Charity Commission Updates Its Reserves Guidance
In the light of the unexpected closure of Kids Company the Charity Commission has updated its guidance CC19, Charity Reserves.
The updated guidance advises trustees to factor in the risk of unplanned closure of the charity when developing the charity's reserves policy. This is to ensure as far as possible an orderly and solvent winding down of the charity's affairs.
The updated guidance states that trustees should "develop a reserves policy that fully justifies and clearly explains keeping or not keeping reserves".
It also emphasises that there is no one size fits all for charities in terms of an appropriate level of reserves and that it is for the trustees to justify their charity's reserves policy and level of reserves. A charity's reserves policy is therefore at its trustees' discretion and The Charity Commission does not dictate in its guidance what level of reserves must be held or indicate what is, or is not an appropriate level. This would depend upon a charity's circumstances.
Some people have criticised The Charity Commission's updated guidance as being unhelpful because they perceive it does not encourage trustees to take a holistic view of their charity's needs by focusing on the risk of unplanned closure.
There are concerns that it could make the sector less resilient if trustees focus upon building reserves and miss opportunities to grow and deliver their charity's objectives.
The Charity Commission emphasises that a charity's reserves policy is an individual decision for trustees to make and that its guidance is intended to support trustees.
The Charity Commission has stated that a full review of the new guidance, with greater consultation will take place later in the year.
It is the trustees' discretion to decide the appropriate level of reserves for their charity to hold taking into account all relevant considerations including the risk of unplanned closure to allow a managed and solvent wind down. However, trustees should also be prepared to justify their charity's level of reserves and many trustees still report difficulty in securing grant funding if their charity's level of reserves as perceived as being high. Deciding upon the right level of reserves remains a balancing exercise for trustees (i.e. mitigating the risk of unplanned closure against developing opportunities for their charity to grow and develop), nonetheless, this exercise is extremely important and the reserves policy must be given due attention to mitigate the risk of trustees being on the adverse end of a Kids Company-type enquiry by The Charity Commission and the media. A charity's reserves policy should also be periodically reviewed as the charity's circumstances change and not, once drafted, remain in a drawer for several years, un-reviewed and unread by the charity's current trustees and executive.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.