Charity Law: You have been warned

This is the message charities might soon receive from the Charity Commission under its new powers. Stephen Cook analyses the prospects

The act will be reviewed within four years
The act will be reviewed within four years

In February this year William Shawcross, chair of the Charity Commission, declared in an article in The Daily Telegraph that it was marvellous to see the new law on charities, which finally received royal assent in March, complete its passage through parliament.

It would enable the commission to tackle abuses more effectively, he wrote, close absurd loopholes such as the potential for people with terrorist convictions to run charities, and help it in its crucial counter-terrorism work, along with countering fraud and protecting the vulnerable.

william shawcross
William Shawcross

"Recent scandals have underlined just why we were right to press for these new powers," he added. "As we begin to implement them later this year, people will see our profile increase."

The Charities (Protection and Social Investment Act) has its roots in both the Cup Trust scandal and the government's concerns about abuse of charities by terrorist organisations (see Genesis of the Act, overleaf). It has been the subject of consultation, pre-legislative scrutiny and extensive debate in both Houses of Parliament.

The commission is therefore reluctant to get involved in further discussion of the rights and wrongs of the powers in the act. "The argument has been made and accepted as to why these powers are needed," says a spokesman.

Some parts of the act have caused minimal controversy: the closing of certain technical loopholes, such as the scope for trustees to resign to avoid disqualification; the clarification of the power of charities to make social investments that further their purposes as well as achieving a financial return; and the measures on fundraising that were tacked on at a late stage, including a reserve power to introduce statutory regulation.

But some parts of the new law have proved highly controversial among MPs, charity lawyers and sector representative bodies - most notably, the power for the commission to issue official warnings to charities when it thinks there has been a breach of trust or duty or other misconduct or mismanagement by trustees, an increase in the list of criminal offences prompting automatic disqualification as a trustee, and a new power for the commission to disqualify people from being trustees if it considers them unfit.

The concerns centre on a lack of safeguards for the issuing of warnings and a failure to appreciate the damage they might do charities; on the effect on criminal justice charities of wider automatic disqualification; and on the breadth of the power for the commission to disqualify trustees, which also has the effect of preventing their employment in the senior management of charities.

These more controversial powers will not come into force for some time - between nine months and a year in the case of disqualification - and before they do the commission has undertaken to consult on and issue guidance on the detail of how they will be used in practice. In that sense, the story is not yet over: the act is what is sometimes called a "coathanger" or "Christmas tree."

Charity lawyers are therefore reluctant to say at this stage how big a change they think the new powers will bring in the overall regulatory regime for charities - are these running repairs or a major reconstruction? The answer, they say, depends very much on how the commission chooses to deploy them.

One experienced practitioner says it is possible the powers will not be widely used and critics of the commission will then accuse it of failing to make the most of them: "But the real risk is the opposite - that the commission is pressurised to use the powers to show how robust it is and move the sector into an age of super-regulation.

"Some of these powers give the commission a lot of discretion - potentially there are some nuclear options in there. And I suspect that, having given the commission the powers, some sections will be expecting results."

The warning power

The warnings are intended to deal with low or medium-level concerns that would not warrant stronger action such as a full statutory inquiry: the consultation on the bill estimated that warnings would be used in 20 to 30 cases a year, but the number could increase if they were found to be an effective remedy.

The act does not specify how much notice the commission must give a charity it intends to warn, although the Minister for Civil Society, Rob Wilson, said in parliament this would normally be at least 14 days so the charity could make representations. He also confirmed that warnings should not be used to give directions to charities, which normally can happen only when a statutory inquiry has been opened.

Alice Faure Walker Alice Faure Walker

Alice Faure Walker, a senior consultant at specialist charity lawyers Bates Wells Braithwaite, says charities will still need to guard against cases where warnings might amount to a direction: "In judicial review proceedings involving the commission, Cage and the Joseph Rowntree Charitable Trust, the parties spent a day in the High Court arguing whether the commission, in asking the trustees of the charity to give certain assurances, had been issuing a direction or a non-binding request."

She points out that if a warning does "fall on the wrong side of the line", it will be hard for a charity to challenge it because there is no right of appeal to the charity tribunal - the only way to challenge a warning is by the longer and more expensive route of judicial review.

Faure Walker adds that the power for the commission to publish warnings, which are meant to apply to low-risk cases, could have disproportionately serious implications: "The public and press are unlikely to make a proper distinction between reports of a statutory inquiry and of an official warning.

Adverse publicity from a warning could easily lead to the blocking off of public support and funding.

"It is helpful that a warning can be withdrawn, and the commission will set out reasons for withdrawal when it notifies the recipient of the warning and publicises the withdrawal."

Another legal commentator notes that Wilson said in the Commons that concern about adverse publicity was an attempt to avoid accountability to donors, beneficiaries and the public: "Such a bald, unsupported statement suggests the government simply does not understand the potential impact on charities."

The same commentator says that monitoring the exercise of the new powers will be especially important because the government chose not to implement all the safeguards recommended by the joint parliamentary committee that scrutinised the draft bill: "It has cherry-picked the committee's recommendations.

"The warning power is one such example, where only some of the committee's minimum recommendations have been implemented. The committee accepted that no appeal beyond a challenge by judicial review was necessary for a warning, with the proviso that the government implemented the committee's minimum safeguards - but the government has gone ahead anyway."

A further concern about warnings is that failure by the charity to remedy the breach specified in the warning will be deemed to constitute misconduct or mismanagement, which enables the commission to move to open a statutory inquiry.

Jo Coleman, a partner at IBB Solicitors and chair of the Charity Law Association working party on the new law, told a conference in October of fears that warnings would be used as "a weapon of choice for the commission when dealing with more complex issues, such as when considering charities' use of political campaigning or supporting unpopular causes."

The CLA had lobbied for an appeal to the tribunal, she said, because it suspected that "the official warning is itself going to become a punishment." This interpretation was refuted by a Cabinet Office official and commission spokeswoman.

The power to disqualify

The disqualification clauses relate to both automatic disqualification as a trustee of people convicted of certain offences, and to the new discretionary disqualification by the commission for up to 15 years of people it considers unfit to be trustees, who would then also be disqualified from employment in a senior position in any charity.

Nicola Evans, charity counsel at Bircham Dyson Bell solicitors, says the discretionary power remains extraordinarily wide: "The concern is that it lacks adequate safeguards to balance the breadth of the power. For example, whether or not a person is unfit to be a charity trustee is not defined at all."

nicola evans
Nicola Evans

The Directory of Social Change, which monitors sector policy, went further and called it "a tectonic shift in power between the state and civil society ... It is fundamentally an illiberal power granting huge authority to a government agency, making the commission judge, jury and executioner regarding any citizen's ability to engage in voluntary action".

Major concerns were also raised about the extension of the automatic power of disqualification from unspent convictions involving dishonesty or deception to a wider range of offences, including serious terrorism, money laundering, perjury and bribery. The list was expanded in the Lords to include people on the sex offenders register.

Critics pointed out that many charities working with ex-offenders rely on trustees and staff with criminal records. The DSC said the net effect would be "to push anyone with a criminal record away from involvement with a charity, despite the fact that, precisely because of their personal experience, they may be able to make highly effective contributions."

There was a rearguard action in the Commons led by the former solicitor-general, Edward Garnier QC, who is a trustee of the Prison Reform Trust, but the best Wilson could offer was to postpone implementation for nine months to a year while a commission working group involving criminal justice charities works on new guidance for the waivers from exemption that it can grant to individuals with convictions.

In most of the key provisions of the act, it will therefore be some time before the sector knows exactly what is going to be hung on the Christmas tree - it might be a couple of years before the real scope of this act is clear. But the government is committed to reviewing it within four years, which could offer an opportunity for revision.

ROYAL ASSENT: The genesis of the new law

Royal assent in March for the Charities (Protection and Social Investment) Act set the seal on a process which began three years ago, when the Charity Commission was hauled over the coals in parliament over the Cup Trust affair and William Shawcross had recently been appointed as its chair.

Margaret Hodge, then a Labour MP and chair of the Public Accounts Committee, said in March 2013 when launching a scathing PAC report on the Cup Trust - a tax avoidance vehicle set up as a charity - that the commission's investigations lacked rigour and it should look at how the law should be changed to prevent such cases happening again.

margaret hodge
Margaret Hodge: scathing report
She ordered an inquiry by the National Audit Office, which reported in December 2013 that the commission did not do enough to tackle abuse of charitable status, its approach was "reactive not proactive" and it should "make a persuasive case for legislative change" if it considered its existing powers were inadequate.

The wheels were already turning behind the scenes: on the day the NAO report was published, the government's Extremism Task Force also recommended strengthening the powers of the commission, as did the Home Affairs Select Committee of MPs the following May. Also in December 2013, the Cabinet Office, "at the request of the Charity Commission", published a 10-week consultation on a raft of proposals "based on evidence from past and current cases of loopholes and weaknesses."

Chief among the changes proposed in the consultation was the main one mentioned in the NAO report - new powers for the disqualification of charity trustees. Shawcross had repeatedly complained that people convicted of terrorist offences could continue to serve as trustees and Lord Hodgson had called in his 2012 review of the Charities Act 2006 for the range of offences incurring automatic disqualification to be widened.

The consultation proposed that this range should be extended to money laundering, bribery and corruption offences related to terrorism, and incitement to racial or religious hatred. But it also proposed to introduce an entirely new general power for the Charity Commission to disqualify people from serving as trustees if it considered them unsuitable.

lord hope
Lord Hope: scrutinised draft bill

The consultation went still further, proposing that disqualification should also prevent a person from acting in "another position of power in a charity." And it proposed a second entirely new power - for the commission to issue warnings to charities where it considered "medium-range" misconduct or mismanagement to have taken place which did not justify a statutory inquiry but might in due course lead to one.

The example given of why this power was needed was of an organisation that had on its walls several images of the founder, who had been imprisoned, and other members of an organisation proscribed under the Terrorism Act 2000. The commission had told the organisation this was unacceptable, but the only way it could ensure action was by a full-scale statutory inquiry.

The consultation, which proposed several other measures to tighten or close loopholes in several of the commission's existing powers, led to a draft bill in October 2014 that contained 10 of its 17 proposals and was scrutinised by a joint parliamentary committee chaired by Lord Hope of Craighead.

The committee reported in February 2015, and shortly after the general election in May 2015 the bill was introduced in the House of Lords.

It included a section confirming the powers of charities to make social investments that both further the charity's purposes and achieve a financial return for the charity; and as it made its way through both houses of parliament, events of last summer prompted the government to tack on to it extra provisions including a reserve power for the statutory regulation of fundraising.


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