Charity law: all change?

A year ago we had COP26 in Glasgow and climate change was top of the agenda. We were also reflecting on the Programme for Government, which gave an indication for forward momentum on the Scottish charity law review, but not much more detail. We were still in the teeth of the pandemic restrictions, which focused the mind on governance and conduct of charity business. Fast-forward a year, and there have been a number of charity law and governance developments, including the announcement of forthcoming legislative reform. Here we consider some of these.

Regulation and supervision

The latest Programme for Government says there will be a Charities (Regulation) Bill, which “aims to strengthen and update the current legislative framework provided by the Charities and Trustee Investment (Scotland) Act 2005. The bill will increase transparency and accountability and maintain public trust and confidence in Scotland’s vital charity sector”. So, what might it include? We can expect that the bill will primarily address topics covered in the Scottish charity law review undertaken over the last few years.

Matters consulted on covered:

• publication of annual reports and accounts, in full and unredacted, for all charities on the Scottish Charity Register;
• an internal database and external register of charity trustees, to enable OSCR to hold key information on trustees and for some information to be publicly available (akin to Companies House or the Charity Commission). It might be that data requirements mean there is further finessing on the implementation of elements of these. It will also be no mean feat to capture and keep updated information on the trustees of around 25,000 charities;
• updated rules on disqualification of charity trustees and individuals employed in senior management positions in charities;
• a power for OSCR to issue positive directions to charities. Currently it can only issue negative directions telling a charity not to do certain things. This will be seen as untying OSCR’s hands on some matters. There would be connected protections for those who could be subject to such directions;
• a power to remove from the Scottish Charity Register charities that persistently fail to submit annual reports and accounts;
• requiring Scottish registered charities to have and continue to have a connection with Scotland. To date, a charity with no connection whatsoever with Scotland can obtain Scottish registration. Some might be doing that to support regulation. In other cases, the reason will have been less clear;
• the ability to make inquiries into the former charity trustees of bodies which have ceased to exist and bodies which are no longer charities;
• creating a new requirement that a de-registered charity’s assets must be used not only to further charitable purposes but also to meet the public benefit test. This avoids a potential quirk that charitable funds could be used in a way that sat outside the 2005 Act’s charity test, through the charity taking the step to de-register, a step which OSCR cannot ordinarily prevent happening;
• updates to OSCR’s powers to gather information when making inquiries;
• reform to give charities established under private legislation etc a more streamlined process for updating their governance and constitutions, it is to be hoped through an OSCR-only process instead of requiring Holyrood procedure, as far as charity law matters are concerned.

More fundamentally?

For many, however, the most eagerly awaited potential parts of the bill are matters that were not initially subject to consultation. Many respondents raised wider issues that could be in need of reform. These included a rethink of the fundamentals of the Scottish charity test; a renewed look at what “public benefit” means; the role and regulation of social enterprise; payment and remuneration for trustees; the process for existing charities to incorporate (often to become a SCIO); updated rules on SCIO member duties (member duties in the context of charitable companies having been considered by the Supreme Court: see Journal, August 2020, online article); winding-up procedures; reducing the risk of “lost legacies” in wills due to changes at charities (see Journal, November 2021, 28); the interaction between rules and regulatory requirements across UK jurisdictions and regulators; developments (on a statutory footing) of the notifiable events framework; and whether trustee duties are focused on acting in the interest of the charity (as an entity) or its underlying charitable purposes.

The Law Society of Scotland’s response is one which considered wider areas for reform. Those involved with charities will be awaiting with interest to see the published bill.

In addition to the Charities (Regulation) Bill, some charities will also be looking out for the Trusts and Succession Bill noted in the Programme for Government. Charities set up as trusts would then be subject to the new statutory framework for trusts. Beyond the general, there will be specific points for these charities to consider, such as any updated rules on accumulation of income, a rule which does not sit well for charities as it dictates how charity trustees spend their funds. Trusts make up a tiny proportion of new charities. Charities that are trusts should be considering whether the trust remains the right fit for them, or a change (most likely to a SCIO) would be appropriate.

Investments: planet before profit?

Everything seems to be about ESG now. Environmental, social and governance matters are front and centre of many initiatives – and some advertising and marketing, leading to issues with “greenwashing”. For charities, trustees have been grappling with interaction of financial and ethical matters for some time.

While it is a wider topic, ethical issues have often been viewed through the prism of trustee investment duties. The recent decision in Butler-Sloss v Charity Commission for England & Wales [2022] EWHC 974 (Ch) attracted much attention. There, the court accepted the approach a charity took in adopting an environmental focused investment policy. It is an English case dealing with an English charitable trust, and different considerations apply to Scottish charities (trusts or otherwise). But it gave an opportunity to reflect on the Scottish position.

Butler-Sloss considered the well known case of Harries v Church Commissioners for England [1992] 1 WLR 1241 (the “Bishop of Oxford case”), and set out an approach trustees should adopt when considering these matters. Very briefly, the court’s starting point was the charity’s constitution, proceeding to a focus on (1) having regard to the purposes of the charity, and (2) considering and balancing carefully the impact of all relevant factors to the charity (pure financial return and otherwise).

It seems to be an approach which sits well with the duties and expectations of Scottish charity trustees, the order of the day being purposes-led decision-making based on care and diligence. In many ways, from a Scottish perspective, Butler-Sloss confirms how trustees should already be tackling such matters, as opposed to offering a revolutionary moment in trustee investment duties and decision-making.

Saying that, the Butler-Sloss formulation does appear to take a positive and proactive view. The Bishop of Oxford schematic was couched in negative terms such as conflicts with purposes or discouraging donations: you needed to find a negative reason to then base a decision to invest in an ethical manner. The approach in this new case is more rounded and looks at the overall formulation of an investment policy.

Its methodology seems to attempt to empower charity trustees to make decisions that they consider are right for the charity and its purposes. And it emphasises that trustees need to go through a full and proper consideration of matters when making decisions. Investments might be an important example of trustee decision-making, but that basic formula of purposes plus duties would seem to underpin all trustee decisions.

We very much agree with Butler-Sloss that a charity’s governing document is the place to start. A charity’s constitution is central to its governance. One reason for Butler-Sloss arising was the perceived ambiguous nature of the underlying law in this area. To avoid that ambiguity, a charity could have a constitution which expressly allows it to take into account wider ethical and societal factors across all decision-making (an “ethical constitution”, if you like). This will help provide a clearer legal basis to support such an approach.

While not introducing anything that seems overly novel, Butler-Sloss is a welcome opportunity to reflect on ethical decision-making and provide some greater clarity on the trustee approach to policy.

Good governance and good meetings

The pandemic put in sharp focus the running of meetings and governance: positive and effective working in an adverse situation. To help with governance, there has been for a number of years the Scottish Governance Code for the Third Sector, emanating from the Scottish Third Sector Governance Forum. As the name suggests, it is designed to be useful for all third sector bodies, including charities. The code features five core principles: purposes, leadership, board behaviour, control and effectiveness. This year saw a consultation on an update to the code, an opportunity to consider any developments to support robust and effective governance. One area covered was the place of an additional specific core principle on diversity and inclusion.

The code is a valuable document to guide charities’ approach to governance. Many charities build it into codes of conduct or trustee handbooks. The topics covered provide a reminder of the blend of high-level or strategic matters, technical legal governance points, and how board members and others work together.

If charity boards wish a live example of how not applying the core principles of governance can cause issues, the infamous Handforth Parish Council Zoom meeting is a good port of call. The event underlined the importance of legal clarity over the basis of conducting business (the “Does Jackie Weaver have authority?” point), the effectiveness of output from that business, and the role of how the business is conducted – more a board interrelationship-based matter.

The last point is perhaps less technical and structural, but one which is fundamental to successful working. The code features (under “Board behaviour”) the place of listening to each other, respecting roles and creating an environment to consider different, and even conflicting, views. In that we would also suggest basic politeness and manners as in themselves a good governance indicator. Returning to Handforth, it started with a technical point on authority and then, it seems, through a less than positive handling of the committee member relationship, an environment was created where effective outcomes were less likely to be achieved. Such situations also underline the key role of the chair of a meeting.

The code is a very worthwhile read. It offers a reminder of a mix of points that help governance, and more importantly help produce good work and impact. We look forward to output from the consultation exercise.

All change?

New legislation will provide some changes. In other areas, there is perhaps greater clarity being offered for trustees undertaking their work, without strict change. On governance, it is always a case of striving for change that has positive outcomes for the charity’s activities. With that, the law can assist.