Charity Commission inquiries

Linked to the Chief Executive’s statement, is the Commission’s policy of announcing the opening of every formal inquiry into a charity unless there are exceptional reasons not to do so. During 2014, the number of statutory inquiries jumped from 15 to 64.

Charities dealing with the Commission need to be aware of the substantial reputational risk. The opening may well attract attention and its successful conclusion with their acquittal may not. We think this means that charities need to take actual or threatened interest by the Commission very seriously and respond with real care.

The Commission is very keen to demonstrate what a good and effective regulator it is and it believes that one of the ways of doing this is publishing the maximum amount of material about its regulatory activity. This means that the old process of support discussion and advice leading to the private resolution of issues has been replaced by a tendency to move straight to a formal inquiry. Now, when a formal inquiry into a charity is opened, even on a relatively minor issue where there is no particular fault but perhaps some interesting technical question, it will publish the fact that the charity is subject to an inquiry unless:

  •  it would contravene confidentiality, commercial sensitivity or national security;
  •  it would severely prejudice the charity and its beneficiaries;
  •  it would not be of public interest.

Therefore, if a charity becomes involved in any way with the Commission, it is possible that the issue may be published on their website. Even if the detail does not reflect badly on the charity, the mere fact of being ‘subject to a statutory inquiry’ may have adverse consequences. Reputational damage is a real risk as is action by funders. 

It is possible to ask the Commission to delay publication of an inquiry report, for example to allow trustees to remedy the problem or if it might prejudice pending or ongoing legal proceedings.

Changes to the annual return

When charities report on their financial year end ending 2015, their response to the Commission will have to include answers to three new questions:

1.    How much income did you receive from:

  •   contracts from central or local government to deliver services?
  •   grants from central or local government?

2.    Does your charity have a policy on paying its staff?

3.    Has your charity reviewed its financial controls during the past year?

The Commission did not include a proposed question on campaigning, but has said that it may revisit this.

There will be risks in responding to the second and third questions negatively and therefore charities should think about taking some steps if they can’t answer positively. This includes:

1.    Creating a pay policy - this doesn’t need to be a complex document and could be limited to a page or so

2.    Putting financial controls in place - fraud is a continuing problem in the sector and all charities must ensure that their financial controls are robust. While the question asks if the charity has reviewed its controls, the charity will wish to seek advice from its auditors and other advisors

These changes are part of the Commission’s emphasis on accountability and transparency and organisations will need to ensure they are able to respond appropriately.

Changes to what trustees ‘must’ and ‘should’ do

The Commission has produced new draft guidance on trustees’ duties (’The Essential Trustee’ (CC3)), which it is currently consulting on.

The key change is the revised definitions of what a trustee ‘must’ do (i.e. a legal requirement) and what a trustee ‘should’ do (i.e. recommended good practice). Historically the Commission has been very careful to make the distinction between legal duties and recommended good practice. However, the new guidance suggests that the Commission expects trustees to comply with specified good practice unless they can justify not doing so (i.e. complying in a different way).

If trustees do not follow specified good practice, the Commission’s view is that they will be at risk of breaching their legal duties. This potentially places a greater burden on charities and will entail carefully checking Commission guidance (which is not something that most boards regularly do). It will also mean that where trustees do not think that it is appropriate to have regard to a piece of good practice guidance, they will need to carefully document the decision making process and any advice or reasoning behind it.

The revised guidance also states that any divergence from specified good practice could result in a trustee being in breach of their legal duties and held responsible for any loss that the charity incurs, as well as the Commission treating it as evidence of misconduct or mismanagement. Given the new Chief Executive’s statement that ‘trustees will no longer receive the benefit of the doubt’, this is a worrying development.

Other changes include a fresh emphasis that the guidance applies to all charities, not just those registered with the Commission. This will therefore include directors of community benefit societies and governors of academy schools among others.

The Commission’s explanation of the changes is that although they will keep the distinction between things you ‘must’ and ‘should’ do, in their view the latter are things ‘you really should do’. Its aim is to make things clearer for trustees, but the new definition is potentially more confusing. It will be interesting to see if the Commission retains the new definition in the final guidance, which is expected to be published in Spring 2015.

James Sinclair Taylor 

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