Charities Act 2016: Protecting the integrity of the sector

The saying goes 'It takes a lifetime to build a good reputation, but you can lose it in a minute'. And don't charities know it, after bruising media and parliamentary scrutiny of high-profile cases of bad fundraising and governance.

The Charities (Protection and Social Investment) Act 2016 received royal assent on 16 March this year, although none of its provisions are yet in force. While enacted to protect charities and to facilitate social investment, the Act also contains significant provisions designed to promote better fundraising.

Protection of charities

Reading the Act, you are left in no doubt that it is underpinned by the Commission's statutory objective 'to increase public trust and confidence in charities'. While the headline provisions dealing with warnings, suspension, and disqualification of charity trustees and staff will clearly impact upon individual charities and are designed to protect them, this is all about the bigger picture in protecting the integrity of the sector as a whole.

So what are the key protective provisions? Under section 75A of the Charities Act 2011, as amended by the 2016 Act, the Commission has new powers
to issue official warnings to trustees or charities where it considers they have committed a breach
of duty or been guilty of other misconduct or mismanagement. The Commission wanted a reasonable and proportionate way of dealing
with low-level breaches of statutory provisions
or breaches of fiduciary duty, where the risk and impact on charitable assets and services is
relatively low.

The Commission has the power to publish warnings. It must give prior notice of the intention to issue warnings and then take into account representations made within the specified notice period. There is no right of appeal against the Commission's decision to issue or publish a warning, and so the only remedy available to individual trustees or charities will be to seek judicial review of the Commission's decisions.

The Commission may extend an existing period of suspension of a trustee or officer to a maximum of two years (section 76), and in deciding it can take account of an individual's conduct regarding any other charity or any other conduct it considers likely to damage public trust and confidence in charities (section 76A). Closing a loophole previously exploited, the regulator now has a power to remove and so disqualify a trustee even when the trustee has resigned before being removed (section 79(5)) and can disqualify people from acting as officers, agents, or employees of charities, as well as charity trustees (section 178).

Section 178A adds to the list of occasions that automatically bring about disqualification, to cover terrorism offences, use of proceeds of crime, money laundering, bribery, and convictions for perjury. The range of offences that allow the Commission, in its discretion, to disqualify people from being a charity trustee now includes being cautioned for a relevant offence, found by HMRC not to be a fit and proper person to manage a charity, or responsible for misconduct, mismanagement, or any other conduct likely to damage public trust and confidence in charities (that phrase again - section 181A).

The maximum period for disqualification as a charity trustee is 15 years (section 181B) and at
least one month's notice of disqualification must be given to the relevant person to allow that person to make representations against disqualification (section 181C).

Social investment

Following consultation in 2014, the Law Commission recommended the introduction of a new statutory power to make social investments, along with revision of the Commission's 'Charities and investment matters: A guide for trustees (CC14)' guidance, including to provide worked examples of social investment decisions made by charity trustees. Section 292A provides a statutory definition of social investment, which is an application or use of funds or other property with a view to both directly furthering a charity's purposes and achieving a financial return for the charity.

All charities are given this power to make social investments, except those established by legislation or by royal charter (section 292(B)). Before exercising a power to make a social investment, charity trustees must consider whether they require advice and be satisfied that the social investment will be in the interest of the charity, having regard to the expected benefits it will achieve.

Also, are mixed motive investments (MMIs) covered by the definition? In CC14 the Commission defines these as investments which trustees make on the basis that they have elements of both financial investment and programme-related investment (i.e. which advance the charity's objects) but cannot be 'wholly justified as either one or the other'. Despite the Charity Law Association's contention that a social investment should not have to 'directly' further a charity's purpose and its strong recommendation that the word be removed from section 292A, it remains, and so does the uncertainty over the status of MMIs, which might only 'indirectly' further a charitable purpose (despite assurances at the report stage during the Bill's passage through parliament that MMIs would be covered).

This leads to uncertainty over the tax treatment of such investments: will they be regarded as 'non-charitable expenditure' and so be subject to tax? Charity clients may be well-advised to seek advance clearance from HMRC in respect of such proposed investments (although this additional step in itself may deter making the investments).

Fundraising regulations

Section 59 of the Charities Act 1992 provides that
it is unlawful for a professional fundraiser or commercial participator to solicit money or represent that charitable contributions are to be given to or for the benefit of a charity, unless this is in accordance with a written agreement satisfying the 'prescribed requirements', set out in the Charitable Institutions (Fund-Raising) Regulations 1994. These requirements include a statement of the principle objectives of the agreement and the methods to be used in pursuit of them, but other than that are concerned with achieving clarity around the
bargain struck.

Last year's distressing cases of Olive Cooke and Samuel Rae mean that such 'mechanistic' requirements are no longer enough. The Public Administration and Constitutional Affairs Committee report on the 2015 charity fundraising controversy was highly critical of some larger charities, their trustees, and the Information Commissioner's Office (ICO) for not being more proactive in respect of charities' misuse of data: charities are not exempt from either the Data Protection Act or the Privacy and Electronic Communications Regulations and need to ensure their activities comply with the law.

This is reinforced by amendments to section 59 of the 1992 Act, requiring a charity's agreement with a professional fundraiser or commercial participator to contain additional safeguards, in particular to specify the voluntary regulatory scheme by which the fundraiser is bound, setting out how that party is to protect vulnerable people and the public from unreasonable intrusions into their privacy, unreasonably persistent approaches for money or property, and undue pressure to give money or property, and how compliance will be monitored.

This will help charity trustees to discharge their duty to act in their charity's best interests. The Commission's recent draft revised guidance on charity fundraising emphasises the important role of trustees as guardians of a charity's values and reiterates their ultimate responsibility for the way in which their charity is run and how fundraising is conducted in its name.

A new section 162A of the 1992 Act requires large charities (generally those with more than £1m annual turnover) to include in their annual reports a statement containing specific information, in particular whether the charity has monitored fundraising activities carried on by a third party on its behalf and, if so, how it has done so, the number of complaints received by the charity or third party about its fundraising activity, and what the charity has done to protect vulnerable people and other members of the public.

These provisions are designed to ensure charities formulate and implement policies to get fundraising right first time, and will complement the Commission's updated guidance and the ICO's revised direct marketing guidance. The message to charity clients is 'prevention rather than cure'. If things go wrong, this will be evident to those who read their annual reports, who are likely to be those funders and members of the public upon whom such charities depend for support. Cancer Research UK is looking to adopt an opt-in fundraising model, seeking unambiguous and explicit permission from all new supporters. It expects to lose millions as a result, but this is the price to pay for building greater levels of trust.

There has been concern about the extent to which the Commission will use its new powers to issue (unchallenged) warnings to trustees and charities and to disqualify people from acting as charity trustees. Last year a leaked draft of the Home Office's new Counter-Extremism Strategy said that new legal powers for the Commission to 'sack trustees' would be used far more widely than expected. The Directory of Social Change has been particularly vocal in warning of the arrival of a 'Big Brother society' for the charity sector.

Nevertheless, the sector must recognise the
work to be done in regaining trust and confidence. The new Fundraising Regulator presents the last opportunity for self-regulation of charity fundraising; all charity trustees have to recognise that the buck stops with them. The challenge for charities moving forward is to embed compliance and good practice
at all levels, as the foundation for realising their mission and keeping hold of that precious
reputation. SJ

Robert Nieri is a senior associate at Freeths