Weighed down

How the finance industry should best be regulated to avoid a repeat performance of the credit crunch while stimulating economic recovery is one of the key policy debates to emerge from the wreckage of the global financial system.

The government has been wary of effecting a box-ticking over-reaction, recognising that regulation should be about quality rather than quantity. Yet this 'less is more' approach is strangely absent from the charity sector which, with each passing year, must navigate ever more complex regulatory waters, with the regulation often appearing to be disproportionate to the underlying risk.

While it has taken an economic catastrophe to trigger a review of the banking system, no equivalent disaster has befallen the third sector, and yet charities would be forgiven for thinking the regulatory walls are closing in around them. A government which readily accepts that too much regulation stifles initiative, creativity and performance in commerce, seems reluctant to accept this premise where charities are concerned.

Fundraising is an activity common to the majority of charities, large and small. However, even the most modest of fundraising events requires serious consideration of legal, regulatory and taxation matters. For example, take the scenario where a charity hosts an outdoor, riverside event tailored towards families, encompassing a raffle, pony rides and paddle-boat races for children. Such an event will embrace a host of regulation.

Where the charity invites its supporters to attend by post and email, it must be mindful of data protection obligations and have notified the information commissioner of its data processing activities.

Where the charity solicits donations in those invitations, it falls within the remit of more regulators and quasi-regulators: the Institute of Fundraising (IoF) will require adherence to their direct mail code; failure to observe the IoF code may bring the charity to the attention of the Fundraising Standards Board, a government creation designed to provide oversight for all fundraising activities in the UK; the Advertising Standards Agency (ASA), which treats fundraising materials as advertising, will also require the charity to honour the ASA code dealing with direct marketing; and the Charity Commission may intervene where the charity has contracted with professional fundraisers to do the mailing on its behalf but have not included the appropriate fundraising statements, detailing the nature of their involvement on the materials. For both Scotland and Northern Ireland, there are different charity regulators and regulatory regimes.

The lottery or prize draw offers a different regulatory challenge. The Gambling Commission may require the charity, depending on the scale of the event, to register the lottery with the local authority. Charities which conduct large lotteries will need a Gambling Commission licence.

Thought must be given to the need to procure Criminal Records Bureau (CRB) checks in relation to each of the charity's trustees, staff or volunteers who supervise any of the children's activities. Even where there is no legal requirement to procure CRB disclosures, it is the Charity Commission's view that trustees might risk being in breach of their fiduciary duties if they fail, without good reason, to carry out appropriate checks. Furthermore, any activity that involves 'intensive' contact with children, encompassing care, supervision, treatment and transportation, will fall within the Safeguarding Vulnerable Groups Act 2006, which enacts the 'Vetting and Barring Scheme'. This newly enacted legislation brings another regulator into being, the Independent Safeguarding Authority (ISA). Essentially, any situation which requires a CRB check will also require ISA registration.

The pony rides and paddle-boat races might require the charity to procure a licence from the Adventures Activities Licensing Authority. The Health and Safety Executive and the event's insurance providers will oblige the charity to undertake complex risk assessments in relation to activities which might have health and safety implications. Failure to do so might invalidate insurance or give rise to strict liability in certain circumstances.

Other types of activity will involve other regulation. For example, if transportation and accommodation is included (e.g. a golfing weekend) the charity will, by default, fall within the package holiday regulations which will impose tour operator responsibilities. Overlying all this is another regulator, HMRC, and the need to consider the application of Gift Aid, income/corporation tax, VAT and substantial donor tax rules.

Target-based approach

The promotion of transparency and risk management has often been cited as the key driver for the introduction of more recent charity regulation. In the past, the Charity Commission's approach to regulation tended to be more 'soft touch', taking the view, still enshrined in law, that charity trustees are responsible for running charities, with the regulator stepping in when necessary.

However, in recent years, in particular after enactment of the Charities Act, the regulator appears to have adopted an increasingly interventionist approach, fuelled by the greater pressure for, and reliance upon, measurable targets. Public accountability of our regulators is, of course, a 'good thing' but is not so easy to achieve. The risk is that, in being subject to a target-based approach, the regulator is put under undue pressure to make the targets, whether or not this produces more effective regulation.

Take, for example, the question of 'public benefit'. This has for centuries been enshrined within the meaning of charity '“ a charity's purposes must, by definition, be 'for the public benefit'. This is now set out in the Act but, during the Act's passage through Parliament, was the subject of heated debate arising from different political views on whether independent schools should be charities. In the end, Parliament did not change the law, save for removing a rebuttable presumption that some purposes, including those for the advancement of education, were for the public benefit.

The regulator was bound by the Act to produce guidance to promote awareness and understanding of the operation of the requirement that a charitable purpose is for the public benefit. This does not seem to have been considered a problem waiting to be solved '“ indeed, there is scant case law on the question, apparently because, in most cases, it is 'obvious' (to quote the Charity Commission's guidance) whether or not the purpose is for the public benefit. The guidance produced, however, has stimulated much legal debate and allegations that the regulator has gone beyond its remit, in that it has sought to impose a new interpretation of existing (and very limited) case law. The result is rather concerning: the guidance, which states (correctly) that it is not the law, is being applied by the regulator in a multitude of situations as if it was legal authority '“ it is not. The democratic process has been sidestepped so that unelected regulators start to take on the role of legislators. Who is regulating the regulators?

Has regulation improved?

The regulator has said that it would welcome new case law, but this presupposes that charities in the depths of a recession have funds available to challenge the regulator's decisions. The Act introduced a new tribunal for charity matters (now contained within the general tribunals structure). This charity tribunal was budgeted to hear 50 cases a year. At the time of writing, it has no live cases and has heard fewer than ten cases since it came into being in March 2008. It should not be assumed that this is because charities are delighted with the status quo. Rather, it must be acknowledged that bringing an appeal is not a decision a charity takes lightly '“ it uses up charity time and resources and, if the charity fails, it is a public defeat which could have reputational implications.

But would this matter so much if the approach leads to better regulation? The regulator published research in December saying, among other things, that 76 per cent of charity trustees taking part in the research 'say they know about the public benefit requirement' '“ does this mean charities are better regulated? Emphasis is placed on the 'public benefit reporting requirement'. This is not a distinct requirement, but one of the many aspects which charity trustees must include in their annual report, part of the long-existing requirement to account publicly for the funds they hold for charity; it requires an account of what the charity has done during the year to further its purposes for the public benefit. Does this 'new' requirement improve charity regulation? How many trustees' annual reports does the average person read in a year?

In promoting the Children, Schools and Families Bill, the government initially sought to make academy schools 'exempt' charities (that is, exempt from registration with and regulation by the Charity Commission). This was said to be a 'sensible piece of deregulation and a reduction in bureaucracy'. The government has now backtracked, reportedly because the regulator had said that it would simplify the registration process for academy schools (although it seems that this had been in place during the previous attempt to exempt these schools). There seem to be mixed messages '“ regulation or deregulation?

No clear purpose

The apparently unrelenting growth in the number and severity of regulations, regulated activities and regulatory agencies is not unique to the charity sector but, perhaps because of the size and breadth of the sector as well as the privileges which come with holding charity funds, it bears a heavy share of the regulatory burden. This may not matter if the regulation was both proportionate and effective in delivering good practice. There is a wealth of evidence on the 'targets' which have been met, but remarkably little to show that this has helped to neutralise the underlying risks.

Charities of all sizes have the daunting task of trying to understand the full range of regulation which applies to them. At the same time, we have a doubling up of regulators with overlapping responsibilities but which themselves do not have the resources or, in some cases, the necessary powers to effect enforcement. The system is so complex, with layer upon layer imposed, that the average person has little hope of making their own impact '“ if someone is purporting to collect for a charity, would you know if they were acting legitimately? Which of the five regulators involved might you ask?

The promotion of robust corporate governance practices is vital to enhance and preserve the reputation of a sector which relies heavily on external financing, but it should not be assumed that all regulation leads in this direction. While the best forms of regulation help to streamline operational processes and ensure that organisations work within recommended practices, others can give rise to excessive paperwork, administrative costs and leave charities bogged down in checklists and reports, to no clear purpose.

With income falling across the sector, the cost of the increasingly unwieldy regulatory burden must be weighed against the impact which it has on the charity's ability to recruit high calibre trustees and to serve its beneficiaries effectively. The sector needs good regulation, not more regulation.