Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Bridges of Headley and Baroness Pitkeathley

Monday 6th July 2015 Grand Committee

[Baroness Pitkeathley (Lab)]

My Lords, I support all these amendments because they encourage trustees to focus more attention on the progress of social investments and to review them regularly. I, too, think that “from time to time” is a bit vague, although I understand that it has a legal meaning.

There are two reasons why I support the amendments. The first is that I think they will make the position of trustees and their responsibilities clearer. Social investment is a fairly new concept and trustees on the whole are not very familiar with it. We are trying to encourage them to be more so, and I believe that these amendments would help in that. The second reason—and here I declare an interest as chair of the Big Society Trust—is that I agree with the noble Baroness, Lady Barker, that the financial return on these social investments is often not realised for some time, although the social return may be obvious at an earlier stage. To some extent, charities and trustees are learning as they go in this area, so any further guidance or direction we can give them would be of benefit.

[The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley) (Con)]

My Lords, I thank noble Lords for tabling these amendments, which raise interesting points, and I hope that I will be forgiven for going into a little detail on our thinking around them.

Once again, I think we agree on the need for transparency and accountability. It is important to ensure that charities take the opportunity to review all their actions from time to time with the intention of ascertaining how effective those actions have been. This should apply to their grant-making activities no less than their financial investments. It is also desirable for charities to be suitably transparent in reporting. Public-facing organisations should aim to explain how they operate, and I share your Lordships’ wish to encourage as much openness and information sharing as is practicable.

However, while I support these intentions, we must be careful not to overburden charities by mandating the collection and publication of information to an extent that could distract from their core activities. This must be the case in particular for the large number of charities that are small and may not have the requisite capacity or capability—the “little platoons” I referred to on Second Reading. Charity trustees have overall responsibility for the investment of their charity’s funds. They must make the strategic decisions about how to use a charity’s assets to achieve its aims.

In relation to financial investments, charity trustees are already under a legal duty to keep their investment portfolio under regular review. Those reviews must cover how their investments are performing, and if an investment manager is used, the service provided by that investment manager. Trustees should also monitor and review their internal arrangements for managing the charity’s investments. In terms of the regularity of the review, the trustees may decide to hold reviews at specific intervals or they may decide to hold a review in response to a specific event, for example if there was evidence of inadequate performance of an investment or if there was a sudden change in the economic outlook. This seems appropriate and allows charities to respond flexibly to circumstances rather than impose a rigid timetable.

The phrase “from time to time” is indeed understood among the legal profession and is explained in case law. The commission’s guidance on investments covers what it means. Given the existing requirements to review financial investments regularly, it would be beyond the scope of this Bill to impose duties to review social investments on the far wider range and greater number of investments in the general sense. Furthermore, in addition to requirements to review investments, there are also a number of disclosure requirements in relation to financial reporting by charities. Any charity with a gross income greater than £25,000 must submit its audited or independently examined accounts to the Charity Commission on an annual basis.

In addition, there is the charities SORP—a nice word—contained in Accounting and Reporting by Charities: Statement of Recommended Practice, which, as I am sure noble Lords know well, sets out the recommended practice for the purpose of preparing the trustees’ annual report and for preparing the accounts. The recommendations of SORP supplement accounting standards, thereby providing an even stronger basis for reporting. The statement of recommended practice deals expressly with the reporting of social investments. As social investments are different from financial investments, the reporting criteria should not and cannot be equated; they should instead be tailored.

While I am extremely keen to see charities taking greater steps towards impact assessment, thereby enabling them to think about their total impact in the round, imposing specific new rules via statute would seem too blunt an approach and potentially a highly burdensome one. It would seem to place a greater requirement for assessing the impact of social investments than currently exists for grants, spending or financial investments. This might have the unintended consequence of making charities less likely to make use of social investment—the opposite of what we are trying to achieve, particularly at this early stage of market development.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Bridges of Headley and Baroness Pitkeathley

Wednesday 1st July 2015 Grand Committee

[Lord Bridges of Headley]

My Lords, I welcome this debate, prompted by the amendment of the noble Baroness, Lady Pitkeathley, who, as the noble Baroness, Lady Hayter, has just said, has extensive experience of this sector. I also welcome, as did my noble friend Lord Hodgson, the chance to climb on my horse and canter around this terrain once again. It is important that we debate these issues and I can see that there are a number of them here. On the one hand there is the independence of the commission but on the other, much more fundamentally, there is the question of its funding.

Before I turn to the future, I shall talk first about the present and where we are today. It is important that we put the debate on funding in the context of recent history. As the Committee knows all too well, in its critical 2013 report on the Charity Commission the National Audit Office found that the commission had,

“no coherent strategy for delivering clearly defined priorities within its broad remit”,

and:

“The Commission does not know how much its activities cost and has not focused its resources on its priorities”.

Those are pretty damning words, as I am sure the Committee will agree. Under the leadership of William Shawcross and Paula Sussex, the Charity Commission is making good progress in addressing these weaknesses. I pay tribute to their leadership and that of the commission’s board. Equally important, I also recognise the commitment and hard work of the staff at the Charity Commission who strive, day in and day out, to ensure that charities are properly regulated and get the service they require.

The National Audit Office undertook a follow-up report on the Charity Commission which came out in January 2015. The report found that the commission has made good early progress in addressing all of the recommendations made by the NAO and the Public Accounts Committee and has put in place a credible programme for change. That said, it also pointed out that there is still some way to go.

The Charity Commission’s 2014-15 annual report, which was laid before your Lordships’ House yesterday, demonstrates some of the progress it has made in its compliance work, for example, and in a number of other areas. It reports that in 2014-15 the commission opened 103 new investigations and used its enforcement powers 1,060 times—up from 64 and 790 respectively in 2013-14. Equally as important, the commission also continues its enabling work through permissions casework, providing online services to charities, and through guidance and engagement to support trustees in fulfilling their legal duties when managing their charities. In the commission’s first contact alone, it dealt with over 57,000 calls, 55,000 emails and granted over 2,500 permissions last year. It continues to refine this work with an aim to provide an “efficient, fuss-free service to charities”. So we are seeing good and positive progress from the commission in becoming a more effective and efficient regulator.

However, as has been discussed, the question of funding is a valid one and I share the noble Baroness’s wish to ensure that the regulator is properly and sustainably funded. I am sorry to disappoint the noble Baroness but I am not able to shake a money tree and magic up a large cheque for the Charity Commission. This is because the Government remain committed to dealing with the record deficit and all parts of government need to contribute to efficiency, including the Charity Commission.

That said, the Government recognise the need for targeted additional resources for the Charity Commission. In October last year, my right honourable friend the Prime Minister announced an £8 million capital investment for the Charity Commission through to March 2017. On top of that, it also received an extra £1 million in funding for 2015-16. This £8 million capital investment will help the commission to refocus its regulatory activity on monitoring and enforcement in the highest risk areas—for example, the abuse of charities for terrorist and other criminal purposes such as tax avoidance and fraud. The commission has said that this significant investment will be spent on technology and frontline operations, allowing it to streamline lower risk work and deploy its resources more effectively to priority work.

So that is where we are. Looking to the future, the Charity Commission’s strategic plan for 2015-18, which was also published yesterday, sets out its four strategic priorities. These are, first, protecting charities from abuse or mismanagement; secondly, enabling trustees to run their charities effectively; thirdly, encouraging transparency and accountability; and, fourthly—this is the matter that concerns the Committee—operating as an efficient and expert regulator with sustainable funding. Under the heading of that fourth strategic priority, the commission has committed to consulting on proposals for alternative funding options, including an annual charge for registered charities.

The strategic plan also makes it clear that the Charity Commission cannot devote the same level of resource to each of its statutory objectives as it previously could. It accepts that means changing the way it operates, allocating resources by relative priority and risk, and working with partners. The commission is looking at various options. However, I should stress that there are no plans in place yet. The commission’s chairman, William Shawcross, has been meeting the chief executives of a number of charities to raise the idea with them and listen to their thoughts. Of course there are those who have concerns. The commission is listening to them and will consult more widely as its plans develop.

As the noble Baroness, Lady Hayter, has illustrated, there is a wide range of views on this subject already. The Populus research that she cited found that the majority of the public—69%, as noble Baroness said—believe that charity regulation should be partly or fully funded by charities themselves. A significant minority of charities—23%—agree with this, while the majority of charities believe that charity regulation should be funded entirely through general taxation. Clearly, therefore, discussions must continue with the sector to see where there is shared ground. Of course, Parliament would want and needs to be involved in any debate, and I know that some of your Lordships have already fed in your thoughts and have expressed them today. Section 19 of the Charities Act 2011 would enable charging to be brought in through secondary legislation, but importantly and crucially, it provides for parliamentary scrutiny of any charging proposals and requires the affirmative resolution procedure.

The issue of independence was raised and whether, if charities are to pay for their regulation, we can ensure that the Charity Commission is independent of government. This again raises questions about the commission’s independence. Its chairman, Mr Shawcross, explored the issue of sustainable funding for the regulator in a speech on 10 June, saying:

“There are indeed very real questions to answer—including how the Commission’s independence, which is so vital, would be protected under such an arrangement”.

We must ensure that the Charity Commission remains independent of government and the sector it regulates, however it is funded in the future.

The funding of the commission is just one strand of ensuring that it is able to be the modern, effective regulator that the public and we all expect. The powers in this Bill are another strand of that. I hope that my response begins to reassure the noble Baroness that we and the commission are committed to ensuring that the regulator has a sustainable funding solution to enable it to regulate charities effectively and efficiently, and that work is already under way to consider the options. With that, I hope that she will feel able to withdraw her amendment.

[Baroness Pitkeathley]

I thank the Minister for his thoughtful response and other noble Lords for their similarly valuable contributions to this short debate. I said that my amendment was controversial; it has also been illustrated that there are many complex issues within it. The debate about how the Charity Commission is funded did not start here and certainly will not finish here. It will be the subject of ongoing relationships. It seems to me that the relationship between the Charity Commission and the sector that it regulates is vital.

I have raised the issue—and the Minister has addressed it—of independence. My noble friend referred to consumer involvement and protection. Those issues will not go away as we look to the future of funding for the Charity Commission, but, for the moment, I am happy to withdraw the amendment.