Update to reserves guidance 'could make charities less resilient', says CFG's Caron Bradshaw

According to the chief executive of the Charity Finance Group, a new focus on the risk of unplanned closure might mean charities concentrate on building reserves and miss opportunities to grow

Caron Bradshaw
Caron Bradshaw

The Charity Finance Group has criticised the latest update to the Charity Commission’s guidance on reserves and warned that it could make charities less resilient.

The updated guidance document CC19, Charity Reserves, which in the new version has the subtitle "building resilience" was published today, along with updates to CC12, Managing a Charity’s Finances: planning, managing difficulties and insolvency and the commission document 15 Questions Trustees Should Ask, a guide for trustee meetings.

The CFG said an increased focus on the risk of unplanned closure and a new emphasis on trustees to justify why they have not kept reserves marked a large shift in focus, so the guidance should have been subject to a full public consultation.

The new guidance warns trustees five times to consider the risk of unplanned closure of the charity – a phrase that was not mentioned in the previous document.

The previous version of the guidance also warned that charity law required any income received by a charity to be spent within a reasonable period of its receipt, and said "trustees should be able to justify the holding of income as reserves".

But the updated guidance says trustees should "develop a reserves policy that fully justifies and clearly explains keeping or not keeping reserves".

It also points out there is no single level of reserves that is right for all charities.

Caron Bradshaw, chief executive of the CFG, said: "We agree with the Charity Commission that trustees should think carefully about reserves and that guidance should be refreshed. However, this update is unhelpful.

"By focusing on the risk of unplanned closure, the guidance does not encourage charities to take a holistic view of the needs of their charity," she said.

The commission’s update comes three days before the planned publication of the Public Administration and Constitutional Affairs Committee report on Kids Company, which collapsed in August amid accusations of financial mismanagement and did not have any reserves.

Bradshaw said: "The reversal in position on reserves could have an unintended consequence of making the sector less resilient as charities focus on building more reserves and missing opportunities to grow and deliver their charitable objectives.

"There is also a danger that it could encourage charities to breach their duty to have the right level of reserves for their organisation in an effort to appease stakeholders.

"Trustees should decide on a reserves policy and target range based on the risks and opportunities facing their organisation as well as a balance between the current and future needs of beneficiaries."

A commission statement accompanying the publication said a full review of the new guidance, with greater consultation, would take place later in the year. This was welcomed by Bradshaw.

Sarah Atkinson, director of policy and communications at the commission, said: "Reserves policies help tell that story clearly and demonstrate that trustees are aware of the real risks.

"These guidance updates are designed to help trustees make the right call and support them, not to overburden them.

"As regulator, there is a limit on how much we can do because these are individual decisions for trustees to make. But these tools will help them manage any difficulties properly and with confidence."

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