CLA response to Social Investment Consultation

The Charity Law Association ("the CLA") has provided its response to the Law Commission's Consultation Paper on Social Investment by Charities.

The Law Commission is conducting a review of selected issues in charity law.  The first issue that the Law Commission is considering is social investment by charities.  The consultation paper which the Law Commission published in April considers the current law and the difficulties that charities face under the current law when making social investments.  Many charity trustees can and do make social investments without having any concerns about the scope of their powers and duties.  However some charity trustees are not confident about making social investments because they are unsure whether their powers under the charity's governing document or under the general law authorises such investments.  In addition to this, some charity trustees consider that in making social investments they may feel that they risk breaching their duties.  The consultation paper proposes the introduction of a new statutory power to make social investments.

The Working Party from the CLA is of the view that the current law governing social investment by charities is not fit for purpose and there is a pressing need for legislative reform in this area.  The Working Party agreed with the Law Commission that there is a lack of clarity in the law as to whether charities have the power to make social investments.  Social investment is generally considered to be within the power to invest.  The Working Party however, concluded that it was difficult to fit social investment within the legal framework for ordinary investment which stems largely from the fact that the case law with respect to trustee investment duties relates in the main to private trusts and pension funds.

The Working Party also agreed that the issue of private benefit will need to be considered in the context of the creation of a new power to make social investments.  The Working Party believes that clarification is necessary as to (1) whether the treatment of private benefit is different for purely charitable activities, financial investments and social investment and (2) the level of private benefit which is acceptable in relation to social investment.

The Charity Commission guidance on the investment powers and duties of charities and charity trustees (known as CC14) has been largely welcomed by the Charity Sector for its constructive approach to social investment and attempt to provide clarity.  However, the Working Party believed that the CC14 in itself has not been able to provide a level of comfort and security which many trustees desire when considering social investment.  The Working Party also concluded that any review of social investment and/or a discussion around the definition of social investment should also be considered in conjunction with HMRC in order to avoid a divergence of views and confusion on the subject.

All members of the Working Party agreed that a new power should be created, as general powers to invest or sweep up powers are not sufficient and when a social investment is made, trustees tend to cobble together the powers available in the circumstances, through usually a combination of investment power, the power to make grants and then reliance on the Charity Commission's guidance to "bless" the proposed steps.  In conclusion, it would be preferable for there to be an express power to make social investment which would need to be sufficiently clear to distinguish it from existing powers.

The CLA also agreed that the new power should apply unless it has been expressly excluded or modified by the charity's governing document.  In relation to whether the new statutory power should be accompanied by a non-exhaustive list of factors, the Working Party could see that a non-exhaustive list of factors for the trustees to consider when making social investments might be helpful.  However the idea of a non-exhaustive list of factors that charity trustees may take into account being mandatory i.e. enshrined in statute, divided members of the Working Party.  The prominent view of the Working Party was that any checklist in a statute should be kept as short as possible and ideally be phrased in a way that it is very clear that it is intended to be non-binding and non-exhaustive.

The Working Party was also of the view that it would be important to exclude the requirement to observe the standard investment criteria under the Trustee Act 2000 when trustees of charitable trusts are considering whether or not to make a social investment.  The reasoning that the Working Party gave was that this would impose cumbersome impractical requirements not designed for social investments and would be illogical particularly when compared to the broad discretion conferred on trustees to carry out their primary purposes for example making grants.

The consultation period closed on 18 June and the Law Commission will analyse the responses and review in discussion with the Government, how to take this aspect of the Charity Law Project forward.

We will keep you updated in due course of updates in relation to social investment.

Posted on: 01/07/2014

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.

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