Lord Hodgson`s Review of the Charities Act 2006 Published

On 16 July 2012, Lord Hodgson`s eagerly awaited review of the Charities Act 2006 was published. The purpose of the review was to investigate whether better regulation of the Charity Sector is needed, and whether the Act enables charities to operate effectively and without unnecessary bureaucracy.

This article focuses on four areas of the review; fundraising, social investment, mergers and winding-up and disposals of land.


Fundraising

Lord Hodgson`s proposals on fundraising are arguably some of the most likely to be taken up by the Government. Lord Hodgson has stated in the report that "fundraising is fundamental to the charity sector`s success, its sustainability and its independence". 

Part of the problem with the current regulatory framework is that some areas are covered by statute whereas others are subject to self-regulation. The face to face collection of direct debits, labelled "chugging" by the media, also represents a specific challenge because it is arguably the area in which clear regulation is most needed. Some sections of the media, and Lord Hodgson have expressed reservations in the past about this type of fundraising and there are concerns that the perceived aggressive practices of some fundraisers can deter shoppers from the High Street having an adverse effect on business. Lord Hodgson has also expressed his concern about the level of inequality in the current system created by National Exemption Orders and textile collection regulations.

The main change recommended by the review in terms of fundraising is to clarify the self-regulation of the charity sector. Lord Hodgson argues that the Fundraising Standards Board (FRSB) and sector umbrella bodies need to work together to agree on firm proposals to deliver the next stage of a sector-funded, central self-regulatory body covering all aspects of fundraising. Lord Hodgson also recommends that the progress of the FRSB should be reviewed by the Government after five years to determine whether it has made satisfactory progress. If this is found not to be the case, the report states that the Government`s reserve power to regulate or require compulsory membership of the self-regulatory scheme should remain a serious option.

The recommendations with regard to fundraising and regulation in Lord Hodgson`s report have largely been positively received. Alistair McLean, the Chief Executive of the FRSB, has stated that Lord Hodgson`s report is both "measured and encouraging". However, concern has been expressed about the proposed changes to the rules for licensing public charitable collections, including National Exemption orders, a system which exempts specified large charities from applying for new licences each time they want to undertake collections. Lord Hodgson has made this suggestion because there is concern that some exemption order holders neglect their obligation to inform local councils about their proposed collection dates. This makes it impossible for local councils to keep an accurate list of which organisations will be collecting in the local area and therefore makes it difficult to allocate collection slots to smaller charities that do not hold exemption orders. Adoption of more detailed regulations as advocated by Lord Hodgson would help to prevent unfairness or any abuse of the system, but any such changes could inevitably increase bureaucracy and costs (which would contradict part of the aim of the review) and a balance would need to be struck. 


Social Investment

Lord Hodgson has said that the recommendations in the report "represent evolution, not revolution", with social investment perhaps being the exception. Social investment can be broadly defined as an investment where the main purpose is to achieve positive social or environmental outcomes and where some financial return may also be generated, but the social outcome is more important than the financial incentive.

Interest in social investment in the charity sector is rapidly increasing with some major charities having launched investment bonds. Charities with sufficient powers of investment in their governing documents can make social or mixed motive investments, but the lack of an explicit statutory power in terms of social or mixed motive investment is arguably a reason why some professional advisers are unwilling to recommend it. Lord Hodgson has also found that some trustees are unwilling to consider social investment as a legitimate choice because they do not fully understood its nature and are driven by aversion to risk.

Lord Hodgson points out in the review that these problems are largely as a result of the fact that social investment is a relatively new concept and therefore it should be left to develop at its own pace. However, Lord Hodgson recommends that this process of development is facilitated by providing support for those involved in the market. Lord Hodgson argues in the review that charity law is not currently capable of facilitating the growth of the social investment market and that a clear legal basis for social investment needs to be established. This would help to install confidence in trustees that social investment can be a legitimate form of investment for charities and promote public confidence.


Mergers and Winding-Up

The Charities Act 2006 introduced several provisions to help charities to merge and restructure, one of which was the introduction of the Register of Mergers. This Register is maintained by the Charity Commission and ensures that legacies and other gifts left to a charity which is wound up following a merger will be automatically transferred to the new merged charity. There are several practical issues and problems with these provisions which Lord Hodgson details in his report and which have been well publicised.

Lord Hodgson argues that the provisions should be modified to provide that all bequests are treated as a gift to the new entity to which the original charity is linked, and that it will still be possible for those drafting a Will to expressly prevent this "gifting over" if they wish to do so. 

Lord Hodgson also recommends that, in order to streamline the process of merging and winding-up, the Charity Commission and HM Revenue & Customs should allow newly-incorporated organisations to continue to be registered under their original charity number where there has not been a material change to the organisation`s objects. Lord Hodgson has also suggested that the banking industry should allow charitable organisations that have merged or incorporated to maintain and rename their existing bank accounts.

The provisions in their current format are inadequate and it would be widely welcomed if amending legislation is put forward to Parliament.


Disposals of Land

The Charities Act 2006 did not change the law surrounding charitable disposals of land, but the Government concluded that Lord Hodgson`s review should include whether wider changes need to be made to the regulations surrounding this area.

In most cases, charities can dispose of their land or interests in land without the need for approval from the Charity Commission. This is on the condition that they comply with the provisions in the Charities Act 2011, including where necessary obtaining a written report on the proposed disposal from a qualified surveyor. If these provisions cannot be followed, the Charity Commission`s prior approval for the disposal must be obtained. Lord Hodgson argues in the report that these requirements are disproportionate, especially in the case of some minor transactions. 

Whilst the Charities Act 2011 already exempts some transactions from the full requirements, there is a potential argument that the current exemptions do not go far enough and that complying with the full provisions can be disproportionate, particularly for low value transactions. Lord Hodgson has also pointed out that the regulations governing the content of the surveyors` written reports do not always cover all of the relevant information needed for sales of agricultural land, whereas on the other hand, in some circumstances the requirements are far more detailed than is necessary.

Lord Hodgson has argued that the disposal provisions are not fit for purpose and should be removed. He has pointed out that trustees are legally required to seek advice when it is appropriate and this applies to the disposal of land as much as any other area of the charity's work. He has suggested that the Charity Commission should offer additional guidance, in addition to the statutory duty of care, which clarifies how trustees should act in both the acquisition and the disposal of land.

The reason the provisions were introduced is to ensure that charities are not exploited in so far as disposing of their interests in land are concerned because land or an interest in land can often be a charity`s most valuable asset. It will be interesting to see whether these recommendations are picked up in any draft amending legislation and how these proposals are viewed by the charity sector.

The next step is to see what aspects of the report are picked up by the Government and whether any amending legislation is laid before Parliament. We will keep up to date with the developments and will report when there are any developments.

Posted on: 02/08/2012

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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