Nine months ago the Charity Commission published an inquiry report concluding that former trustees of Hospice Aid UK had been guilty of misconduct and mismanagement in its deal with a direct-mail fundraising agency in which, over four years, an average of only 5.5 per cent of the income was given to hospices.
The commission ruled that the trustees' decision to sign a contract with Euro DM that "substantially favoured" the agency amounted to poor governance and financial mismanagement and, because most of the donations went to paying the agency, was not in the best interests of the charity. Fundraising material produced by Euro DM, a US-based company, also broke the law, the report said, by failing to say what proportion of income would go to the agency: it "was misleading to the public since it implied that all donations would go to the charity" (see "Professional fundraiser - or consultant?", below).
The inquiry signalled a significant change of approach by the commission. In the past, it took its lead from the relatively weak regulatory regime of the Fundraising Standards Board: it did not want to be seen as harming good causes and was reluctant to intervene as long as at least some money was reaching the end cause.
But the fallout from the Olive Cooke affair and the creation of a stronger regime under the Fundraising Regulator has prompted the commission, with independent legal advice, to start challenging direct mail deals that yield minimal income for a charity's work. The spirit of the times has clearly changed: there is now recognition that, in cases such as Hospice Aid, potential donors might not be properly informed, or might even be exploited. As a result, the regulator has strengthened its own guidance on fundraising and is more confident about taking action on the governance aspects of fundraising.
Sarah Atkinson, director of policy and communications at the Charity Commission, says: "We've warned charities to avoid entering into fundraising arrangements that are structured to avoid the legal rules and the transparency requirements. In some cases, we can see evidence of an agency model that might be designed to exploit naive trustees. We don't have jurisdiction over fundraising agencies, but we would want to disrupt this model and make sure charities are not seen as easy pickings."
According to one charity lawyer, a combination of pressure from the commission, a tighter fundraising climate and more stringent data protection means most charities that rely on this fundraising model without other significant sources of income are likely to close before long.
Confirmation of the commission's new approach came in March when it announced a similar inquiry into the Child Survival Fund, which has a direct-mail contract with the Market Development Group agency in Washington, DC. The inquiry is examining fundraising costs, the proportion of income applied to charitable purposes and whether the trustees acted with "reasonable care and skill".
Hospice Aid UK and the Child Survival Fund are not isolated cases. By analysing charity accounts, the commission has identified about 350 charities that raise most or all of their income through direct mail supplied by agencies. It is understood to have contacted many of them for details of their contractual arrangements and explanations of decision-making by trustees.
Many agencies have developed business models in which they allow charities the use of databases of potential donors as well as direct-mail services. One of the lures is payment by results or payment from proceeds: charities do not pay anything unless donations arrive, but the agency has first call on the income if it does. Some of the agencies, including Euro DM in the case of Hospice Aid UK, give charities loans against future income if early revenue fails to cover costs.
Although only small amounts might reach a charity for distribution at first, the model can be attractive to small or new charities that do not have their own supporter databases and are grateful for any income at all. Kim Way, managing director of Euro DM, says it can take between three and five years for donations to start exceeding fundraising costs.
She says that if larger charities had to separate donor-acquisition programme figures from other revenues, it would become clear that everyone loses money during the acquisition process. "Unfortunately, smaller charities trying to build their fundraising programmes have only the more unfavourable numbers to share," Way says. "If the current environment is intent on putting these smaller charities in that bad light, in time it is likely they will cease to exist and society will have the choice to support only a few big charities at the expense of new and innovative ideas to solving society's problems."
The agencies' mailing lists - often bought and sold - are crucial to their business models. They are used for more and more requests from a range of charities, which can result in some willing or vulnerable people being overwhelmed by direct mail. Before her suicide in 2015, Olive Cooke told her local newspaper that she had received 267 charity mailings in a single month.
One lawyer who has represented charities under scrutiny by the commission says that some of them appear to be "in the pocket of the fundraising agency" and it is not always clear in whose interests the charity is acting.
He says he makes it clear to clients that the world is no longer the same as it was 15 years ago, when the fundraising model offered by the agencies could jump-start a charity into existence and was sold as a win-win.
The model is declining because of a combination of pressure from the commission, a harsher fundraising climate and tighter data-protection rules, he says. It is now harder to acquire and use the names and addresses of potential donors legitimately. Until recently, they were widely traded and exchanged by charities. List owners must now be able to demonstrate that the data was obtained with the full knowledge of the individual.
"The situation is getting more difficult and more of these charities are falling over, which is what the commission wants," the lawyer says. "There's a kind of reformation going on, and I suspect only 10 per cent of the 350 charities on the commission list will be left in a year, which might be a good thing. No charity has a god-given right to exist.
"If the financials still worked, more of them would fight on, but that's not the case. If they do decide to fall on their swords, we're happy to facilitate that. In some ways, it will be a relief not to represent them any more."
The commission plans to publish a report on its review of the 350 charities later in the year, but Atkinson says it is unlikely that the majority will result in statutory inquiries: "In some cases our intervention has resulted in trustees deciding to close a charity, and in others we've seen a change of trustees and a strengthening of trustee capability in fundraising, which has been welcome."
Last year the commission named eight of the 350 charities, four of which have closed: World Relief Mission, the Hungry Children Project, the Gandhi World Hunger Fund and the Mother Theresa Children's Foundation. Still active are the World Children's Fund, Medical Mission International, the Cancer Recovery Foundation and the Child Survival Fund.
The hidden costs of direct mail
The accounts of charities that rely heavily on direct mail reveal the high proportion of income spent on fundraising costs - mostly the fees of the fundraising agencies they use. But the accounts sometimes put part of the cost of mailshots under the heading "education and development."
The Mother Teresa Children's Foundation, for example, declared income of £2.29m in 2015, of which £1.5 m was "gifts in kind" - pharmaceuticals sent to Liberia for the Ebola crisis. The remaining £790K consisted of donations, mainly in response to direct mail.
One section of the accounts says that £392K was spent on raising funds, mainly through direct mail, while another section says £313K went on "education and development". But a note to the accounts reveals that the latter heading actually refers to part of the direct mail shots.
"The educational content is determined by the amount of text and space on each mail shot that is dedicated to material of an educational nature," says the note. "Fundraising expenditure, ie text that may induce a donation from the recipient, is allocated upon the basis of the volume of the text and space that is not related to text of an educational nature."
The total cost of the mail shots was therefore £705K out of the £790K received in donations of money, leaving £85K - less than 11 per cent of donated income - for distribution as grants. One specialist charity accountant told Third Sector that the amount of direct mail costs allocated to "education and development" was a matter of judgement in each case.
The report of the foundation's trustees for 2015 refers to "the current and future potential risk for ineffective or non-efficient direct mail results" and "the need to improve the ratio between mailing income and mailing costs." A decision was made in 2016, the accounts say, to wind down the charity and cease operations in early 2017.
The accounts of charities that rely heavily on direct mail reveal the high proportion of income spent on fundraising costs, mostly agency fees. But the accounts sometimes put part of the cost under the heading "education and development".
The Mother Teresa Children's Foundation, for example, declared income of £2.29m in 2015, of which £1.5m was "gifts in kind": pharmaceuticals sent to Liberia during the Ebola crisis. The remaining £790,000 was donations, mainly in response to direct mail. The accounts said £392,000 was spent on raising funds, mainly through direct mail, and £313,000 on "education and development". But a note reveals that the last heading actually refers to part of the direct-mail shots.
"The educational content is determined by the amount of text and space on each mailshot that is dedicated to material of an educational nature," says the note. "Fundraising expenditure, ie text that may induce a donation from the recipient, is allocated upon the basis of the volume of the text and space that is not related to text of an educational nature."
The total cost of the mailshots was therefore £705,000 out of the £790,000 of donations, leaving £85,000 - less than 11 per cent of donated income - for distribution as grants. One specialist charity accountant says the proportion of direct mail costs allocated to "education and development" is a matter of judgement in each case.
The 2015 report of the foundation's trustees referred to "the current and future potential risk for ineffective or non-efficient direct mail results" and "the need to improve the ratio between mailing income and mailing costs". A decision was made, the accounts said, to cease operations in early 2017.