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The International Journal
of Not-for-Profit Law

Volume 8, Issue 2, November 2005

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

Table of Contents

Letter from the Editor

Public Benefit Commissions

The Public Benefit Commission: A Comparative Overview
David Moore

Charity Commission for England and Wales
Richard Fries

Moldovan Certification Commission
Ilya Trombitsky

Armenian Governmental Commission Regulating Charitable Programs
Tatshat Stepanyan

Articles

From Elections to Democracy in Central Europe: Public Participation and the Role of Civil Society
Susan Rose-Ackerman

Reinventing Liberia: Civil Society, Governance, and a Nation's Post-War Recovery
J. Peter Pham

The Law of Zakat Management and Non-Governmental Zakat Collectors in Indonesia
Alfitri

The Power Shift and the NGO Credibility Crisis
James McGann and Mary Johnstone

Annus Horribilis for Smaller Nonprofits: Restoring Hope Through Building Donor Resiliency
Charles Maclean and Jim Moore

Review

Understanding Organizational Sustainability Through African Proverbs: Insights for Leaders and Facilitators
By Chiku Malunga, with Charles Banda
Reviewed by Emeka Iheme

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From Elections to Democracy in Central Europe: Public Participation and the Role of Civil Society

By Richard Fries 1

Overview

1.1 The Charity Commission for England and Wales (CC) is commonly described as the regulator of charities. It is an "autonomous" government department established under statute, currently the Charities Act 1993 (which is being substantially amended by a Charities Bill now being considered by Parliament). This simple description begs a number of questions: What is the rationale for regulating charity? What is charity in law? What is the nature of the independence that the Commission, as a government department, can exercise? This article will address these questions in describing the composition and functions of the Commission.

1.2 It will be noted that the Charity Commission’s responsibilities are confined to England and Wales, one of the three diverse legal jurisdictions which make up the United Kingdom. Scotland and Northern Ireland have different legal and administrative regimes, though, as with the Internal Revenue Service (IRS) in the United States, fiscal provisions, now administered by the newly amalgamated HM Revenue and Customs department (HMRC), impose a degree of uniformity throughout the United Kingdom. The arrangements for the rest of the UK are described briefly in an appendix to this article.

1.3 Charity is a key concept in British not-for-profit law. It is a complex subject, but in essence a charity in English law is a public benefit organization (PBO). With certain exceptions, charities must register with the Charity Commission and comply with its accountability requirements. The Commission’s day-to-day role is to support and supervise charities, ensuring compliance with the accountability requirements, promoting good practice and discouraging bad practice, and investigating and remedying mismanagement and abuse. It has a range of powers both to modernize charities’ legal structures and to intervene following mismanagement and abuse.

1.4 There are some 190,000 charities on the Charity Commission’s Register of Charities. (The Register can be found on the Commission’s web site, www.charitycommission.gov.uk.) They include public bodies, such as the British Council and the Arts Council; nationally and internationally known organizations, such as the National Trust and the British Red Cross; foundations, of which the Wellcome Trust is the largest; and specialist bodies, such as Arthritis Care and Samaritans. Although some charities are large, professionally staffed organizations (which control most of the charitable sector’s resources – 3% of charities account for 78% of charitable income!), in numerical terms most charities (well over 100,000) are small local bodies, some ancient, such as parish trusts, and others new, such as recently established community organizations. In essence, the CC’s role is to determine what voluntary bodies meet the legal requirements for charitable status, with the benefits and reputation it brings; to ensure that they comply with the legal and administrative requirements for holding that status; and to use its powers to help charities to operate effectively and with integrity. Given the large number of registered charities, it must use its powers selectively. (The new Charities Bill will require it to use its powers "proportionately.")

2. Origins of the Charity Commission

2.1 The Charity Commission was established in 1853. It thus has a continuous existence of more than 150 years (though in a form recognizable today it "only" dates back to 1960). The concept of Charity Commissioners, however, dates back more than 400 years and links with the development of charity in English law.

2.2 Charity is a branch of common law. That is to say, it is determined on the basis of a legal tradition developed by the courts and not by reference to statutory law. (The present Charities Bill, although it provides a statutory framework for the determination of charitable status, reinforces rather than reforms the common law approach.) Charities are non-governmental, non-profit-distributing bodies whose purposes are wholly charitable. Charitable purposes are ones accepted under the common law tradition as purposes serving the public benefit. (The public benefit requirement is strengthened by the new Charities Bill). The common law of charitable purposes has been developed from the Preamble to the Charitable Uses Act 1601, and was codified in the Pemsel judgment of 1891. It is preserved in a modernized form in the present Charities Bill. The essential point is that a key responsibility of the CC is to determine what constitutes charitable, or public benefit, purposes in the modern world.

2.3 The 1601 Act referred to above sought to ensure that charitable resources were devoted to their proper purposes in the public interest. Under that framework, as developed over the centuries by Parliament and the courts, Charity Commissioners were from time to time established to investigate the use of charitable resources. Where there was abuse or obsolescence, action in the Chancery Court was required to remedy or modernize a charity. This process had become so cripplingly expensive, time consuming, and inflexible by the 19th century that reformers, eager to use charitable resources to meet the new needs of Industrial Revolution society, created the Charity Commission as a permanent body to assume, economically and efficiently, the responsibilities previously held by the Chancery Court. The development of the Charity Commission over the last 150 years has been based on that concept, and much of its responsibility continues to be to operate on behalf of the courts.

2.4 The Charity Commission became an administrative as well as a quasi-judicial body as a result of the reforms of the Charities Act 1960 (the basic provisions of which were absorbed into the 1993 Act and indeed remain the basis for the current Bill). In order to improve public information and accountability of charities, the 1960 Act established the Register of Charities and began the process of converting the CC into a regulatory body, with powers of investigation and remedy. The CC, as it is being developed under the new Bill, reflects a modernization process begun in the 1980s. At that time, questions were raised about whether to retain the CC on grounds of both efficiency and cost. The rationale for requiring charities to be subjected to a regulatory body was questioned, as indeed was the viability of charity as a legal basis for public benefit organizations in the modern world. A review process in government and the charitable sector concluded that for reasons of public support and legal flexibility, the law on charity should be put on a modern footing rather than being replaced, and that the CC should accordingly be developed into a modern regulator.

2.5 The mission the CC now sets itself is to promote the public’s trust and confidence in charity and charities, as "the independent regulator for charitable activity." The basis for this is that an organization's status as a charity attracts tangible and intangible benefits and commands public confidence. A body registered as a charity automatically receives a range of fiscal benefits, notably tax enhancement for donations; qualifies to apply for grants from foundations and other bodies; and gains greater respect from the giving public.

2.6 The concept of charity regulation, as developed through the reforms of recent years, is designed, as the CC’s mission statement highlights, to ensure that public confidence in charities is maintained and that they merit the privileges that their status entails. The nature of charity regulation is a sensitive issue – and has therefore to be applied sensitively. The essence of charitable status is that charities are independent. In English law, the notion of "non-governmental" is underpinned by the law on trusteeship. The board of a charity consists of its trustees, who have absolute responsibility for its activities in fulfillment of its charitable purposes. Regulation has to respect this independence.

2.7 The CC’s regulatory powers are thus essentially based on compliance with the legal requirements of charity. As discussed below, the CC’s mission reflects the wider public expectations of the effectiveness as well as the integrity of charities. The role of the CC as regulator in encouraging effectiveness is a sensitive issue, which is at the heart of the nature and development of the CC under the new Bill.

3. Legal Basis for the Charity Commission

3.1 Although the Charities Bill has not yet become law, its essential outlines for the CC are clear, having been discussed at length and in detail during a process that started in 2001, with the establishment of a government review of charity and not-for-profit law and regulation. This article therefore describes the legal basis for the CC as set out in the Bill.

3.2 The Bill establishes the CC as a body corporate with the status of a non-ministerial government department (NMD) with objectives, general functions, and duties set out in the Bill. As an NMD, the CC exercises its powers and responsibilities independent of governmental control and direction. (This is the basis for describing it as an autonomous government department). This status has been subject to criticism during the review process, on the general basis that the CC should exercise its powers on behalf of the public interest at large and not for the government, and, more specifically, that the CC must be able to act against government if, for example, government seeks to interfere with the independence of charities and their right to criticize government actions and policies. Government spokesmen have assured Parliament that it will respect the independence of the CC and as a concession have added a provision to the Bill stating that "in the exercise of its functions, the CC shall not be subject to the direction or control of any minister or government department."

3.3 The Bill sets out detailed provisions described below for the establishment and form of the Commission, for its resourcing out of public funds and for its staffing, at levels agreed with the Home Office, the government department (Ministry of the Interior) to which it relates, and the Treasury (Finance Ministry).

4. Composition of the Commission

4.1 Under the Bill, responsibility for the CC is given to a board consisting of a chair and four to eight members. They are appointed by the Home Secretary (a senior government minister), subject to the general requirements for the integrity of public appointments overseen by the Commissioner for Public Appointments (an independent public office). Two of the members of the CC must be qualified lawyers and one from Wales (appointed following consultation with the Welsh National Assembly). The Home Secretary is required to ensure that CC board members have knowledge and experience of charity law, charity accounts and financing, and the operation and regulation of charities of different sizes and descriptions. Beyond these specifications, there are no particular requirements for the appointment of CC members. Thus, the members of the CC may be expected to be drawn from a variety of backgrounds relevant to the charitable sector. (Under present law, there are only five Charity Commissioners, including two lawyers, one businessman, and two from the charitable sector.)

4.2 CC members, like present Commissioners, will be part-time, remunerated on a pro rata basis. Unlike Commissioners, they will not have the status of civil servants. As part-time "non-executive" members of the CC’s board, they are free to pursue outside interests, but, though there are no formal specifications, general principles of conflict of interest apply – for example, in relation to positions and interests with particular charities. Members may be removed from office by the Home Secretary, but only on grounds of incapacity or misbehavior (undefined) and only after consultation with the Commission.

4.3 The Bill specifies that the CC should have a chief executive. The appointment of other staff is left to the CC, but their terms and conditions of service require government approval (through the Minister for the Civil Service). CC staff, unlike CC members, are, as now, civil servants – i.e., part of the government service. Nonetheless, staff may be drawn from a variety of backgrounds, including the charitable sector, and may be appointed on a short-term basis rather than being part of the permanent government service. The CC currently has more than 500 staff, including about 30 professional lawyers and accountants. It is based in four offices in different parts of England and Wales.

4.4 The Bill empowers the CC to organize its business as it deems best, including by delegating business to committees. It must, however, hold an annual public meeting, publish a report on its performance and activities annually, and present the report to Parliament. In practice, the CC has begun to hold regular board meetings open to the public. The CC is reorganizing its business pursuant to a new strategy it is developing under the provisions of the Bill. Under a Chief Executive (with previous experience as finance director of large charities), the CC will be divided into three broad directorates: Legal and Charity Services, Policy and Effectiveness, and Charity Information and Corporate Services. Each directorate in turn consists of a number of divisions, including Compliance and Support within the Legal and Charity Services Directorate and Charity Effectiveness within the Policy and Effectiveness Directorate. The CC is aiming to concentrate the different functions in its different offices in a single "reception center" in the Liverpool office, to provide a single point of initial contact for all charities.

5. Strategy and Objectives of the Charity Commission

5.1 The Bill defines the CC’s objectives as follows:

The functions and duties that the Bill gives the CC, discussed below, are designed to enable the CC to meet these objectives.

5.2 The CC’s objectives amount to maintaining and enhancing the relevance of and public confidence in the concept of charity as the legal basis for public benefit voluntary organizations; and maintaining public confidence in the integrity and effectiveness of charities by supervising their compliance with legal accountability requirements, preventing and remedying mismanagement and abuse, and advising them on legal, governance, and management practices.

5.3 The strategy the CC is developing to give effect to these objectives is expressed, under the public trust and confidence mission quoted above, in four strands:

6. Functions and Powers of the Charity Commission

6.1 The Bill gives the CC six general functions:

Registration/Qualification

6.2 Registration is the basis for the CC’s role. It involves determining whether a body has a charitable purpose (as defined in the Bill), meets its public benefit requirements, and heeds the independence and non-profit distribution requirements of the law. Subject to appeal, as will be discussed below, the CC's determination is binding, including on the tax authorities (with the tax benefits that follow). While the technicalities of this process can be ignored for present purposes, two features must be emphasized. Registration is a legal requirement. If a voluntary body meets the legal tests for charitable status, it must apply for registration in order to enjoy the legal benefits of that status. But registration is also a right. If the legal requirements are met, the CC must register the body: it does not apply a discretionary policy or other test, although the complex tests required by the Bill will involve considerable and sometimes difficult exercises of judgment, such as whether an organization’s purpose is charitable and provides a public benefit. What the CC is not empowered to do is to make any judgment, on its own behalf or for the government, as to whether there is a need for a new body to pursue its intended purpose (provided it is charitable and for the public benefit), or whether the body will be effective in pursuing its objectives in the way it proposes (provided they come within the set of purposes).

6.3 Present law provides no definition or even clear set of criteria for determining public benefit. The essence of common law is reliance on a body of decisions developed by the courts over centuries, supplemented by the Charity Commission in recent years. The reforms of the Charities Bill preserve the common law basis for determining public benefit but, though not providing a statutory definition of public benefit, set a clear framework under which the Commission will exercise its responsibility for deciding what purposes serve the public benefit and therefore entitle a voluntary organization to register as a charity.

6.4 Under the common law, a charity is an organization with a purpose that is charitable serving the public benefit. The list of purposes set out in the Preamble to the Charitable Uses Act of 1601 is customarily taken as the basis from which the modern notion of charity has derived. It has greatly developed over the 400 years since, especially by a court judgment in 1891 that divided charity into four "heads": poverty, education, religion, and other purposes beneficial to the community. The first three were presumed to serve the public benefit, while organizations with purposes falling under the fourth head had to demonstrate specifically that they do serve the public benefit.

6.5 The Bill sets out 11 "charitable purposes," covering the main aspects of the public interest, together with a 12th purpose equivalent to the old fourth head covering other aspects, including new ones that may arise in the future.2 In a key change, the Bill eliminates any presumption that a given body serves the public benefit simply because it pursues a given objective – for example, seeking to relieve poverty. Rather, every charity, at the point of registration and under ongoing monitoring, will have to demonstrate that it serves the public benefit. While the Bill does not seek to define what constitutes the public benefit, generally or for each category, it requires the Commission to publish guidelines on the approach it will adopt. These will reflect existing law: to be accepted as a charity, in essence, the purpose of a body must bring benefits, which may be tangible or intangible, direct or indirect, to the public at large or a sufficient section of the public.

6.6 It is not possible here to discuss the concept of public benefit in detail, but political purposes and activities deserve mention. Traditionally, the courts have held that purposes cannot qualify as charitable if they are "political," meaning (in charity law) directed at securing or opposing changes in the law or government policy (in England or elsewhere); such purposes are deemed a matter for Parliament (i.e., part of the political process) and therefore lie outside the proper jurisdiction of the courts. This is not as restrictive as it sounds, however, based on the way in which the Charity Commission has interpreted the law in recent years. For example, although the courts refused charitable status to Amnesty International in 1982 on the ground that its purposes were "political," the Commission has now accepted the promotion of human rights as a charitable purpose on the basis that the Human Rights Act, and the European Convention on Human Rights to which the Act gives effect, are part of the English law. The promotion of human rights is also explicitly included in the list of charitable purposes in the Charities Bill.

6.7 Political activities by charities used to be regarded with suspicion, but since the reforms of the 1990s, it has been accepted that charities have the right to campaign in pursuance of their objectives, provided that doing so contributes to the realization of their charitable purposes. For example, a charity concerned with helping needy groups such as the homeless or the disabled can legitimately campaign about relevant laws and government policies. The reform process of which the Charities Bill is part has reinforced this liberal approach.

Supervision

6.8 Under regulations made under the Charities Act, amplified by detailed recommended practices drawn up the CC, charities are required to draw up an annual report of activities and accounts in standard form proportionate to the scale of their activities. Larger charities (currently those with a turnover of £10,000 or more) are required to submit these to the CC. CC supervision is based on securing compliance with the reporting requirements and on following up on any issues of concern that may emerge. The CC has powers to require provision of information, but its supervisory activities generally rely on cooperation. It conducts structured visits to charities to examine governance and management arrangements. Charity law is based on the principle of unremunerated voluntary trusteeship, but there are no specific legal requirements for governance and management. The CC relies on general principles and experience in developing rules of good practice, which are set out in publications such as "The Hallmarks of a Well Run Charity," accessible on the CC’s website. Strictly speaking, such rules are purely advisory unless a charity fails to comply with legal requirements, such as through mismanagement (itself a concept not defined by law) or through acting outside the powers conferred by its constitution. Nevertheless, the CC advice has considerable authority.

Support and Guidance

6.9 Much of the CC’s activities consist of giving support and guidance to charities, both generally, through guidance material (such as that published on its website), and specifically, in response to queries from charities or as a result of its own supervisory activities. Advice and guidance cover legal issues, such as the role and responsibilities of trustees and issues relating to good governance and management. The CC has legal powers to amend charities’ constitutions to enable them to function more effectively.

Investigation

6.10 The CC has substantial powers of investigation under the Charities Act (1993, strengthened in the Bill). There are two parts to these powers: the power to set up an investigation (a formal inquiry), for which no statutory requirements have to be met in terms of suspected mismanagement (though in practice the CC first assesses whether grounds exist to suspect serious issues justifying investigation and possible corrective intervention); and powers to intervene, to protect the charity and its resources, and to put right any failures. The CC’s powers of intervention and remedy include suspending and removing trustees and appointing new trustees, suspending a charity’s bank account to prevent loss while an investigation is underway, appointing a receiver and manager to fulfill some or all of the functions of a charity’s trustees, and ordering trustees to make restitution for resources misused. The aim of CC investigation and intervention is remedial, to enable a charity to function effectively. While winding up a charity is not one of the outcomes to which investigation is directed, this may be the result if a charity is not viable. In such a case, any resources remaining will be transferred to a viable charity with a comparable purpose.

Limits on the Powers of the Commission

6.11 The CC is specifically prohibited from intervening in the administration of a charity. Its role is essentially to support and supervise the functioning of the trustees in fulfilling their governance responsibilities.

6.12 Public confidence in charities depends on their impact as much as on their integrity. The CC, however, is neither empowered nor competent to advise on or regulate the substantive activities of charities – how they may best fulfill their charitable purposes. As part of the increased focus of charity law on public benefit, the CC’s reporting and supervisory requirements concentrate more on requiring charities themselves to demonstrate how their activities achieve public benefit. For larger charities, the CC has introduced a standard information return as a vehicle for impact reporting.

7. Accountability of the Charity Commission

7.1 The fundamental accountability of the CC is to the courts. The precise relationship has developed under successive legislation, from the CC as a quasi-judicial body acting on behalf of, and subject to, the courts to the CC as a regulatory NMD acting in its own right – a complex shift but one that can largely be ignored here. It is, however, important to note that charity law continues to involve trust law, an equally technical branch of common law. Consequently, the courts continue to play a substantive role in charity regulation through their responsibility for the ultimate enforcement of trusts. The CC’s use of its powers, further, is subject to judicial appeal and, in some instances, to substantive reconsideration, not just review, by the courts.

7.2 A notable addition to the framework of accountability in the Charities Bill – its greatest novelty, some have suggested – is the proposal to establish a Charity Tribunal (CT). Again, the provisions are complex (and their examination by Parliament not yet complete), but in essence, substantive decisions of the CC, from registration or its refusal to post-investigation remedial intervention, will be subject to appeal to the CT. Appeals on issues of law in turn may be made from the CT to the courts.

7.3 As a government department financed out of public funds, the CC is accountable to the Home Secretary and the Treasury for its efficiency in using its resources. As with all bodies receiving public funds – whether part of government or not – the CC comes within the purview of the House of Commons’ Public Accounts Committee (PAC); its review agency, the National Audit Office (NAO); and more generally Parliament as a whole. While the general accountability to Parliament is more theoretical than practical, the periodic reviews carried out by the NAO and PAC are important; they have been very influential in the way the CC has developed in recent years. Similarly, as a government department, the CC is subject to review for allegations of maladministration by the Parliamentary Commissioner for Administration (the PCA - the Ombudsman). Reviews of particular complaints undertaken by the PCA require CC response, and the CC has established its own independent, internal complaints review. Both of these, however, are confined to administrative process.

8. Conclusion

8.1 The concept of charity and the Charity Commission have a long history. This has led some to ask whether charity is an adequate legal basis for voluntary organizations seeking to serve the public interest in the modern world. The review process that has led to the reforms of the Charities Bill, however, has overwhelmingly endorsed the view that public confidence in and support for the general notion of charity makes it desirable to modernize the law rather than replace it. The intention behind the Bill is therefore to create a more intelligible framework for charity or public benefit that is appropriate to the needs of the modern world while retaining the flexibility of the common law. So far as the Charity Commission is concerned, the Bill likewise seeks to give it a modern statutory basis that enables it to act as a modern regulator promoting effective charitable activity. The emphasis is on maintaining an active engagement with the charitable sector, encouraging good practice and seeking to prevent bad practice, rather than relying on corrective intervention or sanctions once things have gone wrong. The Bill is not expected to come into operation until later in 2006, so it is of course too soon to say how the new legal and regulatory framework will work; but the wide support for the reforms, in the sector and in Parliament, gives ground for optimism.

Appendix – Scotland and Northern Ireland

Notes

1 Richard Fries was Chief Charity Commissioner from 1992 to 1999. He is a visiting fellow at the Centre for Civil Society at the London School of Economics and a member of the Advisory Board of the International Center for Not-for-Profit Law.

2 At this writing, the draft Bill contains a framework listing the main charitable purposes as follows:

 

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