The International Journal
of Not-for-Profit Law

Volume 1, Issue 4, June 1999

A quarterly publication of the International Center for Not-for-Profit Law

The Regulation of Charities in Scotland

S.R. Moody
Senior Lecturer in Law, University of Dundee

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:

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 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”:

and concerning “dormant “accounts” to:

In addition, other legislation gives powers, in relation to fund-raising, to:

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:

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:

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.

The Influence of the Regulatory Regime in England and Wales

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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Copyright 2008 The International Center for Not-for-Profit Law (ICNL)
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