Charities (Protection and Social Investment) Bill [HL] Debate
Full Debate: Read Full DebateBaroness Barker
Main Page: Baroness Barker (Liberal Democrat - Life peer)Department Debates - View all Baroness Barker's debates with the Cabinet Office
(9 years, 1 month ago)
Grand CommitteeMy Lords, I am intrigued by the amendment. My response to it, on the basis of about 30 years of working with trustees of charities, many of which were unincorporated associations—some were not; some were incorporated—is that the prospect of losing one’s house as a consequence of a decision one made when acting as a trustee was one of the most sobering responsibilities of trusteeship. Indeed, were Lord Phillips with us today, he would explain how, throughout the history of charity law, even though charities have become much more complex as the areas in which they operate have become much more complicated, we have maintained the entity of an unincorporated association precisely to preserve the importance of trusteeship. That said, in my experience, trustees of unincorporated associations were always desperate either to try to get liability insurance, if they possibly could, or to incorporate, precisely to minimise their own risk.
We have kept unincorporated associations because they have an importance in the field of charity. It is important that we still have organisations in which individuals come together and are willing to put their own assets on the line in order to do good and to be judged as such. As with many of the arguments that I have listened to this afternoon, my response is that if there is a new body of evidence that this measure is required because a new form of abuse is going on, I am willing to look at it. However, I take issue with the noble Baroness, Lady Deech: this is not a simple tidying-up of a loophole but a rather large fundamental change to the law of trusteeship with regard to charities. She may be right and there may be a good reason why we should do that, but I would prefer to see a bit more than one briefing from a think tank—if that is not to damn today’s discussion—to say that this is necessary. It is actually a very big transformation of the way in which we organise charities.
My Lords, the Committee owes a debt of gratitude to the noble Baroness for giving us a chance to canter over this ground. As she says, this is controversial stuff but it is certainly worth the sort of creative thinking that she has just outlined.
There are a couple of public policy issues. The first is whether it is an issue for actual fundraising—a way to give more resources to the Charity Commission—but there are those charities for which you might have a second public policy idea; that is, if you made people pay they would behave better. You could use various policies to drive up standards of governance within charities. Some charities say, “What you don’t pay for, you don’t value”. Of course, as we know, a charity number is an exceptionally valuable thing to receive in the sense that it enables you to get local authority or central government funding or makes it possible for you to apply to grant-giving foundations that almost certainly will not even entertain an application from you unless you have a charity number. So there is the argument about how one might use an aspect of this issue to improve governance.
The challenge, of course, is how you levy it. We heard earlier today from the Minister that there were 7,192 new charities last year. Noble Lords can do the arithmetic, whether it is £10, £100 or £250. But unless it is going to be north of £100 for your initial registration you are not going to raise a significant sum of money. People will say that £100 is a great deal of money—maybe. Equally, you might say that if a charity starting out does not have £100 spare, its financial viability is a bit doubtful.
There is an argument about initial registration. I am less keen on things such as fines for late returns of stuff to the commission. If small charities do not do it, the problem of finding them and getting the money means that the administrative costs for the Charity Commission will almost certainly outweigh any money that is received. My particular issue, which came up in the evidence, was that if you set up a trust and you use a standard commissioning trust document, which is available on the website, that is fair enough; but if you want an all-singing, all-dancing trust deed because you are a wealthy bloke or a wealthy lady and you want a very specialised trust to reflect your own wishes, and you are going to send it down to Taunton to the Charity Commission to bless and it spends two or three days blessing it, I do not see why that should be paid for by the taxpayer. If you want your own special trust deed, that is fine—you are entitled to it—but there ought to be a cost-recovery basis for the Charity Commission to be able to get that paid back. That has a degree of fairness and equity that would be attractive and would raise a decent sum of money.
When I paid my visit to Taunton and talked to the people there, they said, “Well, you know, I get this telephone call from a law firm and they ask me a series of questions. I am virtually certain that they are writing down my words, putting it on their letterhead and sending it off to the client with a fee note attached”. There are issues there that need to be explored as part of the exercise that the noble Baroness was talking about. There is no reason why the taxpayer should subsidise the activities of law firms, however eminent and brilliant they may be.
My view is that in the end we shall move inexorably towards a hybrid funding model, under which the state will pay a basic amount for what one might say are the “must-have” tasks and the sector will pay for the “nice-to-have” tasks, such as help desks and the types of things to which the noble Baroness referred. If you talk to charities, there is a list of things that they think it would be helpful for the commission to provide. There might be a bit of argument about what is a “must have” and what is a “nice-to-have” but over time that could be sorted out by discussion and intellectual heavy lifting. The sector needs to show the way and that is a much better way for the sector to take charge and come up with some proposals.
That of course takes me to my last and most important point; namely, the attitude of the Treasury. It is no good my noble friend on the Front Bench thinking that this will happen, unless there is an absolutely cast-iron guarantee that the Treasury will keep its hands off it. If you raise a couple of million pounds or £3 million from the sector and the Treasury says, “That’s a brilliant idea. We will have £3 million off the grant”, the sector will be absolutely furious. How we get to the situation where the sector in good faith enters into a funding arrangement to help develop its own future and to have the right regulatory structure in which we all have trust and confidence, and how we get that level of commitment about which the sector can be assured—not just this year or next year but over time—is a very difficult issue, to which I am not sure that we have yet found the answer. For the sector to move forward with confidence and to think of new, creative ideas of the sort mentioned by the noble Baroness in her opening remarks, it will require us to find a way to unlock that problem.
My Lords, I too thank the noble Baroness, Lady Pitkeathley. The funding of the Charity Commission is a subject which anyone who has met its current chair for longer than about five minutes will have had raised. It is quite a complex issue. One of the most interesting points to arise from the investigation into the Cup Trust was the extent to which the Charity Commission was not, at that stage, aware of the cost of its own operation. At a time when every charity in the land has ruthlessly to look at the cost of its operation, it is only fair that the commission should do so, too.
I want to make three points. Clearly, the matter will not be resolved today but it is a useful contribution to the debate. First, the exercise of the commission’s powers is not in any way related to the number of charities which it has to regulate. In fact, it is rather disproportionate: a very small number of charities cause the most costs to the Charity Commission. Increasingly because of digitisation, most charities are dealt with in a low-cost and volume operation—there are just a few which are bigger.
Secondly, the noble Baroness, Lady Pitkeathley, was quite right when she said that it is the commission’s advice that is most valued. That is an area of work for which it receives no revenue at all. It is rather strange that this country has the most advanced charity legislation and regulation in the world, so much so that one would think we might be able to export it around the world to generate income. If I were setting up a charitable foundation in Russia, I would not want to register it there; I would want to do it here. Much as the previous Government set up an international commercial court in London, might the Charity Commission at some point look towards increasing its income by internationalising and commoditising what it does?
Finally, until the Charity Commission is willing to look to other regulators, such as the FCA, and to appreciate that it has common interests with them and to be less isolated in the way it pursues its function, it will inevitably always be running back to government asking for funding. As the commission has seen in the last few years, government funding is finite. The noble Baroness, Lady Pitkeathley, has raised some really interesting questions which the sector needs to think about but which the commission needs to start thinking about much more creatively than it has done before.
My Lords, all those who have spoken have made the case for the amendment moved by my noble friend Lady Pitkeathley: this review is clearly needed. The Charity Commission has itself published some interesting research, either this week or last week, which gives an interesting insight into the views of the public and charities themselves on the concept of charging for charity regulation. A significant proportion of charities do not presume that the costs of charity regulation should continue to be met entirely from public funds. The wider findings of the study indicate a public appetite for charities to be regulated effectively. This leads one to question whether the Charity Commission can do that without sufficient funding. However, the report also shows that charities and the public are rather split on how to fund regulation. As my noble friend has indicated and as the noble Baroness, Lady Barker, referred to, it is unusual for a regulator to be funded by taxpayers rather than the regulated community. We have the example of the FCA, but the Legal Services Board, the accountancy regime and the CQC are funded by their regulated communities.
The noble Baroness, Lady Barker, made the point about a regulator feeling part of the regulators’ community, sharing benchmarks and the whole of that attitude. She also drew on the point about user involvement. I have been a member of some regulators, and I chaired a consumer body of one of them. We benchmarked the different ombudsmen in various sectors. The Charity Commission is an ombudsman in that sense but this was a different issue. There was a feeling that it was a useful exercise not only in how they could compare themselves with each other, but also in how as their users we could influence how they were working for us. It would be nice if the commission could see itself in that environment.
My Lords, before we start to debate the matters related to social investment in Clause 13, I should declare an interest. I am one of the vice-chairs of the All-Party Parliamentary Group on Social Enterprise. The Committee will not be surprised to learn that many of the amendments that stand in my name have been put forward by Social Enterprise UK. It did so because it is the national body for social enterprise and has a direct interest in social investment. It conducts research on policy and Bill campaigns over the whole field of social enterprise, and social investment is very much at the heart of that. Social Enterprise UK chairs the Social Investment Forum, which is a network of social investment and finance intermediaries designed to keep money flowing around the social enterprise market. It therefore has a direct interest in the first ever legal definition of social investment. Perhaps because it is the first ever legal definition of social investment, there is considerable concern that the law should be right. That is not easy, because by its very nature social investment, as opposed to straight financial investment, is not easy to define.
I thank all noble Lords who took part in what was a very technical but extremely important discussion. It is important out in the field. It took me back several years to a discussion I had with a colleague who had been to visit a rather far-flung part of our charitable empire. We discussed whether or not the fact that some pensioners went on some of the holidays that were provided by the organisation was enough to make it so distinguishable from a travel agent that it might just be a charity. That is a flippant way of saying: it is very important for trustees to understand exactly what their powers are going to be. The intention of us all is to open up the social investment market and those who work in this field know that even the best of the social investment charities are very cautious and very conservative in the way in which they exercise their powers. We will not be doing the sector any favours if we allow there to be considerable doubt on the part of the trustees about where they are going to fall. So I very much welcome what the Minister said and, like the noble Lord, Lord Hodgson of Astley Abbotts—not my noble friend any more—I would be delighted to come and meet him, but we might be lawyered up when we do. I beg leave to withdraw the amendment.
My Lords, after that foray into the wider realms of charity law and purposes, we come back to the anorak stuff of social investment. As the noble Lord, Lord Hodgson of Astley Abbots, alluded to earlier, new Section 292C(2) sets out the considerations which charities must make before they exercise a power to make social investment, and it refers specifically to advice that they should take.
As we discussed in relation to the earlier amendments, there are two different sets of considerations which trustees will have to make. One is a straight financial assessment. I know that it is argued that some social investments are almost akin to the making of grants—they are very few, I would imagine—so a great deal of what most people involved in making decisions about giving assets to social investments are concerned with is the business case for doing so and the likelihood of return. It is therefore quite right that the subsection should place a strong requirement on trustees to obtain advice on that. I think that most trustees making a social investment would seek the advice of people who had relevant experience in business.
On how charities make a judgment as to what is a correct social investment, which is particularly relevant given what the Minister said in his response to the previous amendments, we are talking not only about charities being able to make investments which are seen to be socially good but about such investments being both socially good and in pursuit of their charitable objects. That brings an important level of complexity to this matter because many charities would see making an investment in the sort of work which they do as not only being desirable but having the potential to get them out of some of the financial deficits which charities are getting into. They would say that that was quite a complex thing to do, whether or not it fell under this legislation.
I understand what the Government are trying to do by saying that before trustees risk money, they should take early advice. There was some debate on subsection (2)(a), which states that before making a social investment charity trustees must,
“consider whether in all the circumstances any advice about the proposed social investment ought to be obtained”.
There was a fear on the part of some people that that might give people carte blanche to go ahead and make investments without taking advice at all. Perhaps the Minister might make clear whether the Government envisage that there will be circumstances in which charities go ahead and make social investments without taking any advice.
I turn to the point of my amendment. If the investment concerned is truly to be a social investment, an interested party ought to be the beneficiaries of a charity. That is so for two reasons. First, they ought to be the people who can talk about the social value of the investment being made. Secondly, for different reasons, the beneficiaries of a charity have a direct interest in determining whether or not a social investment would be the best use of the assets of the charity from which they would otherwise benefit. It is therefore not unreasonable for there to be a discussion that includes both them and other relevant stakeholders. In a way, this is supposed to add a bit of belt and braces to the social aspect of social investment. I beg to move.
We would all agree in principle that the beneficiaries of a charity should surely be involved as far as possible. My difficulty is where it is reasonable. Who decides, particularly if an investment goes wrong, whether or not it was reasonable to have consulted them?
I turn to Amendment 20, which is in my name and that of the noble and learned Lord, Lord Hope of Craighead, who cannot be with us today as he is required elsewhere: I am sure that the Committee, like me, will be happy to know that he was today confirmed as the new Convenor of the Cross Benches. I declare my interests: I have worked for and with a number of UK and international charities for much of my life. Latterly, in about the last eight years, I have moved much more into the investment world, where I look after some quite substantial investment portfolios for clients that include charities.
I am going to take a slightly different approach from some of the other speakers, which may or may not make me popular. I shall approach this amendment in three steps: first, what happens currently; secondly, what I think the Bill as it stands would mean for trustees; and, thirdly, why I think the amendment is needed. So what happens currently? Much of what is called social investment already probably happens in two ways. The first is that some charity investors seek to use various degrees of what we might call “ethical overlay” to their investment portfolios. At its simplest that is an ethical portfolio, and you can buy them off the shelf. It might involve avoiding certain companies or sectors, and tobacco and arms are obvious examples of that. These are available now; you can buy them online as a private investor if you wish to, or a charity could do the same. A common difficulty, of course, is the divergence of opinion about what is an ethical investment; I do not propose to dive into that today as I suspect we could spend most of the evening on it.
However, the provisions of the Bill go well beyond this type of investing. Moving perhaps closer to what the Bill envisages, some trustees invest in projects or activities where there is an expectation of some element of financial return beyond mission-related benefits. I agree about “mixed motive”; I prefer “mission-related”—it is a case of potayto/potahto. One might cite social enterprises, revolving credit funds, concessional lending to development projects or just models of work that require an element of repayment by the beneficiaries to recycle the money and ensure that they treat the money that they receive responsibly.
Last week I chaired a group in Birmingham for the Prince’s Trust, which advances modest sums to individuals seeking to start their own businesses. These loans are repayable to the trust to fund further such work, and that is made very clear to the beneficiaries when they receive these loans. My view, however, is that realistically these types of projects fall within the spending activities of that charity rather than being classed as investments, for reasons that I will come on to—the “two pockets” approach that the Minister referred to earlier. Nevertheless, the 2006 report of the noble Lord, Lord Hodgson, showed that there is anxiety among some trustees about how such activities fit within their responsibilities to invest charitable resources prudently. His report suggests specifically that a fear that social investments might not be within these rules is holding back and inhibiting investment into them and that it should be put into law that social investments are in line with trustees’ responsibilities—something that most of us have touched on already today. The Law Commission came to a very similar conclusion in its 2013 report and the wording of this section of the Bill follows very closely what it said. It comes as little surprise that the Minister told us that it had drafted this section. I am also glad to hear that better guidance, associated with that, is on its way, because my first instinct on reading the Bill was that this might be better dealt with through guidance than law. However, I bow to the far greater expertise that has been deployed on that matter than I have to offer.
So far, so good, but there are four other aspects of social investing that cause disquiet for trustees. Simply passing a Bill to say that they can make social investments does not sufficiently address those. First, social investing is poorly defined. It lies somewhere between charitable spending on worthwhile activities and investing for purely financial return. It is widely covered elsewhere, particularly in the Law Commission report, where one witness stated that it is,
“an unclear concept and capable of being used by a proponent to mean precisely what the proponent wants it to mean”.
The Bill seeks to define it; we have agreed to discuss that point separately, on the head of a pin, so I will not elaborate further today.
The second issue is that the returns on a social investment can be extremely difficult to quantify. The old cliché that two economists in a room will give you three opinions multiplies exponentially in this sort of area. Measuring and attributing a numerical value to social benefits, which trustees are going to have to compare between, can produce a very wide dispersion of arguably equal returns, depending on which criteria you use, how you weight them and—let us be candid—how keen you are to promote that particular investment to whoever is listening to you on the other side of the table. The prospect of asking trustees to leave the realms of quantifiable financial return, which they could then use for good works, and enter the world of social, environmental and other forms of accounting puts off as many as the worries about whether they are entering into something they should not be doing. The whole idea ends up, very quickly, in the “too difficult” box or, as I suggested earlier, allocated to the spending committee, a topic touched on widely in the Law Commission report.
Thirdly, if social investing takes off as a significant asset class—and it is already well on its way—it is, inevitably, going to attract an increasing number of purveyors and advisers who want to attract funds, recommend certain types of investments or manage funds within them. That is no bad thing in itself, but only if it is properly regulated. If it is not, whole new areas of mis-selling arise, where social investments could be knowingly or just irresponsibly hyped to investors and trustees. The danger in that is exacerbated by the difficulty in calculating, quantifying and comparing returns.
Finally, the Bill gives the power to make social investments, but it does not look at the possibility that some charities themselves may well want to use this as a fundraising opportunity and market them to other charities or the public. Add to this formula a situation where a trustee is involved both as a trustee of a charity marketing a social investment and as a trustee being invited to invest in it and you can see the complexities. I have not put forward a specific amendment on that point but I urge the Minister to think about whether we could address it at the next stage in terms of enabling charities to use social investments to raise much-needed funds, without the hideous cost of compliance which will probably come with it, but at the same time restrain them from being overexuberant in doing so.
That brings me to my underlying concern and the reason for the amendment: in pretty much every case, charities that have traditional investment portfolios have highly regulated individuals managing those portfolios. I believe the noble Lord worked with the FCA—FSA as was—so he will have background on this but an individual recommending investments has to be very specific on the expected returns, the level of risk, the previous track record of this type of investment and the previous track record of the person, object or company providing it. You have to be able to evidence that you know your customers in great detail and that what you are recommending to them is suitable. That may not be the case in the world of social investment. Social investments may be more risky, more volatile, more concentrated and certainly less liquid—an important consideration for charity trustees with bills to pay—than what I might call mainstream financial investments. You can sell a blue-chip investment at the press of a button but if you are putting money into a 10-year health project in a developing country, pulling your money out halfway through because you need the cash is not only technically but reputationally and morally a very difficult place to be.
I thank the noble Baroness, Lady Barker, and the noble Lords, Lord Cromwell and Lord Watson, for their contributions. As to what the noble Lord, Lord Watson, has just said, I have said that I will consider a number of amendments. Obviously I am always looking for ways in which we can improve the Bill. Before I turn to the amendments, I too would like to put on the record my congratulations to the noble and learned Lord, Lord Hope, on his election as Convenor of the Cross Benches.
I thank the noble Baroness, Lady Barker, for drawing attention in Amendment 19 to the important role of a charity’s beneficiaries, as well as its wider stakeholders, in the process of good governance. Trustees would be well advised to maintain close contact with their stakeholders and to make sure that they understand the full range of views that such a broad group is likely to represent.
As to social investment, there is a clear duty on trustees to consider all the circumstances relating to the proposed transaction before deciding whether to take advice and from whom. The scope is deliberately wide and inclusive, such that if it is determined that beneficiaries or other stakeholders should be asked for advice, there is no impediment to this course of action. However, the breadth encompassed by the duty does not benefit from an enumeration of the range of possible advisers to whom trustees might turn. It might also lead to practical difficulties relating to identifying the relevant stakeholders, as well as ambiguity as to what is represented here by the term “reasonable”, a point made by my noble friend Lord Hodgson. I hope that the noble Baroness will be content that the aspiration and intent are there in the Bill and will feel able to withdraw the amendment based on this existing breadth.
With regard to Amendment 20, I thank the noble Lord, Lord Cromwell, for his extremely thoughtful and thorough speech, which I will read with care in Hansard. My understanding is that the amendment’s intention is to strengthen the duties of trustees relating to the financial characteristics of social investments, and in particular that they should make a comparison with any similar investments that are subject to a stronger regulatory regime and satisfy themselves that the proposed social investment is suitable. The intention, I understand, is to prevent any potential regulatory arbitrage whereby minimal mission benefits might be used as a pretext for making, in effect, financial investments that would not pass muster if they were pure financial investments.
I am in full agreement with the intention here: to ensure that where social investments are made, they are undertaken for the right reasons and with proper analysis of both the mission benefits and financial returns. It would clearly be of detriment to the nascent market in social investments if the social aspect were to be used as a fig leaf to pass off financial investments that would otherwise be unsuitable. So I thank the noble Lord for raising this issue. However, I do not believe that that would be the effect of the Bill.
Under the current law, when making a financial investment the trustees of a charitable trust must comply with three principal investment duties under the Trustee Act 2000: first, to consider the standard investment criteria—namely, the suitability of an investment and diversification of investments in a portfolio; secondly, to take advice unless it is reasonable not to do so; and, thirdly, to review the trust’s investments from time to time.
Sometimes, but not always, a social investment will be an “investment” under the Trustee Act 2000 and the three investment duties will apply to the social investment. The Law Commission reported:
“There was general agreement amongst consultees that the duty under the Trustee Act 2000 to consider the standard investment criteria (suitability and diversification of investments) created difficulties for trustees making social investments and should be removed, or at least tailored to suit social investment, but that the duties to review investments and to consider obtaining advice were appropriate”.
In relation to the first duty, the Law Commission said:
“A particular problem is the duty to consider diversification of investments, as part of the standard investment criteria. A social investment is unlikely to play a part in a diversified portfolio, because it is selected not with a view just to financial return but also for the mission benefit that it will produce. When compared with a mainstream financial investment, a social investment may carry a particularly high risk or it may be unjustifiably large within a charity’s investment portfolio (or conversely, unjustifiably small and disproportionate to the fixed transaction costs), and all the more so where the expected financial return is modest”.
The Law Commission concluded that the second and third duties were, with some modification, appropriate for social investment. The commission therefore recommended tailored duties which are set out in the Bill. It said:
“The new duties, being tailored to social investment, should apply in place of the duties imposed on trustees by the Trustee Act 2000”.
For completeness, I should say that in so far as there are any other duties on charity trustees in respect of financial investments, the Bill does not change them, so classifying a financial investment as a social investment would not change those duties. All the Bill does is exclude the Trustee Act investment duties if they would otherwise apply. It may be that the Trustee Act investment duties would not have applied to a social investment in any event. For example, if the charity takes the form of a company rather than a trust, the Trustee Act investment duties will not apply.
I return to the question of whether there would be any regulatory arbitrage; whether a social investment could be used as a fig leaf to pass off financial investments which would otherwise be unsuitable. The new duties are not less stringent for social investment; rather, they are tailored to social investment. The Bill has been drafted such that both sets of duties would generally produce the same result.
Tailoring the duties means that trustees do not have to try to shoe-horn a social investment into the Trustee Act regime for financial investments. The Law Commission reported that this approach,
“creates consistency between the duties that apply to financial investment under the Trustee Act 2000 and social investment, whilst properly catering for their differences”.
While in theory unscrupulous trustees might try to justify an inappropriate financial investment under the guise of a social investment, I do not think that they would succeed in this endeavour; the tailored duties should still produce a sensible result that showed the transaction to be inappropriate. Furthermore, the Charity Commission and the courts would be astute to shams; they would look at the substance of a transaction and if it is a financial investment, the trustees will be expected to comply with the financial investment duties. Taken as a whole, I believe that the Bill already contains sufficient safeguards in respect of financial regulation. In response to the good point made by the noble Lord, Lord Watson, about the FCA, I am happy to talk to the authority and to other financial advisers about this new power. I hope that the noble Lord, Lord Cromwell, feels comfortable about not pressing the amendment.
That was a useful go-round. This is a very complex subject and it is extremely helpful to get the Minister’s words on the record, not least because I am sure there will be court cases and legal challenges to the investment decisions that trustees make. Some of those investments will turn out to be losers, so it is important that we have on record as much as possible the steps that we believe it is right to expect trustees to take. As the noble Lord, Lord Hodgson of Astley Abbotts, said, this is different from straightforward financial investment. We cannot take a direct read-across from the work of organisations such as the FCA and put it into this Bill. None the less, it is important. I am glad to have established in the form of a statement from the Minister that one would reasonably expect trustees to have consulted with stakeholders and beneficiaries before putting some of their assets into this form of investment. I take his words at this stage and beg leave to withdraw the amendment.