Hodgson Charities Act Review

The Charity Commission should consider providing a single piece of guidance setting out how it defines each of the charitable purposes and the factors it will consider when applying those definitions to a decide whether an organisation qualifies as charitable. It should also give thought to producing more model objects to supplement this guidance and assist new charities to comply with the law.

The Government, through the Civil Society Red Tape Challenge, should consider the totality of the regulation facing charity trustees with a view to reducing it where possible.

Development of social impact measurement should not be added to the existing statutory list of charitable purposes at this time.

The Charity Commission should still approve disposals to “connected persons,” plus mortgages and other charges granted to connected persons.

The Charity Commission should work with umbrella bodies and other groups in the sector (e.g. infrastructure organisations) to promote their best practice guidance on trustee recruitment.

The Government, working with business, should produce best practice guidance for employers on what trusteeship is, the benefits for employees, and how to effectively support employees who are trustees to meet the commitments of their role.

The Government should lead the way in demonstrating good practice by encouraging staff to consider trusteeship and enabling them to use volunteering days in this way.

Businesses should explore the potential for loaning or seconding staff to charities.

Trusteeship should normally be limited in a charity’s constitution to three terms of no more than three years’ service each, and the Charity Commission and umbrella bodies should amend their model constitution documents to reflect this. Any charity which does not include this measure in its constitution should be required to explain the reasons for this in its annual report.

Umbrella bodies should, working with the Charity Commission and Government, investigate ways to draw together and promote a centralised portal for trustee vacancies.

The Government should introduce a ‘right to know’ for all charitable trustees i.e. a right to access any information, within the confines of data protection law, held by the charity that they reasonably judge necessary to discharge their duties effectively.

The Government should consider if and how to widen the types of criminal offences disqualifying individuals from charity trusteeship, taking into account the need to support rehabilitation of former offenders.

The Charity Commission should prioritise its core functions.

The attention of the Tribunal should be drawn to the important role it has to play in ensuring case law precedents reflect emerging social mores.

The Commission’s statutory objectives are sound, but it should focus more tightly on regulation of the sector; not just reactive but proactive regulation, including checking random and risk- weighted samples of charity accounts. The Commission should be more proactive in deterring, identifying, disrupting and tackling abuse of charitable status.

The Charity Commission’s competence is in charity law. It should not be producing guidance on issues that are not concerned with that, unless it provides clarity on an issue that directly impacts on charity law and is published jointly with another organisation that can provide authoritative advice.

The Commission needs to be adequately funded to properly regulate the sector. Some analysis of financial efficiency and requirements needs to be undertaken as reductions in the Charity Commission’s budget take place.

Consideration should be given to whether the name ‘Charity Commission’ is sufficiently well-matched to the Commission’s role going forward to support public and sector understanding of its role. A change to “Charity Authority” is suggested.

The Charity Commission exercises a number of functions and grants a number of permissions that could be moved elsewhere, or removed altogether, to streamline regulation. A list of the functions that could be altered or removed is set out in Appendix A. Where this de-regulation enables charities themselves to make more decisions, there should be a “comply or explain” approach.

The general threshold for compulsory registration should be raised to £25,000 (to match the accounting threshold), with compulsory registration also applicable to all (non-exempt) charities that claim tax relief.

The process of lowering the registration threshold for excepted charities should continue, first to £50,000 and then to £25,000, over a period of three years. This three year period should commence once all existing organisations wishing to convert to a Charitable Incorporated Organisation have had two years to do so, to manage the impact on the Charity Commission.

Voluntary registration should be introduced by bringing s30(3) of the Charities Act 2011 Act into force, once the process of registering excepted charities with an income over £25,000 has been completed and when all existing organisations wishing to convert to a Charitable Incorporated Organisation have had two years to do so. Applications for voluntary registration should only be available online.

The processes for registering and organisation with the Charity Commission and for tax relief with HMRC should be joined up into a single process. The Charity Commission and HMRC will need to work together to design and implement such a process.

All charities which are unregistered should be required to disclose this fact on their correspondence, fundraising materials and cheques.

The Charity Commission, in its drafting of new guidance on public benefit and more widely, should take on board the comments made by the sector regarding the need for a clear distinction between legal requirements and best practice in the text.

The Charity Commission should continue to ensure that the information available about the charities on its register meets public needs and demand and is regularly reviewed to ensure it continues to meet these requirements.

Work by Companies House and the Charity Commission to create a single reporting system for charitable companies, as recommended in Unshackling Good Neighbours, should continue as a matter of urgency. The potential for joint accounting requirements should also be investigated.

The Charity Commission should continue its work to develop more partnerships with sub-sector umbrella bodies, enabling them to take on a greater role in promoting compliance, developing best practice (including model governing documents) and helping their membership with queries. The Commission should underscore these agreements with Memoranda of Understanding that are published on its website.

The Commission should keep such partnership arrangements under review, and include a section in its annual report about the effectiveness of its partnership working.

The Office for Civil Society and the Charity Commission should begin discussions with the Homes and Communities Agency about the feasibility of it becoming the principal regulator of charitable social housing providers in England.

The Charity Commission should be given the power to delegate some or all of its functions to other bodies, where it considers this to be in the interests of good regulation and the overall standard of regulation will be equivalent. In all cases the Commission must both retain its powers to investigate any individual charity and be able to withdraw a co-regulation authorisation at any time.

The term “principal regulator” should be changed to “co- regulator.”

The requirement to submit accounts and reporting information should be aligned with the registration threshold.

All compulsorily registered charities should be required to submit their accounts and Annual Return and they should be publicly available on the Commission website.

Voluntarily registered charities must submit accounts, for publication on the Commission’s website, but must do so electronically. Submissions by charities that are compulsorily registered but have an income below £25,000 per year must also be electronic.

In order to address future public concerns about ‘what constitutes a charity,’ in practical as opposed to historical-legal terms, the Government should stimulate a widespread sector and public debate on the question.

All registered charities with an annual income of less than £25,000 should be identified on the Commission’s register as “small” alongside their registration number. The intention of this is to improve the public perception that these charities are subject to little proactive regulatory oversight – and alert potential donors to this fact.

The Summary Information Return should be abolished, subject to the requirement that all the information it provides is available elsewhere in charities accounts and Annual Returns.

The Charity Commission should continue with its plans to simplify and improve the Charities SORP.

The income level at which charities are required to have their accounts audited should increase from £500,000 to £1 million. The audit threshold for charities with assets valued at £3,260,000 should be removed completely.

The Charity Commission should explore technology-based ways of validating data from the information provided to it in both charities accounts and Annual Return.

All information required to be submitted by charities should be combined into a single document for simplicity. The first page of this should be a list of key risk indicators to help the Commission identify a sample of charities for further investigation. The completed list should also be published on the charity’s register entry to aid public understanding and exercise of judgment.

Sanctions for late filing of accounts and Annual Returns should include the withdrawal of Gift Aid. Government and the Charity Commission should also give thought to the costs, benefits and logistics of introducing late filing fines.

Government should work with the Charity Commission to develop a fair and proportionate system of charging for filing annual returns with the Commission and for the registration of new charities. Any such charges should be set at a level to reflect the activities that they cover. Any funds raised must be accepted by HM Treasury as being an incremental increase in resources available to enable the Commission to carry out its functions more effectively not merely reason to reduce its budget by the same amount.

The Commission should be able to continue to offer bespoke legal advice such as the development of specialised schemes, on a cost recovery basis, if it wishes.

Individual charities should adopt and publish internal procedures for disputes and complaints. Umbrella bodies are ideally placed to support charities with this by the development of pro-forma procedures and support in their implementation, perhaps even taking on the role of adjudicator for their members.

The Charity Commission, as part of its information strategy review, should identify and implement ways of drawing public attention to the public benefit reports of individual charities.

Schedule 6 to the Charities Act 2011 should be removed and the jurisdiction of the Tribunal reformulated on the face of the legislation as: a) A right of appeal against any legal decision of the b) A right of review of any other decision of the Commission

Those who should have standing before the Tribunal to appeal or seek a review should be (i) the charity (if it is a body corporate); (ii) the charity trustees; (iii) any other person affected by the decision, order, direction, determination or decision not to act, as the case may be.

The Charity Commission and Tribunal should work together to produce and agree guidance as to the scope of the Tribunal’s jurisdiction and when a claim can be brought (including interventions by interested parties in reference cases).

The time limit for bringing a Tribunal case should be extended to four months.

Responsibility for making decisions on appropriate use of funds in specific litigation should be transferred to the Tribunal.

The Charity Commission should be given the power to make references to the Tribunal without the need for the Attorney General’s permission, provided they notify the Attorney of any references they make and the Attorney retains the right to become a party to the case.

The Tribunal should consider whether there are any further ways in which it could use its caseload management powers to simplify proceedings, make them less adversarial and dispose of cases rapidly. Parties should be encouraged to deal with cases without an oral hearing where appropriate.

The Tribunal should consider the value of including in each of its judgments a plain English summary of the key points and decisions, to aid understanding of the law.

The Government should consider ways in which the Tribunal could be empowered to take account of changing social and economic circumstances as well as case law precedents.

The FRSB and sector umbrella bodies, assisted by the Cabinet Office and Charity Commission, need to address the confused self-regulatory landscape, and agree a division of responsibilities which provides clarity and simplicity to the public, and removes duplication. This is a key challenge for the sector, which within six months of the acceptance of this recommendation should work up and agree firm proposals to deliver the next stage of a sector-funded, public-facing, central self-regulatory body covering all aspects of fundraising.

Charities should recognise the importance of public benefit reporting both to public confidence and their own ability to attract supporters, and take responsibility for complying with reporting requirements, stressing the ‘impact’ rather than the ‘process’ of their activities.

The Charity Commission should do more to support self- regulation - for example including the FRSB tick logo on member charities’ public register pages, asking at registration whether organisations are members of the FRSB, promoting the FRSB in communications to charities, and publicising for the public the FRSB as the complaints handler in relation to fundraising.

The FRSB tick logo and branding should be retained. Members of the self-regulatory scheme must use the ‘tick’ logo on fundraising materials – there should be a “comply or explain” approach to this. Sector umbrella bodies also need to do much more to support and promote the FRSB and self-regulation among their membership.

Government, the regulator, umbrella bodies and the FRSB should work together on levers that would promote membership of the FRSB.

More should be done to promote the rulings of the FRSB in relation to both members and non-members. Where members persistently fail to meet the standards they should be ejected from the scheme. Where non-members persistently follow poor or illegal practices, the FRSB should develop formal referral mechanisms to the relevant statutory regulators or enforcement agencies including a commitment to take action on such referrals.

As it grows, the FRSB should audit its members' compliance, moving away from a system that relies on self-certification. New members should be given a transitional or probationary period during which they can develop their compliance with the Codes, but could have complaints judged solely against the Fundraising Promise. Likewise the FRSB should consider how to regulate fundraising by small (<£25,000) member charities, who may struggle to meet all aspects of the IOF's Codes. Instead, small charities should have their complaints assessed only against the Fundraising Promise.

There should be an initial 'expectation' that all fundraising charities with an income over £1 million (‘large’ charities) should be members of the FRSB. Over time this expectation should expand to capture more charities.

Government should review the progress of the FRSB in another five years’ time to determine whether it has made the step change required in terms of coverage, and public awareness. The reserve power for Government to regulate or require membership of the self-regulatory scheme should remain a serious option if self-regulation stalls or fails to make sufficient progress.

Government should work with the Institute of Fundraising, FRSB and other specialists to produce simple guidance on solicitation statements for professional fundraisers and commercial participators.

The following key changes need to be made to the rules for licensing public charitable collections, either under existing legislation or new legislation: a) National guidelines or model regulations should be developed covering (a) eligibility criteria for organisations wishing to apply for a licence, (b) accountability and transparency of collections, (c) the balance between different types and scale of collection, (d) frequency of collections, and (e) conduct of collections; b) Within this national framework, local authorities should have a significant degree of freedom in determining the frequency and extent of different types of collections, but should not be able to ban a particular fundraising method that is accepted nationally. c) Local licensing authorities should be able to opt to delegate the management of different types of collections (taking licensing back in-house if problems arose), or continue to manage licensing directly themselves. d) Face to face collections should be brought into the licensing regime. However, local licensing authorities should be encouraged to rely on self-regulation of these types of collection by the PFRA. e) Collections on private property should remain, as at present, at the discretion of the owner/occupier. f) The Government should explore the appetite and options for licensing all types of house to house textile collections to equalise the position between commercial and charitable collections. g) National Exemption Orders should be abolished, though provision must be made to allow for collections on recognised ‘flag days’ and urgent (e.g. disaster) appeals, and thought given on how to minimise the regulatory burden for existing exemption order holders before implementation. h) There should be a right of appeal against the refusal of any type of licence to the Charity Tribunal. i) In London, consideration should be given to transferring licensing responsibility from the Metropolitan Police to local licensing authorities if there is demand for such a change.

A standing committee should be formed to drive forward these changes and monitor progress. Initially this should be chaired by the Cabinet Office and its core membership should include the Charity Commission, FRSB, and Institute of Fundraising. Wider membership should be brought in for public charitable collections.

The Charity Commission should instigate a set of key indicators to help identify charities which might be at higher risk of failing to meet their legal obligations and should then take steps to improve organisations’ performance or take the necessary action against them.

The rules governing investment by charities should be amended to the following effect: a) As the primary duty on charity trustees is to further the purposes of their charity, trustees are entitled to consider the totality of benefit that an investment is expected to provide, in terms of both financial and social benefit, when making investment decisions; b) The term ‘investment,’ for these purposes, includes any outlay of money where the charity expects some form of financial return, whether or not that is the primary motive for making the outlay; c) The other existing principles governing investment in the Trustee Act 2000 should continue to apply.

The Government should also consider an amendment to the Trustee Act 2000 to draw attention to the distinct responsibilities imposed on the trustees of charitable trusts as opposed to private trusts (i.e. the need to further charitable purposes rather than simply preserve capital).

The Government should introduce a legal power for non- functional permanent endowment to be invested in mixed purpose investments, with the requirement that capital levels must be restored within a reasonable period.

The Government should work to develop a standard social investment vehicle to allow funding from different sources to be invested, and maintained separately, in the same product.

The private benefit requirement in relation to investment should be reworded to “necessary and proportionate”, although the Charity Commission should produce clear guidance on this change to ensure it does not undermine the wider public benefit principle.

The charities SORP should be revised to facilitate the appropriate reporting of social investments. As part of this, the professional accountancy bodies should identify a standard system for valuing social investments; one possibility might be that trustees’ valuation is used until a reasonable period of operation has elapsed to allow investments time to demonstrate their merits. The approaches followed in the early years of the private equity industry, which faced similar challenges, might usefully be considered.

The Government should consider amendment to the Financial Services Bill to provide a statutory and regulatory underpinning to social investment

Charities should be able to apply to HMRC for a prior clearance on tax treatment ahead of the making of an investment; in time, as the market matures, HMRC should provide clear guidance on the tax treatment of different types of social investment. HMRC should also consider establishing a specialist unit for handling social investment issues.

The Government should consider ways of revising financial promotion rules to allow social investment advice to be given. Proportionate approaches to promotions requirements for low- value deals should also be investigated in order to free up the lower end of the investment market without undermining important consumer protections.

The FSA should consider establishing a specialist unit to deal with the challenges of social investment – for both the investor and the investee.

Charities who fall into the ‘large’ category set out in Chapter 6 should have the power to pay their trustees, subject to clear disclosure requirements on the quantum and terms of any remuneration in the individual charity’s annual report and accounts.

The name of the term ‘mixed motive investment’ should be replaced with ‘mixed purpose investment’ to provide the general public with a clearer understanding.

Modify the merger provisions to provide that all bequests shall be treated as a gift to the new, merged or incorporated charity where a Will may otherwise cause a gift to fail if the original charity has ceased to exist. This should include safeguards around the relevance of the new charity’s objects to ensure that the intentions of the testator are respectfully considered.

Professional advisers should work to identify a standard form of wording for a charitable bequest that can be used easily by Will drafters and members of the public.

The Charity Commission and HMRC should revise registration practices to allow newly-incorporated organisations to continue to be registered under their original charity number where there has not been a material change to the organisation’s objects.

The banking industry should allow charitable organisations that have incorporated or merged to maintain and rename their existing accounts in the name of the new body.

Disposals of and mortgages and other charges over charity land should be deregulated and rely on the charity trustees acting under their duty of care following Charity Commission guidance.

The Charity Commission should work with relevant professional bodies to develop this guidance and include specific types of common transaction – including acquisitions as well as disposals.

Charitable IPS should be required to either register with the Charity Commission or resign their charitable status.

Work by Companies House and the Charity Commission to create a single reporting system for charitable companies should continue as a matter of urgency. The potential for joint accounting requirements should also be investigated.

The application of IFRS to charitable organisations should be proportionate and should add no additional burdens to these organisations; the Financial Reporting Council should work with the Charity Commission before and during implementation to ensure this.

Trustees of all charities should consider reimbursing trustees’ expenses, especially if they consider this would result in a wider range of individuals taking on the role.

The impact of CIOs should be assessed three years after implementation.

Regulations to allow charitable companies, IPS and Community Interest Companies to covert to CIOs should be expanded to include enabling CIOs to convert into charitable companies.

No change should be made to the list of charitable purposes.

For the time being, the recommendation of the Calman report that a UK-wide definition of charity be introduced should not be implemented. However, the harmonisation of the definition across the UK remains desirable in the longer term, and this issue should be revisited at a later date.

The Charity Commission should remain as a Non-Ministerial Department, with its independence protected in statute.

The Commission should prioritise its core functions: registering charities (and maintaining an accurate register); identifying, deterring, and tackling misconduct and abuse of charitable status; and providing the public with information (in a relevant form which is easily understood by the public) about charities, and charities with information about charity law.

To minimise the impact on the Charity Commission, deregistration of those outside the new limits should be upon request only.

The Charity Commission should remain the main regulator of charities in England and Wales.

A new Charities Ombudsman, or expansion of an existing Ombudsman to cover charities, would offer little additional value and is not recommended.

Membership of the FRSB should not be compulsory at this stage - neither the sector nor the FRSB would be ready for such a significant shift. .