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Charity law changes provide stronger protection

13 March 2017 • Jo Loake

The Charities (Protection and Social Investment) Act 2016 makes a number of amendments to the Charities Act 2011 to provide stronger protection for charities from individuals who are unfit to be charity trustees. The Act gives the Charity Commission (Commission) new or strengthened powers to tackle abuse of charity more effectively and efficiently.

The Act also gives charities a new power to make social investment, which pursue both a financial and social return and reinforces trustee responsibility and accountability for fund-raising as well as strengthening the Government's reserve powers to regulate fund-raising.

Protections

The Act:

  • adds new criteria to the criteria which automatically disqualify a person from being a charity trustee;
  • extends automatic disqualification to senior management positions in charities;
  • gives the 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;
  • gives the Commission a new warning power, enabling it to issue a warning where it considers there is either a breach of trust or duty or other misconduct or mismanagement;
  • gives the Commission a new power to direct a charity to be wound-up following an investigation;
  • enables the Commission, in the context of a statutory inquiry, to direct that a charity not take certain actions.

The Act also:

  • makes clear that failure to follow a Commission order or direction constitutes misconduct;
  • extends the period for which the Commission may suspend a person from charity trusteeship;
  • enables the 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;
  • enables the Commission to remove a disqualified trustee from a charity where they have not stepped down;
  • updates the existing power to direct charity property to be applied to another charity to deal with a particular problem;
  • 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.

In more detail

Warnings

Section 1 inserts into the Charities Act 2011 a new section 75A, which provides the Commission with a power to issue an official warning to a charity or charity trustee where there is a breach of trust or duty by a charity or trustee, or other misconduct or mismanagement in the charity. A breach of duty would include non-compliance with a Commission order or direction. The Commission is required to give notice of a warning and the warning notice must specify certain matters, including the grounds for the warning, and any remedial action that could address the warning. The Commission is to take account if any representations on the content of the warning made to it within the period set out in the notice.

 

There is no right of appeal to the Charity Tribunal against an official warning, however in addition to the representations process described above, an official warning could be challenged through judicial review.

 

The official warning will specify the breach, and may provide advice and guidance to the charity on how the charity can remedy the breach that has been identified in the warning.

 

Wider conduct to be taken into account

Section 3 inserts into the Charities Act 2011 new section 76A. Where the Commission has opened an inquiry into charity A, provided there has been misconduct/mismanagement in charity A and the Commission can link it to a person, this provision enables the Commission to take into account any other relevant evidence of that person’s conduct for example in charity B or outside of charity but which may damage public trust and confidence in charity, for the purpose of deciding what protective power(s) it would be proportionate/appropriate to exercise in relation to charity A. The Commission could only take account of conduct that would be relevant to the management or administration of a charity and would have to set out in its statement of reasons the conduct it was taking into account in decisions to exercise any compliance powers. The Commission would not be able to take into account any conduct that was not relevant to the management or administration of a charity.

 

Removal of trustees and disqualification

Section 4 inserts into the Charities Act 2011 a substitute section 79 which deals with removal of charity trustees following an inquiry. The revised section 79 makes it clear that the Commission can make a scheme in relation to a charity when there is an inquiry open and the Commission is satisfied that there is either misconduct or mismanagement or there is risk to charity property. The test for the Commission to exercise its power to remove a charity trustee, or other office holder, remains that there must be both misconduct or mismanagement and risk to charity property.

 

Section 5 inserts into the Charities Act 2011 a new section 79A which enables the Commission to remove a disqualified charity trustee if they continue to remain in their position once disqualified. The Commission is required to give notice to each of the charity’s trustees, but is not required to give public notice of the order, and is not required to provide a particular period of notice or a mechanism for representations. The power does not extend to removing disqualified persons from senior management positions, as this would be for the charity’s trustees to enforce (their failure to do so could result in the Commission taking action against the charity’s trustees).

 

Section 9 amends section 178 of the Charities Act 2011 and inserts new section 178A into the Act to extend the criteria that automatically disqualify a person from being a charity trustee.
The existing criteria for automatic disqualification remain unchanged.

 

Section 10 inserts four new sections (181A, 181B, 181C and 181D) into the Charities Act 2011, and makes some other consequential changes.

 

New section 181A provides the Commission with a power to disqualify a person from being a charity trustee and in a senior management position in a charity. New section 181B inserted by section 10 provides that a disqualification order must specify the period of disqualification, which can be up to 15 years, but must be proportionate having regard to certain matters. It also provides that a disqualification order can only take effect after the period for lodging an appeal to the Charity Tribunal has expired without an appeal being lodged, or where an appeal is lodged when it is either withdrawn or finally determined by the Tribunal.

 

New section 181B also provides the Commission with a power to suspend a person from being a charity trustee once it has served notice of its intention to make a disqualification order against that person. The suspension would be for up to one year, extendable for up to a further year. The suspension would be subject to periodic review by the Commission (new section 181B(7)). Whilst suspended the person must obtain the Commission’s approval before taking up any charity trustee position (new section 181B(10)). The suspension lasts until either the Commission makes a disqualification order, it gives notice of its intention not to make such an order, the period of the suspension expires, or on review the Commission considers the suspension should be discharged.

 

A person subject to a disqualification order would be subject to the same criminal consequences (section 10(3)) and civil consequences (section 10(4)) as a person disqualified under section 178 Charities Act 2011.

 

New section 181C sets out the process for making a disqualification order. New section 181D provides for the variation or revocation of disqualification orders.

 

Power to direct NOT taking action

The Commission already has the power (in section 84 of the Charities Act 2011) to direct that a charity (or trustees) take certain actions in the context of a statutory inquiry. Section 6 inserts into the Charities Act 2011 a new section 84A which gives the Commission a new power to direct a charity not to take certain actions in the context of a statutory inquiry.

 

Winding up

Section 7 inserts into the Charities Act 2011 a new section 84B which enables the Commission to direct a charity to wind up in certain circumstances. The Commission itself cannot wind up the charity, as to do so would be acting in the charity’s administration, so this new power enables the Commission to direct the trustees (or if necessary other persons in the charity such as any remaining employees or members) to take the necessary steps to wind it up (new section 84B(2)).

 

Charity property

Section 8 amends section 85 of the Charities Act 2011 so that the Commission may make an order to apply charity property where the person holding the property is "unable" to apply it properly (at present, a person must be "unwilling"). It also amends section 85 of the Charities Act 2011 so that compliance with the order does not result in a breach of contractual obligations to the charity (e.g. banks who act on client instruction).

 

Fundraising

Section 13 amends section 59 of the Charities Act 1992. The effect of the amendments is to prohibit commercial fundraisers from raising funds for a charitable institution unless the fund-raising agreement between the commercial fundraiser and the charitable institution includes certain terms in relation to fund-raising standards which the commercial fundraiser undertakes to follow.

Section 14 provides two new reserve powers for Government to ensure the effective regulation of charitable fund-raising should there be insufficient support for the new self-regulatory system that is being established.

 

Social investment

Section 15 amends the Charities Act 2011 by inserting Part 14A, which contains three sections: section 292A (meaning of "social investment"); section 292B (general power to make social investments); and section 292C (charity trustees’ duties in relation to social investments). It also makes consequential amendments to the Trustee Act 2000.

 

The Act defines "social investment" by reference to the objectives that are sought to be achieved by entering into the transaction. A relevant act of a charity is a social investment if it is done with a view to both (a) directly furthering the charity’s purposes and (b) achieving a financial return for the charity.

 

There are further specific provisions in relation to permanent endowments and the power to make social investments being restricted in the objects of a charity. The new Act sets out a number of duties when making social investments, whether made under the new power or not and further that any social investments are to be reviewed from time to time.

 

The duties cover steps to be taken before a social investment is made; trustees must be satisfied that a social investment is in the interests of the charity based on its overall benefit to the charity, namely the combination of (a) the expected direct furtherance of the charity's purposes and (b) the expected financial return. A charity might make a social investment with an emphasis on the charity's purposes, or with an emphasis on the financial return, or where the trustees' motivation is both in equal measure.


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