THE
REGULATION OF CHARITIES IN SCOTLAND
Abstract
The voluntary sector
in Britain is often presented in sociological studies as one unit for
analytical purposes, which, although very diverse, can nevertheless be best
understood as a whole without regional differentiations. While this may hold true for certain kinds
of analyses, particularly those that focus on economic and organisational
issues, it is an unsatisfactory and inaccurate approach for other purposes,
particularly where regulation is an important component of the study. This
article represents a first step in correcting that monolithic view of the
United Kingdom, by outlining the historical development of charities in
Scotland, describing the current Scottish regulatory framework in relation to
charities and testing the utility of certain theories about regulation in their
application to Scottish charities.
Introduction
At first glance the
position of the voluntary sector in the United Kingdom, both historically and
today, is one where there is little geographical differentiation, and where the
key issues for macro-economic and sociological study are the same regardless of
region or country. Major studies of the sector (such as Ware’s Between Profit and State, Kramer’s Voluntary Agencies in the Welfare State
and Brenton’s The Voluntary Sector in
British Social Services) do not consider it necessary to dissect the United
Kingdom into its parts. While acknowledging that there are differences between
the sector in Northern Ireland, England and Wales, and Scotland, most writers
do not regard them as of sufficient importance to affect the general structure
of their arguments and conclusions. (It should be noted, however, that Salamon and
Anheier do acknowledge these distinctions and suggest that they may have an
important bearing on the nature of voluntary sector development (Salamon and
Anheier:1992)).
Certainly it is possible to conduct a successful study which
elides the differences, as these authors have done. Macro-economic theories and
approaches derived from organisational analysis can be applied to a
non-differentiated United Kingdom and may generate results that are useful for
the sector as a whole. Nevertheless,
there is a major gap which such general approaches cannot fill, and that is in
relation to the regulatory framework, in both a legal and administrative sense,
which is different in the three parts of
the United Kingdom. Two key issues are often forgotten in contemporary
consideration of the voluntary sector.
The first is outside the scope of this article and has been
considered elsewhere (Salamon and Anheier:1992; Ware: 1989; Kendall and
Knapp:1996). It concerns the variety of
legal forms which charities in the United Kingdom may take and the diversity of
regulatory mechanisms that arise, either because of legal form or as the result
of the nature of the charity’s activities.
The focus of this article is on the second key issue, that is the
existence of different regulatory regimes governing charities within the United
Kingdom, which arise out of the legal and administrative split between England
and Wales, Northern Ireland, and Scotland.
The appearance of sameness belies significant differences between these
regimes.
This article attempts to begin to bridge that gap, not simply to
add to the sum of knowledge about regulation of the voluntary sector but, more
importantly, to test out whether differences in the regulatory framework impact
on the role and function of the third sector in Scotland. In doing so, the focus of attention is on
charities in Scotland rather than the broader sweep encompassed by
non-charitable voluntary agencies and the informal part of the voluntary
sector. The problem of defining the unit of analysis when researching the
voluntary sector is a long-standing one, which will not be considered in any
detail in this article but the author is mindful of those difficulties,
particularly for an international audience.
The Historical Development of Charities in the United
Kingdom
For centuries charities throughout the United Kingdom have
enjoyed a privileged legal status and a special place in public sentiment. As early as the twelfth century, philanthropists
were giving money for relief of the poor using the legal mechanism of the trust
to ensure that their wishes were fulfilled (Jones:1969; Chesterman:1979; Keeton
and Sheridan:1962). The State was not
always keen to encourage the development of charitable giving, as, for example,
with the Mortmain Act 1736 which was designed to protect private rights against
dispositions to charity in England and Wales, reflecting the interests of the
great landowners. For the most part, however, it was regarded as desirable to
support philanthropy. Charities were also seen by classical economists, such as
de Tocqueville, as a bulwark against State encroachment upon democratic
societies, standing “in lieu of those powerful private individuals whom the
equality of conditions has swept away” (de Tocqueville:[1835] 1968). Charitable
endeavours were seen as an essential component of “civil society”, in which
“the rule by which men commonly judge of external actions is taken from the
supposed influence of such actions on the general good...and public utility is
the great object at which the actions of men should be aimed”
(Ferguson:[1767]1980:37-38). (The
notion of civil society, which is currently experiencing a revival among
politicians and academics alike, is a product of the Scottish Enlightenment.)
The flexibility of the trust concept, the
judicial policy of benignant construction of charitable trusts, the opportunity
to alter beneficiaries by applying the cy-près
doctrine and, from 1799 onwards, the exemption from taxation afforded to
charities all helped to facilitate their development (Gladstone:1982). By Victorian times charities in the United
Kingdom were the major providers of social services, the pioneers of innovation
in social welfare provision and vigorous campaigners on a wide range of social
and cultural issues, as, for example, the Charity Organisation Society
(Mowat:1961).
The development in the twentieth century of State benefits and
welfare services was not welcomed by many of the established charities. Not only did such apparently comprehensive
provisions undermine their philosophy of individual reliance, but their
influence and prestige were also threatened.
The Webbs, in their major contribution to the welfare debate, offered
charities a choice of role (Webbs:1912).
Either they could operate a system which would parallel or duplicate
State provision, the parallel bar
notion, or they could offer services which went beyond the State system, the extension ladder approach.
Surprisingly, perhaps, the advent of the Welfare State did not
lead to the demise of the charitable sector in the United Kingdom. The architect of the benefits system, Lord
Beveridge, was keen to emphasise the continuing role for charities even within
the new dirigiste order
(Beveridge:1948). The Wolfenden Report
on the future of voluntary organisations, for instance, stated that “the
voluntary system complements, supplements, extends and influences the informal
and statutory systems”(Wolfenden:1978:26). In fact, there has been a resurgence
of voluntary action in the second half of this century, particularly in the
form of self-help groups and pressure groups, and voluntary organisations have
moved into new areas, such as advice-giving and counselling, environmental concerns
and conservation (Kramer:1982).
In the 1990s, with successful endeavours by government to roll
back the boundaries of the State, the voluntary sector has once again assumed
renewed importance. Conservative
philosophy, particularly that of the “New Right”, has reinforced the idea that
private philanthropy and individual responsibility should be partners in
creating a more robust, entrepreneurial society (King:1989;Taylor and
Lansley:1992). This approach is
accepted by all of the major political parties in the United Kingdom. It is
reflected in the replacement of State provision by private sector initiatives,
a significant increase in direct funding of the voluntary sector by government
(Leat et al:1986; Knapp, Robertson and Thomason:1990) and the growth of the
“contract culture” (Johnson:1992;Kramer:1990).
The rationale underlying such support by government is, according
to Knapp et al, based on the values
of consumer choice, specialisation, cost-effectiveness, flexibility,
innovation, advocacy and participation.
In this climate charities have quite literally become “big business” and
the scope and influence of the third sector is unlikely to diminish in the
future. Indeed, the Labour government
has pledged to support the expansion of the sector and to work closely with it
(Labour Party Manifesto:1997).
So the voluntary sector in the United Kingdom today shares a
common history and is a major part of economic and social life in all three
jurisdictions. However, jurisdictional
differences do exist and do affect the structure and operation of the voluntary
sector in Scotland, England and Wales, and Northern Ireland. This article deals only with the position in
Scotland, which has a separate legal system and its own government department,
the Scottish Office.
Regulation of Scottish Charities before the Law
Reform (Miscellaneous Provisions) (Scotland) Act 1990
Charitable Purposes
The term “charity” is a familiar one to the Scottish public but
the legal position of charities in Scots law has traditionally been very
different from the situation in England and Wales. The establishment of the Charity Commissioners in 1853
(Charitable Trusts Act) and the major expansion of their powers this century
(through the Charities Acts 1960, 1992, 1993) has not been reflected in
Scotland. While charities established
in Scotland have always needed to meet the requirements of English law in order
to qualify for tax exemptions (now governed by the Income and Corporation Taxes
Act 1988), in all other respects Scots law before the 1990 Act treated
charitable trusts as public trusts.
Such trusts are to be distinguished from purely private trusts and the
fulfilment of their purposes may be enforced through an action raised by the
Chief Law Officer in Scotland, the Lord Advocate, acting on behalf of the
public. Public trusts also come under
the special jurisdiction of the Court of Session, which can intervene to
protect the public interest (Mitchell
v. Burness (1878) 5 R 954),
particularly to allow schemes for variation of public trusts. It is important to recognise that the trust
as understood in English law is not the same as the trust in Scots law, where
there is no difference between legal and
equitable interests in land
and no Court of Chancery with specific and exclusive jurisdiction.
Within Scots law the judiciary has emphasised the distinction
between public and private trusts rather than the charitable/non-charitable
split. Any purpose that is charitable
will almost inevitably be construed as for the public benefit and there are no
decisions that distinguish between charitable and public trusts. A trust whose purpose is against public
policy will not be given effect (M’Caig’s
Trustees v. Kirk Session of the
United Free Church of Lismore 1915 SC 426), neither will one where there is
no public benefit to an identifiable section of the public (Aitken’s Trustees v. Aitken 1927 SC 374 at 381).
As with any trust the courts will seek for certainty in relation to
purposes so that a charitable trust will fall if the description of the purpose
or the beneficiaries is too vague (Hay’s
Trustees v. Baillie 1908 SC 1224;
Mackinnon’s Trustees v. Mackinnon 1909 SC 1041). Nevertheless,
the words “charitable” and “educational” have each been held to denote distinct
purposes and are therefore not void for uncertainty, leaving the trustees free
to select the proper object for the trust.
The Scottish courts adopt a benign approach to the definition of
charitable trusts and will endeavour to find ways of making the objects of the
trust enforceable even where procedural requirements have not been complied
with or the trust deed is defective in form (Burgess’s Trustees v. Crawford
1912 SC 387 at 395). Case law does not
offer conclusive evidence that Scottish courts will choose charitable purposes
in preference to others where upon normal construction the non-charitable
purposes would generally be selected (Blair v. Duncan 1901 4F(HL) 1 at 6) but this is generally assumed to operate
in practice. Indeed the term “charitable” was not regarded as a term of legal
significance until Part 1 of the Law Reform (Miscellaneous Provisions)
(Scotland) Act 1990 introduced major reforms to the regulation of charities in
Scotland.
Thus Scots law avoided the artificial, and arguably illogical,
definition of charitable purposes, which has dogged English charity law since
1601. Under the classification of
charitable purposes confirmed in a landmark case about taxation in 1891 (Income Tax Special Purposes Commissioners v. Pemsel [1891] A.C. 531), a body can
qualify as a charity, both for tax exemption and registration by the Charity
Commissioners, only if it is established for one or more of the following purposes:
·
the relief of poverty
·
the advancement of
education
·
the advancement of
religion
·
other purposes
beneficial to the community.
This classification operates both to include bodies that would
not be regarded as charitable in lay terms, such as private fee-paying schools,
and to exclude others whose objects would appear to be philanthropic and of
social benefit, for instance self-help groups.
The residual fourth head has traditionally been interpreted narrowly by
judges and has not, therefore, been used to encompass bodies of public and
social benefit which do not fit into the first three categories
(Warburton:1995). The impact of such a diffuse and unsatisfactory definition in
England and Wales has been to dilute the “public benefit”’ requirement and to
give the advantages of charitable status to bodies which would not, in other
jurisdictions, be so regarded, while at the same time denying this favourable
position to groups regarded by the public as deserving.
This has also led to the application of a “multi-tier” analysis
of the voluntary sector in order to overcome the heterogeneity and lack of
common reference points that result from this classification. Salamon and
Anheier’s division into the “broad” and the ”narrow” voluntary sector and the
Office for National Statistics’ split between general charities, all charities,
and the wider voluntary sector reflect this attempt at reclassification for
research purposes (Kendall and Knapp:1996; SCVO:1996).
The absence of a specific
regulatory regime in Scotland
This open-textured approach to charitable trusts adopted by Scots
law ran in tandem with an absence of any direct regulation of charities through
a distinct legislative or administrative regime. In England and Wales, on the other hand, numerous statutes have
dealt with charitable trusts and other charitable foundations since the
thirteenth century, but none of these has had any material effect on the
majority of Scottish charities, with the exception of United Kingdom taxing
statutes. The Charity Commissioners,
who form the body responsible for the registration and monitoring of charities
in England and Wales, have gradually extended their powers over the last 150
years. Increasingly the Commissioners
operate both administrative controls and in a quasi-judicial capacity, making
decisions that help to define and interpret the law. Since 1993 they have produced annual publications presenting
their decisions, which are of high authority (Charity Commissioners for England
and Wales:1993,1994,1995,1996).
In Scotland no equivalent body exists. Regulation before the 1990
Act depended entirely on the rules laid down in the constituting document of
the charity and the application of the general law. Indirect controls were increasingly
exercised through contractual arrangements and by the end of the 1980s funders
had begun to demand greater accountability.
But it was not until the legislative reforms came into force on 27 July
1992 that a distinct regulatory regime for charities in Scotland was
introduced. This marks a significant departure from the very laissez faire attitude to charities
regulation which had typified Scotland before the 1990 Act and brings with it
additional responsibilities for Scottish charities, both in terms of public
accountability and internal management. The significance of these changes can
best be understood by outlining the position of the charitable sector as it is
in Scotland today.
Mapping the Charitable Sector in Scotland
Diversity
The charitable sector in Scotland is probably the most diverse of
any part of the “social economy”, in terms of geographical coverage, field of
work, use of paid staff and levels of income and expenditure. It ranges from
major international charities, such as the Red Cross, to very local community
projects focusing on one geographical area and sometimes even one street. It includes churches, universities, private
schools, NHS Trusts, museums, business and professional associations
side-by-side with bodies more traditionally associated with the voluntary
sector, such as the Scout Association, the National Trust for Scotland and many
more which are household names. It
covers groups where all the input is voluntary, (for instance, tenants’
associations), to agencies with highly qualified paid staff (Barnardos, for
example). It spans grant-making trusts,
where trustees dispense large or small amounts of money to assist particular
groups, continuing a tradition going back to the Middle Ages, and also major
service providers, for instance under the Care in the Community scheme. New areas of work are constantly opening up
and bodies seek recognition from the Inland Revenue at the rate of 100 each
week (SCVO:1997b). Groups concerned about the environment, self-help groups and
advice-giving agencies have mushroomed over the last 10 years.
Contribution to Economic
and Social Life
Until recently, it was difficult to obtain any accurate measures
of the contribution made by charities to Scottish national life. Since 1996, however, the Scottish Council
for Voluntary Organisations has developed a database on Scottish charities, the
CRIS database, which is proving an invaluable tool for information. Figures provided by CRIS to the Commission
on the Future of the Voluntary Sector earlier this year illustrate this
contribution (Kemp:1997).
The figures also show
the variety of fields of work to which charities contribute, even where a more
restricted definition than the legal definition of “charity” is used, excluding
churches, hospitals, quangos and schools.
Using the categorisation of fields developed by Kendall and Knapp, and
applying a broad definition to include all those Scottish voluntary
organisations which enjoy legal recognition as charities, religious activities
represent the major field of work (32%), followed by social care and
development (23%) and culture and recreation (17%). When organisations such as churches, non-departmental public
bodies, hospitals and educational institutions are excluded (using the term
“general charity” for this narrower group of charities) the pattern shifts
significantly, with culture and recreation taking the lion’s share (27%). Service provision is the primary function of
most Scottish charities (59%) and for the vast majority of such charities (83%)
the beneficiary is an individual.
In addition, a survey by the Office of National Statistics of
charitable organisations provides some useful data on income and source of
income, drawing on a representative sample of 1,500 Scottish charities and
collecting data for the financial year 1994-5 (SCVO:1996). The estimated 10,000 general charities in
Scotland had a combined income of £1.4 billion, with 33% from donations (from
individuals and grant-making trusts), 53% from government (including contracts
and grants), 3% from business and 11% internally generated, mostly from
investments. Total assets amounted to £4 billion. This figure includes the
contribution made by Enterprise funding, funds from Europe and the National
Lottery, which amounted roughly to £164 million for the last years for which
figures are available. While most
Scottish charities (65%) are very small, with an income of less than £25,000,
about 2% of charities control 78% of the charitable sector’s income in Scotland
(Kemp:1997).
The voluntary sector in Scotland has a paid work force of over
50,000 or 34,000 FTEs and the number of unpaid workers amounts to a staggering
700,000 (SCVO:1997). Efforts are now being made to cost out voluntary input,
although economists have been slow to recognise this hidden resource. The Kemp Report notes a study by the Centre
for Research in Social Policy at Loughborough University that estimated the
market value of the work of 12 small social welfare charities. According to that study the minimum
“replacement” cost for providing the 12 services was £110,000 and the annual
“value” of direct service provision by volunteers ranged from £2,000 to
£14,000.
Increasingly government is divesting itself of its service
provider role and involving the private charitable and commercial sectors in
providing services. At the same time,
much of the most innovative work in the social services, the arts and the
environmental field is undertaken by charities. For instance, pioneering developments in working with young
offenders have been carried out by Save the Children and National Children’s
Homes, funded by the Scottish Office.
Changes to the Regulation and Control of Scottish Charities
The 1990 Act
If something works, why change it? At a time when deregulation is much in vogue it may seem strange
and somewhat illogical for government to have introduced regulation of charities
into Scots law. In answering that
question it may be useful to apply Ware’s seven-fold typology of the purposes
of charities regulation in the liberal democratic state (Ware:1989):
·
the maintenance of the
supply of services
·
the protection of
members and donors
·
the protection of
service recipients through minimum standards
·
the protection of
employees
·
quality assurance and
VFM
·
the regulation of
unfair competition.
The maintenance of the supply of services by non-state agencies
has become increasingly important within the Scottish economy. Yet until 1992
the nonprofit sector was subject to no direct form of regulation. Any organisation operating in Scotland could
call itself a charity provided it did not seek the tax advantages derived from
charitable status. There was no set format for charitable accounts, except
where a particular format was required under the charity’s constituting
document or as the result of its legal form (for example, limited companies).
While the Court of Session had jurisdiction over “public trusts” and the Lord
Advocate could prosecute charities where there was sufficient evidence of
fraud; there were no particular powers of investigation or judicial
intervention in such cases.
The establishment of a regulatory framework was closely linked to
the protection of the major funder of the voluntary sector in Scotland, the
State. In the 1980s government in
Scotland began to move away from direct service provision while at the same
time channelling more funding to the voluntary sector, through both contracts
and grants. Self-regulation by
charities was no longer regarded as providing adequate safeguards. Greater attention was paid to
target-setting by funders and the monitoring of services to protect the service
user. Several reports on government funding of the voluntary sector were highly
critical of the apparently haphazard way in which grants were awarded and
monitored (Woodfield:1987; Woodfield:1988).
There were well-publicised instances of major frauds involving
charitable funds (for example, the case of the Salvation Army). These concerns were UK wide but in Scotland
may have had a greater impact because of the absence of any regulatory
framework outside the general law. In
addition, government in Scotland appears to give a much higher proportion (53%)
of the funding received by Scottish charities than is the case in England and
Wales where the equivalent figure is 28% (SCVO:1996).
In addition, voluntary sector employees were actively involved in
Trade Union activity, lobbying for improvements in conditions, which were
regarded as poor and salary levels that could not compete with either the
public or commercial sectors. Major differences in the terms and conditions of
employment existed between charities, depending on the requirements of the
funders, available resources and the charity’s ethos. In general, the pay and conditions of employees in Scottish
charities compared unfavourably with their nearest counterparts, local
authority workers.
Quality assurance and the monitoring of service provision was
demanded not just by government but also by the public, concerned about
apparently high costs of charities administration. Under the position before
the 1990 Act the public had no right to information about the work, and the finances
of charities and data obtained by the Inland Revenue was confidential. A “cosy” relationship had developed between
the long-established charities and the Scottish Office, which enabled large
amounts of funds to be secured by a relatively small number of agencies,
without the establishment of clear targets, requirements of extensive feedback
or systematic monitoring and evaluation.
The impetus for the 1990 Act, therefore, came from 3 sources:
government scrutiny of increasing public expenditure channelled into the
voluntary sector, concern among umbrella groups and some charities themselves
and a perceived unhappiness on the part of the public with the lack of
accountability of charities. While a
concern about unfair competition does not appear to have been a major influence
on the desire for external regulation, the other stated purposes noted by Ware
(see above) are clearly evident in the preparation of the new regime.
A variety of options
for changes in the legal position of charities in Scotland were put forward in
consultation papers produced by the Scottish Home and Health Department in 1988
and 1989 (SHHD:1988; SHHD:1989). The adoption of a body equivalent to the
Charity Commission was considered and rejected as unnecessary and too costly,
but the result of the consultation was to establish categorically a perceived
need for better forms of accountability and regulation of charities in
Scotland.
The 1990 Act for the first time acknowledged the need for
separate regulation of charities and introduced a regime designed to strengthen
both internal management and external accountability. Under the new regime only
bodies recognised by the Inland Revenue are entitled to call themselves
charities and therefore to benefit from the privileged position which charities
enjoy for tax purposes and also public goodwill towards charitable endeavours
(s.2). There are currently about 24,000
recognised bodies on the Inland Revenue Index. The public is now permitted to
have access to key information (in the form of accounts and explanatory
documents) which must be supplied on request by any body recognised by the
Inland Revenue as a Scottish charity (s.1(4)). Any person can obtain the name
and address of a “recognised body” from the Financial Intermediaries and Claims
Office of the Inland Revenue (s.1(1)). No body is entitled to call itself a
charity unless it has been recognised and its details entered on the Inland
Revenue Index (s.2). The presentation of charity accounts is now subject to
certain legally binding requirements, including scrutiny by an auditor or
independent examiner, under secondary legislation laid by the Secretary of
State before Parliament.
The Lord Advocate is given extensive powers to investigate
charities and bodies holding themselves out as charities (s.6). The exercise of these powers is usually
delegated to one part of the Lord Advocate’s Department, the Scottish Charities
Office,
which is authorised to make
inquiries about any body, to inspect the records of any body, to question any
person who might have information relevant to an enquiry and to suspend “any
person concerned in management or control”. (This term has a particular
significance under the 1990 legislation since such persons have responsibility
for meeting the requirements set down in the Act and in secondary legislation
made under it. A civil lawyer will undoubtedly find it strange to discover that
no definition is given of this term, in spite of its importance. It appears
that it may include paid employees who exercise de facto control over a charity’s operations and also the other key
decision-makers within the charity who exercise a management function, such as
the members of an executive committee or the directors of a company limited by
guarantee.) To date the Lord Advocate
has instigated successful proceedings against a body which was not in fact
recognised by the Inland Revenue at all and had not been formally constituted
in any way but was nevertheless able to obtain thousands of pounds by claiming
to be a charity (Meningitis Scotland).
Indeed, the Court of Session is able, under the 1990 Act, to suspend
persons concerned in management or control of a body, to appoint judicial
factors either without limit of time or temporarily, to freeze bank accounts
and other funds, to restrict the transactions and payments which the body can
undertake, to appoint trustees or to remove persons concerned in management or
control and to transfer assets (s.7).
Certain powers are also available in relation to English
registered or non-registered charities and non-recognised bodies mainly managed
or controlled in or from Scotland or with property in Scotland which hold
themselves out to be charities. Seven
recognised bodies and one non-recognised body have so far been the subject of
legal proceedings under the 1990 Act.
Certain religious bodies enjoy a privileged status under the
Act. If they are recognised as
“designated religious bodies” by the Secretary of State for Scotland they need
not comply with most of the legislative requirements and legal proceedings
cannot be brought against them under the Act.
The Act also for the first time disqualified certain people from
being persons concerned in the management or control of Scottish charities viz those convicted of a crime of
dishonesty, undischarged bankrupts, those subject to a disqualification under
the Company Directors Disqualification Act 1986 or persons already disqualified
under the Act itself (s.8). The Lord
Advocate has the power to waive such disqualification.
In addition, the Act permits the court to approve a scheme for
the transfer of assets, prepared by the Lord Advocate (s.9). The legislation
also established the position of Scottish charities nominee whose job it is to
investigate dormant accounts of recognised bodies and, where appropriate,
transfer the assets to another recognised body (s.12). (For a full analysis of
the provisions of the 1990 Act see Charity
Law in Scotland, Barker, Ford, Moody and Elliot (eds.) 1996.)
External Controls
The 1990 Act therefore gives particular responsibilities to 4
“watchdogs”:
·
the Inland Revenue
·
the Scottish Charities Office
·
the Secretary of State for Scotland
·
the general public
and concerning “dormant
“accounts” to:
·
the Scottish charities nominee.
In addition, other
legislation gives powers, in relation to fund-raising, to:
·
local authorities.
The Inland Revenue has responsibility for recognising Scottish
bodies as charities and also provides general guidance about charitable status
and charity accounts.
The Scottish Charities Office has powers to investigate
recognised bodies or bodies holding themselves out as charities. In about two-thirds of all such cases, its
role in practice is advisory and facilitative; to assist charities reported to
it to comply with the legislative requirements. In a minority of cases, it instigates proceedings against the
charity concerned (Crown Office:1994, 1995, 1996) . There have been seven cases
to date where proceedings have been taken by the Lord Advocate against a
recognised body on the grounds of misconduct or mismanagement.
The Secretary of State for Scotland lays regulations before
Parliament under the 1990 Act regarding designated religious bodies, accounts,
schemes for the transfer of assets and the procedures to be followed by the
Scottish charities nominee.
The general public is the main vehicle through which concerns
about organisations purporting to be charities or recognised bodies come to the
attention of the Scottish Charities Office. Members of the public therefore
have an important role to play in monitoring charities’ activities. In the
majority of cases where proceedings have been taken under the 1990 Act, it
appears that members of the public approached the Scottish Charities Office
with concerns.
Local authorities have duties arising out of the Civic Government
(Scotland) Act 1982 and the Public Charitable Collections (Scotland)
Regulations 1983 but exercise no powers under the 1990 Act.
Internal Controls on
Scottish Charities
In strictly legal terms the main instrument of internal
regulation is the constituting document of a charity, which is usually a trust
deed (in the case of trusts) memorandum and articles of association (for
registered companies) or a constitution (for unincorporated associations).
However, generally this in itself will not provide detailed guidance on all
issues relating to management.
The 1990 Act is, for the most part, not explicitly concerned with
internal management. It is only in the
area of accounting and where a re-organisation of a public trust is required
that secondary legislation details the format that must be followed (Charities
Accounts (Scotland) Regulations S.I. 1992 No. 2165;Public Trusts
(Reorganisation)(Scotland) Regulations S.I.1993 No. 2036). Nevertheless, the
Act contains an implied duty that those persons concerned in management or
control of recognised bodies and bodies holding themselves out as charities be
responsible for their honest and competent management.
In addition, funders and contracting partners, particularly in
the field of social welfare provision, increasingly require concrete evidence
of sound management practices on the part of charities before any awards are
made and often build in monitoring and performance targets. Charities are
expected to meet the effectiveness and efficiency standards that are found in
successful small businesses and model themselves accordingly (McKay:1996). The
Scottish Office, along with other government departments such as the Department
of Trade and Industry, are the second major contributors to Scottish charities,
after the public, and can use contractual requirements to monitor the
charitable sector.
Effectiveness of the
Regulatory Regime
A range of studies, particularly in the field of environmental
regulation, has sought to test out the efficacy of different regulatory regimes
in achieving the goals set for them.
A useful classification
charting effectiveness has been developed in Scotland by Rowan-Robinson,
Watchman and Barker (1990) as follows:
·
the clarity of the
objectives of the legislation
·
the measurement of
unlawful conduct
·
the character of the
enforcement agency
·
the objectives of
enforcement
·
the character of the
deviant population
·
the organisation of an
enforcement agency
·
external dependency
relationships
·
sanctions for breach of
control.
There is insufficient empirical data at present to apply this
checklist in any rigorous way to charities in Scotland but some preliminary
ideas can be presented. (The effectiveness of the provisions is currently the
subject of a research project by the Charity Law Research Unit at the
University of Dundee in Scotland, funded by the Scottish Office.)
The legislation is clearly not intended to replicate the
regulatory position in England and Wales, but rather to provide a “halfway
house” between the pre-1992 Scottish situation and the Charity Commissioners’
powers and responsibilities towards English charities. There is no body charged with the duty to
monitor charities pro-actively in Scotland, and no agency with responsibility
for providing general advice and guidance. It is a matter in the first instance
for the Lord Advocate, through the Scottish Charities Office, to define what
constitutes unlawful conduct, “misconduct or mismanagement”, under the
Act. No definition is given in the
legislation of this key term and it will ultimately be a matter for judges, applying
the usual rules of statutory interpretation, to decide whether the Scottish
Charities Office is interpreting its meaning correctly. However, it has already become clear from
decided cases that a broad definition is being applied. Payments to those
managing the charity and their families, excessive administrative costs,
failure to keep records of meetings and unduly high fees to professional
fundraisers have all been regarded as instances of misconduct and mismanagement
(Crown Office:1994,1995,1996, 1997, 1998).
The operations of the enforcement agency have been the subject of
external scrutiny by the Charity Law Research Unit at the University of Dundee
but the findings have not yet been published.
However, the Scottish Charities Office has indicated that its approach
to the majority of cases referred to it is to encourage compliance on the part
of Scottish charities with the requirements of the Act and with best practice
in voluntary organisation management.
Its remit under the 1990 Act is to conduct investigations in response to
concerns and it is not the usual practice for the Scottish Charities office to
initiate investigations itself. It
provides advice on sound management and financial practices in those cases
where fraud is not suspected, which represent the vast majority of cases
reported to it. Although it is part of
the Lord Advocate’s Department, which is primarily concerned with criminal
prosecutions, much of its work requires expertise in a very different area, the
law of trusts. This cross-over between
highly specialised subdisciplines of law is an interesting facet of the work of
the Scottish Charities Office.
The model proposed by Rowan-Robinson et al, while helpful in pinpointing key features in the regulation
of the voluntary sector, omits certain important mechanisms which, while
relatively new, have the potential to become increasingly significant. These additional factors include the role of
professional advisers, the importance of umbrella groups, the impact of changes
in England and Wales, the tension between voluntarism and professionalism and
developments in the European Union.
The Role of Professional
Advisers in Regulation
With increasing regulation of the voluntary sector in Scotland
and growing professionalisation, it is not surprising that there have been
parallel developments in the provision of professional advice to
charities. Traditionally, perhaps,
charities were used to obtaining professional advice without fee or at a
discounted rate. However, with the
increasing complexity of law and practice in this area, and with concerns about
professional indemnity insurance coverage in such cases, professional advisers
are treating the voluntary sector as a growth area for income. Few Scottish charities retain in-house
lawyers or accountants but law and accountancy firms are becoming more involved
in advice-giving. Several law firms
have set up specialist units and there is sufficient work for several
accountancy firms to deal solely with clients that are charities.
It should be noted that professional advisers who are involved in
making executive decisions on a regular basis may be regarded for the purposes
of the 1990 Act as “persons concerned in management or control” and may
therefore have an implied duty to administer the charity honestly and
competently. For example, a financial
adviser who acts as de facto
treasurer of a charity would probably be so defined, as might also a solicitor
who manages a grant-making trust between meetings of trustees.
Professional advisers will also have particular responsibilities
arising from their professional obligations which may require them to “blow the
whistle” where they consider that the charity is not conducting its affairs
honestly and competently. In several of the cases that have been the subject of
court proceedings under the 1990 Act, it was the auditors who reported their
concerns about financial misconduct to the authorities.
Professional advisers, then, have an important role to play in
regulating charities, both from within the organisation and as external
scrutinisers. This is especially
important at a time when quite small charities, which may be staffed entirely
by volunteers, are receiving funding to employ staff and acquire premises. Such agencies may not be aware of the
demanding responsibilities that fall on employers and leaseholders of
commercial premises. For instance,
where a small, entirely voluntary community-based charity receives substantial
funding from the National Lottery to employ staff and occupy premises, there
will be a range of advice required by that charity. Not only will payroll systems need to be established but members
will probably be unfamiliar with the role of employer generally and the various
support, supervision and feedback mechanisms which must be put in place to
ensure effective management.
Unfortunately, all too often funders may be reluctant to fund
such infrastructural development since it is not direct service delivery. The effective use of professional advisers
should be one feature of a successful regime for regulating charities. It has
the merit of being less heavy-handed and more acceptable to charities than
direct government intervention.
The Importance of
Umbrella Organisations
Over the last ten
years, charities in Scotland have increasingly looked to umbrella organisations
to provide advice and guidance and there has been a concomitant growth in the
establishment of such organisations. They take a variety of forms:
·
national general
·
national specialist
·
local general
·
local specialist
There are two organisations, the Scottish Council of Voluntary
Organisations and Volunteer Development Scotland, which have a Scotland-wide
remit and have a very diverse membership.
There is a wide range of specialist Scottish umbrella groups, such as
Children in Scotland and the Scottish Federation of Youth Organisations (known
as Youthlink). Finally, there are
locally based Councils of Voluntary Service and Volunteer Bureaux and some
specialist local umbrella groups involved in, for instance, childcare. Within the larger charities there is much
closer attention being given to monitoring and evaluation of service by the
central body, with moves away from loose federations towards a branch structure
controlled directly by the centre.
Experience suggests that effective umbrella organisations can be
a useful part of the regulatory framework for the voluntary sector but that
such bodies require having a clearly defined role and be resourced sufficiently. It is not clear whether umbrella bodies in
Scotland are performing their functions satisfactorily and further work needs
to be done in this area.
In spite of the significant differences between the regulation of
charities in Scotland and in England and Wales it is inevitable that the
more-established and interventionist regime operated by the Charity
Commissioners will impact on the Scottish situation. Concern has been expressed about the possibility of unscrupulous
people moving to Scotland to exploit what is perceived to be the less
rigorously regulated climate. There are
no Scottish regulations governing the activities of professional fundraisers
and commercial sponsors, whereas English charities are the subject of fairly
strict controls under the 1992 Charities Act.
Although the Institute of Charity Fund-raising Managers has produced a
voluntary Code of Practice for its members who operate in Scotland, which is
equivalent in most respects to the English Regulations, this does not, of
course, have the force of law behind it (ICFM/SCVO:1995).
One of the most serious cases dealt with by the Scottish
Charities Office, against a charity called the Leukaemia Children’s Cancer
Fund, concerned professional fund-raisers who had direct access to the
charity’s bank account and took 58% of the fund-raising proceeds. In a further instance a charity whose sole
purpose was raising funds for the survivors of domestic violence diverted 94%
of its funds to the major fund-raiser who was also the founder of that
charity.
It is clear, therefore, that an important question for consideration by those undertaking research on the regulation of charities is the negative or positive impact of contiguous regulatory regimes which are markedly different from each other.
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