A new ball game

The Charities (Protection and Social Investment) Act 2016 passed into law in March this year. The act grants new powers to the Charity Commission in dealing with charities and their trustees, and gives charities the right to make social investments. Although the government has committed to waiting at least a year until some provisions are brought into force, the majority of the legislation may well be implemented shortly.

The act is divided into three main parts; (a) the strengthening of the regulatory powers of the Charity Commission; (b) the granting of powers to charities to make social investments; and (c) an element on fundraising techniques.

One of the most significant of the commission's new powers is the ability to issue an 'official warning' to charities or trustees. This can be issued where the commission believes there has been misconduct or mismanagement, or a breach of trust or duty. A warning may also be published by the commission, meaning that it brings with it a real risk of adverse publicity for the charity. Although a warning can be amended or withdrawn, there is no right of appeal to the Charity Tribunal. (Attempts to attach stronger safeguards to the use of this new power were regrettably largely rejected by the government.)

The act also strengthens the regulatory powers available to the Charity Commission after it has opened a statutory inquiry. Among other things, it extends the period of time that a trustee or employee of a charity can be suspended, allows the commission to direct a charity not to take a specified action, and enables it to direct that a charity be wound up.

The current grounds for automatic disqualification include a conviction of an offence involving dishonesty or deception, bankruptcy, and disqualification from acting as a company director. This will be extended to include a conviction under counter-terrorism legislation, a conviction for bribery or perjury, contempt of court, and being on the sex offenders register. These changes will not come into force for at least 12 months, as rehabilitation charities are consulted.

Further, the commission will have a new power to disqualify someone from serving as a trustee. This power is drafted in extraordinarily broad terms, allowing the commission to disqualify someone on the basis of any past or present conduct (whether or not related to a charity) which the commission considers may be damaging to public trust and confidence in charities. Such disqualification can last for up to 15 years.

The power for charities to make social investments is confirmed in statute in the second part of the act. A social investment is an investment which is carried out with a view to both directly furthering the charity's purpose, and achieving a financial return for the charity. Bringing this to life in the House of Lords' debate, Lord Bridges explained that this would allow a 'horse and zebra charity' to invest in a 'horse and donkey social enterprise', if the trustees had 'satisfied themselves that the combination of expected financial return and mission benefit in relation to horses is appropriate'.

When making social investments, trustees will be required to consider whether specific advice is needed, and obtain and consider any advice. The trustees should be satisfied that the investment is in the interests of the charity, taking into account the benefit they expect to achieve for the charity (both in terms of furthering the charity's purpose and achieving a financial return) and should keep social investments under review.

Finally, the act introduced additional controls over the relationship between charities and commercial organisations that raise money on their behalf. All charities that have relationships with such commercial organisations will need to ensure that their fundraising agreements are compliant with the new requirements. Larger charities will also be required to include a new statement about their fundraising practices in their annual reports.

Pippa Garland is an associate at Bates Wells Braithwaite 

She writes the regular philanthropy comment in Private Client Adviser