Last week saw the deadline for submissions to the charity law review being conducted by the Conservative peer Lord Hodgson. Third Sector reporters look at the themes advanced by lawyers, umbrella bodies, fundraising organisations and finance groups
The clause in the Charities Act 2006 that requires a review after five years mentions only five questions, including public confidence in charities, the level of charitable donations and the willingness of individuals to volunteer.
But the government says it wants Lord Hodgson (right) to cast the net as widely as possible and draw in subjects including the definition of public benefit, the charity tribunal, sector transparency, social investment, mergers, thresholds, legal forms and red tape. "For the avoidance of doubt, the review may also consider any other matters in relation to charity law as it sees fit, and may also consider other matters subject to the agreement of the Cabinet Office," Hodgson says in his call for evidence.
- Charities failing to submit accounts on time should be suspended from the register and lose Gift Aid (Charity Commission)
- There should be a charity ombudsman and a mediation service as an alternative to the charity tribunal (Charity Law Association)
- Charities should not be charged for registration or regulatory services (Bates Wells & Braithwaite, Charity Commission)
Perhaps the biggest governance shake-up proposed in the responses to Hodgson lies deep in the Charity Commission's 100-page response and concerns charities that fail to submit their report and accounts to the regulator within 10 months of the end of their financial year.
It says that "maintaining and improving filing rates is in our view important to maintaining public trust and confidence in the sector", and its favoured sanction would be to suspend defaulting charities from the register and withdraw Gift Aid from them.
There is currently an 84 per cent compliance rate on filing accounts, but the commission warns that this might fall without a wider range of sanctions. "Further consideration should be given to creating a legal power to suspend defaulting charities from the register, although it would be necessary to explore further the complex legal issues that this might give rise to," the commission says.
The existing sanction of prosecuting charity trustees for the failure to file an annual report and accounts "is considered disproportionate except in the most extreme cases", the commission says. It concludes that withdrawal of Gift Aid "is the strongest option and could be introduced as a direct consequence of suspension from the register".
On complaints and disputes about the commission's actions, the commission says that it is too early to assess the effectiveness of the charity tribunal, set up three years ago to provide a low-cost, accessible means for people to challenge regulatory decisions.
The Charity Law Association disagrees, however. "This has not been the cheap alternative to the High Court that was envisaged," says Simon Weil, partner at Bircham Dyson Bell and a CLA member.
"The numbers that have had recourse to the tribunal have been much lower than expected, and those who have used it often find it slow and expensive."
The CLA wants the tribunal to have "a more general supervisory authority to review decisions made by the Charity Commission". It also proposes a mediation process as an alternative to going to the tribunal.
But the Charity Commission says it would be "extremely concerned about any move away from the current approach to defining the decisions that can be appealed to the tribunal, towards a more loosely defined system that allowed appeals against, for example, all regulatory decisions of the commission".
Another CLA proposal is an ombudsman to deal with complaints of maladministration against charities. It says it could be part of the Financial Ombudsman Service.
The leading charity law firm Bates Wells & Braithwaite and the commission both warn in their submissions that introducing charges for charities to join the register would be detrimental to the sector.
Christine Rigby, a solicitor at the firm, says her clients are concerned that charging introduced "by the back door" because of the current economic downturn "would not go away".
The Charity Commission argues that a charging policy would be seen as "a tax on charities" and would "risk being a disincentive to community charitable activity".
Another issue raised by Bates Wells & Braithwaite is the sheer volume of regulations and guidelines from the government and the Charity Commission.
"There is a general theme that the sector is drowning in guidance, which can undermine trustees' own decision-making," Rigby says.
- Trustee payment: Acevo wants to make it easier, but Navca, the Small Charities Coalition, the Directory of Social Change and most members of the Association of Charitable Foundations are against
- Umbrella bodies becoming regulators is opposed by Navca, the DSC and the ACF
- Voluntary registration with the Charity Commission for charities with incomes below £5,000 should be permitted
Trustees can be paid only if there is specific authority in the charity's governing document or the Charity Commission or the courts have authorised it. But Acevo thinks charities should be able to pay their trustees if they think fit, according to Ralph Michell (right), director of policy at the chief executives body.
"The default position ought to be less one of suspicion, and more that charities want to do this because they think it is in the interests of their beneficiaries and their mission," he says. Acevo is not submitting a written response to the Hodgson review, but Sir Stephen Bubb, its chief executive, has met with Lord Hodgson and will do so again with a delegation of members.
The local infrastructure body Navca strongly opposes trustee payment in its submission to Hodgson. It also criticises the idea of umbrella bodies regulating charities, citing potential conflicts of interest. Navca is one of several bodies to say that charities with incomes below £5,000 should be able to register with the commission voluntarily because registration can help with fundraising, for example.
Navca also says it dislikes the suggestion that the commission should bar new organisations from registering if their purposes duplicate those of an existing charity. But it does say that trustees of would-be charities should consider whether a new organisation is necessary.
The training and publishing organisation the Directory of Social Change also opposes the suggestion that new organisations should not be registered if their roles duplicate those of existing charities, but says the Charity Commission could improve the way it directs would-be founders of charities or philanthropic trusts towards existing, similar organisations. Like Navca, the DSC opposes payment of trustees and umbrella bodies becoming regulators, and also wants charities with incomes below £5,000 to be able to register voluntarily. It also cautions against allowing investors who get a financial return by investing in a charity to "control charitable activity".
The Small Charities Coalition thinks most charities with incomes below the current registration requirement want to be allowed to join the register voluntarily. Cath Lee, its chief executive, says a small survey of members carried out earlier this year found that a third of respondents backed the existing £5,000 threshold for compulsory registration with the commission, a third suggested raising it to £10,000 and a much smaller proportion opted for £50,000. Most respondents thought trustees should not be paid and about 40 per cent thought it appropriate in some circumstances. But most small charities would not be able to afford to pay, Lee says.
The Association of Charitable Foundations says a majority of its members favour legislation allowing charities to engage in 'mixed-motive' investments, which further the charity's aims but provide a lower return than those that are solely financially motivated. Such legislation would give trustees the power to take both the social and financial impact of investments into account when investing in order to further charitable aims or public benefit.
ACF members are also opposed to the payment of trustees, although not unanimously, and are against umbrella bodies or other regulators regulating charities.
The National Council for Voluntary Organisations has not yet submitted a response to Lord Hodgson but will send him the report of its Charity Law Review Advisory Group, which will be completed shortly. It declined to outline the key points likely to be made in the report.
- A universal system of self-regulation should be introduced (IoF, FRSB)
- Bad fundraising behaviour must be dealt with more robustly (IoF, FRSB, Charity Commission)
- A unified system for public charitable collections should be implemented (PFRA)
The Hodgson review has asked for views on self-regulation of fundraising and the future regulation of public charitable collections. On the former, there is general agreement that statutory regulation should not replace the existing system, but improvements are needed.
The existing system covers only members of the Fundraising Standards Board. In its response, the FRSB says that all fundraising charities and organisations with annual voluntary incomes above a certain level should be obliged to join. Its proposals include restricting public fundraising licences to FRSB member charities and greater encouragement by the Charity Commission and other strategic partners for fundraising charities to join it. The commission says that, subject to consultation, it might display information on the charity register about membership of bodies such as the FRSB.
The Institute of Fundraising is also in favour of universal self-regulation, but calls for simplification of the system. It suggests that the commission be the official regulator, delegating power to one or more bodies to enforce the fundraising codes of practice.
It also suggests the government uses its "convening powers" to bring closer together the three main organisations involved in self-regulation - the IoF, the FRSB and the Public Fundraising Regulatory Association.
There is a general view that stronger sanctions are needed for organisations that breach the codes. The commission calls for infringements to be dealt with "robustly" and the IoF and FRSB say fines should be a last resort. On public charitable collections, there are calls for a more unified regime, which is covered by various legislation. Part 3 of the act would make the commission the lead regulator for public collections, but the commission estimates that it would need £4m in set-up costs in the first two years, then annual running costs of about £1.5m.
The PFRA proposes that part 3 should be implemented, apart from the element that would make the commission the lead regulator for public collections. It also calls for an amendment that would allow local authorities to grant permits for doorstep collections, which are not covered by the act. It says local authorities could then operate this system in partnership with a self-regulatory body, such as the PFRA.
The Charity Retail Association says the House to House Collections Act 1939 should remain in place, with minor amendments to the part that allows a local authority to refuse a licence if it considers that the proportion of the amount raised that goes to charitable purposes is too low.
The CRA says self-regulation for house-to-house collections should be "tentatively explored", but it has concerns that charity shops might be disadvantaged by a collections booking system.
It also recommends a working group involving the Cabinet Office, the Department for Business, Innovation and Skills and key sector bodies to explore the regulation of commercial collectors, which can operate without licences at present. The IoF supports this.
There is some agreement about keeping National Exemption Orders, given out by the Cabinet Office to 43 organisations that have carried out house-to-house fundraising without a licence. The Iof says they should be subject to stricter enforcement.
The CRA also suggests a "licensing-lite" proposal to address any perceived issues of unfairness by those that do not have an NEO, with longer licensing periods and automatic renewal of licences.
- There should be no move away from filing accounts with the Charity Commission (Institute of Chartered Accountants, Charity Finance Group)
- Removing barriers to merger would help, but the changes needed cannot be achieved through charity law (Charity Finance Group)
- A clearer legal framework is needed to support social investment, especially "mixed-motive" investment (Social Finance)
The question of whether smaller charities should be exempted from filing accounts with the Charity Commission gets a resounding 'no' from accountants.
Nick Brooks, head of not-for-profit at Kingston Smith and chair of the Charities Technical Committee of the Institute of Chartered Accountants in England and Wales, says he would prefer all registered charities to have to file their annual report and accounts with the commission. At present, only charities with incomes above £25,000 have to do so. The registration threshold is £5,000. Those with incomes between £10,000 and £25,000 have to file an annual return with less detailed information.
"We believe this would improve accountability and transparency," says Brooks. "It is helpful that accounts and annual reports are freely available on the commission's website. Many charities do not include accounts and reports on their own websites."
The Charity Finance Group agrees, saying that "the thresholds for registration and filing could, if anything, be made more flexible so that smaller charities can give open access to them on the commission's website".
The CFG and the ICAEW both favour law changes to promote mergers. The ICAEW asks for a power for merged charities to receive income given in their pre-merger names. For the CFG, the main problems preventing merger are pensions and employment law - outside the scope of the charities acts.
Social Finance says a clearer legal status is needed for 'mixed-motive' investment, where a charity invests for profit and a social return. It says recent commission guidance indicates that this type of investment is acceptable, but the legal position is unclear. It also says there is a case for tax breaks.