Charities (Protection and Social Investment) Bill [HL]

Lord Watson of Invergowrie Excerpts

Monday 6th July 2015 Grand Committee

Moved by

[Lord Watson of Invergowrie]

20B: Clause 13, page 17, line 23, leave out “from time to time”

[Lord Watson of Invergowrie (Lab)]

My Lords, Amendments 20B and 22ZA are complementary and seek simply to bring some rigour to the duty of charity trustees to review their charity’s social investments. Amendment 21, in the names of the noble Baroness, Lady Barker, and the noble Lord, Lord Wallace of Saltaire, seek to broaden that to cover all investments, and we see no reason why that should not be supported.

The term “from time to time” seems, and I have to say sounds, oddly vague wording to form part of legislation. After all, what does it mean? I suspect that, if you asked 100 people for their understanding of the term, you would almost certainly receive not far short of 100 different answers. Finding a definition to fit those four words would be comparable to attempting to answer the conundrum, “How long is a piece of string?”. Throughout the consideration of this Bill, there have been numerous occasions where noble Lords have sought to introduce greater clarity to its wording. I could not find any other line of this Bill where greater clarity is more necessary, and I believe that the wording must be changed.

To a significant extent, charities will enter uncharted territory when this Bill becomes law and they gain the new power to make social investments. Some will adopt and adapt quickly, and others less so, but it will be essential that all of them keep a close eye on how their social investments are progressing and how they are influencing the work of the charity, not least alongside their traditional investments. For that to happen, at least initially the social investments should surely be maintained under constant review, until they settle down and become an accepted and established part of the charity’s wider activities.

We believe that charities should be as open and transparent as possible about their investments—and not just social investments—and how these investments further the purposes of the charity. There is at least a possibility that the general public could be concerned about their donations being used for social investment, particularly if they are not clear just what social investment is and what it involves or, indeed, where the investment might go in terms of the companies involved. It is important that such concerns are acknowledged and are met with a willingness on the part of charities to be fully open as to what they are doing in terms of social investments. Those donating have a right to be certain that they are not giving their money, however indirectly, to companies that undertake activities of which they may disapprove and may not wish to support.

Also, there would be a double benefit here, we believe, because it is surely the case that the social investment market itself would benefit from greater information being made publicly available as charities begin to delve into it. That is what informs the first provision in Amendment 22ZA, together with an assessment of how the investments further the charity’s purposes. It is difficult, I suggest, to envisage an argument against the amendment, although I suspect that the Minister will have been provided with one by those sitting behind him.

Finally, we believe that the term “from time to time” should be replaced with a requirement to publish charities’ reviews of their social investments after the first three years of this Bill becoming law. I have already referred to the uncharted territories in which all charities that choose to make use of social investment provisions will be sailing. For that reason, we believe that it will require an early assessment to identify any difficulties, how these were resolved and what lessons have been learnt. Publication of these reviews will enable charities then to benefit from each other’s experiences. Thereafter, we believe that reviews at five-yearly intervals would be quite appropriate. I beg to move.

[Baroness Barker (LD)]

My Lords, it may be useful if I speak to Amendments 21 and 22. Like the noble Lord, Lord Watson of Invergowrie, we are seeking to make the concept of social investment clear in legislation. Part of the aim of doing so is to make sure that social investment policies sit alongside the overall investment policies of a charity and are treated in much the same way.

Our first amendment, Amendment 21, seeks to delete “social” in subsection (3) of new Section 292C. This is one of those cases where a deletion is meant to lead to more inclusivity, so in fact we are suggesting that all a charity’s investments should be the subject of a periodic review. Amendment 22 seeks to ensure that trustees are under an explicit duty to make their investment policy available publicly to their donors and beneficiaries.

One of the big challenges of social investment is that, by its very nature, most of the time it is unlikely to bring about significant financial return. For example, if a charity invests in a business to be carried out by its beneficiaries—for example, former prisoners and so on—any such business is unlikely to turn a profit in the first few years of its existence. Therefore, it is doubly important that charities are able to do double accounting—that is, they have to be able to explain to the public what has happened to the financial return and also how they have calculated the social return or the return in terms of the benefits to them in furthering their charitable objects.

I happen to be of the school that says that there ought to be a greater degree of transparency overall regarding charity investments. Sometimes in our sector, charities can be somewhat fearful of being attacked for the sorts of investments they have to make in order to obtain a financial return. With the development of social investment, there is a need for charities to up their game across the board, and therefore such transparency would be helpful.

I also agree with some of the points made by the noble Lord, Lord Watson of Invergowrie. The term “from time to time” is probably a well-understood legal phrase: it is something that should happen but it is difficult to put an exact timeframe on it. Some investments will take place over a long time, and therefore an accounting period of three years would not make sense for charities. Equally, the point made by the noble Lord, Lord Watson, that they must be reviewed stands. Therefore I, too, shall be interested to hear the Minister’s reply, and I hope that between us we can flesh this out to make it just a bit clearer.

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I thank noble Lords for raising these important points, but I hope that I have persuaded them that the appropriate review and reporting measures already exist, and that the noble Lord will be content to withdraw his amendment in the light of such considerations.

[Lord Watson of Invergowrie]

My Lords, I thank the Minister for that response. I welcome the fact that he joined the noble Baroness, Lady Barker, and my noble friend Lady Pitkeathley in supporting the need for that.

It is important that charities are as open and transparent as possible. There have been examples of this involving charities: one within the remit of the Charities Commission—after a “Panorama” investigation when some of Comic Relief’s investments were revealed, it was somewhat embarrassed and rowed back from them—and one outside the Charity Commission’s remit. As noble Lords may remember, when it was discovered that the Church of England was investing in Wonga, that was pretty hastily stepped back from. At this stage we do not know what other charities may or may not have in their investment portfolios, and I think that that is to be regretted. People giving money to charities have a right to know not just that the money is going to the charity’s stated purposes but how the money that they give could be used for investment, whether for social investments or traditional investments.

For that reason, I find it hard to take on board the Minister’s comment that we do not want to overburden charities; of course we do not, but we want things to be done properly. We are going into an area where charities have not previously been, and social investments are going to take some time to become widely accepted. During that period, charities being as open as possible and saying exactly whom they were investing in would help with the public identification of social investments as an aspect of charity life that they were comfortable with when making their investments. So I do not find it a convincing argument on the Minister’s part that the burden placed on charities would be a reason for not accepting these amendments.

On the question of “from time to time”, I was not quick enough on my feet and the Minister had moved on to something else before I could ask him about it. The phrase “from time to time” may be a legal term, but I still do not know what it means. How long should the Charity Commission wait before it says to a charity, “It’s now been five, 10 or even 15 years and you’ve never yet reviewed your social investment”? There has to be some cut-off point, whether that be decided by the size of the charity, the field in which it is involved or whatever. Surely charities have to have some idea and it cannot just be a case of saying, “Well, this has been a bit of a quiet year, so let’s just put out a review”—or, even worse, “We’ve had a busy year, so let’s not put out a review”, which would perhaps be open to misinterpretation.

So there is a looseness to this part of the Bill that I do not think the charities themselves will particularly welcome. Nevertheless, I have heard what the Minister has said. There are issues here that we could return to on Report, but for the moment I beg leave to withdraw the amendment.

Amendment 20B withdrawn.

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[Baroness Barker]

My Lords, my noble friend Lady Kramer was one of that small band of people banging away during the passage of the Financial Services Bill, and if she were here, she would be very strongly in favour of this. She is one of the very few people in your Lordships’ House who has had the experience of running a bank in her time, in the United States, and makes the simple point that it is wrong that individual people can only give grants or money to a social entity in their community and cannot invest in it. That is because of the restrictions that apply to soliciting such investments. It is perfectly possible, as the noble Lord, Lord Hodgson of Astley Abbotts, set out in such detail, to make a distinction between a strict financial investment, which has to have with it all the safeguards which the noble Lord, Lord Cromwell, set out for us so clearly last week, and a social investment. If the Government were willing to stop throwing this proposal around like a hot potato between departments and move on with it, it could bring about not only a new source of investment for small charities but, at the same time, an increase in the skills level of small organisations to build business cases. That is something the charitable sector has not traditionally been good at but which it will need to be increasingly able to do in future. There is a lot to commend in this proposal.

[Lord Watson of Invergowrie]

My Lords, this amendment would enable charities to market social investments to individual investors but exempt charities from the restrictions of the financial promotions regime. It would provide rules for the development of a regulatory regime for marketing by charities and allow the Treasury to set out rules for the communication of financial promotions by charities through regulations, if it chose to do so.

From our point of view, three of those sound quite reasonable, but I have to ask the noble Lord, Lord Hodgson, whether an exemption from the Financial Services and Markets Act 2000 and the 2005 order means less protection for consumers—by which of course I mean investors. Would the new rules specifically for social investments come into force at the same time as social investments were no longer required to meet the demands of the 2000 Act? In my view, the noble Lord, Lord Hodgson, did not spell out in sufficient detail why exemption from the Act is necessary. We believe there are potential difficulties in freeing up charities from those laws.

[Lord Hodgson of Astley Abbotts]

It is perfectly possible, although it is exceptionally expensive, to have a financial promotion involving an authorised offer of shares because it goes to everybody. Such an offer has to deal with people who are quite unsophisticated and therefore it must be done carefully: the process is lengthy and expensive, and hundreds of thousands of pounds have to be spent in preparing a prospectus that is fit for the general public. That is quite right and entirely appropriate—I am not complaining about that.

What we have here is people who might be interested in making a social investment and who would understand—I am sure the Treasury rules and regulations would make this clear—that the primary purpose was not to have a financial return and that they should act accordingly. This is designed to enable social companies such as charities to raise relatively small sums of money without the commensurately high costs that would be required if you were offering the promotion to the general public. This would be a new category of investor, and if the noble Lord were to ask whether that was better or worse, I would answer that it is different—not better or worse. This would be designed, or purpose made, for this particular area.

[Lord Watson of Invergowrie]

I thank the noble Lord for that clarification. However, again, are we to constrain the development of social investments on the grounds of cost? Obviously there is no maximum or upper limit as to what a charity will or will not be able to afford when trying to pursue the provisions of the Bill in relation to social investment, and that is part of the problem. I certainly do not want to see that restrained at all; I would like to see all charities, even smaller ones, feel that they can enter this field with confidence. I think that is what all noble Lords present in this debate would want to see.

However, we have some fears. It would not require too great a leap of the imagination to arrive at a situation where, for example, a charity working for older people might devise a product that offered attractive-sounding investment opportunities to the elderly, showing how they would do great good for the cause even if the return was not quite what other products might have produced. That could be fraught with potential pitfalls that could make telephone cold calling, which noble Lords will recall we discussed in Committee last week, seem quite innocuous, and I would want to make sure that such difficulties did not arise. It might also be possible for cold calling to be used to market those bonds or whatever the products on sale were to be termed. I do not want to overdramatise such possible scenarios, but we have to be aware that they could arise. Certainly in the early days of social investment for charities, it will not all be plain sailing.

I want to ask the noble Lord why the amendment states that the Treasury “may” set out rules for the communication of financial promotions by charities. Again, that seems a little loose. If it is thought that such rules are necessary, I would have thought that “may” should have been replaced by “must”. It might be thought that the need for such rules would be paramount at the start, when the whole area of social investment is introduced, with many charities being less than absolutely clear about what is required of them.

[Lord Hodgson of Astley Abbotts]

By some alchemy of draftsmanship, “may” equals “shall” in drafting legislation. Do not ask me how it comes about, but they mean the same. We have had this discussion many times in these Committees. “May” and “shall” are the same word for a parliamentary draftsman.

[Lord Watson of Invergowrie]

Alchemy, the noble Lord says. I am not a chemist, but that still seems rather opaque to me.

To return to the rules, it may not be necessary for them to be compulsory further down the line, but if there are to be such rules, they should apply right from the start and to everybody if we want to ensure that social investment takes off smoothly. Further, how might any rules proposed by the Treasury be consulted on? It is an important aspect whether the sector would have an opportunity to feed in and have its views given appropriate weight.

We are largely in agreement with the amendment proposed by the noble Lord. Some of the clarification that he has provided is helpful. I look forward to the Minister’s response.

[Lord Bridges of Headley]

My Lords, I pay tribute to my noble friend Lord Hodgson for his determination, if not doggedness, on this issue and in seeing it being addressed. I should pay tribute also to his excellent eyesight for being able to read my brief and especially my handwriting, which is a first.

Before I go into the detail, let me take a step back and put this debate in a little context. We recognise that, increasingly, the public are looking to invest their money socially in a range of social investment sector organisations, including charities. This is a growing area of activity alongside areas that we are already familiar with, such as donations to charities, which of course remain significant.

In particular, we know that there is an increase in the number of members of the public making small, direct investments in charities and social enterprises. Specifically, we know that there has been an increase both in the value of investment offers—the market was worth £249 million in 2014, up 78% from 2013—and in the number of participants. More than 15,000 individuals invested in co-operatives, to which my noble friend referred, and community benefit societies in 2014—up 33% from 2013—so this is a growing market.

Such investments might take the form of shares in community enterprises, such as the more than 3,000 people who recently bought shares in Hastings Pier Charity, or they may take the form of bonds in charities. As my noble friend alludes to in his amendment, we know that for such investors the decision to make an investment in the charity or the social enterprise is often motivated by factors other than, or in addition to, the prospect of financial returns.

A recent study found that doing social or environmental good was an important factor in deciding to invest for 90% of investors in community shares, such as those in the Hastings pier project. I understand, however, that the effect of the financial promotion regime is an increasingly important issue for charities and social enterprises looking to raise funds from the public in this particular way. These financial promotion rules, which are designed to protect consumers, apply to many of these deals. Where they do not apply there are emerging voluntary regimes, such as the community shares mark, which was launched last week.

I understand that the aim of today’s amendment is prompted by concerns around the appropriateness of these rules for charities which want to raise investment funds from members of the public, just as they might ask for donations. These concerns indeed reflect reports from the social investment sector that issues around inconsistent treatment for the different types of social enterprises under these rules lead to disproportionate costs and unnecessary complexity. I also understand, as my noble friend said, that this is not the first time that these issues have been raised.

I want to assure noble Lords that the Government are indeed aware of these issues and, in response to interventions from your Lordships during the passage of the Financial Services Bill, the Government made very valuable changes to ensure that the FCA had the proper incentives to take into account the differing needs of different types of organisations that it regulates, including those of charities and social enterprises. Since then, the Government and the FCA have been working with the sector to consider evidence about the effectiveness of the regime, particularly in light of the report Marketing Social Investments—An Outline of the UK Financial Promotion Regime, which was published by the Social Investment Research Council last year. These discussions between the sector and the Treasury are live and ongoing, but I believe—indeed I am told—that real progress is being made in understanding the challenges faced by charities and social enterprises.

I also think that it is important that the issue of changes to the scope and substance of regulation raised today should be considered as part of those discussions between industry representatives, the FCA and the Treasury. I have, therefore, written to the Treasury to make it aware of the issues that have been raised to ensure that they are given full consideration. I will be meeting my right honourable friend the Economic Secretary to the Treasury to discuss them.

I am sorry to say that this is one of those issues that is a large hot potato—as the noble Baroness, Lady Barker, said—that sits both in the lap of the Cabinet Office and in the Treasury, but I am grasping my end of it with both hands and trying to ensure that action is taken. It is, of course, in all our interests that any regulation is proportionate, consistent and clear. Protection of consumers must be paramount, as the noble Lord, Lord Watson, said—a point with which I entirely agree. We also need to be careful that investors understand what they are investing in, as the noble Lord said, and that the reputation of the growing social investment market is protected. That is why the Treasury is engaging with key stakeholders and interested parties on these issues.

In addition to looking at suggestions, including in this amendment and what has been said in the debate, the Treasury will explore whether there are other non-legislative ways of mitigating burdens or costs to social investment offerings. Obviously there will need to be consultation on this point if further action needs to be taken. I warmly welcome my noble friend’s input to the Treasury on these points and, as I said, I am meeting my right honourable friend the Economic Secretary to the Treasury to discuss them. I invite my noble friend to withdraw his amendment.

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Having said that, I welcome Clause 14. However, if we are looking at the true purposes of the Bill, it should be widened in the ways that I am proposing. I beg to move.

[Lord Watson of Invergowrie]

My Lords, the Labour Party has no objection to Amendment 26, with the exception of the first six words. It does not seem appropriate to ask that the Chancellor become involved in a review such as this because it would seem unnecessarily to broaden the aegis of this part of the Bill relating to social investment, and we do not believe that it would be welcomed by charities.

I am aware that this amendment is supported by Social Enterprise UK and the Charity Finance Group, and I understand the rationale behind it, which is that the Treasury controls fiscal and regulatory levers with regard to investment and therefore should have a say in this area as well. However, at a stage in the process when some charities will remain sceptical of entering the field of social investment, the shadow of HM Treasury lurking in the background does not seem to us to create the kind of setting designed to assuage such concerns.

I wrote in my note of this speech that Amendment 27 is uncontentious, but I have just heard the noble Baroness, Lady Barker, outline why she has included it. She basically said that the amendment has been included to allow for the review of the activities of the Charity Commission. I do not think we necessarily disagree that that might be appropriate in some circumstances. I assume that behind the scenes it goes on anyway, but the amendment says,

“any other areas deemed relevant by the Minister”,

which leaves the door open for the Minister to say, as I imagine he might well do, “Well, I don’t deem it relevant for us to carry out a review of the Charity Commission—certainly not in this context”. By and large, we would not be unhappy with an open door in this situation. As the noble Baroness, Lady Barker, said, it is in many pieces of legislation that come before us.

That leaves only Amendment 29, which stands in my name and that of my noble friend Lady Hayter of Kentish Town. This is similar to Amendment 22ZA, in which we argued for the inclusion of an initial review of charities’ social investments after three years, with subsequent reviews at five-yearly intervals. The arguments in favour in Amendment 29 are similar too, mainly to the effect that, with a number of significant changes being introduced in this Bill, it will be important to review their effectiveness at an earlier stage to enable progress to be assessed and any difficulties encountered to be highlighted. Doing so will enable all charities to benefit from the experience of others, while the Cabinet Office might wish to seek to amend the Act in the light of experience. Each of the factors listed in paragraphs (1)(a) to (c) are easily measurable and will inform the reviews with the most up-to-date information available.

Publication of the reports of the reviews will also provide Parliament with an important opportunity to examine the impact of the Act at that point. A period of five years seems to us to be too long to await that kind of appraisal initially and for it to be laid before Parliament, and we believe that it would be in charities’ best interests to initiate the review after three years, with further reviews every five years.

[Lord Bridges of Headley]

My Lords, this has been an interesting contribution to the debate. Let me start by setting out the aim of the review provision in the Bill before commenting in detail on the amendments.

Clause 14 makes provision for the operation of the Act to be reviewed by the Minister at least every five years, in line with government policy on reviewing legislation that imposes a regulatory burden. I should add, on the point made by the noble Baroness, Lady Barker, about the Charity Commission per se, to which the noble Lord, Lord Watson, referred, that I am reminded that the Public Accounts Select Committee reviews the Charity Commission every year and the NAO will undertake a follow-up review of the Charity Commission’s progress. The review of this legislation will, by considering the operation of the Act, consider the Charity Commission’s use of powers, guidance, and so on.

The purpose of such a statutory review is to establish whether, and to what extent, the provisions in the Bill have achieved their original objectives. The review must also consider whether the objectives are still valid, whether the measures are still required and the best option for achieving those objectives—and if so, whether the provisions can be improved to reduce burdens on businesses, including charities. The review must address three related questions. First, are the policy objectives that led to the introduction of the measures still valid and relevant? Secondly, if the objectives are still valid and relevant, is regulation still the best way of achieving those objectives compared with the possible alternatives?

Thirdly, if regulation is still justified, can the existing measures be improved? Additionally in this Bill, the review must include consideration of how the Act affects public confidence in charities, the level of charitable donations and people’s willingness to volunteer. As I am sure noble Lords know, this follows on from similar requirements in the Charities Act 2006 but should not be considered limiting on the scope of any review. The standard period for such a review to take place is within five years of the legislation being enacted, a point I shall return to.

I turn to Amendments 26 and 27 in the names of the noble Baroness, Lady Barker, and the noble Lord, Lord Wallace of Saltaire. As the noble Baroness said, social investment is a relatively new field but it is growing very fast, and the UK is already a world leader in many respects. I do not believe that the review clause of the Bill is the right place to propose a wide-ranging review of the social investment market, public perceptions of social investment and any impact on grant-making. In relation to social investment, the Bill makes a modest contribution by clarifying the existing law for charities in a way that we hope will encourage more charities to consider whether making social investments is right for them. For many, as I have said, it will not be.

The Cabinet Office and the Treasury have worked closely together for several years on growing the social investment market, a point I made earlier—for example, on the social investment tax relief that was launched in April 2014, the first of its kind in the world, or on the establishment in 2012 of Big Society Capital, the Investment and Contract Readiness Fund and the Social Outcomes Fund. The then Government also published annual progress updates on growing the social investment market. These covered a broad range of policies, including those owned by the Cabinet Office and the Treasury, so a lot is being done here already. All this was done without a statutory requirement for a review. I do not believe that a statutory review requirement would achieve much that is not already being done more frequently and with much broader scope.

There is nothing in the review clause that would prevent the Minister from specifying other matters to be considered in or alongside those required in the statutory review, so I do not think that Amendment 27 is really needed. I would strongly argue that the scope of the review clause is right as it is, and that it would be wrong to start focusing it on matters beyond the direct scope of the Bill when these are already being considered and reported on regularly by the Government. I hope that I have been able to persuade the noble Baroness to withdraw her amendment.

On Amendment 29, in the name of the noble Lord, Lord Watson, I have some sympathy with his arguments about bringing forward the first review but should also point out some of the downsides to holding the review within three years rather than five. Once the Bill becomes law, the clock begins to count down towards the review, but the Commission will need to develop and consult on guidance in relation to its new powers as well as putting in place systems and processes, training and internal guidance for its staff. It is not unrealistic to expect this process to take at least six months. The review clause requires the review to be published within so many years of enactment, which means that the review itself will have to begin earlier—say, six months. So it is easy to see how in practical terms a “three-year” review would actually be a two-year review, losing six months to preparation and guidance at the beginning and six months to the review itself at the end.

Then there is the important point that the commission itself has said that it would expect to exercise some of the powers on only a very few occasions each year—for example, the power to direct the winding up of a charity, which the commission expects to use on only two occasions each year. Factor in the time that it takes for an appeal to be determined, and one can see that there would be a real risk that some of the powers in the Bill may have been exercised only a couple of times by the time of a three-year review. That is unlikely to provide a sufficiently useful sample on which to base an assessment of the powers’ efficacy.

The standard period for reviewing legislation is within five years. The provision in the Bill as it stands does not prevent the review from taking place earlier than five years after enactment. It is also worth pointing out that the Charity Commission publishes an annual report on its compliance work called Tackling Abuse and Mismanagement, which I referred to last week, to help explain its case work and to help trustees learn any important lessons. This annual report would represent a good opportunity for the commission to report on the use of its new powers as and when they are used.

Having said all that, the noble Lord, Lord Watson, has made some helpful points about the timing of a review and I would like to consider them in more detail. For now, however, I hope that he will feel able not to press his amendment.