RESPONSE TO THE CONSULTATION ON EXTENDING THE CHARITY COMMISSION’S POWERS TO TACKLE ABUSE IN CHARITIES Background Charity and voluntary sector work is at the heart of Stone King’s practice. The firm’s Charity & Social Enterprise team is recognised as one of the leading practices in the UK. We act for many hundreds of voluntary organisations including 189 of the country’s largest charities with activities ranging across a broad spectrum. We have also been appointed as Interim Manager by the Charity Commission on 6 occasions and have been involved in advising on several more. Using our considerable experience in this area, we would like to submit the following comments on the consultation regarding the potential extension of the Charity Commission’s powers to tackle abuse in charities. For further information visit www.stoneking.co.uk or contact our Head of Team, Ann Phillips. General Comments Overall, Stone King is generally supportive to the idea of the Charity Commission (the “Commission”) being given more or improved powers to tackle abuse in charities. However, we would also like to see wider use of the current powers of the Commission, which would limit the number of new powers required to regulate the sector effectively. We believe that the Commission’s application of powers under the Charities Act 2006 has been rather tentative and that the existing powers could be applied more broadly and creatively. Pursuant to section 20 (2) (b) of the Charities Act 2011, the Commission is barred from acting in the administration of a charity, and any extension to existing powers will need to respect this, and aim to assist only as far as is necessary for the Commission to regulate effectively. We would add that the previous approach to increasing the powers of the Commission (notably in the 2006 Act), was based upon responding to difficulties in past cases, which risks the introduction of a power that is never or rarely used because the individual situation does not arise again. We would, instead, support a more generalised approach to the introduction of new powers, to enable the Commission to adapt to new and novel circumstances, as and when they arise. This will also enable the Commission to be more proactive, rather than reactive. We would expect any new powers to be accompanied by publicly available guidance on when and how the Commission intends to use the powers, to ensure continued transparency in the operation of the Commission within its Risk Framework. We have noted in recent months a tendency for the Commission to appoint interim managers where previously they might have issued strong regulatory guidance, whether or not accompanied by the opening of a statutory inquiry. This may well have something to do with the considerable spending cuts which the Commission has suffered and the need to transfer the cost of correction of the faults in management and governance of the subject charity onto the charity itself.
Response to specific questions Proposal 1 - Extending the list of criteria that trigger automatic disqualification from trusteeship. Q1) Do you consider that unspent convictions for the range of offences listed above should automatically disqualify a person from charity trusteeship? Whilst it may be appropriate for individuals who have been convicted of the list of offences provided to be disqualified from trusteeship, Stone King do not necessarily agree that the best way to achieve this is through extending the list of offences to which an automatic disqualification applies. What is considered criminal activity changes over time as the view of society change, and offences may be added over time, or removed. Therefore, at no point in time can an exhaustive list of offences be produced which should always disqualify an individual from trusteeship. As a recent example, offences under the Terrorism Acts would not have been within the contemplation of the 1993 Act draftsmen, but are highly relevant to todayâ€™s society. Also, with the speed of change in technology, and jurisdictional challenges that the Internet brings, it is conceivable that internationally recognised offences may develop, which may warrant inclusion in the list. To avoid a situation where the list of offences that require automatic disqualification is constantly in need of updating, we would suggest that the widening of the general power in proposal 2 would be sufficient to ensure that individuals who have been convicted of offences which make it inappropriate for them to act as a trustee can be disqualified. The criteria should be drafted as widely as possible to give the Commission appropriate scope in which to act, and include appropriate safeguards, as discussed below. The Commission would need to produce guidance for trustees as to the types of offences that should be taken into account when deciding whether to appoint an individual, and the Commission will need to develop a good working relationship with the police to ensure that relevant checks can be made should an issue arise. We suspect that in practice that is easier said than done; how often has the Commission used the power (under ss.48 & 49) to obtain a search warrant and to enter premises? Q2) Are there any other offences not listed above which should automatically disqualify a person from acting as a charity trustee? In particular do you have any views on whether other offences under Part 1 of the Public Order Act 1986 as amended should be added to the list? Given the answer to Q1 above, we do not take the view that any other offences should be added, but would add that we would disagree with the addition of any offences that are not linked to dishonesty. In the case of public order offences, for example, there is a risk that an individual who is convicted of an offence whilst taking part on a legitimate protest is automatically disqualified, which could raise issues under the Human Rights Act 1998, and the right to freedom of expression provided in Article 10. Q3) Do you have any other views on automatic disqualification from acting as charity trustee? No
Proposal 2 - There are other circumstances where rather than being automatic, disqualification from charity trusteeship should be left to the Charity Commission’s judgement on a case by case basis. Q4) Do you agree that the Charity Commission should have a new power to disqualify someone whose behaviour means they are unsuitable to act as a charity trustee? As indicated in the response to Q1 above, Stone King supports the proposal for a general power of disqualification, provided that such a power is granted with appropriate safeguards. In the equivalent company law legislation1, the disqualification is made by the Court and not the regulator, and so we would recommend that a similar provision be made, so that the Commission has to apply to the Tribunal before exercising this general power to remove. Q5) Do you have a preference between option 1 (the limited power) or option 2 (the broad power)? If the power is to have appropriate safeguards, as suggested above, then we would prefer option 2 – the broad power. This option has the advantage of being adaptable to meet novel or unique circumstances that may not be envisaged at the time of drafting, but which may well occur at some point in the future. We would expect the Commission to have clear, publicly available guidance on the types of circumstance in which it intends to use the power, with guidelines as to how it would operate in practice. This guidance can be updated and policies amended as and when it becomes necessary to do so, without the difficulties and time that would be necessary to amend primary legislation. Q6) In relation to the limited power, do you agree with the criteria listed above? Do you think there are any criteria that should be added to the list or removed from the list? In particular do you think that there are any criminal offences, conviction for which, should enable disqualification where the Charity Commission considers it is in the public interest? We would support a general power, rather than the specific power, for the reasons given above. This question in effect supports our view, as it would be impossible to create an exhaustive list of categories, and so a general power with appropriate safeguards would leave the Commission free to use its judgment in appropriate cases, and use the power as and when the right circumstances arise, without being bound by a restrictive list which does not meet the needs of a particular set of facts. Q7) Do you agree with the proposals for waiver of disqualification, that they should follow the current arrangements that apply? Yes – it should always be possible for a waiver to be sought, as there will be circumstances where it might be appropriate for an individual who would otherwise be disqualified to act as a trustee. An obvious example is in the case of addiction-related charities, where it may be appropriate and highly useful for a beneficiary to sit on the board, but because of personal circumstances, beneficiaries may have convictions which would otherwise render them unsuitable. Also, attitudes change over time, and it may be that an individual is disqualified for a reason that would no longer result in that sanction, and they should be given the opportunity to act as trustee to ensure equality of treatment. 1
Section 6 of the Company Directors Disqualification Act 1986 3
Proposal 3 - Removal from trustee body and notification of other trustees. Q8) Do you agree that existing removal powers should be amended to enable the Commission to remove a disqualified trustee? Yes – Stone King agree that the current powers do not enable the Commission to deal quickly and effectively with an individual who is disqualified, but is refusing to resign from their position. We agree that a power to remove someone who is disqualified would solve this lacuna in the legislation, and lead to a much speedier resolution where this is an issue. Proposal 4 - Dealing with disqualification where only one or two trustees remain. Q9) Do you agree that the existing s.80 and s.81 powers should be amended to enable the Commission to act swiftly to deal with disqualifications which would otherwise result in an insufficient number of trustees for the charity to continue to operate? We believe that the Commission could use its existing powers to appoint trustees and make orders to direct the charity to apply funds elsewhere and make orders regarding property using ss. 80 and 81, and also ss. 84 and 85. Proposal 5 - Preventing disqualified trustees acting in another position of power in a charity. Q10) Do you agree that a person who is disqualified from being a trustee should also be prevented from acting in other positions of power in a charity? Whilst we have sympathy for the Commission’s concerns about actions by what one might call “shadow trustees”, we believe that this power would not be practically workable. The first difficulty that we envisage, is in defining a “position of power”. Given the vast array of charities and the many different structures available, it would be impossible to create a certain list. Indeed, this has been highlighted as a failing of the HMRC “fit and proper person” test. The second difficulty is in the enforcement of the power. Would the Commission also require a power to remove an individual from a “position of power” if disqualified? If the individual is an employee, how would this sit with employment law? The third difficulty that we foresee with such a power, is that it strays into acting in the administration of a charity. The trustee board should be robust in making decisions about the individuals it “employs” to run day to day activities, and it should be for the trustees to take a view as to whether a particular conviction or disqualification makes an individual unsuitable to act in a position of power. Should the trustees fail to adequately consider this in their decision-making, an unsuitable individual is appointed, and there is some damage to the charity as a result, the Commission can take action as against the trustees for their failure to act appropriately. Therefore, we take the view that such a power is unnecessary, and would be extending the Commission’s remit too far.
Proposal 6 - Where a disqualified person is a director of a corporate trustee of another charity, preventing them from participating in decisions about the charityâ€™s affairs. Q11) Do you have any comments on this proposed change? Stone King see the logic for this proposal, and agree in principle, but given the Tribunalâ€™s ruling that the director of a corporate trustee is not a charity trustee 2, we fail to see how this could be implemented successfully. Proposal 7 - Extend the existing power to remove a trustee (or other officer holder) so that it can be exercised where there is misconduct or mismanagement OR a need to protect charity property. Q12) Do you have any comments on this proposed change? Stone King support such an extension to this power. There have been (and likely will be in the future), cases where there has been misconduct but there is no immediate risk to property because the charity has none. It does not necessarily follow that a lack of risk to property means that the circumstances do not give rise to the need to exercise a power of removal. However, Stone King would like to point out that circumstances may arise where there is a risk to property, but no misconduct in the administration of the charity, and there would need to be very extreme circumstances for this to warrant a removal. (Trustees may make a legitimate decision to invest in a particular risky market, and may be free to do so if based on sound advice, but there would nonetheless be a risk to charity property. The absence of any misconduct or mismanagement would, we presume, mean that the Commission would not consider taking action in these circumstances). Proposal 8 - Preventing trustee resignation as a means to avoid disqualification Q13) Do you agree that this loophole should be closed? Do you have any other comments on this proposal? Stone King agree that the loophole should be closed. Proposal 9 - Misconduct or mismanagement in any charity can be used as evidence. Q14) Do you agree that misconduct or mismanagement in any charity can be used as evidence by the Charity Commission? We agree that the Commission should be able to take an holistic approach to the question of suitability to be a trustee, and therefore conduct in other charities should be able to be taken into account when assessing this. Proposal 10 - Amend the existing power to direct specific action when an inquiry is open and there is misconduct/mismanagement OR there is a risk to property so that the Commission can exercise it without opening an inquiry. Q15) Do you agree with this proposed change? Stone King are not convinced by the rationale for this proposed extension of an existing power. There is a very low threshold required for the opening of an Inquiry 3, and we 2
See para 143 of the Tribunal decision in Mounstar (PTC) Ltd v Charity Commission CRR/2013/0001 CA/2013/0003 5
take the view that the threshold for opening an Inquiry is lower than that which should exist before the Commission looks at using this very wide power. Keeping the requirement to have an Inquiry open means that the Commission carry out an initial analysis of the seriousness of a particular situation, before stepping in and taking action. We believe that there needs to be a two stage process of analysis and that the current position provides an appropriate check and balance. If matters are urgent, there is no bar to the Commission taking a view on the making of a direction at the same time as the decision is taken to open an Inquiry, so that the direction can be served shortly after the Inquiry is open. Conversely, if there is insufficient evidence to open an Inquiry, we do not believe that there would be sufficient justification for a proportionate use of this power. In some instances, in accordance with the Commission’s Risk Framework, an Inquiry can be opened very quickly, and so we do not see that this is a significant enough burden on the Commission to warrant such a significant extension of its powers. We would prefer to see the Commission using its power under ss. 76-78 to appoint an interim manager who would make decisions directly in place of the trustees, rather than the Commission trying to take such decisions remotely “from the desk” and, as we have said, with limited resources. Proposal 11 - Extend existing powers to enable direction to prevent acts of misconduct/mismanagement or acts in breach of fiduciary duty taking place. Q16) Do you have any comments on proposal 11? We would strongly disagree with such a proposal being introduced, and have particular concerns about the evidential burden that would be required to use this power. Until an act has actually been committed, what would be the burden of proof on the Commission to show that it will be an act of misconduct/mismanagement or in breach of fiduciary duty? On a balance of probabilities? Highly likely? Certain? There would be no way of being certain that trustees would continue to take a particular course of action without the use of this power, and so we would suggest that it would be impossible to use with any certainty. In relation to criminal acts, the police can be involved and therefore only civil matters are relevant in to this proposal. The Commission already has the power to freeze bank accounts in section 76 (3) (d) of the Charities Act 2011 to ensure that property is safeguarded. Any further powers in this regard would, we feel, be going too far. Proposal 12 - Power to direct application of charity money to another charity when individuals are unable to apply money properly (currently the power can only be exercised if they are “unwilling”). Q17) Do you have any comments on proposal 12? We would broadly agree with the extension of this power to assist in situations where there may only be one trustee who cannot act. However, we would want to see the Commission considering the use of its existing power to appoint trustees in cases where there is only one trustee, and that trustee is therefore unable to act. However, we do see the benefit of this provision in relation to making an order for banks to apply charity money, though we have to say that our experience is that banks are not 3
See para 131 onwards in above decision 6
always helpful in complying with orders of the Commission and we would urge some further discussion between the Commission and the banking industry. Proposal 13 - Where an inquiry has been instigated, the Commission can restrict/prevent actions (for example preventing the use of premises for unlawful purposes) as well as financial/land transactions and enable the Commission to direct, for example, that a speaker does not speak at a charity event or on charity premises where to do so would amount to the trustees committing misconduct or mismanagement. Q18) Do you agree with this proposed change? As with proposal 11, Stone King would resist the proposed extension of powers suggested in proposal 13 for the reasons given above. Such a power would also stray into acting in the administration of a charity. In such cases, the Commission should be looking at the actions of the trustees and their decision making processes, rather than attempting to prevent a situation that may never arise. The example outlined strays into the question of freedom of speech. If there is concern that a particular speaker will be speaking at an event and may incite racial hatred or terrorism, for example, the police can, and should, be involved. It is not for the Commission to take a view on what might constitute a criminal offence in any given circumstance. There is also a risk that if such a power existed, and the Commission stepped in and took action to prevent a situation, there would be little evidence on which the Commission could base a case for suspension or removal. Proposal 14 â€“ Extend an existing power to enable the Commission to direct a bank to notify the Commission of certain movements on a bank account. Q19) Do you have any comments on this proposed change? We understand that the police and HMRC have similar powers, but such orders are granted by the Court. We would support such a power if there was a safeguard in place which required the Commission to obtain an order from the Charity Tribunal before exercising this power. Proposal 15 - Breach of a Commission order or direction is in itself an act of misconduct which can result in use of Commissionâ€™s other compliance powers including disqualification. Q20) Do you have any comments on this proposed change? We are generally supportive of this change, but would question whether it needs any formal amendment to statute? This could be considered an issue of Commission policy in terms of when powers are used, and there appears to be no bar to this in existing legislation. Proposal 16 - Ability to issue official warnings, which if not heeded could result in the Commission using its other powers. Q21) Do you have any comments on this proposed change? We believe this to be unnecessary, and if granted, would add another layer of bureaucracy to a process with little benefit. If the Commission has engaged with a charity, and that charity has failed to address the Commissionâ€™s concerns, there are a 7
number of powers available – including the power to institute an Inquiry, and it is not clear how adding an “official warning” to this process could speed things up where appropriate. Proposal 17 - A new power for the Charity Commission to direct a charity to wind up and apply all of its net assets for charitable purposes by direction or scheme where necessary. Q22) Do you have any comments on this proposed change? Stone King do not believe that this power is necessary, and it is too close to the Commission acting in the administration of a charity. The Commission has existing powers to deal with this situation – including the power to direct the application of property, and the power to appoint trustees to make a decision regarding the appropriate course for the charity or, if finding new trustees is problematic, to appoint an interim manager. It is not for the Commission to take a view on whether a charity should be wound up – it is for the trustees to take this decision, and act accordingly. Such a power would not address any area of particular concern which cannot already be addressed by the use of the Commission’s existing powers, and so we would see no benefit to this. Conclusions In our collective experience of dealing with charities and the Commission, we at Stone King agree that the current powers are not as effective as they could be. This has been partly due to a historic reluctance on the Commission’s part to use the powers that it has, which we are hopeful is now changing. Some extensions to existing powers would be regulatory function – particularly in closing removal. However, Stone King would like to powers in more cases, and in more innovative powers.
useful to assist the Commission in its loopholes around disqualification and see the Commission using its existing ways alongside these new or improved
Inevitably, this may lead to some of the Commission’s actions being referred to the Charity Tribunal, but we believe that this would act as helpful clarification of where the boundaries lie. We would resist any powers which see the Commission acting in the administration of a charity (or getting close to it), as this is not appropriate for a regulator. Stone King Solicitors 12.02.14