The regulatory landscape
Regulatory action by the Charity Commission is increasing. There were 18% more regulatory concern cases, 25% more statutory inquiries and just under 60% more inquiry powers used in the Commission’s most recent financial period than its previous one.
Common themes for the Commission opening investigations are governance failures, safeguarding issues, conflicts of interest and/or unauthorised trustee benefits, accounting and record keeping failures, and trustees acting outside of their charity’s purposes.
Regulatory action has a number of negative consequences on a charity. It can be time-consuming and costly, particularly if professional advice is required, and/or if external investigations need to be commissioned. It can impact on a charity’s activities, reduce morale and lead to staff turnover, and damage reputation and affect income streams (by putting off existing or potential new donors). It can also result in direct monetary loss through fines, for example from Companies House for missing filing deadlines or the ICO for breach of data laws.
The risks for faith-based charities
Faith-based charities can sometimes find themselves slightly more at risk of regulatory action than other charities. This is because faith-based charities often:
- undertake activities, work with partners or make grants in “high-risk” areas, such as warzones or countries with corruption issues or weaker financial controls; through their fearlessness and conviction in helping people most in need around the world, exposure to some degree of risk comes with the territory (quite literally);
- have spiritual leaders, or individuals who occupy a delivery role that comes with remuneration or other benefits (such as accommodation), on their board, sometimes acting concurrently as a charity trustee, religious leader and senior executive; although this can be perfectly appropriate and can benefit a faith-based charity’s mission and its beneficiaries, it can also mean more complexity around ensuring there is genuinely collective decision-making, as well as managing conflicts of interest and avoiding unauthorised trustee benefits; and/or
- place significant trust on volunteers or staff responsible for financial controls who happen to be adherents to the religion in question, which – if not backed-up with appropriate formality, oversight and monitoring – can expose the charity to risk of financial abuse.
This article looks at what faith-based charities can do to avoid the common pitfalls that lead to regulatory action. It also provides some general tips on how charities can best respond if they do find themselves engaged by the Charity Commission or experiencing a serious incident.
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Prevention – avoiding the common pitfalls
Prevention – avoiding the common pitfalls
A key factor in avoiding common regulatory concerns is having an appropriately robust, clear and regularly reviewed governance framework.
Delegation
Formal written delegated authorities (such as schemes of delegation) are recommended in the recently updated Charity Governance Code. Whatever format these take, they should have clearly defined scope and limits for delegated powers. They should also provide for how the trustees will maintain oversight of their charity’s delegations and governance framework more generally.
Policies
Appropriate policies should be in place, such as conflicts of interest, grant-making (for grant-making entities), whistleblowing and complaints, safeguarding, financial controls and investment policies. The Commission’s updated Annual Return form is helpful in signposting policies and procedures that could be relevant, and prompting consideration of whether one or more should be adopted. Relevant policies should not simply be implemented, but regularly reviewed to make sure they are up-to-date and suitable; it is often helpful to think of them as “living” documents, constantly developing in alignment with a charity’s operation.
Record keeping
Record keeping for board and committee decision-making should be appropriately detailed, and should include not only the decision, but:
- the rationale for a decision;
- any documents or information considered by the trustees or committee members; and
- (if relevant) how conflicts of interest or loyalty were managed.
If a third-party reader (such as a Charity Commission caseworker) would not be able to follow the reasoning for a board or committee decision from reading the relevant minutes or written resolution, this is almost certainly a sign that record keeping is not adequate. The Commission’s guidance on trustee decision-making contains more detail about what the Commission expects in relation to decisions and their recording.
Familiarity with governing document
It is important that trustees of faith-based charities are familiar with their charity’s governing document, in order to avoid inadvertently breaching it. Common pitfalls are:
- objects (it is essential that trustees understand their charity’s objects/purposes and their scope – if these are not wide enough to encompass planned activities, the trustees should reconsider the activities or consider whether they should apply to the Commission for consent to widen their charity’s objects);
- powers (although many charities have a wide range of permissive powers, not all charities do, and powers can sometimes have constraints, restrictions and provisions in relation to certain actions; trustees contemplating action should be clear about what power is relevant to their plans, and if unsure seek advice);
- trustee term limits / retirement by rotation requirements (missing term expiries can sometimes cause serious challenges for evidencing that trustees are validly in place or that decisions were validly made);
- conflicts of interest / loyalty (trustees must understand how their governing document provides for conflicts to be identified and managed; failure to adhere to conflicts provisions is a common trigger for statutory inquiries); and
- unauthorised benefits (a governing document will almost always outline the limits of what trustees and members can receive by way of benefits from their charity; trustees must be clear on these limits, particularly where board members are receiving remuneration or there are complex structures, such as subsidiary companies, where – for example – trustees who also act as remunerated directors of the subsidiary can find themselves receiving benefits that are not authorised under the charity’s governing document).
If a governing document is ambiguous, not detailed enough (particularly on administrative provisions) or in need of modernisation or updating, trustees should consider amending it.
Filings
Late filings of annual returns and/or annual accounts risk Commission engagement, particularly where there has been a repeat offence. Beyond the risk of the Commission considering regulatory action of some kind for the filing failures in and of themselves, there is also the risk of the Commission forming concerns about a charity’s wider governance or operations, and asking questions and/or requesting documents (such as meeting minutes or policies).
Keeping on top of regulatory filings is a relatively straightforward way of limiting risks of regulatory engagement, and avoiding the administrative burden and time costs that come with it.
Overseas grant-making
Where faith-based charities are making grants outside the UK, it is important that they consider and adhere to HMRC’s guidance on payments by charities to overseas bodies. This guidance doesn’t just apply to grants to “high risk” jurisdictions, although it is particularly important for these. It also applies to grants to charities or non-profits in lower risk jurisdictions (such as the United States or Europe), as well as to connected organisations based abroad (such as a founder organisation, or another charity within the same “group”).
Just by way of example, grants made to an organisation that is part of the same religious movement as the charity but without written terms and conditions (e.g. that restrict use to English charitable purposes, and have monitoring powers and recovery powers) risk a charity being viewed by HMRC as having failed to take the ‘reasonable steps’ required, and therefore – potentially – as having made non-charitable expenditure that gives rise to a tax liability.
Failure to appropriately formalise overseas grant-making also risks regulatory action from the Charity Commission, were the Commission to become aware of it.
Response – some general tips
The Charity Commission has a wide range of interventional powers. These include powers to: issue official warnings that appear on a charity’s public register; open Statutory Inquiries, which the Commission almost always publishes statements and reports about; appoint an ‘interim manager’, who manages the charity’s property and affairs; restrict the transactions that the charity can enter into; transfer property of a charity and/or make freezing orders against a charity’s assets.
Sometimes the Commission will correspond with a charity informally, raising questions about a charity’s activities and/or requesting documents. This may happen because of something in the public sphere (such as the media or social media) having been picked up by the Commission or a complaint having been made, and it can sometimes develop into other action – for example, into a regulatory concern case being opened.
Below are some general tips for responding to Commission engagement. Do note that they are not an exhaustive list and may not fit every situation; trustees should seek professional advice as needed depending on the scenario.
- If a serious incident has arisen for a charity, the trustees should report promptly via the designated serious incident reporting route; where a report that should have been made has not been made, the Commission will often have immediate concerns about the trustees’ management of the situation.
- When corresponding in response to Commission questions or concerns raised, responses should be clear, accurate and aimed at giving the Commission reassurance that the trustees are appropriately dealing with the issue (including specifics of how) and able to resolve it themselves, without the need for Commission intervention.
- It is rarely beneficial for a charity to have to clarify or correct earlier responses to the Commission; the Commission is usually open to agreeing to extensions for response deadlines; where a deadline is not realistic, it is a good idea to ask the Commission for an extension before the deadline expires, rather than sending back an unclear, incomplete or inaccurate response, or missing the deadline.
- The Commission is unlikely to agree to adjudicate on a theological disagreement or religious debate, and will normally expect trustees to take reasonable steps to prevent these from impacting on their management of their charity in advancement of its purposes.
- Where appropriate, setting out details of how a charity is taking steps to ensure that a particular issue or error will not reoccur can often reduce the risk of regulatory escalation.
- Preparing appropriate communications, both internal and external, are often helpful when the Commission has or is likely to use regulatory powers. There is often an ability to review and make representations to the Commission before the Commission publishes reports; it may be appropriate for a charity to make clear to the Commission the risks or damage that would arise from a report in its proposed form, and to ask for reconsideration or rewording.
If your charity would like support with any of the preventative actions outlined above, or in responding to regulatory engagement, please do contact us.
The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further advice.