outlined here, while giving some further impression of how the power may be used, would continue to give the commission a very great degree of discretion in how and when it would issue a warning.

"This will do little to provide any reassurance to those who fear the commission might make unreasonable or arbitrary use of the power – for example, in response to an unjustified media story.

"As it’s currently proposed, there is a significant disparity between how easily the warning power could be used by the commission and the severity of implications it could have for the charity."

A spokesman for the Charity Commission said the public expected charities to be more open and transparent and expected the commission to publish more information on charities.

"Our draft guidance on publication of official warnings applies the same principles and considerations as already used for publishing reports about our casework and whether publication would be in the public interest," he said.

He said the draft guidance made it clear that an official warning was different from a statutory direction, which the commission could issue only after it had opened a statutory inquiry, and there were only specific circumstances in which the commission could direct trustees to take a particular action, or refrain from it.

"Our draft guidance and approach follows the provisions of the act and reflects the discussions held in parliament and concerns that were raised during the legislative process," he said.

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