The International Journal of Not-for-Profit
Law - Volume 2, Issue 1
A quarterly publication from The
International Center for Not-for-Profit Law
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CHARITY AND THE CHARITY COMMISSION Richard Fries Chief Charity Commissioner Introductory In
the British system the Charity Commission is the regulator of charities. It was
originally established nearly 150 years ago, in 1853. It is part of Government -
technically a non-Ministerial Department. But it is independent of the political
process, with powers given by our Act of Parliament, exercised under the
oversight of five Commissioners whose Chairman, in effect, I am. We five
Commissioners, two full time and three part time, reflecting different expertise
(legal, accounting and voluntary sector) have some 550 staff. We are government
servants. We are independent both of the political process and the voluntary
sector. The rationale is to provide independent oversight of charities with the
overall aim of maintaining public confidence in their integrity. You
can find out about our role, and about the charitable sector, on the
Commission's website on the Internet. Much
of the Commission's detailed work, particularly its legal role reflects the
particular ‑ one might say peculiar nature and history of our legal system
and its institutions. We share with the USA and some Commonwealth countries an
Anglo-Saxon common law base. This is very different from civil law and other
codes. But the world-wide upsurge of interest in the importance of civil society
and its institutions, and the co-operation and exchange of experience, has
demonstrated that behind the legal, social, economic and cultural differences
lie common principles. Their exploration benefits us all. But it is most Nature
and Role of the Charitable and Voluntary Sector in Britain First
necessarily, a word about terminology. In Britain we customarily talk of
voluntary organisations (the voluntary sector and voluntary action). Within
that, charities form a distinctive part of the sector defined by their public
purpose. They are bodies serving the community, not just private or personal
ends. Whether
there is a common definition, even within one society, let alone
world‑wide, is an interesting question. The Johns Hopkins International
Comparative Non-Profit Survey, now in its second phase, seeks to address that
question world-wide. The contention is that there is ultimately an underlying
definition which defines a distinctive sector; and that that sector has a
distinctive ethos. We can perhaps leave the mapping and the defining to
academics. But at the heart there is a vital core, namely bodies devoted to
community purposes; bodies which are independent in that pursuit; and bodies
which are non-profit distributing. This third sector is an organised form of
independent group activity, arising out of informal, unstructured family and
neighbourhood activity - good neighbourliness, good citizenship. There is an
important additional core criterion distinguishing part of the sector, namely
public or community purpose. Public
Benefit/Charity Charity
is the distinctive term in Britain which is defined on the basis of public
benefit. The charitable sector is that part of the third sector which is devoted
to public purposes. Thus charities in Britain are voluntary bodies whose purpose
is predominantly to benefit the community, not private individuals. Any private
benefit must be incidental. There are thus three defining characteristics of
charities: public benefit; independent governance; non-profit distribution.
(Arguably, there is a fourth characteristic which is as fundamental, namely that
they are non-political.) The
range of public purposes served by charities in Britain is, by definition, as
broad as the definition of public purpose itself. Strictly speaking there is no
definition of charity (or public purpose) in English charity law. Conveniently
classified under four headings, charity covers relief of poverty, sickness, need
and infirmity; education and the promotion of recreation and culture; the
promotion of religion; and a range of other beneficial purposes including such
diversity as the environmental and heritage issues, animal welfare and community
relations. A core function of the
Charity Commission is to determine whether an organisation meets the legal
requirements to be a charity and if so to register it on the public Register of
Charities (now on Internet). Charities
come in a great variety of forms, in particular providing services, providing
funding, and engaging in advocacy. Their types are equally diverse, some
depending on fund‑raising in varying forms, others endowed with their own
capital, many engaging in voluntary activity with a minimum of formality. Of
course, all these characteristics may be combined in different ways. The scale
ranges in Britain from the Wellcome Foundation, arguably the largest foundation
in the world, with capital of £10 billion, devoted to medical research,
national institutions like the British Council, the Arts Council and the
National Trust, down to a mass of small local bodies. There are some 300 really
large charities, with an annual income of over £10 million, another twoand-a-half
thousand over £1 million - down to more than 100,000 with an income of less
than £10,000 a year. The origins of the charitable sector in Britain go back a
millennium or more. Almshouses providing housing for the needy have a continuing
history of a thousand years. Our present legal framework derives from an Act of
Parliament of 1601 which reaffirmed the charitable framework in order to tackle
postmedieval social and economic difficulties by harnessing the commitment of
the public spirit. The Industrial Revolution prompted a new upsurge of
philanthropic activity in many new forms, embraced within the developing
tradition of voluntary and charitable activity. The British Welfare State re-defined
the relationship after the Second World War when the State took over
responsibility for much welfare provision - social services, health, housing,
education and so on. The emphasis for the charitable sector then became
innovation and complementing public provision. But for 2 or 3 decades now,
voluntary and charitable activity has found an increasing role in areas regarded
as Government responsibility. That government should link closely with charity
is natural given the definition of charity as serving public purposes. One may
say that the State takes responsibility for many issues which might otherwise be
left to charity, and our history has been an ebb and flow of state
responsibility. This is one of the key issues for Government and charity now. Charities
play an important role contributing to informed public discussion about the
issues they are involved in. This can involve lobbying Government, and engaging
in campaigning and political activities of a non-party nature (something
on which the Charity Commission has given guidance to charities). Charity
is a distinctive branch of English law, with a very long history going back
before 1601. It has to be understood in the context of the common law tradition
that citizens have a right to form associations without needing state authority.
Thus voluntary bodies need no permission to exist and indeed need no specific
legal form. Charity law exists, in principle, as much to protect charities as to
regulate them. Charities may take a number of forms. The main ones are:
A common factor is that ultimate responsibility rests
with those running the charity, often called trustees - independent
governance. The ultimate legal accountability of charities is to the High
Court, which protects the use of charity money to ensure that it goes to its
public charitable purpose. The Charity Commission's role (and indeed its origins
in 1853) is ultimately to act as a streamlined administrative alternative to the
oversight of the High Court. It follows from the legal framework that the ethos
of the sector, in all its dimensions, is to provide public facilities and
advocacy on the basis of the independent agenda of the trustees. Agenda setting
is a key characteristic - and of course one of the current issues. But
that is what justifies regarding the charitable sector as the realisation of
civil society. Benefits
of Charitable Status The principle that charities serve a public purpose is reflected in
tangible and intangible benefits accorded to them. There are three main benefits
of charitable status in Britain.
Behind this lies the advantage - if it is
an advantage when set against the constraints of charity law - of a
protected legal status, supported by the courts and the Charity Commission. Regulation
and Accountability This range of privileges and benefits provides the rationale for
accountability. It also makes it a practical necessity in order to ensure that
public confidence is maintained. The second core role of the Charity Commission
is to provide an appropriate framework of accountability for charities. Our role
runs from registration to confirm that bodies meet the requirements for
charitable status, through the provision of accountability requirements, in
terms of reporting activities and maintaining proper financial accounts, to
providing day-to-day support and supervision to charities to meet
the requirements. The accountability which the Charity Commission provides is part of a
wider accountability which charities have. This takes a number of forms, and is
the subject of a good deal of discussion in Britain at the moment. Many
charities have a membership structure. The trustees are accountable to their
members. Often this takes the tangible form of annual election. Increasing
emphasis is put on accountability to "beneficiaries" or users,
Charities in particular fields, particularly ones where there is a substantial
public policy interest, are often accountable to a specialist body - housing charities to the Housing Corporation for example. That links with
accountability to bodies which give grants or pay for services. The fundamental
accountability is however to the law - that the trustees are ultimately
responsible for deciding, within the law, what their charity should do to
fulfill
its objects. The role of the Charity Commission is to provide a framework for
that accountability, co‑operating with other forms of accountabilityAlongside
this is the expectation that charities should be "transparent" - that, as bodies serving the public interest, what they do and how they
spend their money should be open to public scrutiny. The accountability
framework the Commission is developing is designed to give easier access to
information about charities. The monitoring process and the Register of
Charities on the Internet are steps in that direction. The diversity and independence of charities determines the nature of the
regulatory framework. Charities are not like privatised utilities, providing on
a profit making basis essential services accountable on a prescribed basis
subject to detailed regulation. The regulation of charities reflects the fact
that charity law defines a diverse range of issues as charitable. But it is the
responsibility of the charities themselves - that is ultimately of the
trustees - to determine how the purposes of the charity should be
fulfilled. The Charity Commission is not allowed by law to interfere in the way
the trustees administer their charities in seeking to fulfil their purposes.
Much of the Commission's work is legal service, advice and guidance, working by
co-operation. But the Commission does have power to intervene to remedy
misconduct and mismanagement. Given the relationship, self-regulation is a
vital principle - that charities themselves should set standards by which
their performance should be judged. Groups of charities, for example the
Association of Charitable Foundations, and specialist representative bodies,
like the Institute of Charity Fund-Raising Managers, form a peer group to set
standards. The Commission works in partnership with such bodies, for example
with the National Council for Voluntary Organisations sponsored initiative to
develop standards for charities. The Charity Commission has grown and changed much since it was
established in 1853. In particular it has been thoroughly modernised in the last 10 years
- our
website on the Internet is one example. Our current statute, the Charities Act
1993, gives the Charity Commission a wide range of powers, essentially failing
under the headings of registration, monitoring, guidance and investigation. It
gives the Commission the overriding duty to use those powers to enhance the
ability of trustees to achieve their charitable purposes. Thus, although
reasonably described as a regulator, the Commission's supervisory
responsibilities have an essentially constructive bias. Even the investigatory
function is remedial ‑ to put things to rights, not to impose sanctions. In developing our strategy, the Commission has set itself the aim of giving
the public confidence in the integrity of charities. Under this the
Commission has three objectives‑
The powers and functions of the Commission are geared
towards achieving these objectives. One issue of debate as this strategy has been developed, has been the
question of whether a regulatory body with investigation responsibilities can
also function as a support and advisory body. Our view is that although
combining the "policing" with the "friend" roles requires
sensitivity, there is no conflict between them. The aim and
objectives set out a framework of working with charities, as the Act
requires, to make sure their constitutions are fit for their purposes, to give
them advice and guidance on good practice, to help them spot potential problems
and take preventative action, and to intervene in constructive and remedial ways
where things have gone wrong. Registration The basic function of the Commission is to maintain a Register
of Charities. This was only established in 1960. Most of the charities on
the Register pre-date its creation, often by many decades- even centuries!
There are now over 180,000 entries. The law requires bodies which are
exclusively devoted to charitable purposes to register with the Commission
(subject to some exceptions). At the registration stage the Commission is
essentially concerned with determining that the body is indeed charitable and
that it is properly formed in accordance with the requirements of the law. This
reflects the principle that charitable activity should be encouraged. To set up
a charity is a right which anyone may enjoy. The point of registration is to
confirm charitable status, to bring the body into the framework of support and
supervision which the Commission provides. Registration was originally a stand-alone act, confirming authoritatively that the body concerned was a charity. The status of registered charity is valued, not just for the tangible tax relief it affords, but for the status and credibility it brings. Routine supervision of registered charities has been set up under the 1993 Act and the Commission now capitalises on the opportunity at the point of registration to assess the viability of a charity and if necessary to note work required with the charity to enable it to be effective, if necessary through regular monitoring. But the Commission cannot refuse registration on grounds of viability as distinct from legal grounds. One debate in the charitable sector is whether charities should be
subject to some form of mandatory requirement to confirm competence. The
argument against is that anyone should be entitled to engage in public spirited
activity - the essence of charity. At present, the supervision and
monitoring which the Commission provides is regarded as a sufficient check on
people whose enthusiasm is greater than their competence. It would be
inappropriate for a Government body like the Charity Commission, however
independent, to "ration" charitable status. But there are concerns
that absolute freedom to set up a charity means duplication and proliferation.
Our view is that raising standards and accountability is the best approach. Accountability
and Monitoring Registration as a charity brings responsibilities. The accountability
framework is graduated according to the size of the charity, with simple
reporting of activities and receipts and payment accounts for small charities,
up to sophisticated reporting and accounting for large charities. The Commission
sends a return to all registered charities but the majority of charities, below
the £10,000 a year income threshold, are only asked to provide basic details to
maintain the accuracy of the Register. The 50,000 plus charities above the £10,000
a year threshold must complete a more detailed return and send in their report
and accounts. The aim of the accountability framework is to support good
management, appropriate to the size of the charity, to make it properly
accountable to its members, beneficiaries, users and the public, and thirdly to
enable the Commission to carry out its supervision. The supervision is based on
the fact that the public believe that the status of being a registered charity
gives confidence in its integrity. This was not so when registration was first
introduced because there was no on‑going supervision. Indeed, the Register
became out of date and of little value. The new (1993) law is designed to enable
the Charity Commission to give the right level of continuing supervision. This
process enables the Commission to scrutinise the activities and financial
circumstances of the charity as the basis for regular supervision. Advice
and Guidance Each of the Commission I s three offices has a Support Division which is responsible for the day‑to‑day relationship with charities. They are responsible for providing charities with a legal service to amend or update their constitutions where this will enable them to fulfil their purposes more effectively. They are responsible for giving advice and guidance on a range of legal, governance, management and financial issues. And they aim to take up issues where there appear to be problems developing in the way the charity is being run, They operate through a range of outreach work, including visits to individual charities, road‑shows open to charities in a particular locality and participation at conferences and comparable events. Investigation Each of the Commission's offices has an Investigation Division
responsible for using the commission's intervention powers where problems have
arisen which cannot be dealt with on a co‑operative basis by the Support
Division or where deliberate abuse is occurring. The Commission's powers to
intervene are where there is suspected misconduct or mismanagement, or where the
charity's resources need protecting. The powers include suspending trustees,
freezing bank accounts and appointing a receiver and manager to act in place of
the trustees. The underlying principle is that the Commission aims to set up the
charity on an effective basis, if necessary with new trustees. Although the
Commission does not have the power simply to deregister a charity, on
occasions the only viable course of action is to dissolve a charity,
transferring its resources to a comparable charity operating effectively. Prior
to investigation, difficulties which are detected on monitoring or by
information or complaints made to the Commission are evaluated by a separate
section to determine firstly whether there is cause for intervention and
secondly, if so, whether it is better done through Charity Support or
Investigation. This helps to separate the support, co‑operative and
investigatory policing functions. Professional
Support The Registration, Support and Investigation Divisions, are supported by
teams of lawyers and accountants. In addition to the professional expertise
which they provide to the operational divisions, the Commission's policy
function is of growing importance. That is combined with the Commission's
communications functions. The Commission has a responsibility for developing the
interpretation of the law and accounting practice and disseminating it both
within the Commission and to the charitable sector. The Commission's Register,
being developed in electronic form, and available on the Internet, provides the
Commission's means of communication with charities. A regular Newsletter is sent
to all charities and advice and guidance material prepared and disseminated,
both electronically and in hard copy. Government
and Civil Society Though civil society is a new label, and even the notion of the voluntary
sector a fairly recent construct, independent voluntary activity has a long
tradition marking British institutions. It continues to flourish despite
prophets of doom. Donations from the general public amount to nearly £2 billion
a year. Up to half the population take part in some form of voluntary activity.
Over 4,000 new charities are set up each year. The principle that people
organise to pursue common interests, for example in recreation and sport, is of
course universal. Perhaps second only to the American tradition, Britain has
always had a rich life of clubs and associations. The legal tradition we share
with America has encouraged that through minimum formality. The link between
citizens' own purposes and the general public interest is difficult to define,
even artificial. British legal framework underpins a range of bodies,
particularly from the 19th century, including self‑help and mutual
associations as well as charities. The underlying issue is how to develop this
tradition and commitment in ways which meet the needs and realities of the
electronic 21st century. There are issues about the definition of charity as the determinant of
public purpose bodies. People have regularly hankered after a neat definition
‑ a committee of the voluntary sector called for that only a couple of
years ago. Some even think that charity as a tradition is outmoded and should be
replaced by some new legal concept of public service organisations. Most think
that the goodwill still invested in the charity tradition has fundamental
vitality and must be fostered and developed rather than replaced. Issues include
responding to the modern concern with user involvement. The narrow historic
image of charity as the rich giving to the poor is outmoded. The institutions
and legal framework need to respond to changing circumstances. The common law
tradition enables the Commission to help this process. The law defining what is
charitable can be interpreted in the light of changing social and economic
circumstances and the constitutional and governance framework developed to
enable charity to move forward. Part of this process is the first
full-scale thematic review of the Commission's Register of Charities ever
undertaken. The relationship between charity and Government is close, complex and
ever‑changing. One reason for the richness of British philanthropy is that
the British concept of state responsibilities at the time of the Industrial
Revolution was minimal. A safety net for the poor and sick
was provided, but much was left to philanthropic activity, in relief of
poverty, in provision of medical services, and education. Many national
charities were established in that period, for example the
Royal National Lifeboat Institution, which continues to provide out of
public donations with no Government support, for sea‑rescue around
Britain. The development of the Welfare State following 1945 in particular, took
into state provision much that had been provided through charity, particularly
in social service and medical provision, though it ran alongside continuing
charity activity. Special issues, for example tackling particular forms of
disability and illness, continued to be dealt with by charities in
co‑operation with the public services. And the charitable sector saw a
particular role in innovation, for example in community based facilities for
tackling delinquency or mental disorder. Charity has always been important as an
outlet for philanthropic instinct ‑ the origins of the Wellcome Trust lie
in the wish of the founder of the pharmaceutical company to leave its wealth to
medical research. Since the 1960's the partnership between charity and voluntary
bodies has grown and become more complex. A "mixed economy" is well
established in many spheres, traditionally in education, in the provision for
old people, which straddles the three sectors of public service, charitable and
profit making provision, in children's services, where the National Society for
the Prevention of Cruelty to Children has a statutory role as well as voluntary.
The distinction between direct provision of services by public authorities and
their procurement through other agencies, including charities, has become
important. A contract culture has developed through charities and other bodies
contracting to deliver services rather than obtaining grants or public
donations. Local authorifies have begun to hive‑off spheres of
responsibility through contracts, for example in housing and leisure services.
Central Government has encouraged the establishment of bodies, like Crime
Concern, to tackle issues on an independent basis. The Government and voluntary
sector have recently created a “compact" to provide a framework within
which this partnership can develop. The more complex relationship between Government and voluntary bodies
raises questions of accountability standards and independence.
A general issue facing charities is the challenge to be both properly
accountable and professional ‑ able to demonstrate to supporters and the
wider public that charitable money given to them is used effectively, while
retaining the distinctive voluntary ethos of commitment to altruistic public
benefit purposes. The development of formal accountability carries the danger of
emphasising professionalism at the expense of commitment. A fundamental
principle of the development of regulation is to keep these in balance. In
particular to emphasise the responsibility of trustees to preserve the ethos of
their charity, particularly where complex services are involved; and to minimise
the accountability requirements for small voluntary bodies exemplifying the
community spirit. Richard Fries
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