Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Watson of Invergowrie and Lord Bridges of Headley

Monday 20th July 2015 Lords Chamber

[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

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Watson of Invergowrie and Lord Bridges of Headley

Monday 6th July 2015 Grand Committee

[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.

--- Later in debate ---

[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.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Watson of Invergowrie and Lord Bridges of Headley

Wednesday 1st July 2015 Grand Committee

[Lord Watson of Invergowrie (Lab)]

My Lords, we support the amendment in the name of the noble Lord, Lord Bew. Change is needed because, as we have heard, many people who have suffered in a manner that would allow them to seek at least adequate redress against an unincorporated charity are currently in effect unable to achieve that. There are a lot of unincorporated charities. The Charity Commission has around 125,000 of them on its register, which gives some idea of the scope of those that may be covered by this amendment.

Surely there is a need for parity, because where a tort has been committed in the course of a charity’s activities, the remedy should not be different simply because of the charity’s status. An example of an unincorporated charity being able to escape the consequences of its actions arose a few years ago, and I had personal contact with it. Noble Lords may recall that a number of charities became involved in fundraising to assist countries in sub-Saharan Africa. Huge amounts of clothing, toys and other portable goods which had been donated by the public in the UK were transported by road to people in need in those countries. I had a friend who was involved in delivering those goods as part of one of the convoys. Sadly, during the journey his convoy met with an accident in which he suffered a serious leg injury. He is now unable to drive and has lost his job, because driving was an essential part of it. However, the charity was unincorporated so he had no effective means of redress in the form of compensation. He did receive some, but not nearly as much as he would have done had he been able to take action against an incorporated charity.

I do not think that there is any point in repeating the comments made by noble Lords in this debate. I simply wish to say that the amendment is a sensible one and I hope that the Minister will agree to bring forward an amendment on Report that incorporates its aims.

[Lord Bridges of Headley]

My Lords, I thank the noble Lord, Lord Bew, and the noble Baroness, Lady Deech, for their explanation of the amendment. This has indeed been an illuminating debate and I thank them for it. As has been alluded to, an amendment along these lines was first proposed by the Henry Jackson Society in its submission to the Joint Committee on the Bill, and the submission was published in the committee’s report on the evidence it received. It is worth pointing out that the Joint Committee did not recommend changing the law as proposed in that submission.

Perhaps I may briefly summarise our view around this point. As noble Lords will know, “charity” is a status rather than a legal structure. Organisations can choose from a range of different legal structures when establishing a charity. An unincorporated structure, as has been said, has no separate legal identity of its own, and so the trustees must hold the charity’s property and enter into contracts for the charity, where this is required, in a personal capacity. Unincorporated structures are usually simpler, and have fewer and less demanding reporting obligations than corporate structures, as the noble Baroness, Lady Barker, pointed out. The downside is that a trustee’s personal assets are at risk if the charity is sued and its assets cannot pay the debt. This personal liability is often a reason that many charities choose to adopt a corporate structure. Even so, many smaller organisations opt for an unincorporated form, such as a trust or unincorporated association, as the noble Lord just said.

In a corporate structure, the charity itself has a legal identity enabling it to hold property and enter into contracts in its own name. As directors, the trustees act as agents of the charity. If they act properly, they and the charity’s other members have the benefit of limited liability, protecting their assets from being available to creditors in the event that the charity’s assets are exhausted. However, the accounting, reporting and insolvency requirements that apply to corporate structures are usually more demanding. Many charities choose the structure of a company limited by guarantee, and an increasing number of small and medium-sized charities are opting to incorporate as charitable incorporated organisations—a structure designed specifically for charities and implemented in 2012.

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

As an employer, the trustees of an unincorporated charity would be vicariously liable for the actions of an employee if they were acting on behalf of the charity and the same principles would apply, enabling a claim to be paid out of the charity’s assets. Indeed, a person suing the trustees of an unincorporated charity 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. If a third party reasonably believes a trustee is acting on behalf of a charity, it may sue all the charity’s trustees. Ordinarily, the trustees would be entitled to an indemnity from the funds of the charity under the charity’s governing document. However, a trustee in breach of trust or duty would be unlikely to be able to rely on this indemnity, so would remain personally liable. In either case of a trustee or employee acting on behalf of a charity, liability is not likely to be, nor should be, automatic, as the amendment seems to propose; it would still need to be established by the court where the liability should lie, based on the facts of the case.

In our view, the current legal position already supports the provisions within the amendment that damages may be recoverable from the assets of the charity, whether it is incorporated or unincorporated. Apportionment of liability between the trustees of an unincorporated charity is already possible under the Civil Liability (Contribution) Act 1978 if a claim is not brought against all of the trustees. The amendment would also run counter to the long-established principle that unincorporated associations do not have legal personality. I would be delighted to meet the noble Lord, Lord Bew, and the noble Baroness, Lady Deech, to discuss all this further, but, in the mean time, I invite the noble Lord, Lord Bew, to withdraw his amendment.

--- Later in debate ---

[Lord Watson of Invergowrie]

My Lords, I am in favour of these amendments. It is important to ensure that the Bill is drafted as clearly and concisely as possible to enable charities to make the most of social investment in furthering their purposes.

In 2012, the noble Lord, Lord Hodgson of Astley Abbotts—who has, as ever, provided us with an insight into some of the work that led to the Bill before us today—said in his review of the Charities Act 2006 that while charity law did not actively prohibit social investment, it was,

“certainly not set up to support it”.

He went on to advocate a statutory power for charity trustees to engage in social investment and statutory clarification of just what social investment is and involves. That makes it all the more puzzling why the previous Government chose not to include the social investment aspects in the draft Bill that was the subject of pre-legislative scrutiny by a Joint Committee of both Houses. If social investment is suitable for inclusion in this Bill, why was it not suitable for the draft Bill? Is there an answer? Of course, it is not a new idea but we are where we are and it is certainly to be welcomed that we now have this clause in the Bill.

In preparing for this part of the Bill, I tried to answer the question: what is social investment? I am not alone in that. The term is often confusing to many, and a lack of transparency could undermine its potential. As I understand it, this is the first time that social investment has been defined in statute, although neither the Bill nor its Explanatory Notes are particularly helpful in their attempts to define it. Am I the only one to have read the Explanatory Notes on Clause 13, paragraph 80 in particular, and found myself little more aware of what social investment really is and how it might operate as a result?

According to the Big Society Capital website, social investment is,

“the use of repayable finance to achieve a social as well as a financial return”,

which certainly has the benefit of being both clear and concise. Big Society Capital was the first ever social institution of its kind, established by the coalition Government in 2012 as an independent organisation with an investment fund of some £600 million. However, the concept actually emerged under the Labour Government of 2005 to 2010, who established the Commission on Unclaimed Assets to examine how funds released from dormant bank accounts could be used to generate the maximum public benefit. The creation of a social investment bank was a key recommendation of the commission and, following a consultation, the Labour Government proposed naming it the Social Investment Wholesale Bank. Fast-forward to the arrival of the coalition Government, for whom the title was perhaps a tad too left-sounding, hence the incorporation of what I regard as the largely meaningless big society name—whatever became of that concept, I wonder?

Whether Big Society Capital is now succeeding in supporting the third sector in the way it was intended to do is open to question and there are arguments both for and against within the sector. Certainly, Big Society Capital should have a positive impact on the social investment market by facilitating the provision of funding capital to the third sector. It is also charged with increasing awareness of and confidence in social investment by promoting best practice and sharing information; improving links between the social investment and mainstream financial markets; and working with other investors to embed social impact assessment into the investment decision-making process.

A new social investment market is emerging, developing ways to connect socially motivated investors with social sector organisations that need capital so that they can grow and make a greater impact on society. All this is to be welcomed, and the fact that every organisation that has sent noble Lords a briefing has welcomed the addition of social investment to the Bill demonstrates that it is an idea whose time has come, certainly in the third sector. The key is to make sure that it is as effective as possible in enabling charities to further their stated purposes while achieving a financial return for them.

Clause 13 is, by consensus, necessary. Noble Lords have already referred to the Law Commission consultation, which highlighted that there are differences of opinion regarding the ability of charities to make social investment based on their existing charitable powers. Clause 13 removes any such doubts and will enable charities to undertake social investment more easily and without the need for legal advice, at least as to the principle of the investment.

It is self-evident that social investments should be made only after careful consideration of the risks of the investment and evaluation of the benefit that will accrue as a result of it. Trustees should also be clear as to how they will evaluate the social investment and how regularly the investment will be reviewed. Such reviews should consider the effect that the social investment may have on the rest their overall investment portfolio and other activities, such as grant-making. Social investments are not made in isolation and it is surely sensible for trustees to take this into account when making a decision.

We support the amendments in this group. As has been stated, there is a need for clarity on what social investment is and how it will operate. The noble Lord, Lord Hodgson of Astley Abbotts, made the important point that the current wording of new Sections 292A and 292C does not reflect adequately the suggestions made by the Law Commission in its report. It is important for the Bill to be as clear as possible and I hope the Minister will be open-minded on this broad point and that he will not dismiss the amendments but will undertake to look at them in the way they have been brought forward. I hope he will give an undertaking to bring forward his own rewording 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.

[Lord Bridges of Headley]

My Lords, I am grateful to the noble Baroness, Lady Barker, and my noble Friend, Lord Hodgson, for tabling these amendments. I entirely share the sentiments of many noble Lords that we need to examine the definitions in detail, although this might get very technical. This is clearly the first time that we have attempted to define social investment and set it out in statute. It is entirely right and proper that we take time to debate and define to make sure that what we are doing is fit for purpose.

I will pick up on what has been said about the definition of social investments. Traditionally, as your Lordships know, those charities that have money to invest have taken a two-pocket approach to pursuing their goal. On one side, they seek to maximise financial returns from their investments. On the other side, they distribute those returns to further their mission. Sometimes, but not always, they try to measure the impact they are having. I would argue that social investment is different, because it sits between these two pockets. It involves investments that further the charitable mission but also expect to generate a financial return. This means the capital can be recycled again and again, contributing to a sustainable model and reducing dependency on grants and donations. In the right conditions, it can enable a greater impact than the traditional model, and further benefits from the focus on measuring and reporting on the outcomes that have been generated.

Turning to the amendments, it may first be worth recognising that Clause 13 has been prepared by the Law Commission, as the noble Baroness, Lady Barker, said, in order to implement its recommendation for the creation of a new power, and associated duties, when making social investments. The Bill is not the Government’s interpretation of what the Law Commission recommended; rather, it is drafted by the Law Commission to reflect its own recommendations. In this way, the definition of social investment used for the purpose of this Bill has been deliberately drafted to be as wide as possible while retaining the distinctiveness of the “social” element. It covers a spectrum, from investments that are mostly intended to further charitable purposes but involve some return of capital, through to those that are primarily financial but have a small mission benefit. I think of these as the two poles at the extremes of the spectrum. At one end are social investments that look much like grants, with a very limited expected return of capital. At the other are social investments that look very similar to traditional financial investments, but have a small role in furthering a charitable purpose. Social investment must combine some aspect of each pole, but the nature of the combination is entirely flexible.

Neither the furtherance of the charity’s purposes nor the financial return should be required to take precedence. 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, I hope the noble Baroness will withdraw her amendment.

On the other hand, the definition of social investment used here seeks to ensure that there is a direct relationship between the social investment and the charity’s purposes; in other words, there should be a clear causal connection between the act done by the charity and the charitable service ultimately provided. Allowing for indirect furthering of the charitable mission would mean that the power of social investment applied to investments that were purely financial but where the returns were used for charitable purposes. I thank my noble friend Lord Hodgson for raising this important consideration with me, but in order that the clear causal connection should be maintained I hope that he will be content to not move his amendment.

Turning to Amendments 16A, 18B and 20A, I thank my noble friend Lord Hodgson for the work that he has done and continues to do in this area. His input is of great help and has been of real benefit to the charity sector. My understanding is that these amendments are intended to ensure that the definition of social investment is wide and can cover all potential situations, even those where the furtherance of the charity’s mission is slight or occurs piecemeal. In particular, I understand that the intention is to make explicit that mixed-motive investments, as described in Charity Commission guidance note CC14, are covered by the definition.

I take this opportunity to state explicitly that the Bill has been drafted by the Law Commission to include MMI as one aspect of social investment. Furthermore, officials have been in continued dialogue with the Law Commission on this and other points, and the commission is satisfied that the drafting properly reflects the intent. So long as some direct furthering of the charity’s purposes is intended, no matter how small or partial, along with some anticipated return of capital, no matter how minimal, the investment is covered by the definition. Mixed-motive investment clearly falls within this. It partly furthers charitable purposes and partly achieves a financial return. I hope that this provides assurance to my noble friend and that he will feel comfortable not moving the amendment. I know that we seek a similar destination here, and I hope I have shown that the vessel that we are embarking in stands good for the journey.

--- Later in debate ---

[Lord Watson of Invergowrie]

Of course I accept that advice would be taken; advice has been taken with normal investments up to this point. However, we are going into new areas here and, at least at the start, there needs to be caution and careful consideration by charity trustees. I do not think that because something is in the Bill it will have a chilling effect. If, as the noble Lord, Lord Hodgson, says, it is being done anyway, I do not see a problem. However, some charities might not be as circumspect as others and I would like to see that measure in the Bill as a back-up.

The amendment would require trustees, in deciding whether a social investment would be in the interests of the charity, to consider how far they think a social investment would further one or more of the charity’s purposes and to consider the financial return. The trustees would have to be comfortable with the social investment.

As I say, I was rather taken aback by the noble Lord’s response. I defer to his vast experience in this field, and in many other aspects of the Bill I have agreed with most of what he has said; that is why I was rather surprised. However, it is perhaps important to ask the Minister what consultations he has had or intends to have—I hope he has had them—with the charity sector on this point. Equally, we should consider the point made by the noble Lord, Lord Cromwell, about meeting with the FCA in future.

We have now completed three days in Committee on the Bill and, unless I have missed them, there have not been any concessions by the Minister, which is quite unusual. The wording of the Bill is not beyond improvement and I invite the Minister to bear that in mind—hopefully, in relation to these amendments—when we return on Monday. The point of the Committee is to seek to improve the Bill. We are not dealing with different political agendas on the vast majority of the amendments, and I hope that the Minister will take these comments in the spirit that I have made them.

[Lord Bridges of Headley]

I thank the noble Baroness, Lady Barker, and the noble Lords, Lord Cromwell and Lord Watson, for their contributions. As to what the noble Lord, Lord Watson, has just said, I have said that I will consider a number of amendments. Obviously I am always looking for ways in which we can improve the Bill. Before I turn to the amendments, I too would like to put on the record my congratulations to the noble and learned Lord, Lord Hope, on his election as Convenor of the Cross Benches.

I thank the noble Baroness, Lady Barker, for drawing attention in Amendment 19 to the important role of a charity’s beneficiaries, as well as its wider stakeholders, in the process of good governance. Trustees would be well advised to maintain close contact with their stakeholders and to make sure that they understand the full range of views that such a broad group is likely to represent.

As to social investment, there is a clear duty on trustees to consider all the circumstances relating to the proposed transaction before deciding whether to take advice and from whom. The scope is deliberately wide and inclusive, such that if it is determined that beneficiaries or other stakeholders should be asked for advice, there is no impediment to this course of action. However, the breadth encompassed by the duty does not benefit from an enumeration of the range of possible advisers to whom trustees might turn. It might also lead to practical difficulties relating to identifying the relevant stakeholders, as well as ambiguity as to what is represented here by the term “reasonable”, a point made by my noble friend Lord Hodgson. I hope that the noble Baroness will be content that the aspiration and intent are there in the Bill and will feel able to withdraw the amendment based on this existing breadth.

With regard to Amendment 20, I thank the noble Lord, Lord Cromwell, for his extremely thoughtful and thorough speech, which I will read with care in Hansard. My understanding is that the amendment’s intention is to strengthen the duties of trustees relating to the financial characteristics of social investments, and in particular that they should make a comparison with any similar investments that are subject to a stronger regulatory regime and satisfy themselves that the proposed social investment is suitable. The intention, I understand, is to prevent any potential regulatory arbitrage whereby minimal mission benefits might be used as a pretext for making, in effect, financial investments that would not pass muster if they were pure financial investments.

I am in full agreement with the intention here: to ensure that where social investments are made, they are undertaken for the right reasons and with proper analysis of both the mission benefits and financial returns. It would clearly be of detriment to the nascent market in social investments if the social aspect were to be used as a fig leaf to pass off financial investments that would otherwise be unsuitable. So I thank the noble Lord for raising this issue. However, I do not believe that that would be the effect of the Bill.

Under the current law, when making a financial investment the trustees of a charitable trust must comply with three principal investment duties under the Trustee Act 2000: first, to consider the standard investment criteria—namely, the suitability of an investment and diversification of investments in a portfolio; secondly, to take advice unless it is reasonable not to do so; and, thirdly, to review the trust’s investments from time to time.

Sometimes, but not always, a social investment will be an “investment” under the Trustee Act 2000 and the three investment duties will apply to the social investment. The Law Commission reported:

“There was general agreement amongst consultees that the duty under the Trustee Act 2000 to consider the standard investment criteria (suitability and diversification of investments) created difficulties for trustees making social investments and should be removed, or at least tailored to suit social investment, but that the duties to review investments and to consider obtaining advice were appropriate”.

In relation to the first duty, the Law Commission said:

“A particular problem is the duty to consider diversification of investments, as part of the standard investment criteria. A social investment is unlikely to play a part in a diversified portfolio, because it is selected not with a view just to financial return but also for the mission benefit that it will produce. When compared with a mainstream financial investment, a social investment may carry a particularly high risk or it may be unjustifiably large within a charity’s investment portfolio (or conversely, unjustifiably small and disproportionate to the fixed transaction costs), and all the more so where the expected financial return is modest”.

The Law Commission concluded that the second and third duties were, with some modification, appropriate for social investment. The commission therefore recommended tailored duties which are set out in the Bill. It said:

“The new duties, being tailored to social investment, should apply in place of the duties imposed on trustees by the Trustee Act 2000”.

For completeness, I should say that in so far as there are any other duties on charity trustees in respect of financial investments, the Bill does not change them, so classifying a financial investment as a social investment would not change those duties. All the Bill does is exclude the Trustee Act investment duties if they would otherwise apply. It may be that the Trustee Act investment duties would not have applied to a social investment in any event. For example, if the charity takes the form of a company rather than a trust, the Trustee Act investment duties will not apply.

I return to the question of whether there would be any regulatory arbitrage; whether a social investment could be used as a fig leaf to pass off financial investments which would otherwise be unsuitable. The new duties are not less stringent for social investment; rather, they are tailored to social investment. The Bill has been drafted such that both sets of duties would generally produce the same result.

Tailoring the duties means that trustees do not have to try to shoe-horn a social investment into the Trustee Act regime for financial investments. The Law Commission reported that this approach,

“creates consistency between the duties that apply to financial investment under the Trustee Act 2000 and social investment, whilst properly catering for their differences”.

While in theory unscrupulous trustees might try to justify an inappropriate financial investment under the guise of a social investment, I do not think that they would succeed in this endeavour; the tailored duties should still produce a sensible result that showed the transaction to be inappropriate. Furthermore, the Charity Commission and the courts would be astute to shams; they would look at the substance of a transaction and if it is a financial investment, the trustees will be expected to comply with the financial investment duties. Taken as a whole, I believe that the Bill already contains sufficient safeguards in respect of financial regulation. In response to the good point made by the noble Lord, Lord Watson, about the FCA, I am happy to talk to the authority and to other financial advisers about this new power. I hope that the noble Lord, Lord Cromwell, feels comfortable about not pressing the amendment.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Watson of Invergowrie and Lord Bridges of Headley

Monday 29th June 2015 Grand Committee

[Lord Watson of Invergowrie (Lab)]

My Lords, as one who was a member of the Joint Committee under the excellent chairmanship of the noble and learned Lord, Lord Hope, I share his puzzlement as to why this change has been made to the draft Bill. I have no wish to repeat the words of the noble and learned Lord, but those of us in opposition do not fully understand why such a change should have been made and we invite the Minister to explain that if he can, and to say why, after the Joint Committee recommended acceptance of the draft proposal, and given that, as we have heard, the Charity Commission wants this change, the original wording of the draft Bill should not be reinstated. There is little more to say than that. I look forward to the Minister’s response.

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

My Lords, I, too, will keep my remarks relatively brief, by reason of the conclusion that I have come to as a result of what the noble and learned Lord and the noble Lord have said.

The provision corresponding to Clause 8 in the Bill made reference to “unable” in the manner proposed by this amendment. The Charity Commission asked for the change following several cases where financial institutions holding charity property were contractually unable to transfer it to secure its proper charitable application but would have been willing to do so. As the noble and learned Lord said, the Joint Committee which considered the draft Bill supported the provision.

However, as is noted in the report, the Charity Law Association, while it did not oppose the change, questioned whether the meaning of the word “unable” was sufficiently clear and whether banks in such situations were really unable to transfer charity property, or simply unable to breach a contract to do so. Therefore the Joint Committee recommended that the Government consider the inclusion of some form of statutory protection for a financial institution in cases where compliance with a Charity Commission direction in these circumstances might constitute a breach of its contract with a charity. The Government therefore followed this recommendation and amended Clause 8 to provide for such statutory protection. Since the clause was aimed at dealing with financial institutions which are contractually unable to transfer property, this statutory protection was considered sufficient and the reference to “unable” was omitted.

The amendment tabled by the noble and learned Lord, Lord Hope, proposes to reinstate the reference to “unable”, as we have heard, and further examples have been provided as to when this would be needed beyond the contractual liabilities of banks. I also note what the noble and learned Lord said about his conversations with the Charity Commission. In light of this, I am happy to give further consideration to the amendment and to return to this on Report.

Charities (Protection and Social Investment) Bill [HL]

Debate between Lord Watson of Invergowrie and Lord Bridges of Headley

Tuesday 23rd June 2015 Grand Committee

[Lord Watson of Invergowrie]

My Lords, I start by saying that the Opposition support these amendments as well. One of the issues arising among a number of organisations in response to the Bill is that it lacks clarity in various ways. If one of the more straightforward means of overcoming some of that lack of clarity is changing the wording as suggested here, then we should all welcome that.

The noble and learned Lord, Lord Hope, mentioned the recommendation of the Joint Committee and that the wording “aware of” was suggested. In response to the committee’s recommendations, the Government stated in their report of March this year:

“The Government will explore implementing the Committee’s recommendation to replace ‘privy to’ with ‘aware of’ with Parliamentary Counsel. The term ‘privy to’ is already widely used in the existing legislation and we want to carefully consider the implications of any change before committing to a change of wording”.

Following that consideration, the Bill was not changed and, of course, “privy to” remains in it.

The noble and learned Lord, Lord Hope, told us why he came back with amended wording. My only thought on the matter is that a former Law Lord’s understanding of the law would be something to which I would give weighty consideration—to put it mildly. Can the Minister say why, and indeed whether, Parliamentary Counsel continues to believe that that wording is right? This is a fairly straightforward change that should be made to the Bill.

[Lord Bridges of Headley]

My Lords, I stand with some trepidation to debate with the noble and learned Lord, Lord Hope, on this matter. Mention has been made of my right honourable friend the Justice Secretary and his remarks yesterday. I have been very careful in this debate not to use “impact” as a verb. I am also very intrigued by this area. This debate over the word “privy” makes me wonder whether it needs to be modernised in terms of the Privy Council, but I do not want to get into that right now.

It strikes me that what we are debating is what the layman understands versus what is legally accurate and watertight. The Joint Committee that considered the draft Bill, chaired by the noble and learned Lord, recommended, as the noble and learned Lord just said, that the term “privy to” be removed and replaced with “aware of”, so that the Bill referred to a person who was aware of an action that constituted misconduct.

--- Later in debate ---

[Lord Watson of Invergowrie]

My Lords, we think this clause in its generality provides an important addition to the powers of the commission. It is appropriate that a person’s activity outwith their work with or for a charity should be taken into consideration. That is not to say that we are uncritical of the wording of the two paragraphs referred to in these amendments in the name of the noble Baroness, Lady Barker.

One reason it is a useful addition is that it would only apply after a statutory inquiry had begun. That would be a sign that the Charity Commission already believed that there was evidence of misconduct or mismanagement. That is clear from the last two lines of page 2 of the Bill. Of course, there are concerns—some of which noble Lords have referred to in the Joint Committee’s report. It is again a question of provisions being drawn too widely and lacking clarity.

The Government’s response to the Joint Committee’s report stated that they would,

“look to revise the draft Bill to make this clearer”.

Unfortunately that has not been done. I invite the Minister to say why the Government eventually proved unable or unwilling to do so. It is regrettable, although I do not think it constitutes a reason to remove the wording completely from the Bill. I do not think that is appropriate. We agree with comments that have been made about the need to refine the wording, and perhaps some attention might be given to the report published yesterday by your Lordships’ Select Committee on the Constitution on this and two other Bills. Paragraph 41 of the Select Committee’s report was critical of new Section 76A to be inserted by the Bill. I am sure the Minister has already read that report and taken it on board. It is important that that should be considered further before Report.

The final paragraph of that report states:

“The concerns identified by the JCHR from a human-rights perspective are mirrored by corresponding constitutional concerns on the grounds of legal certainty. We draw these concerns to the attention of the House”.

That simply adds to the arguments we have already heard in relation to these amendments.

An important suggestion of the Select Committee’s report is that conduct should be qualified in terms of its seriousness. It must be recalled that this activity does not need to lead to a charge or a conviction. On these amendments, and I think in a previous amendment, the noble Baroness, Lady Barker, mentioned that things that you do at one stage in your life these days follow you around through social media. It is very possible that a person a lot younger than me and a lot more able on social media might well do something that seems relatively trivial but that could come back to haunt them in later years. That has to be borne in mind.

The noble and learned Lord, Lord Hope, referred to evidence that the Joint Committee received about political causes. That is a concern. It could be that somebody who was publicly critical of government policy or of the Charity Commission might find that coming back to them. I do not mean that as a trivial point. The point is that we do not know what would be regarded as something that could effectively add to charges already assembled by the Charity Commission in targeting an individual. It is a question of uncertainty. We have heard this point several times this afternoon. In light of what the Minister has heard, I hope he will reconsider this matter, possibly with a view even to bringing forward a government amendment on Report. Given those remarks and the report of the Select Committee on the Constitution, I hope we may be able to look forward to that when we consider this matter again.

[Lord Bridges of Headley]

My Lords, this has been a very stimulating debate and I pay tribute to the noble Baroness, Lady Barker, for provoking it. I shall first address Amendment 5 about the proposed powers of the commission to take into consideration the conduct of a person outside a charity. I recognise that these are broad powers in that they allow the commission to take into account any outside conduct. However, these powers are necessary to enable the commission to address conduct which could seriously damage public trust and confidence in charities and need to be viewed in the context of the other criteria that apply to their use, along with the various safeguards in place.

Just as we have to place a large degree of trust in charity trustees to exercise their discretion properly in running their charities, we need to trust the Charity Commission to regulate independently and in the public interest. Of course, there is a range of safeguards, not least the independent judicial oversight provided by the Charity Tribunal, which has shown since it started work in 2008 that it is not afraid to criticise the Charity Commission in the few cases where it considers that the commission has overstepped the mark and acted disproportionately.

As I and others said on Second Reading, the Bill seeks to achieve a balance. The powers that it would confer on the Charity Commission need to be broad enough to make them useful. If they are too narrow they would be impractical and go unused—a point that my noble friend Lord Hodgson made. But charities need to know the circumstances when the powers may be used and I believe that the Bill achieves that balance.

The purpose of the noble Baroness’s first amendment would be, as we have discussed, to limit the other conduct that the Charity Commission could take into account when considering the exercise of its compliance powers. It is important that we retain this part of the clause as it prevents the undermining of public trust and confidence in charities, as all relevant—I stress “relevant”—conduct ought to be taken into consideration before the commission determines how to act accordingly. The commission could not take account of any irrelevant conduct. Indeed, I argue that the commission could be criticised for failing to act, or for taking only weak regulatory action, if it were unable to take into account relevant evidence of misconduct of an individual outside of a charity.

I shall illustrate this with an example. The Charity Commission opens an inquiry into charity A regarding concerns of financial mismanagement. It establishes misconduct and mismanagement against trustee X, an accountant, as large payments have been taken out and not accounted for. Blank cheques have also been signed by trustee X. The commission then approaches other relevant regulators which provide them with information that trustee X has had two cases of professional misconduct for accountancy irregularities in previous employment. Under Clause 3 as proposed, the commission would be able to take this other evidence into account before deciding what action it would be proportionate to take in the circumstances. If the amendment were to be accepted, the commission would be able to give no weight to this other, potentially compelling, evidence.

I emphasise that safeguards would be in place to ensure that any conduct outside of a charity would be only that which was relevant to the decision being considered by the commission. I shall illustrate those safeguards. First, there must be a statutory inquiry open and the Charity Commission must be satisfied that there is misconduct or mismanagement linked to the individual in the charity under inquiry before it can rely on any conduct from outside the charity as a makeweight in its decision-making.

Secondly, the commission, when exercising its powers, must provide a statement of reasons under Section 86 of the Charities Act 2011, which would set out the evidence it relied on in making the decision. This would include any evidence it relied on from outside the charity. No amendment to the Bill is needed to ensure that that is the case; we can amend the Explanatory Notes to make that clear.

Thirdly, as with all the Charity Commission’s compliance powers, the commission would have to be satisfied that the exercise of the power would be in line with the principles of best regulatory practice, including that it is proportionate, accountable, consistent, transparent and targeted only at cases where action is needed, as set out in Section 16 of the Charities Act 2011.

Finally, there is, of course, a right of appeal to the Charity Tribunal in relation to the exercise of the commission’s compliance and remedial powers, ensuring judicial oversight of the exercise of the relevant power.

The noble Baroness’s second amendment would remove the condition that enables the Charity Commission to consider disqualification on the basis of conduct likely to damage public trust and confidence in charities. The power to disqualify from charity trusteeship and senior management positions is indeed a significant power. As such it is important that the process is rigorous but fair, and, once again, balanced.

I shall explain what that will mean in practice. First, the individual must have met tougher new criteria to become a trustee and not be automatically disqualified in the first place. Secondly, before the commission can decide to disqualify an individual, three new conditions need to be met, as set out in the guidance issued by the Charity Commission. First, one of criteria A to F is met; secondly, the individual is considered to be unfit to be a charity trustee, defined by that guidance; and, thirdly, the commission considers it,

“desirable in the public interest in order to protect public trust and confidence”,

in charities.

The commission then has to give notice of its intention to disqualify and give a period for representations to be made before any decision is made. If a decision is made to disqualify, the disqualification could take effect only after a period of time has elapsed in which the individual can lodge an appeal with the tribunal—that is, 42 days. If the decision is appealed to the tribunal, obviously the tribunal would be able to confirm or overturn the disqualification. In making a decision, the tribunal would consider the case entirely afresh on the basis of all the evidence before it; it would not simply review the Charity Commission’s original decision. Lastly, all the commission’s actions in this process would have to abide by Section 16 of the Charities Act 2011.

As was said just a moment ago, the Joint Committee that undertook pre-legislative scrutiny agreed that there was a,

“need for a broad power to disqualify an individual in certain instances, not all of which can be specifically identified and encapsulated in legislation”.

The noble Baroness, Lady Barker, referred to one scenario and asked whether a person could be disqualified on the basis of an overseas conviction in a country where homosexuality is illegal. An overseas conviction is not enough on its own. As I have said, the commission must also be satisfied that a person is unfit to be a charity trustee and that disqualification is in the public interest to protect public trust and confidence in charity. Furthermore, the conviction must concern a charity; on its own, it would not trigger disqualification. I draw the noble Baroness’s attention to that point in the little box on page 3 of the guidance, where it talks about a,

“conviction abroad for bribery or terrorist financing in connection with a charity or similar body”,

and says that such a conviction,

“would take account of any concerns raised about any court or other legal processes, their compliance with right to a fair trial … and whether the standards of evidence and justice would not be accepted in a UK or European court”.

I think that that is all pretty relevant with regard to her scenario.