Charities (Protection and Social Investment) Bill [HL]

Lord Bridges of Headley Excerpts

Monday 20th July 2015 Lords Chamber

[Lord Gold (Con)]

I support this amendment. My noble friend Lord Deben spoke of an implicit goodness on the part of those people who set up a charity and want to do something good. I understand that entirely but we are faced here with a different problem, unfortunately, of individuals who may wish to hide behind what seems to be a charity for wholly inappropriate purposes. While they are personally liable for things that may go wrong, those people might vanish into the distance and not be there to compensate those who have suffered badly as a result of charitable money being misused. Unfortunately, at the moment it is difficult to bring an action against an unincorporated association. If a trustee acts outside his powers, it is by no means easy to bring such an action. This amendment would make it easier for those who have suffered, where charitable money has been used for wrongful purposes, to look to the charity. It would make it less easy for those who misused that money to be able to hide in the way that perhaps at the moment they can.

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

My Lords, I thank the noble Baroness, Lady Deech, and the noble Lord, Lord Bew, for their thoughtful explanations of this amendment and for sparing the time to discuss this issue with me privately. I also thank the noble Baroness, Lady Barker, and my noble friends Lord Deben and Lord Gold, for their contributions. When we discussed this in Committee I made several points that noble Lords will be glad to know I will not repeat in great detail now as this can be quite a complex matter—as noble Lords will have gathered. I will stick to the principal points.

If an individual or entity commences litigation against an unincorporated charity, usually all the trustees of that charity would be named as parties. That is because an unincorporated charity has no separate legal identity—the point that others made. This would include proceedings for tortious liability against a charity trustee in his or her capacity as a trustee of that charity, or an employee in the course of his or her employment. If damages were awarded against the trustees, the trustees ordinarily would be entitled—if they acted properly and reasonably—to indemnify themselves from the assets of the unincorporated charity under the charity’s governing document. However, they could be jointly and severally liable for any shortfall where the charity’s assets are insufficient to meet the level of damages awarded.

In that respect, a person who sues an unincorporated charity can be in a stronger position than a person who sues an incorporated charity, where the directors’ liability can be limited, as they could seek redress from the assets of the charity and the personal assets of the trustees. For an incorporated charity, in the absence of any charity assets there is limited redress against the directors and members. Also, the unincorporated charity is in the same position as other unincorporated associations—for example, many trade associations. A trade association could make a flawed recommendation to its members that resulted in tortious liability.

It is important to restate that liability should not automatically attach to the charitable association’s assets, as the amendment seems to propose. In all cases, it should be for the court to establish where liability should lie, based on the facts of the case and the charity’s governing document. There may be other unintended consequences resulting from the amendment which we would also want to avoid.

In our view, damages may be met from the assets of the charity, whether it is incorporated or not, under the law as it stands. However, I recognise that a number of people have raised concerns over how the law operates in this area. As I said, I met the noble Lord, Lord Bew, the noble Baroness, Lady Deech, and my noble friend Lord Gold to discuss the nature of these problems. In response to their thoughtful contributions today, while I cannot give any commitments about amendments to the Bill, I will and certainly do commit to look at this issue in more detail over the summer, and in particular to reflect on whether there is a lacuna in the law as it stands that puts victims of unincorporated charities at a significant disadvantage. I will obviously keep the noble Baroness, Lady Deech, the noble Lord, Lord Bew, and my noble friend Lord Gold informed as to my deliberations. I am happy to keep others who spoke on this amendment informed, too. I fully understand that this is a complex area. We do not wish to rush into it.

I understand that the Charity Commission shares a number of the concerns raised and it would be happy to write to the noble Lord, Lord Bew, in more detail on this point as our deliberations progress. I am sure that the Charity Commission would be happy to meet with the noble Baroness, Lady Deech, and other noble Lords should they so wish. With all that said and in mind, I hope that the noble Baroness will not press her amendment.

[Baroness Deech]

I am grateful to the Minister for his conversations with us and for the very valuable suggestion of bringing in the Charity Commission to get evidence, which is very hard to collect in this field. However, I would like to correct a misunderstanding that seemed to flow around the House. This amendment would not incorporate charities, nor do I recollect saying that most charities were incorporated.

It does no such thing to the charity structure, but would simply enable the victims to access the assets of the charity where the trustee himself or herself does not have enough. In that sense, it would simplify the running of the charity and its structure. As the Minister said, assets will be used in any case, so there is no question of somehow continuing the preservation of a charity’s assets when wrong has been done to a victim. However, given that we need to consult the Charity Commission on that, I beg leave to withdraw the amendment for now.

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[Lord Watson of Invergowrie]

My Lords, I have the greatest respect for the noble Lord, Lord Moynihan, especially on sport-related matters, so it was a little disappointing to hear him repeat the suggestion made in Committee by the noble Lord, Lord Lexden, which he stated again this evening: that the amendment seeks a one-size fits all solution. That is absolutely not the case. Precisely because of the sort of reasons the noble Lord, Lord Lexden, just outlined, schools vary greatly in size; therefore, what they can be reasonably expected to do in terms of community engagement will also vary. If a large private school has state-of-the-art sports facilities, it may reasonably be expected to invite pupils from state schools to use them—not just the pitches and courts, but coaching from the staff. In all probability a smaller school would have much less extensive facilities, so it might be appropriate for that school to send one or more coaches out to local state schools to engage directly with them. The same would be true of the assistance with learning issues raised by the noble Lord, Lord Wallace of Saltaire, be it Mandarin or music tuition using instruments perhaps not available in local state schools. To be most effective, the approach would necessarily vary, but it is entirely unacceptable for any school to say, “We cannot do anything because we’re simply too small or too remote”.

The noble Lord, Lord Wallace, referred to the “agreement” reached between the Charity Commission and the ISC. Unknown to anyone else, secret meetings have been taking place while the Bill has been progressing through your Lordships’ House; indeed, only yesterday we became privy—if I may use that contentious term in the context of the Bill—to the outcome. This private agreement was finalised without any discussions with representatives of state schools or local government education authorities; nor were some noble Lords whose names appear on the amendment consulted or even informed, which would have been courteous, if nothing else. Is it not bizarre, to put it no more strongly, to allow the umbrella body for private schools to help write the rules by which it will be judged? Perhaps the Minister can answer that point.

The agreement could result in some limited progress, but it means private schools being allowed to retain an entirely voluntary approach. The ISC says it hopes that the agreement demonstrates that the body is taking steps towards further encouraging engagement between independent schools, state schools and local communities. I suppose it does, but the key word is “encouraging”. Up to now, encouraging has brought us only to the point where the noble Lords, Lord Moynihan and Lord Wallace of Saltaire, felt compelled to spell out in their contributions in Committee why much more needed to be done and why they believed that statutory backing was needed to make it happen.

Further, the website that various noble Lords referred to this evening, Schools Together, which will go online later this year, will merely “request” that member schools provide contact details of the co-ordinators of partnership work at their schools, finishing with the telling statement, “such information to be provided voluntarily”. So there are get-outs at each end, and it seems that the ISC clearly has no intention of forcing its members to do anything they do not want to do. It is difficult to imagine a weaker form of wording, as the noble Lord, Lord Wallace of Saltaire, said himself.

We also learn that the Charity Commission is to commission a research report 12 months from the introduction of the agreement. Crucially, it seems that only the commission and the ISC will have detailed discussions around the terms of this research project in advance. Again, there will be no input from the state schools this is meant to assist. Will the Minister insist that state schools and local authorities be involved in the discussions relating to this research report? I very much hope that he will acknowledge the importance of that happening.

In Committee, the Minister said:

“Most of the Bill is about giving the Charity Commission the tools it needs to do its job”.—[Official Report, 6/7/15; col. GC17.]

The talks we have heard about between the Charity Commission and the ISC apparently suggest that both organisations were intent on avoiding compulsion in any form. If, as has been suggested, one of the reasons why the Charity Commission did not want that to happen was that it does not feel it has the necessary resources to enforce it, I suggest that that is not a reason of any substance. We were told the same about compulsory registration with the Fundraising Standards Board, and it is just not good enough. If that is the case, the Government are preventing the Bill bringing about meaningful change in these two areas, contrary to what the Minister said, because they will not give the Charity Commission the tools—that is, the resources, which I suppose are largely financial—to do its job effectively.

Currently the onus is on state schools to apply for support, and the agreement would maintain that position. If, as the noble Lord, Lord Wallace of Saltaire, said, this amendment is carried, private schools will have to be proactive and seek out nearby state schools and say, “How can we help you share our facilities and our expertise?”. It would put the responsibility on charities, which gain from charitable status, to go out and abide by the terms of that status by sharing their resources. How can that be seen as objectionable? Private schools would have to report on their success with such outreach initiatives, enabling the Charity Commission to check that they were observing the terms of public benefit effectively. Currently, as has been said, schools mark their own homework on their charitable work, which the figures show is not sufficient. Surely that is not acceptable.

It is important to have a strong regulator to ensure that standards in public trust and confidence are maintained, and enforcing the public benefit requirement is surely a key part of this. The amendment does that, and I welcome the fact that these important issues have been debated by noble Lords this evening.

[Lord Bridges of Headley]

My Lords, I start by saying that I remain strongly in sympathy with the aims of the noble Lords whose names are down on this amendment. Before I address the amendment, I will make a general observation. Charitable status confers on charities a number of benefits, and that is right. Charities deserve our support in fulfilling their purposes. However, those benefits come with responsibilities, which trustees must ensure their charity fulfils. A core purpose of the Charity Commission, helped by this Bill, is to ensure that every charity fulfils those responsibilities and obligations. How they do so is up to them, but do so they must. I repeat: every charity must fulfil them, no matter what they do. It is important that law and regulations be applied and enforced without favour or prejudice to any one sector of the charitable world. There must be no light touch or heavy hand towards schools with charitable status as opposed to religious groups, or towards animal charities as opposed to environmental charities. They all—I repeat, all—must abide by the law and fulfil their obligations.

With that in mind, I turn to the issue raised by the amendment. To fulfil their charitable purpose, many schools have forged partnerships with state schools, enabling the latter to share private schools’ facilities. This has brought huge benefits, as a number of your Lordships have mentioned. It has widened access to first-class sports facilities, for example, and extended the use of music and drama facilities which might otherwise be unavailable to local state schools. Such partnerships are to be strongly encouraged. I agree with noble Lords that, while there are many terrific examples—and these should be applauded—we could certainly see a lot more of them. A strong nudge to those who have not yet given genuine consideration to the potential for such partnerships to further their charitable aims would surely be widely welcomed.

Where I differ with the amendment is not, therefore, in the aim but in the approach, for it proposes not a nudge but a legislative requirement which would severely limit the charitable purposes that charities which are independent schools can pursue, and I cannot agree that that is the best way forward. There are some important issues of principle here. First, the amendment would single out charitable schools in legislation. As has been mentioned, no other type of charity is treated in this way. Secondly, it would single out only one way in which schools could demonstrate public benefit. Again, no other charity is treated in this way in legislation.

In practice, charitable independent schools can demonstrate their benefit, and satisfy the “public benefit requirement” for the purposes of the Charities Act 2011, in a wide range of ways, including through bursaries—one-third of ISC school pupils receive help with fees—outreach teaching or sponsorship of an academy. Other options include sharing their curriculum or putting on summer schools for state pupils and so on. An important principle of charity law is in operation here. The law places the decision on which approach, or combination of approaches, the charity should take in the hands of the charity’s trustees. That is how it should be, and it should not be for government or the regulator to interfere. Setting particular duties or minimum standards around one particular form of public benefit by one particular type of charity would set a dangerous precedent. I am sure there are those who might like to see particular duties placed upon religious charities, for example, and others who might take a different approach to NGOs from the one they would take to domestic charities, and so on.

Given what I said at the very start, I think it is clear that this is very dangerous territory to get into. Furthermore, it is contrary to the spirit of charity law, which has been tested in the Upper Tribunal. Public benefit must be real and not tokenistic, but it is not for the Charity Commission to dictate to schools, or to any other type of charity, the type or amount of provision they make. That should be a matter for the trustees of the charity concerned, taking into account the circumstances of their charity.

Alongside that are issues of practicality. Some schools’ circumstances may mean that it is not appropriate for them to share facilities. Some may not have sports or arts facilities or expertise that they can share, or local state schools may simply not need their drama facilities. Overriding the discretion and judgment of trustees, who are acting in the interests of the community as a whole, as to what is the most practical option in their area seems an odd thing to do if genuine local partnership is what we are aiming at.

As well as impinging on the discretion of trustees, making this a matter of law and regulation impinges on the discretion of the regulator, the Charity Commission. Of course, where the commission doubts that an independent school really is serving the public benefit, it can already step in, but it should be allowed to make that judgment in the round and not be required to give special attention to any one particular means of fulfilling a school’s charitable mission. In some cases, I fear that a statutory approach could be positively counterproductive.

As I have said, I am greatly in favour of encouraging more partnerships for the purposes of sharing facilities, but I am not keen to champion that ahead of, for instance, academic partnerships. Singling out one form of public benefit for special treatment in law rather implies a hierarchy in which this particular approach is elevated above others. I am all in favour of nudging schools towards the sharing of facilities, but inadvertently nudging them away from other means of helping the education of others could be counterproductive.

There is another unintended outcome which would, I fear, be very likely if we were to move to legislation, and that is the loss of good will among the very community we are hoping to influence. I have been quite struck by the significant good will from the independent schools sector in relation to partnerships with state schools of this sort. The ISC has made it clear to me that it is in fact very keen to do more to promote best practice in sharing facilities and expertise—for example, in sports, music and the arts. This enthusiasm has, I am delighted to say, been translated into action through a very welcome dialogue with the Charity Commission, which recognises the spirit of and intention behind the amendment. As has been mentioned, this dialogue has resulted in a package of measures, agreed by the two organisations, which will provide just the “nudge” that I think we are all looking for

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[Lord Watson of Invergowrie]

My Lords, given that this is the first time that social investment has been defined in statute, perhaps it was not surprising that considerable time was spent in Committee in pursuit of its meaning. I am not certain that we nailed it down effectively. Indeed, some, including Social Enterprise UK, continue to argue that the Bill fails to differentiate between financially motivated investment which also happens to be in line with the charity’s social purpose and consciously or explicitly socially motivated investment.

All investment has some kind of social impact and much financial investment produces positive social returns. In Committee, the Minister avoided giving a clear answer as to how social investment is to be differentiated from financially motivated investment; rather, he pointed to the Charity Commission and the courts making such judgments. Only time will tell whether that proves to be the case. For that reason, it is to be welcomed that the Bill will be reviewed after a period of three rather than five years. In the mean time, the amendments in this group offer some clarity in the Bill’s provisions on social investment and we are content to offer them our support.

[Lord Bridges of Headley]

I thank the noble Baroness, Lady Barker, for tabling Amendments 20 to 24. Taking time to consider the definition of social investment used in the Bill has been a valuable exercise and I have no doubt that we are all much the wiser for it.

I will deal with the amendments in turn, but I should make it clear that the Law Commission recommended these powers, the Law Commission drafted these clauses, and the Law Commission has been consulted on the amendments. So I am not sure that I totally agree that the Bill does not accurately reflect the Law Commission’s recommendations.

Amendments 20 and 21 would change the definition of social investment such that directly furthering the charity’s purposes must be the primary consideration over achieving financial return. The range of social investments covered by the Bill would be restricted only to those where directly furthering the charity’s purposes is the primary aim. It would thus exclude those investments where achieving a financial return is the primary aim, as well as introduce a definitional issue around how to determine which of the two purposes is primary.

This is contrary to the intention of the Bill, which deliberately aims for a wide definition of social investment where neither the furtherance of the charity’s purposes nor the financial return should be required to take precedence. Some social investments place emphasis on charitable purpose, some on financial return; in other cases, the trustees will be motivated by financial return and furtherance of purposes in equal measure. None of these cases should be excluded from the statutory definition of social investment and from the scope of the new power; all investments right along the spectrum should be included. To hold one above the other would potentially restrict the breadth of investments that fall under the power thereby making it less likely to be used. In order to maintain as wide a scope as possible for the power’s use, so that the power may have the largest possible impact, it is important that the definition of social investment remains suitably inclusive.

As to Amendments 22 and 23, let me state for the sake of clarity that the definition of social investment used in the Bill covers anything short of a total loss of funds. It includes both a neutral and a negative return, short of such total loss. In this way, repayment of any part of the capital invested would be a “financial return” within the definition. The amendments seek to include cases where the expected financial return may be equal to, rather than greater than, a total loss of the investment. This would move us firmly into grant-making territory and mean that grants and other spending, where there is no expected financial return, would fall under the category of social investment. I do not think that this would be a desirable change to the Bill.

The third and final amendment in this group would delete new Section 292A(6), which is a necessary counterpart to the definition of an act of charity used in new Section 292A(4)(b). These parts of the clause are, I recognise, a little cumbersome, but they are necessary to deal with the so-called Rosemary Simmons problem, a case which was raised during the Law Commission consultation. It makes clear that giving a guarantee can count as a social investment despite the fact that money is only put at risk and not actually paid over. As such, it is a necessary inclusion to cover the full breadth of potential social investments. Deleting this subsection would leave the Bill deficient.

The noble Baroness will be aware that the Government have put proper time and effort into getting a definition of social investment that is fit for purpose. As she said, we have been dancing on the head of a pin for some time. I will address this at greater length when I cover government Amendments 25 and 29, referred to by my noble friend Lord Hodgson. I hope on this basis that the noble Baroness will be content not to press her amendments.

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Moved by

[Lord Bridges of Headley]

25: Clause 13, page 16, line 36, at end insert—
“( ) The fact that a relevant act may also have results other than those mentioned in subsection (2)(a) and (b) does not prevent the carrying out of that act being regarded as the making of a social investment.”

[Lord Bridges of Headley]

My Lords, it is to government amendments to Clause 13, relating to the definition of social investment, that I now turn. It is the dancing on the head of a pin that I promised to undertake, which was mentioned by the noble Baroness, Lady Barker, and follows our fruitful debate in Committee and my meeting with my noble friend Lord Hodgson and the noble Baroness.

Noble Lords will recall that I described the power of social investment as being deliberately drafted to be as wide as possible while retaining the distinctiveness of the “social” element, so that the power covers a spectrum from transactions that are mostly intended to further charitable purposes but involve some return of capital, to those that are primarily financial but have a small mission benefit.

There are two poles at the extremes of the spectrum. At one end there are social investments that look much like grants, with very little expected return of capital. At the other end, there are social investments that look very similar to traditional financial investments but have a small role in furthering charitable purpose—and one which is deliberately sought. Social investments must combine some aspect of each pole, but the nature of the combination is entirely flexible.

I also took the opportunity to make it clear that the Bill does intend to include mixed motive investment within the definition of social investment. That said, I have remained open to your Lordships’ suggestions that the Bill could be clearer on this point. This is of particular importance given the intent of this legislation to be expressly permissive and to encourage the uptake of social investment by charities. Thus I reiterate that in relation to the power of social investment: first; there is no minimum degree of mission benefit before the social investment power is engaged; secondly, it is the combination of the mission benefit and the financial return which may cause trustees to consider a social investment to be in the interests of a charity; and, thirdly, a charity’s purposes need not be advanced on an exclusive basis—there may be other unrelated outcomes that are features of the transaction as a whole but are not part of the charitable mission of the specific charity investor and are not part of their reason for investing.

For the record and for completeness, the Law Commission recommendation paper which forms the basis of Clause 13 states that,

“we consider that the definition should make clear that insofar as a social investment is justified by its expected mission benefit: (1) only the charity’s objects are relevant; other benefits which do not fall within the charity’s purposes are irrelevant (even if they may be charitable purposes for another charity); (2) for a charity with multiple purposes, a social investment need not further each one of those purposes; and (3) the charity’s social investment must be expected to cause the mission benefit that is relied on to justify the social investment. However, insofar as a social investment is justified by its expected financial return, it need not be used exclusively and directly to further the charity’s purposes”.

It may be worth me unpacking this further by way of an example. A charity might have the care of horses as its charitable purpose. It may wish to invest in a horse and donkey social enterprise, which provides joint facilities for both. The social enterprise may also expect to make a financial return, perhaps from charging visitors. It is entirely right that, having weighed the benefits to horses along with the expected risk-adjusted financial return, the horse charity is able to invest in the horse and donkey social enterprise. So long as the trustees have satisfied themselves that the combination of expected financial return and mission benefit in relation to horses is appropriate, this is covered under the social investment power. For the avoidance of doubt, this would also be the case for a horse and zebra charity investing in the horse and donkey social enterprise.

To put this in a more generic formulation, the social investment power will enable charities with wide charitable objects to invest in a wide range of social enterprises on an unrestricted basis, and by way of equity or debt or a combination of the two, or indeed through any other suitable financial instrument. With this in mind, and following discussions with the Law Commission and others, we have decided to amend the definition used by the Bill in a way that will make this even clearer, and to put it beyond any doubt in relation to matters of interpretation that could be raised some years hence. This explains Amendments 25 and 29.

I hope that this meets with the approval of the noble Lords who raised concerns in this area. I recognise that it may not go as far as some may like, but it is as far as we feel able to go without raising the spectre of private benefit. The Bill does not change the law on private benefit, which was deliberately excluded from the scope of the Law Commission review. However, for the record, the Law Commission recommendation paper states that,

“there was broad agreement that the law relating to private benefit does not generally prevent charities from making social investments … It does not seem to us that it is an obstacle, if properly understood, to social investment done with the aim of furthering a charity’s purposes”.

I trust that my laying out of the definition and the thinking behind it in some detail has served to make the case clear.

I thank the noble Lord, Lord Cromwell, for Amendments 30 and 31. It is, of course, important for charity trustees to be prudent and to think about the long-term management of their charity’s assets, whether they are making a social investment or engaged in any other activity. This month, the Charity Commission published its revised guidance, The Essential Trustee, (CC3), which says, for example, that trustees must,

“make balanced and adequately informed decisions, thinking about the long term as well as the short term”,

and that they,

“must act responsibly, reasonably and honestly. This is sometimes called the duty of prudence. Prudence is about exercising sound judgement”.

Trustees are therefore already subject to duties that cover the points made by the noble Lord’s amendment.

The purpose of Section 292C is to set out certain duties that apply specifically to social investment, not to codify the entirety of trustees’ duties when making social investments. In addition to these duties, trustees will of course also be subject to the duties imposed by the general law, including the law of prudence. The specific duties in 292C also modify the duties imposed by the Trustee Act so that they are tailored to social investment. Just as the Trustee Act does not include an express duty to consider prudence and the long-term management of a charity’s assets, nor should the social investment duties.

The Law Commission’s recommendation was that the trustees should be satisfied that a social investment is in the charity’s interests, having regard to the two limbs of the definition in Section 292A: namely, furthering purposes and the financial aim. The wording of the government amendment deliberately refers back to those two limbs of the definition; it does not need to do more than that.

Finally, the long-term management of a charity’s assets will not always be a relevant consideration when making a social investment. It would be relevant if a charity is using its investment assets to make a social investment, but this will not always be the case. A charity might use its disposable income to make a social investment. For example, if a charity’s endowment produces an income of £10,000 to be spent this year, the charity might decide to use £2,000 of that to make a social investment that is expected to further the charity’s purposes and might result in a payment of, say, £500. That might not be a prudent long-term management of that £2,000 as an asset, but it is an excellent use of the charity’s funds and the possibility of getting £500 back is better than simply giving £2,000 away. I fear that the wording of the noble Lord’s amendment might suggest, even if it is not intended to, that such a social investment is not permitted, and I hope that he will be content not to press it. I beg to move.

[Lord Cromwell (CB)]

My Lords, I shall speak to Amendments 30 and 31, which are amendments to government Amendment 29. In doing so, I remind the House of my involvement in the charity sector and in financial investing. I am grateful to the Minister for government Amendment 29, which I support. I sense that I may be swimming against the tide here, but I hope that he will feel able to reconsider his approach to the text by adding what we have suggested in the amendments tabled in my name and that of my noble and learned friend Lord Hope of Craighead.

The Minister’s amendment highlights the need for trustees to consider a social investment in respect of two factors: the charity’s purposes and the financial return. I am sure he is right in that. No financial return is not, in my definition at least, an investment. The missing element in our view is to consider how a social investment fits into the pattern of overall investments and the long-term plan for the charity’s assets as a whole, not just considering the investment in isolation, which I think Amendment 29 seems to imply.

Some might say that prudence and long-term planning are motherhood and apple pie because they are self-evident. However, the Bill is breaking new ground. It invites trustees to engage with a new type and class of investment. These are welcome additions to the investment universe, but they are different from and less regulated than mainstream financial investments. Furthermore, these investments are likely to be presented in different ways, separately, and by different people. I hope that the Minister will agree that, first, the wording we suggest does not place any barriers in the way of social investing, or certainly none that a worthwhile social investment could reasonably object to. Secondly, they provide a context to such investments, and given that this is a new area of investing, a reasonable sense check that trustees should observe when making or considering them.

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[Lord Watson of Invergowrie]

My Lords, on the first day of this month in Committee, I said:

“It is important for the Bill to be as clear as possible and I hope the Minister … will give an undertaking to bring forward his own re-wording to improve this section on Report. We have a singular aim: to make this section of the Bill as effective as possible. It would be in the interests of everybody, not least the charities themselves, for the wording to be tightened up”.—[Official Report, 1/7/15; col. GC 191.]

The section was on the meaning of social investment, so it is pleasing that the Minister has heeded my words and has indeed strengthened the Bill both in terms of the government amendments in this group and in the group that follows. I thank him for that.

We also believe that the two amendments in the names of the noble and learned Lord, Lord Hope of Craighead, and the noble Lord, Lord Cromwell, would enhance this clause, but the Minister has already set out his stall on these matters, so there is not much more that I can say on that.

[Lord Bridges of Headley]

My Lords, first, I apologise for getting carried away with excitement so that I gave my answer before the noble Lord had even posed the question. It is a novel way, especially for the noble and learned Lord, Lord Hope, who knows far more about most of these matters than me.

I entirely agree with what the noble Lord, Lord Watson, and my noble friend said about the need for simplicity and clarity in these matters. I also think we all agree that this is a new area of the law and we need to proceed carefully, cautiously and make sure that what we are doing meets the needs of the sector and that we do not land up in a world with unintended consequences.

In response to the noble Lord, Lord Hodgson, who asked whether I would consider what he had to say on the amendment, I am perfectly happy to reflect further but I am sorry to say that I can absolutely make no commitment on this matter. I point out, as the noble Lord, Lord Watson, said, that the next review of the Charities Act will be not in five years but before that. That decision has been made for the specific reason that this one area of the law, like many others, merits further consideration at that point. I am sure that well before that we will want to consider all those points on how the law is settling down and bedding in. I very much hope that the noble and learned Lord, Lord Hope, and the noble Lord, Lord Cromwell, will be part of that discussion and those deliberations. I am sorry I cannot meet what they want right now but I certainly assure them that we will be beating a path to their door, even if they are not coming to ours, to ask for their views.

Amendment 25 agreed.

Moved by

[Lord Bridges of Headley]

26: Clause 13, page 16, line 37, after “that” insert “carrying out”

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Moved by

[Lord Bridges of Headley]

27: Clause 13, page 17, leave out lines 17 to 21 and insert—
“(4) This section and section 292C do not apply in relation to—
(a) charities established by, or whose purposes and functions are set out in, legislation;(b) charities established by Royal Charter;but they apply in relation to all other charities, whether established before or after this section comes into force.(5) In subsection (4) “legislation” means—
(a) an Act of Parliament or an Act or Measure of the National Assembly for Wales; or(b) subordinate legislation (within the meaning of the Interpretation Act 1978) made under such an Act or Measure.”

[Lord Bridges of Headley]

Moved formally.

[Baroness Barker]

My Lords, the House might find it useful to hear from the noble Lord, Lord Bridges, on the Government’s Amendments 26, 27 and 28, which were not grouped with the previous group starting with Amendment 25. I would find that helpful.

[Lord Hodgson of Astley Abbotts]

My Lords, these amendments are about the royal charter charities, so they are very different. We had so far been dealing with social investments and the definition of that. This group is about the special position of royal charter charities. I am not sure that it will detain us very long, but nevertheless it is a different topic and they have been separated by the Bill team into two different groups.

[Lord Bridges of Headley]

My Lords, if I am right, I will address Amendments 26 and 28, which relate to very minor improvements to language, adding an active grammatical formulation and a specific rather than generic identifier respectively. I trust that they will not require further explanation.

The amendment to new Section 292B(4) improves the wording of the specification around the exclusion of charities established by legislation or by royal charter. They have been excluded from the social investment power because of the differences in governance structure. The amendments here simply offer an improved form of wording to reflect this.

The addition of new Section 292B(5) is needed to explain better the territorial extent of the subsection on charities established by legislation, as set out in new Section 292B(4). It clarifies that the exclusion relates specifically to charities established by, or whose functions are set out in, legislation or secondary legislation authorised by Acts of Parliament or measures of the Welsh Assembly. I expect that these measures will not trouble noble Lords unduly, being of a rather technical nature without policy implications.

[Baroness Barker]

My Lords, it was very helpful of the noble Lord to give us that explanation of Amendments 26 and 28, which, as he said, were minor and technical, but they set out the geographical differences of certain charities. That was very helpful. I invite the noble Lord to address Amendment 27, which deals with charities established by royal charter. Noble Lords would find that helpful.

[Lord Bridges of Headley]

My Lords, forgive me. I thought that I had addressed that in what I have just said but, clearly, I have not. As far as I understand it, I thought that the amendment as set out relates to what I have just addressed as regards the wording of the specification around the exclusion of charities established by legislation or by royal charter. I thought that I had just explained that to the noble Baroness, but I hope she will forgive me if she wishes to be clearer about the purpose of her amendment. My apologies, I am not entirely clear why we are in this situation.

[Baroness Barker]

My Lords, the noble Lord has made it clear to the House that certain charities established by royal charter are exempt from the provisions of social enterprise. I, for one, am content to leave the matter at this stage.

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Moved by

[Lord Bridges of Headley]

28: Clause 13, page 17, line 24, leave out “this Part” and insert “section 292B”

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Moved by

[Lord Bridges of Headley]

29: Clause 13, page 17, line 33, at end insert “, having regard to the benefit they expect it to achieve for the charity (by directly furthering the charity’s purposes and achieving a financial return)”

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[Lord Bridges of Headley]

My Lords, first, I apologise to the noble Baroness, Lady Barker, and others for my slight confusion over the previous amendment. I seem now to be a bus or a bus conductor—I am not sure which—but I hope to bring a smile to my noble friend Lord Hodgson’s lips.

As my noble friend says, the amendment aims to insert a new section into the Charities Act to exempt charities from the FCA’s financial promotion rules and to give the Treasury a power to create a new regulatory regime for charities marketing financial promotions, taking this out of the hands of the FCA. This amendment was tabled by noble Lords in Committee. I repeat what I said then: I understand that the effect of the financial promotion regime is an important issue for charities and social enterprises looking to raise funds from the public in this particular way. I also understand that my noble friend’s amendment is prompted by concerns around the appropriateness of these rules for charities that want to raise investment funds from members of the public, just as they might ask for donations.

The amendment suggests that the Treasury should become the regulator, and may be probing in that respect—indeed, I am sure it is. However, I believe that the model of independent expert regulation by the FCA is the right one. That said, it is of course in all our interests that any regulation is proportionate, consistent and clear. As my noble friend knows well, the Government are supportive of social investment and very keen to ensure that regulation is proportionate for the charities and social enterprises involved and, crucially, for the consumers who want to invest in these products. Indeed, very valuable changes were made to the remit of the FCA in 2012 to give it duties to have regard to the desirability of sustainable economic growth and to the differing needs of different types of organisations it regulates, including those of charities and social enterprises. None the less, I am aware of the ongoing concerns about regulatory approaches to retail social investment, and the Government are committed to doing anything they can to remove any unnecessary burdens, while of course not eroding consumer protection or the integrity of the financial system.

As my noble friend said, following Committee, I met my honourable friends the Economic Secretary to the Treasury and the Minister for Civil Society to discuss the issues around financial promotions and social investments that were raised by my noble friend Lord Hodgson in Grand Committee and supported by a number of other noble Lords. We agreed that the model of independent expert regulation by the FCA is the right one and that consumer protection must be paramount. It is therefore important to ensure that the current regime supports social investment rather than looking to shift responsibility to the Treasury. We also agreed that the Treasury and the Cabinet Office will write jointly to the FCA to consider regulatory approaches to how members of the public make social investments, with a specific focus on the financial promotion rules.

As I mentioned in Committee, the Government and the FCA have been working with the sector to consider evidence about the effectiveness of the regime, and this work will continue. The important issues raised in these debates will of course be considered as part of these discussions with industry and the FCA. I believe we are making progress and, as I said, my honourable friend the Economic Secretary to the Treasury will be writing to my noble friend, as well as the other noble Lords who raised this important issue, to update them on progress. In the light of this, I hope my noble friend will think that a bus may have at last arrived and will understand that work is ongoing in this area. On that basis, I invite him to withdraw his amendment.

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[Lord Hodgson of Astley Abbotts]

My Lords, I am going for a third major prize now. I have retabled this amendment, which proposes a wholesale redrafting of Schedule 6 to the 2011 Act.

As I said before, this may sound a rather technical matter but, as I explained in Committee, it has a very important purpose: to improve access to justice for charities, especially smaller ones. The last Labour Government set up the Charity Tribunal in the 2006 Act, which was a very good development. Prior to that, only the High Court could provide a means of redress for small charities, which was expensive and slow. Charities, especially smaller charities, had no option but to submit to the directions and decisions of the Charity Commission. However, what was a good idea and gave with one hand took away with another. Schedule 6 is 10 pages long and complex in that it says what can be appealed against, who can bring the appeal and what the remedy is. It is difficult for charities and many charities’ lawyers to understand. The evidence to my review was that the sector found it complex and difficult to follow. My amendment is designed to sweep these complexities away.

In response to the amendment in Committee, my noble friend said:

“I am not sure that everyone shares my noble friend Lord Hodgson’s viewpoint on the difficulty of interpreting Schedule 6 to the Charities Act 2011. There are some who are attracted to the structure of Schedule 6 and find it easy to navigate. It allows one to look up a particular provision and quickly see who can appeal and what decisions are available to the tribunal. It is not something that has been raised with the Government as causing particular difficulty, other than by my noble friend”.—[Official Report, 6/7/15; col. GC 17.]

That stung me into action, and I decided that I was going to find out all about it. I have done some more research and discovered three things. First, there is a widely supported view that Schedule 6 is too complex and difficult to navigate. That supports my case for reform. Secondly, my amendment is too widely drafted as regards standing—that is, who may make an appeal. By way of example, many of the appeals that have been lodged to date in the tribunal in relation to schemes have been brought not by the charity trustees who had sought the proposed scheme themselves but by third parties objecting to the scheme, such as local residents objecting to a scheme in relation to parkland or parents at a school objecting to a scheme for the school. There have also been some politically motivated complaints. As a result, I have to accept the weakness of my amendment as drafted. Finally, and most importantly, my research revealed that my noble friend already has some powers to improve the operation of Schedule 6 without resort to primary legislation. Under Section 324 of the 2011 Act, entitled, “Power to amend provisions relating to appeals and applications to Tribunal”, my noble friend can act to improve the way the schedule operates.

If I accept that my amendment cannot do the business as presently drafted, all I am asking my noble friend to do tonight is to accept that there is a consensus among charity lawyers that Schedule 6 is absurdly complicated and not consistent in its principles and application and to say that he will initiate a review of the operation of Schedule 6 with the objectives of obtaining: first, a clear, generally applicable definition of a decision, including a non-decision; secondly, a clear principle of locus standi, which could and should include limitations based on remoteness from the decision’s effect; thirdly, recognition that the tribunal was intended to provide a straightforward basis of objective appeal against a regulator making decisions of direct impact, which justifies something beyond the judicial review principle; and fourthly, a logical staging through the Charity Commission’s internal review process to the tribunal as a next level. He can then use his Section 324 powers to introduce whatever interim improvements are possible until the next bus comes along to enable statutory improvements to be made.

It is easy to pass this off as a very technical matter, but access to justice is a very important principle and this undertaking to have a review would lead to improvements to that access for the charity sector. I beg to move.

[Lord Bridges of Headley]

My Lords, my noble friend Lord Hodgson has fought the corner of rationalising Charity Tribunal appeal rights for many years. Every time he gets knocked down, he gets straight back up and continues to fight from the blue corner. I applaud his persistence.

In principle, the Government have maintained a consistent position that they are not averse to rationalising the rights of appeal and review to the Charity Tribunal set out in Schedule 6, as my noble friend pointed out, but—it is an important “but”—we would not want to create new appeal rights where none currently exists that would add to the tribunal’s caseload. Neither would we want to expose the Charity Commission to challenge where it decides not to take action and where an appeal right does not currently exist. Creating rights of appeal where the Charity Commission decides not to take action could well result in an unmanageable workload of cases for the Charity Commission, diverting its resources. It would also effectively enable the tribunal to direct the use of the commission’s powers and resources. As I said before, we consider that the balance is about right under Schedule 6 as it stands in terms of what decisions can be appealed.

In terms of who can appeal, my noble friend Lord Hodgson made some fair points about legal standing to bring an appeal. For many appeal rights, the legal standing in relation to the Charity Tribunal is widely drawn, encompassing,

“any other person who is or may be affected by the decision”.

That is very wide compared to most other jurisdictions. However, it recognises that charities exist for the public benefit and that the regulator’s decisions about a charity can have a significant impact on people who would not normally be able to bring an appeal. I accept my noble friend’s point that some people find Schedule 6 clunky and difficult to use, but I am not sure how it could be condensed into a simple provision without inadvertently making the sorts of changes that we want to avoid.

The Government have agreed with many of my noble friend Lord Hodgson’s recommendations over the years. We find that he is usually right. I am sorry to say that this is a rare case where we will have to part company and agree to disagree on some of his points. I hope my noble friend will not be too disappointed to learn that I will not commit to any amendments on this subject. I am happy to reflect on the points that he raised—they were detailed points and I will not simply wave them away right now—and will listen if he thinks we can make improvements to Schedule 6 through the power to do so in secondary legislation. Again, I should be clear that I make no promises. As I already said, we do not want to introduce new appeal rights. I thank my noble friend for all he continues to contribute to this debate. While I cannot agree to his amendment, I very much hope that we can continue to have conversations about this matter.

[Lord Hodgson of Astley Abbotts]

I am grateful to my noble friend for his extensive response and kind remarks. I understand that my amendment is faulty. I have no wish to press it to a Division. That would be entirely wrong as it does not work. I just hope that at some point we can look at how Schedule 6 works and see whether there are ways that it can be made clearer, and if that can be done by secondary legislation. It would be wonderful if we could do that. If we have to come back to consider it another day then so be it. For tonight, I seek leave to withdraw the amendment.

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[Lord Watson of Invergowrie]

My Lords, I am in the surprising and mildly embarrassing position of having to say to the Minister that I am glad that he did not take me at my word when we dealt with reviews in Committee. I have studied the Hansard and, under what was then Amendment 29, I sought the first review to be completed within three years. However, I am quoted—so I believe that I would have said it—as saying that,

“it would be in charities’ best interests to initiate the review after three years”.—[Official Report, 6/7/15; col. GC 36.]

The Minister has now come along with an amendment that says that the first review must begin “within 3 years”. I certainly welcome that. I was looking for a completion in three years, but I took on board the Minister’s comments in Committee when he said that the system would have to get up and running and the commissioner would need to take people on and put them in the proper positions, with all the various arrangements that have to be put in place, such as internal guidance. On that basis, he has made a very reasonable offer. In terms of what I actually intended, he has come halfway towards meeting me. Where I come from, that is called a score draw—and, on this occasion, I am prepared to settle for that.

I would be supportive of the amendment in the name of the noble Baroness, Lady Barker, because it adds an important issue that we should take into consideration, after all that was said about social investment earlier.

[Lord Bridges of Headley]

My Lords, I am grateful to the noble Baroness, Lady Barker, for explaining the rationale behind her amendment and to the noble Lord, Lord Watson, for what he just said.

Clause 14 currently makes provision for the operation of the Act to be reviewed by the Minister at least every five years, in line with government policy. We agreed a requirement for the review to include specific consideration of certain matters based on requirements in the statutory review provision of the Charities Act 2006, but that should not be considered as limiting the scope of any review of this legislation.

As noble Lords know, this Bill makes only a modest contribution to the growth of the social investment market, by clarifying charity trustees’ social investment powers and duties. At the moment, charitable foundations hold some £80 billion in assets, of which less than £100 million is invested as social investment. While we certainly hope that more charities will consider the total impact that social investment can deliver, I expect that it will be an incremental growth rather than a sudden swing of the pendulum.

That said, I do not believe that a statutory review requirement to consider a specific aspect of social investment and its interaction with grant-making would achieve much that is not already being done more frequently by many parties, not just the Government, and with much broader scope. I am reluctant to say so, but I do not accept the rationale for Amendment 34.

As the noble Lord, Lord Watson, said, I have sympathy, as I demonstrated in Committee, with several of his arguments for bringing forward the first review from five years to three. I do so not least because of the measures being introduced on social investment, because of the point the noble Baroness, Lady Hayter, made about the disqualification power, and because of the issue of fundraising more generally and ensuring that we continue to maintain the public’s trust and confidence in charities as a whole.

As the noble Lord said, my concern was that if we said the review would have to report within three years, that would be seen as too soon, particularly when one factors in the time it would take to prepare guidance and commence provisions, and for the review itself. That is why I have come back with government Amendment 35 which requires the first review to begin within three years and to report within four years. This strikes me as a sensible compromise which I hope noble Lords will support.

[Baroness Barker]

My Lords, I am disappointed that the significant change to the substance and purpose of the Bill made by the insertion of the new clauses on social investment will not form part of the review of the Act. I do not have a problem with the timing of the review; I welcome the fact that it will be sooner than it would otherwise have been.

I do not understand the Government’s reluctance to subject the new proposals on social investment to the scrutiny which will be applied to the rest of the Bill. Like others in this House, I am keen that we take every opportunity to try to increase social investment. Over the past 20 years, social investment has been very slow, despite the support of successive Governments. Therefore, it is a shame that we pass over an opportunity to look at how this first attempt to put a definition into legislation is working and its impact on the funding of the sector. Reluctantly, I beg leave to withdraw the amendment.

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Moved by

[Lord Bridges of Headley]

35: Clause 14, page 18, line 23, leave out from “apart” to end of line 24 and insert—
“( ) The first review must begin within 3 years after this Act is passed, and the report of that review must be published within 4 years after this Act is passed.”