Law: Warning Regulation Overload

Ahead of the annual Charity Law Conference next week, we ask how the legislative burden really affects the sector.


Over-regulation means that large charities will become the 'Tescos' of the sector, argues Stephen Lloyd.

It may seem counter-intuitive for lawyers to complain that excessive legislation and red tape are barriers to the voluntary sector realising its full potential. After all, isn't the clarion cry of critics attacking unnecessarily complicated or onerous legislation that "this will only benefit the lawyers"? While it would be disingenuous of us to deny the logic of this, we are also members and trustees of charities and witness first-hand the difficulties caused by poor regulation.

Of course, we are not anti-regulation per se. There are many laudable reasons for flexible and proportionate regulation - such as fostering transparency, promoting efficiency and raising standards. But the fact remains that much regulation is too prescriptive and overly protective.

There is also a contrast between rhetoric and reality because, although successive governments have promised to cut red tape, in practice the legal burden increases year on year.

Much of our concern is focused on the smaller, grass-roots charities.

It is an oft-repeated statistic that 0.33 per cent of charities vacuum up 46 per cent of all charitable income. This trend is unlikely to be reversed. Indeed, the probable result of the increasing plethora of laws is that the larger charities (which can afford the in-house lawyers and external counsel) will become the 'Tescos' of the sector, monopolising the resources, expertise and know-how. Monopoly charity will march in step with monopoly capitalism.

But at what price? The excellent report issued by the Better Regulation Task Force, Better Regulation for Civil Society, published in November 2005, gives serious evidential weight to these concerns: 61 per cent of those who responded to the task force's survey said they believed that regulation inhibits social innovation.

Numerous examples are given in the report: volunteers who have stopped preparing food because of onerous hygiene requirements; the children's school play bus scheme that can no longer operate because of excessive regulation; and the negative effect greater regulatory liabilities have on recruiting trustees. These examples are replicated across the country and are made worse in areas of rural isolation. Blair Thomson, chair of the Cornwall Voluntary Sector Forum, has told us that for some small Cornish charities compliance issues can threaten to take precedence over the needs of beneficiaries.

What can be done? The task force considers there should be no special deregulatory pleading for the charity sector. We disagree. As Margaret Bolton pointed out in the NCVO report The Impact of Regulation on Voluntary Organisations, the voluntary sector often operates in the most disenfranchised communities, providing services for hard-to-reach groups with complex needs. Given the "added value" that charities bring, it is not a sign of weakness to ask for greater flexibility. The risk of not doing so is to promote conformity above creativity, homogeneity above innovation.

So if we could control Parliament and Brussels for a session, what would we keep and what would we repeal? We would focus on repealing, and the list is long. For example, liberalising charities' capacity to trade, simplifying tax and employment law and the regulations around public sector contracts. We would bring in a proportionality test for health and safety.

Some of this list is in the task force report, and the Charity Commission has also put forward useful proposals.

Employment law is a classic example of an overly technical law that is particularly burdensome for the smaller charity. How on earth are trustees meant to get to grips with the full gamut of the law, when even employment tribunals find it difficult to understand whether a European directive has been properly enforced in regulations?

While there is regulation by incremental stealth, there is also regulation arising from fear and panic. The Serious Organised Crime and Police Act 2005 (which amends the Protection from Harassment Act 1997) is one such example. New harassment laws were rushed through Parliament as a response to extreme animal activism without any detailed scrutiny. They potentially capture all forms of political protest, provided that the protest takes place more than once. Although there is a defence of reasonableness and one could seek to rely on conventional rights of freedom of expression and assembly, this is a very worrying development. It could be particularly problematic for smaller grass-roots charities, which might not even be aware of it.

Government is also prone to deregulate with its right hand and reregulate with its left. A current example is Gift Aid. Following the tsunami and the ensuing vast number of oral Gift Aid donations, Gordon Brown was lauded for scrapping the need to send the donor a written confirmation of their gift. However, the detailed HM Revenue & Customs guidance says charities can stop doing this only if they keep a record of the donor making their gift for six years - it is some surprise that the record requirements are just as onerous as writing to the donor to confirm their gift.

We look forward to the Government's response to the task force's proposals.

It will be a tragedy if only the larger charities can afford compliance and the growth and diversity of smaller charities is hindered by over-regulation. It is well to remember that mighty oak trees grow from small acorns.

Stephen Lloyd is partner and head of the charity department at law firm Bates, Wells and Braithwaite. He is speaking at the 15th Annual Charity Law Conference on 6 March, organised by the Directory of Social Change and Bates, Wells and Braithwaite. The conference, which will be held at the RSA in London, is sponsored by Charity Bank. Third Sector is the media partner. For details, visit


Learning to manage risk is one way charities can deal with increasing regulation, says Peter Scott.

Charity legislation has increasingly focused on accountability and transparency when it comes to regulating the running of charities. Trustees now have greater legislative and moral responsibilities as the guardians of the charity's assets, and with that comes risk.

For any organisation, risk management should always be a fundamental part of its strategy.

However, because of the nature of the voluntary sector, risk management has assumed a greater importance for charities and is now a statutory requirement.

The Statement of Recommended Practice 2000, or Sorp, introduced the concept of risk management to many charities for the first time.

Charities that had progressively grown in certain areas have often responded to new legislation on an ad hoc basis. For them, risk management is an opportunity to ensure statutory compliance by the charity as a whole rather than with sector-specific laws only.

Sorp 2000 requires the trustees to include a statement on risk management that relates to "major risks" the charity might face. Those risks will depend on the charity's size, the nature and complexity of the activities it undertakes and the financial resources it has available.

Risk assessment is often seen as an onerous duty, but learning to manage that risk effectively can reduce the burden. There are a few key steps that every charity should take:

1. KNOW YOUR ROLE - The trustees are responsible for the management and control of the charity, and it is the trustees who must provide, with reasonable confidence, a positive statement regarding risk management in their annual report.

However, this does not mean the trustees must undertake the risk management process themselves. Trustees should, where it's possible, delegate aspects of the process to managers but ensure that they review and consider the final results. Other external professionals and advisers can assist the trustees.

One of the key objectives of risk management is to ensure compliance with the charity's statutory requirements. It is important, therefore, to consider the regulatory framework throughout all stages of the risk-management process. Solicitors have specialist knowledge of the various regulations and can provide advice to the trustees that is tailored to their needs.

2. IDENTIFY THE RISKS AND DEVELOP A RISK POLICY - Risk is an inherent part of a charity's life, so the trustees must be aware of the charity's exposure to risk and decide the levels of risk they are able and willing to accept.

The process must be specific to the charity and should focus on the activities, structure and environment in which the particular charity operates. It should be carried out by people who have a detailed knowledge of the charity's workings.

For the process to work, the trustees should consult managers and staff from all levels of the charity by asking for their comments and suggestions.

All team members should know their personal role in the process.

Involving staff is a great benefit because they will necessarily be involved in implementing any recommended changes, so their support is vital from the outset. Because employees have to follow the charity's procedures on a daily basis, they are often aware of the weaknesses in the system and the areas where improvement is needed.

3. ASSESS THE RISK AND EVALUATE THE ACTION REQUIRED - The risks should be assessed for their likelihood of occurrence and the impact they would have on the charity's operational objectives. This process enables trustees to identify the risks that fall into the major risk category identified by the Sorp statement. A major risk is one that has a high likelihood of occurring and, if it did, would have a severe impact on the charity's operations, objectives or reputation.

The trustees must assess the appropriate action required to mitigate the risk, and they should bear in mind that the cost of doing so should be proportional to its potential impact.

4. PLAN FOR PERIODIC MONITORING AND ASSESSMENT - The risk management process is evolving - previously identified risks may no longer apply and new ones may arise. Annual monitoring, together with update reports, should be undertaken by the trustees. Staff, managers and trustees need to be committed to implementing the recommended changes. Communication within the charity will ensure that responsibilities are understood and that risk management becomes part of the culture.

Charities face increasing regulation. If a charity has an effective risk-management system in place, it is an opportunity to measure both its statutory compliance and its effective running across the entire operation.

Strategic risk management is essential to enable a charity to reach its objectives. The purpose of risk management is not to avoid risks but to identify and manage them. By managing its risks, the charity will be better equipped to deal with regulation, to measure the outcomes and impact of its work and to identify new opportunities.

Peter Scott is a partner in the charities group at Cripps Harries Hall LLP. He acts for many national and international charities and is a trustee to many of his clients. He is a member of the Charity Law Association and chairs several charities.

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