The Charities (Protection and Social Investment) Bill 2015 (“the Bill”) is currently before Parliament. The Bill is relatively short and deals with two areas in particular: i) the powers of charities to make social investments; and ii) granting the Charity Commission (“the Commission”) increased powers to deal with, and help to prevent, the abuse of charities.
Whilst it is the latter that has attracted most attention, many charities will draw comfort from the introduction of a statutory power to make social investments. Such statutory power may also be of interest to local authorities and other public bodies as social investments are often cited as ways in which charities can operate more efficiently. Such investments will be of interest to public bodies both as trustees of charities and as potential partners of third sector organisations.
What is a social investment?
A social investment is also known as a programme related investment (a term that originated in the US); programme related investment is the term the Commission uses in its detailed guidance on investments.
The Law Commission’s report on social investments (from 2014) is clear that a social investment is:
a transaction from which it [the charity] seeks to achieve both its charitable purposes……and a financial benefit
The Law Commission’s report also states that this is “unlikely to be an “investment” in the legal sense”. The primary objectives of a social investment are to further a charity’s purposes whilst also seeking to generate a financial return. Some regard making a social investment as an entrepreneurial way for charities to operate because the charity receives a return on its funds (or at the very least gets those funds back) to use for its purposes. This should be contrasted with making a grant, where there is usually no return for the charity.
Charities usually apply their funds in direct furtherance of their purposes or by investing their funds to produce a financial return to be applied in furtherance of the charity’s purposes. A social investment, however, is made with the intention of achieving both outcomes. This may be attractive to local authorities and other public bodies looking at innovative ways of delivering services by partnering with third sector organisations and seeking aligned funding streams to benefit their communities.
The power to make a social investment
Many charity trustees are unsure whether they have the power to make social investments because the majority of charities do not have explicit powers set out in their governing documents. The result is that charity trustees have to rely on powers to spend (and possibly to invest) when making social investments, the uncertainty of which can make charity trustees uneasy. This is something that Lord Hodgson reported on in his review of the Charities Act 2006. As a result of Lord Hodgson’s review, the Law Commission undertook a review of the law on social investments.
It is worth noting that the proposed power to make a social investment will supplement, rather than replace, any other powers that a charity may rely on to make a social investment. The power may be restricted by a charity’s governing document and it applies to charities in existence when the Bill passes into law as well as those established after that date.
The Bill also introduces duties in relation to the making of social investments. The duties apply regardless of whether the power used to make the social investment in question is the new power set out in the Bill or some other power in a charity’s governing document.
Before exercising the power to make a social investment, charity trustees must consider whether advice should be obtained and satisfy themselves that the investment is in the best interests of the charity. Charity trustees must also review social investments from “time to time”. It is worth noting that the duties imposed on them cannot be restricted or excluded by the charity’s governing document.
The social investment element of the Bill has been well received by charity trustees and the Charity Commission, even though the view of many is that the Bill is only really setting out in statute powers that many charities already have. That said, many hope that having a statutory power will encourage an upturn in social investments by charities.
Protection of charities – increasing the Commission’s powers
The Bill is also seeking to provide the Commission with a number of new powers. It is worth noting that the Commission already has an extensive set of powers, although they are not always widely used. One of the reasons for the new powers is to prevent the abuse of charities, particularly in relation to terrorist fundraising.
The new powers that the Commission is proposed to be given include a power to issue “official warnings” for breach of trust, misconduct or mismanagement. The Commission will also be able to suspend a charity trustee pending investigation and ultimately remove a charity trustee following an inquiry or disqualify a charity trustee or a person in senior management of a charity. It will also have the power to wind up a charity by giving public notice.
The Bill also increases the number of matters that result in automatic charity trustee disqualification; now included are: unspent convictions for an offence of dishonesty, contempt of court and disobedience regarding a Commission order. The Bill states that the Commission will keep a register of all persons that have been disqualified by the High Court or Commission.
There are differing views in the charity sector as to how often these powers will be used and the extent to which the powers will affect the operation of charities. However, the Commission regards the new powers as vital if it is to fulfil its role as an effective regulator.
Progress through Parliament
The Bill completed report stage in the House of Lords on 20 July 2015. During this the Lords proposed 2 new clauses. Clause 9 which prevents charities being compelled to dispose of their assets, indicating the strength of opposition to the Government’s controversial “right to buy” scheme. This is highly likely to be defeated in the Commons. Clause 14 is designed to protect the public from intrusive fundraising practices by placing more regulation on charities using commercial fundraisers.
The Bill received its third and final reading in the House of Lords on 14th September 2015 and its first reading in the House of Commons took place on 15th September 2015. The date for the second reading in the House of Commons (where the general principle of the Bill will be debated) has not yet been announced.
Article by Huw Rolant Jones, Paul Pugh, and Stephen O'Reilly at Eversheds.