Regulator of Community Interest Companies

Lord Johnson of Lainston Excerpts

Monday 11th March 2024 Lords Chamber

[Lord Harris of Haringey (Lab)]

My Lords, in begging leave to ask the Question standing in my name on the Order Paper, I refer to my interests in the register as chair of the Fundraising Regulator, which oversees charitable fundraising.

[The Minister of State, Department for Business and Trade (Lord Johnson of Lainston) (Con)]

The regulator is funded on a cost-recovery basis from fees and has significant powers, including the ability to investigate and dismiss directors. Community interest companies have been an enormous success since their introduction almost 20 years ago. There are now around 31,000 CICs delivering substantial benefits to communities throughout the UK. My department maintains ongoing dialogue with the regulator to ensure that this growing market continues to have the appropriate oversight applied.

[Lord Harris of Haringey (Lab)]

The very phrase “community interest company” generates a warm feeling among the public. It makes the organisations concerned sound like charities. But charities are subject to charity law and to regulation, in particular about how they fundraise or raise money on the street; they require licences and are obliged to follow a code of conduct. Why does the Minister think that there are organisations that decide they do not wish to register as charities but as community interest companies? Why are they trying to avoid that sort of regulation to protect the public? If he wants an example, perhaps he should look at the Inside Success Union, which has ignored a whole series of complaints against it. Why does the Minister think that is adequate?

[Lord Johnson of Lainston (Con)]

I congratulate the noble Lord, Lord Harris of Haringey, if I may, on his work to oversee the Fundraising Regulator. The comments he has made and recent example that he has just given are things that we take very seriously. I have communicated with the registrar at Companies House today and she is also ensuring that she is available for further inquiries relating to this particular situation. However, without giving too long an answer, community interest companies are a fabulous idea. They allow social entrepreneurs to take up opportunities in their community, to distribute dividends back into the company and to incentivise people to invest in social benefit. Communities across the country have benefited from these fabulous concepts, and we want to do more. They have been growing in number every year—we now have just over 30,000; I think that they have doubled in the past four years—and, frankly, this Government will do everything we can to see them continue and flourish.

[Lord Razzall (LD)]

My Lords, first, to follow on from the noble Lord’s question, bearing in mind that this has been going on—as the Minister indicates—for over 20 years, does the Minister not think that it might now be time to update the community interest test with clearer guidelines, which might meet some of the points that the noble Lord, Lord Harris, has made? Secondly, does the Minister not think that this might be an opportunity to increase the annual turnover test to encourage small companies to become CICs and to register accordingly?

[Lord Johnson of Lainston (Con)]

I am grateful to the noble Lord for his input in this important area. These principles absolutely need to be kept under review. I have looked into this myself in great detail; only 38 complaints were made last year about these entities, which, considering there are 31,000, is not a significant amount. I do not believe that any CIC has been struck off the company register. We have updated the procedures around Companies House—director verification, statements of accounts, and so on—which will also apply to CICs. I am therefore very hopeful that we will see continuing reforms. I refer back to my original comment about the work that the noble Lord, Lord Harris, is doing to regulate fundraising. That is a separate point that is not necessarily related to company law, and we fully support his efforts in trying to make sure that it is properly regulated and ordered.

[Lord Leong (Lab)]

My Lords, as the Minister said, there are 31,000 CICs in the UK. They deliver significant benefits to communities across sectors including the environment, education, health and sports. However, the number of CICs being dissolved is increasing year on year, reaching an alarming 3,100 last year. What assessment have the Government made of whether dissolutions are the result of fraudulent activities, potentially putting community assets at risk?

[Lord Johnson of Lainston (Con)]

I thank the noble Lord, Lord Leong, for that point. This is not an assessment that the Government have undertaken; it is the responsibility of Companies House. With more data now available following our reforms, the registrar will be able to undertake this research. I would say, however, that this is a sector where there will be relatively high turnover. A lot of these are social businesses with very limited amounts of capital; some are experimental and it is absolutely right that they behave like companies, with the element of success or failure. Ultimately, the number of CICs is growing every year, in significant compensation for those that are being dissolved, and we are very pleased to see that.

[Baroness Bennett of Manor Castle (GP)]

My Lords, the rules allow for 35% of a CIC’s distributable profits in one year to be paid out in private dividends. What figures do the Government have on the average amount across the sector that is being paid out in dividends, and how is that monitored?

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[Lord Johnson of Lainston (Con)]

The noble Baroness asks a good question. This is information I requested today, ahead of this Question, but have not yet received, so I will be delighted to provide that to her and other noble Lords. I am also interested in looking at some of the CICs which have become multimillion-dollar enterprises. This is not just a café or a local book-lending club, although those are to be lauded; they are significant community health businesses providing enormous value to the local community and to patients, and sometimes doing things differently and innovatively. This is charity entrepreneurship of the sort that this Government support.

[Lord Harris of Haringey (Lab)]

My Lords, I hesitate to prolong this, but the Inside Success Union is not the only example of a community interest company that has decided that it does not wish to be subject to regulation, in particular concerning raising money directly from the public. The Minister talked about the relatively small number of complaints received by the regulator. Is he aware that the regulator prides herself, in her last annual report, on the fact that she did not open any investigations into the complaints received? Surely we would expect a regulator to take those responsibilities more seriously.

[Lord Johnson of Lainston (Con)]

I am not delighted to hear that phrased in that way, but the noble Lord is right to suggest that these complaints should be properly investigated. I have received reassurance today personally from the registrar, Louise Smyth, who I believe does an extremely good job running Companies House, that any allegations around the behaviour of CICs in relation to their relationship with Companies House will be thoroughly investigated. It is important that we do not confuse this with their work in terms of fundraising, which the noble Lord has done an extremely good job of investigating. Of course, the Government support having a well-regulated fundraising sector so that all charities can operate effectively and the public can have trust in the philanthropic sector.

[Lord Naseby (Con)]

I thank my noble friend and the Government for the support they have given to the whole mutual movement and the support they are giving now to these community groups. There is a move in the country, and any of us who live outside London know that there is considerable interest in this sort of newish structure. Certainly, on behalf of those in Bedfordshire and Northamptonshire, I say a huge thank you to His Majesty’s Government.

[Lord Johnson of Lainston (Con)]

I am extremely grateful to the noble Lord for his comments. As he well knows, I support the mutual movement wholeheartedly. It actually goes hand-in-hand with CICs, and this Government are doing all we can to get more money into the philanthropic sector. My own office, the Office for Investment, working with my new noble friend Lord Petitgas, has been working very hard internationally to get more donors into the UK. I also congratulate the chairman of the Charity Commission, Orlando Fraser, who has been doing an excellent job in ensuring that our charity sector is seen as a beacon around the world.

[Lord Berkeley (Lab)]

My Lords, I declare an interest as a board member of a CIC. We were trying to buy a village shop in Cornwall which was about to close down and we found the regulations and the structure very easy to operate and it worked very well. But there are an awful lot of other pubs and shops in Cornwall and other places that are on the brink of financial failure at the moment and it is very important that CICs exist to help them. At the same time, when you are doing this with not very much money, my noble friend’s Question about regulation is also very important. We need the comfort to know that the regulator is doing its job properly if this is really going to work, as it needs to.

[Lord Johnson of Lainston (Con)]

I thank the noble Lord for those comments. Of course, I wholeheartedly agree that it is very important that CICs have the confidence of the public. People are going to invest in them and they are expected to operate at the highest possible level of probity and integrity. That does not mean to say that all of them will be a success, but the principles of combining philanthropy with private enterprise, with the outcomes that that has achieved in a very easy to operate and low-cost format, seems to have been enormously successful. It is something that we want to continue, but I am very aware of the comments made to me today and I will make sure that they are passed on to the relevant authorities.

[Lord Vaizey of Didcot (Con)]

My Lords, my noble friend the Minister mentioned the importance of philanthropy. Echoing the spirit of these questions, I congratulate him wholeheartedly on a recent advertisement I spotted inviting appointments to an office of philanthropy for inward investment. It is a very perceptive move for the Government to have a strategy to contact foundations around the world to encourage them to invest in the UK’s cutting-edge science, for which we are justly world renowned.

[Lord Johnson of Lainston (Con)]

My noble friend, as always, says wise words in a passionate manner and I congratulate him on them. I appreciate the salience of raising the Office for Investment’s philanthropic division in this House. It is important that we are able to project the extraordinary opportunities for venture philanthropists in the United Kingdom and I call on Members on all sides of the House to assist me in projecting our incredible philanthropy opportunities to the rest of the world.