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Charities (Protection and Social Investment) Act 2016

Policy background

Protection of Charities

  1. The Charity Commission’s statutory objectives include increasing public trust and confidence in charities and promoting charities’ compliance with their legal obligations. A significant part of the Charity Commission’s compliance work involves identifying and investigating misconduct or mismanagement in charities and taking appropriate and proportionate action in response to protect charity assets.
  2. The Charity Commission already has a range of investigatory and enforcement powers designed to protect charitable assets where there is serious misconduct or mismanagement. As a civil regulator, the Commission has no powers of prosecution, so if the Charity Commission discovers criminal activities it reports those activities to the police or other appropriate law enforcement agencies. The Charity Commission must not become directly involved in the running of or administration of a charity, although it can under certain circumstances give directions to charity trustees, appoint interim managers to displace the trustees and make remedial schemes.
  3. Currently, people with an unspent conviction for a criminal offence involving dishonesty or deception are automatically disqualified from acting as a charity trustee until their conviction is spent or they obtain a waiver from the disqualification from the Charity Commission.
  4. In his 2012 statutory review of the Charities Act 2006 "Trusted and Independent; giving charity back to charities ", Lord Hodgson of Astley Abbott’s recommended that the Government consider extending the range of offences that automatically disqualify a person from being a charity trustee. The Government accepted his recommendation in its response in September 2013.
  5. In December 2013 the National Audit Office (NAO) published a report on the regulatory effectiveness of the Charity Commission. The report concluded that the Charity Commission did not do enough to identify and tackle abuse of charitable status, and that this "undermines the Commission’s ability to meet its statutory objective to increase public trust and confidence in charities".
  6. The report found that the Charity Commission "needs to make greater use of its statutory powers in line with its objective of maintaining confidence in the sector; and develop an approach to identify and deal with those few trustees who deliberately abuse charitable status".
  7. The NAO report also identified deficiencies in the Charity Commission’s powers and barriers to their use. It made a number of recommendations to the Charity Commission and recommended that the Cabinet Office should "assist the Commission in securing legislative changes to address gaps and deficiencies in the Commission’s powers."
  8. The Government’s Extremism Task Force also recommended addressing gaps and deficiencies in the Charity Commission’s powers in the specific context of tackling extremism. It recommended "consulting on new legislation to strengthen the powers of the Charity Commission: these powers will help us tackle extremism, as well as other abuses of charitable status such as tax avoidance and fraud." Subsequently, the Home Affairs Select Committee, in its 2014 report on counter-terrorism also recommended stronger legal powers for the Charity Commission to counter the abuse of charities for terrorist purposes.
  9. In December 2013 the Government published a consultation on 17 proposals for reform put forward by the Charity Commission and which dealt both with the range of offences resulting in automatic disqualification from charity trusteeship, and gaps and weaknesses in the Charity Commission’s existing powers.
  10. Consultation feedback indicated broad support for the role of the Charity Commission and for ensuring it has the tools it needs to do its job. Not all of the proposals attracted support from the majority of respondents. A draft Bill was published for pre-legislative scrutiny in October 2014. Ten of the original 17 proposals were taken forward in the draft Bill.
  11. Parliamentary pre-legislative scrutiny was undertaken by the Joint Committee on the Draft Protection of Charities Bill. The Joint Committee took evidence from a wide range of stakeholders, and published its report on the draft Bill in February 2015. The Joint Committee broadly supported the proposals to give the Charity Commission more powers, however it recommended that effective safeguards must be in place to ensure charities and their trustees are treated fairly by the Commission.
  12. The Government’s response to the Joint Committee report was published in March 2015. It accepted most, but not all, of the Joint Committee’s recommendations, and the draft Bill was amended accordingly.
  13. In terms of protection of charities, the Act:
    1. adds new criteria, including certain criminal offences, to the criteria which automatically disqualify a person from being a charity trustee in England and Wales;
    2. extends automatic disqualification to senior management positions in charities;
    3. gives the Charity Commission a new power to disqualify an unfit person in certain circumstances from being a charity trustee and senior manager in a charity for up to 15 years, subject to safeguards;
    4. enables the Charity Commission to continue to proceed with removal where a trustee resigns after notice of removal has been served;
    5. gives the Charity Commission a new warning power, enabling it to issue a statutory warning where the Commission considers there is either a breach of trust or duty or other misconduct or mismanagement;
    6. gives the Charity Commission a new power to direct a charity to be wound-up following an investigation, and after public notice of its intention to act and a period for representations, where that would be more appropriate than attempting to restore the charity to health;
    7. enables the Charity Commission, in the context of a statutory inquiry, to direct that a charity not take certain actions.
  14. The Act also:
    1. makes clear that failure to follow a Charity Commission order or direction constitutes misconduct;
    2. extends the period for which the Charity Commission may suspend a person from charity trusteeship pending removal from a maximum of one year to a maximum of two years;
    3. enables the Charity Commission to exercise its existing scheme-making power in the context of a statutory inquiry where it is satisfied that there has been misconduct or mismanagement or there is a need to protect charity property. Currently both misconduct/mismanagement and need to protect charity property limbs must be met;
    4. enables the Charity Commission to remove a disqualified trustee from a charity where they have not stepped down;
    5. updates the existing power to direct charity property to be applied to another charity to deal with a particular problem;
    6. prevents a person disqualified as a charity trustee who is also an officer of a corporate body that is a charity trustee from participating in discussions and decisions when the corporate body is acting as a charity trustee.

Social Investment

  1. Certain research indicates that social and environmental impact is becoming more important across the UK economy. It has been suggested that one in three British consumers will pay more for products with a positive social or environmental outcome (Based on findings of Nielsen’s, Consumers who Care Survey 2013) and 60% of millennials (those born between 1980 and 2005) want to work for organisations with a social purpose (According to the recent survey of millennials by Deloitte, available at: www.deloitte.com/MillennialSurvey (opens in new window)).
  2. There are around 180,000 regulated social sector organisations, such as charities, community interest companies and community benefit societies with a combined annual income greater than £39 billion and workforce of more than 800,000 people (NCVO Almanac 2012, Government estimates from BIS, Small Business Survey, 2010 and ONS, Blue Book, 2011). In addition, there are an estimated 180,000 enterprises delivering social outcomes that do not take a regulated social form. These enterprises employ 1.5 million people and turnover c. £120 billion per year.
  3. Growth in this field is being supported by a positive investment market worth around £3 billion in 2014. Whilst savings in ethical banks and credit unions rose by 29% to £1.86 billion in the last three years, the fastest growth was to be found in the smaller direct investment sector, which consists of community share issues, bonds issued by charities and bonds and equity in a small number of socially motivated public companies (Ethex positive investment report 2014).
  4. Registered charitable trusts and foundations have £60bn assets under management and many have social missions that are highly compatible with social investment. This suggests they have the potential to provide the sort of risk capital that can support growth in this field. But to date it is considered that regulatory uncertainty has been an inhibiting factor (only £0.1bn has been socially invested). A new power of social investment would seek to reduce this uncertainty, leading to a subsequent boost to investment (Association of Charitable Foundations Research Briefing: Charitable Trusts and Foundations' Engagement in Social Investment, 2013).
  5. In his 2012 statutory review of the Charities Act 2006, Lord Hodgson of Astley Abbotts recognised that the current law made it difficult for charities to engage in making social investments. This is because charities are unlikely to have an express power to make social investments, but must instead rely on a combination of their separate powers to spend and their powers to invest for financial returns. He recommended that charity trustees’ investment powers and duties be amended to made social investment easier for those charities that wish to undertake it.
  6. As a result of Lord Hodgson’s recommendation the Government asked the Law Commission for England and Wales to review the law, consult and make recommendations. The Law Commission published proposals for public consultation in April 2014. It proposed that charities should be given a new power to make social investments, along with associated duties when making or reviewing social investments.
  7. The proposals were well supported by charities and the wider social investment sector, and the Law Commission reported in September 2014 recommending legislation to create a new social investment power and duties for charities.
  8. The Act gives effect to recommendations of the Law Commission in its Recommendations Paper, Social Investment by Charities (September 2014) by:
    1. introducing a power for charities to make social investments;
    2. setting out the duties that must be complied with by charity trustees when making social investments, whether pursuant to the statutory power or otherwise; and
    3. making consequential amendments to the Trustee Act 2000.
  9. The social investment provisions in the Act, and the notes on sections on the relevant provisions below, were originally prepared by the Law Commission. Before being introduced into the House of Lords, the provisions were amended by the Government to exclude charities established by legislation and by Royal Charter from the new social investment power and duties. Further amendments were made during the passage of the Act through the House of Lords to clarify the definition of social investment and trustees' duties when making social investments.

Fund-raising

  1. Charity fund-raising practices have been largely self-regulated by charities themselves, although there are rules and regulations relating to certain activities - for example Part 2 of the Charities Act 1992 which includes a reserve power for the Minister for the Cabinet Office to make regulations to control fund-raising for charitable institutions, data protection legislation, licensing requirements for charity collections, legislation governing lotteries. The Charity Commission's regulatory role is limited to circumstances where charitable funds are at risk or where the fund-raising indicates a serious governance failure in the charity.
  2. In 2015 there were a series of media exposés of unacceptable fund-raising practices in which elderly and vulnerable people were targeted by charities and put under pressure to donate. Several trustees and charity chief executives gave evidence before the Public Administration and Constitutional Affairs Committee in which they expressed their shock that such poor practices were undertaken by sub-contractors in their charities' name. The Government asked Sir Stuart Etherington to review the existing self-regulatory arrangements, supported by a cross-party panel of Peers and make recommendations for improvements. The Government put forward amendments during the passage of the Act to reinforce trustee responsibility and accountability for fund-raising.
  3. The Act (see section 13 below) reinforces to charity trustees their responsibility to ensure that fund-raising for their charity is undertaken responsibly and in a manner that does not damage public trust and confidence in their charity or the wider charity sector. It does so by:
    1. Requiring third party, commercial fundraisers to include terms in any contracts with charities setting out their fund-raising standards, how the fundraiser will protect vulnerable people, and how the charity will monitor whether standards are being met.
    2. Requiring trustees of auditable charities (usually those with incomes over £1m) to include a section in their trustees' annual report setting out their approach to fund-raising, whether they use third party commercial fundraisers, and how they protect vulnerable people from undue pressure in their fund-raising.
  4. The Etherington review ("Regulating Fundraising for the Future: Trust in charities, confidence in fundraising regulation" www. www.ncvo.org.uk/fundraisingreview) reported in September 2015. It made a number of recommendations, chief among which was the creation of a new, tougher Fundraising Regulator to self-regulate charity fund-raising. The Government accepted all of the recommendations in the Etherington Review. The new Fundraising Regulator is expected to be up-and-running in 2016.
  5. The Act extends the scope of the existing reserve power for the Minister to regulate fund-raising. It enables the Minister to:
    1. Require charities to register with a specified Fund-raising Regulator, comply with its requirements, have regard to its guidance and pay fees to it; or,
    2. Make the Charity Commission responsible for regulating charity fund-raising (the Commission may charge fees for this purpose pursuant to separate regulations).

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