Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Hodgson of Astley Abbotts and Lord Wallace of Saltaire

Monday 6th July 2015 Grand Committee

[Lord Wallace of Saltaire]

My Lords, I must remind the noble Lord that on the previous day that this Committee sat he made a very powerful speech about the need to define rather more clearly some of the elements in the Bill. He now seems to be arguing in entirely the opposite direction.

I recognise that the public benefit test has to be left relatively broad, and indeed both these amendments say so. I also recognise, with regard to the use of the word “fully”, that there are ways in which this amendment might need to be reconsidered.

All that we are attempting to do here is to make it clear that there is an expectation of public benefit, as we have both said. Different schools demonstrate that in different ways, and we all expect them to do so. I have to say that many of us are a little worried about a small minority of schools that now seem to have a large proportion of overseas students, for example, and have raised their fees to such an extent that they are a very long way from the original charitable purposes for which they were founded. If we are nudging them—nudging is, after all, one of the things that this Government are extremely keen on—in the right direction, it is this sort of wording that seems to be pushing them in that direction, and that is what we wish to do. I do not think that we are going down the route of politicisation; we are, however, reminding them—and providing them with some examples—that charitable status is a privilege and public benefit is an expectation.

[Lord Hodgson of Astley Abbotts]

I entirely agree that charitable status is a privilege. The question is whether that status is better enhanced by statute or by guidance. I am saying that the test should be made clear but it should be a Charity Commission guidance test rather than be put in statute, with all the inflexibilities and ancillary problems that may flow from that.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Hodgson of Astley Abbotts and Lord Wallace of Saltaire

Wednesday 1st July 2015 Grand Committee

[Lord Hodgson of Astley Abbotts]

My Lords, I have three amendments in the group, Amendments 18A, 18B and 20A, which follow the noble Baroness down the rabbit hole of definition. However, I have to say that the advice I am getting—I am not going to pretend that I drafted these amendments—is that the Bill as drafted does not do what it says on the tin. I should like to take a minute to explain why that is the case and why the Government should be considering amendments along the lines of these three. I am supported in this by members of the Charity Law Association.

Perhaps I may back up for a moment. We spent quite a lot of time in my review on social investment, which obviously presents tremendous opportunities if we can set it up right and make it work effectively. As I said at Second Reading, that is not just in terms of this country. We in the UK have done so much heavy lifting that we are in a world-leading position in this new area. We heard from my noble friend on the Front Bench at Second Reading that the Law Commission carried out a consultation on these and various other proposals to remove unnecessary impediments to the growth of social investment. That consultation ended in July 2014 and the commission’s final report underpins much of what lies in Clause 13. I do not doubt for a moment the Government’s good intentions regarding social investment, but there is a view held by specialists in this area that the current drafting of the clause—specifically, proposed new Section 292A—does not capture the results of the Law Commission’s consultation, which the Government have accepted and which I think this Bill was supposed to implement. It is worth quoting from the summary of its conclusions at paragraphs 6 to 8 of the report:

“6. We recommend that a new statutory power should be created, conferring on charity trustees the power to make social investments, so as to put the law beyond doubt.

“7. A social investment is any use of funds from which charity trustees seek both:

(1) to further one or more of their charity’s objects; and

(2) a financial return, which might include (i) income, (ii) capital growth, (iii) full or partial repayment, or (iv) avoiding incurring financial liability at a future date.

“8. We recommend that the new power should apply unless it has been expressly excluded or modified by the charity’s governing document”.

The consultation paper produced by the Law Commission contains a splendidly clear diagram of how this works and sheds light on what is a pretty technical area. At one end are the grants where the money is given and at the other end is investment where there is a financial return. But in between, close to a grant, there are what is known in the trade as programme-related investments, which support the charitable objectives of the charity but do not expect a financial return. As you inch towards financial investments by moving across the spectrum, you reach something known as mixed-motive investment, a title that I find quite appalling because a mixed motive sounds like an ulterior motive. I wanted to change it to “mixed-purpose investment”, but that was altogether a bridge too far and we are still stuck with the terrible title of mixed-motive investment. Never mind; we can leave that for another day.

There is concern among charity lawyers that the Bill permits programme-related investments but does not give an adequate statutory power to mixed-motive investment, which I like to call mixed-purpose investment. That is because of the general drafting, particularly the use of the word “directly”, of subsection (2)(a) of Section 292A to be inserted in the Charities Act 2011 under Clause 13. Charities may not always act directly to further their charitable purposes. They may do so through a third party, which may not be exclusively charitable.

I have received examples of how this might work. First, a diabetes charity seeks to invest in a company developing foods calculated to reduce the impact of diabetes on sufferers but which are available to the general public. The investment will achieve some mission benefit for the diabetes charity but the fact that the foods will be available more widely means that not all the activities of the investee will advance the objects of the charity because there is a commercial element. The object therefore will be advanced only in part, which is why we need to get the words “in part” in the rephrasing.

Secondly, a charity that has purposes to relieve unemployment wants to invest in a social firm in the construction industry that employs ex-offenders at risk of unemployment. Once employed, the individuals employed by the social firm are not charitable beneficiaries because they are employed. The investment by the charity and the social firm may in part relieve unemployment but it also, in part, advances other purposes and benefits individuals who are employed by the social firm.

The worry is that almost any situation in which a charity is investing in a non-charitable social enterprise—picking up the point made by the noble Baroness—such as co-operatives, community benefit societies or community interest companies, will likely involve mixed-motive investment and will likely advance the objects of the charity in part and not exclusively. Without adequate clarification of the power, the Government risk introducing a statutory power which fails to achieve the clarity and confirmation that they seek.

Quite simply, Amendment 16A deletes the phrase,

“directly furthering the charity’s purposes”,

and replaces it with,

“furthering one or more of the charity’s purposes in whole or in part”.

The examples that I have just given underline that. Amendment 18B would insert a new subsection at the end of what will become subsection (7). It would state:

“A relevant act of a charity may be carried out with a view to furthering one or more of the charity’s purposes in whole or in part for the purposes of this section even where the relevant act may not exclusively further one or more of the charity’s purposes”.

Finally, Amendment 20A would make an amendment to new Section 292C, to which we will come later, headed “Charity trustees’ duties in relation to social investments”. At the end of subsection (2) it would insert,

“having had regard to the degree to which the relevant act is expected to further one or more of the charity’s purposes in whole or in part, and the expected financial return”.

That is all quite complicated, technical and difficult but it has important consequences. However, the charity law sector is concerned that we need to bottom this out. I am sure that the Government accept that, and I certainly believe that we want to put the ability of trustees to make mixed-purpose, mixed-motive investments beyond statutory doubt. I am sure that my noble friend will not be able answer all this today but I hope that he can take on board the concern about the technical details. I think that they have been raised elsewhere with the Treasury and so on, and it may be that we will need to have a discussion about it. I hope he can see what the sector is driving at. The sector is merely wishing to ensure that what the Government want to achieve can properly be achieved by the Bill. Currently, it does not think that the drafting achieves that.

[Lord Wallace of Saltaire]

My Lords, I agree with much of what the noble Lord has said. Perhaps I may remind him that when I first went to a tutorial with him on charity law history, he said that part of the glory of charity law was that so many definitions were left loose.