2023… just the start of charity law reform?

2023 has been a busy year for charity law. Central to that has been the Charities (Regulation and Administration) (Scotland) Act 2023. There will be a process of communicating the changes under the 2023 Act. But for many the Act should not be seen as the end of a process on charity law updates; rather just the start of the journey on Scottish charity law reform.

What does the Act do?

The 2023 Act is not a comprehensive update to Scottish charity law. The core of the Act contains changes driven by the Office of the Scottish Charity Regulator (“OSCR”) – changes which seem quite sensible and reasonable to support OSCR’s work. There were rounds of consultation by the Scottish Government ahead of the bill being introduced to the Parliament. Now that the Act has been passed, attention will turn to communicating the changes to the sector and the timetable for implementation.

Trustees

Concepts of transparency and accountability were stated to be driving forces behind the consultation leading up to the bill. With that, the Act requires that the “name of each charity trustee” will be part of the (online) Scottish Charity Register. In addition to the public facing register, OSCR is now required to keep a “schedule of all charity trustees”. This is internal information for OSCR. This will of course be no small logistical undertaking for OSCR. There is recognition of the data protection issues, and also exemptions from providing information where, for example, safety could be compromised.

The “rolling review” was big news when the Charities and Trustee Investment (Scotland) Act 2005 was passed. The 2005 Act required OSCR to have an ongoing review of charitable status for existing charities. That was quite a task for OSCR. The Act removes this duty. It enables OSCR to target regulation and reviews of charitable status.

The Act moves on to update the bases for disqualifying charity trustees. This is largely a technical update. There is a more fundamental change to disqualification rules about who can be disqualified. To date it has been restricted to charity trustees. The Act changes that. Those in “senior management functions” can now be disqualified.

A “senior management function” is one where either (1) the role relates to the management of the charity and the individual is not responsible to anyone else other than the trustees, or (2) the role involves control over money and the individual is only responsible to (other than the trustees) another person in a senior management function. The former is aimed at chief executive roles while the latter is essentially focused on finance directors.

On disqualification information, the Act introduces new rules to require OSCR to maintain a record of removed trustees, and in the future, removed senior managers. This is to be kept in a format which can be searched on the basis of an individual’s name. It will not be possible to produce a list of all removed persons from this system.

It means charities would be able to search the register against a prospective trustee or senior manager.

The Act makes sensible changes to enable OSCR to have extended powers to deal with charities that no longer have a functioning number of trustees. There had been a gap in that where a charity had no trustees, OSCR could not assist. This has been remedied. OSCR will be able to appoint interim charity trustees in such a situation.

Scope of regulation

OSCR at present has the power to tell charities and others not to do certain things. However, it cannot positively direct action to be taken. A recently published interim inquiry report (ZesT Football Club) is an example of OSCR’s actions having to be framed in the negative. That changes under the Act. That seems a sensible update. OSCR will be able to direct positive (in every sense) actions. There will still be the same protections and process as before around OSCR arriving at such a direction.

There had been uneasiness for some time that charities with no connection to Scotland could nevertheless be registered in Scotland. If they met the Scottish charity test, OSCR could not refuse to register them.

The Act deals with this by asking the question: “when is it not appropriate for OSCR to regulate the charity?” In this instance it is not appropriate to regulate the charity where that is due to the charity’s lack of connection with Scotland. The new rules set out a non-exhaustive list of factors which would point towards a charity having insufficient connection to Scotland to base OSCR registration and regulation. These rules will apply to new applications and existing charities.

There is therefore a power to remove such charities already on the Scottish Charity Register.

Accounts

There are statutory updates to certain aspects of accounts requirements. This includes putting trustee reports on a statutory footing. That fits with the view that charity accounting is “not all about the numbers”. The narrative of a charity’s work is important and is useful for public information. We will also see all charity accounts being made available (unredacted) via the online Scottish Charity Register.

Staying with accounts, OSCR is also given better powers to deal with unresponsive charities. That is, charities who fail to provide accounts. The Act enables OSCR to seek to remove such charities. If OSCR seeks to remove a charity on this basis, there will be notice given to the charity and publicly available information about that fact.

The annual return is now also brought on to a statutory basis. The fact that it did not have that basis already may come as a surprise to some. Away from the Act, OSCR has been consulting on updates to the annual return questions.

Successor charities

A briefing at Journal, September 2023, 36 summarised an update to the rules on legacies in favour of charities which have, essentially, wound up and transferred their assets to another charity – the issue being that where a charity has changed its structure through, for example, a transfer of assets to a SCIO or a merger with another charity, there is a risk that legacies named in wills for the old charity will be lost.

While narrower in scope, the rules in the Act are inspired by the law in England & Wales on this topic. There will be a “record of charity mergers”. It is for the charity to notify OSCR to ensure the change is entered on the system. From that date (or such other date as is specified in regulations), legacies in wills can then find their way from the old charity to the new one. The essence of the update is that “mergers” would seem to need to be registered prior to the death in question. We are pleased to see this development. It was one that was not consulted on originally. It is good that the Scottish Government took up the call to reform this area at the intersection of charity and succession law. The current situation leads to sensible governance updates being shelved by some, or cumbersome “legacy charities” remaining on the Scottish Charity Register.

The new rules still allow those making wills to take control of the situation. They can specify in the will what happens. The Act creates some examples of when it is not to be taken that the deceased intended the legacy to pass to the new charity. We think these rules provide sufficient clarity and certainty for those making wills.

Names

Among more minor (in the Act’s parlance) reforms is a change to the rule that two charities cannot have the same name. This causes some issues for charities changing into a new, more modern legal form (for example, from trust to SCIO). It enables the “old” charity name to be used by the “new” charity. This is a sensible move. The new rules do not take away from rules to protect charity names in less benign situations.

Also on names, there are some changes to the rules on the consents process, to deal with OSCR suggesting a change to the proposed new name. There is also new regulation on “working names”: a name a charity uses beyond their formal legal name.

Currently, even with OSCR consent granted, a charity must wait until 42 days have elapsed since they applied to OSCR for consent. That could be annoying in practice. The 42 day rule is repealed under the Act – a seemingly small but very useful update.

Leaving the register

It has always been notable that a charity can just exit the OSCR charity regulation realm. If a charity requests this, OSCR cannot refuse. But there are provisions to govern the use of the charity’s assets after it leaves the Scottish Charity Register. There is, however, a gap: a body that no longer has charitable status has to use the assets for charitable purposes, but need no longer use them for the “public benefit”. This has been remedied.

“Statutory” charities

For charities set up by Act of Parliament or similar, there were positive developments as the bill progressed. The consultations covered this topic. That offered the prospect of clarity on when such charities (or at least some of them) would avoid the need to promote private legislation to make certain constitutional changes. For many of these charities, it is a historical curiosity that they have a parliamentary underpinning to their constitution. The bill as introduced did not include provisions to update these rules, but provisions were ultimately added to the bill during its parliamentary passage. This is welcome.

A wider review of Scottish charity law?

The 2023 Act covers a relatively narrow range of topics, bringing welcome updates but not a comprehensive review. Throughout the consultation exercises and the progress of the bill through the Parliament, there has been a constant call for a wider review of Scottish charity law. The Scottish Government’s Programme for Government stated it would work to “develop the scope for a wider review of charity regulation”.

In some quarters that is a call for a review of the notion of what is a “charity” and “charitable”. Beyond the parameters of “charity”, there are a number of technical points that deserve reflection. While technical, they are rules that, if updated, would make a difference to charities in practice and the furtherance of their purposes. The issues that come under this umbrella include:

• a statutory basis for “notifiable events”: informing OSCR of serious issues occurring at a charity;
• a streamlined conversion process to enable unincorporated charities to incorporate – one which avoids the current potential need for cumbersome and expensive transfer procedures, which can be a barrier to better governance structures being adopted;
• a review of who can be a SCIO, and the minimum number of members of a SCIO;
• a reflection on the duties incumbent on members (as opposed to trustees) of a SCIO;
• on trustee duties, understanding what is really meant by acting “in the interests of the charity” (s 66(1) of the 2005 Act);
• taking the opportunity to recast the useful but knotty provisions on the reorganisation of charities and restricted funds (chapter 5 of the 2005 Act);
• revisiting the terms and scope of rules on trustee remuneration.

Governance bijurality

Charity trustees of charities established as trusts should also take note of the Trusts and Succession (Scotland) Bill (the “Trusts Bill”).

Charities other than SCIOs will also have to consider other areas of law that affect their governance in addition to charity law. That could be, for example, company law (on which see OSCR’s 2023 inquiry report on Pollokshields Development Agency), trust law, or the rather nebulous law applicable to unincorporated associations. Having two areas of law on such constitutional matters could be described as governance bijurality.

The Trusts Bill seeks to be a statement on a wide range of trust law matters. Charity trustees will need to be up to speed on updated rules on decision-making, changing trustees and the power to delegate trustee functions. There are some more niche topics in the Trusts Bill that do tend to affect charitable trusts, such as ex officio trustees and the somewhat quaint (and literally Dickensian) rules on the accumulation of income in trusts.

There have been calls to make sure the Trusts Bill fully considers the interaction with charity law. It would be unfortunate if there was a clash of legal areas on what trustees should be doing. Whatever the terms of the Trusts Bill, charity trustees of charitable trusts must (1) consider whether or not being or remaining a trust is appropriate (compared to other legal forms), and (2) ensure they follow charity and trusts law in how they manage their governance.

What next?

The 2023 Act requires OSCR to report on what it has done to promote charities’ awareness and understanding of what they need to do to comply with the provisions of the 2005 Act. That communication exercise following the 2023 Act will be one of the immediate tasks in charity law. It is hoped that in parallel there is the start of a wider review to keep charity regulation modern and effective.