The International Journal
of Not-for-Profit Law

Volume 2, Issue 1, May 1999

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

Keynote Speech: Charity and the Charity Commission

By 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 fruitful when it is based on mutual understanding and respect for our differences as well as the similarities.

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
Chief Charity Commissioner
May 1999

 

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