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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.

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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 today’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

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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

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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.

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Proposal 6 - Where a disqualified person is a director of a corporate trustee of another

charity, preventing them from participating in decisions about the charity’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 Tribunal’s

ruling that the director of a corporate trustee is not a charity trustee2, 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 Inquiry3, and we

2 See para 143 of the Tribunal decision in Mounstar (PTC) Ltd v Charity Commission

CRR/2013/0001 CA/2013/0003

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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

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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 – 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 Commission’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 Commission’s concerns, there are a

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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 useful to assist the Commission in its

regulatory function – particularly in closing loopholes around disqualification and

removal. However, Stone King would like to see the Commission using its existing

powers in more cases, and in more innovative ways alongside these new or improved

powers.

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