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The Charity Commission is Using its Power to Issue Official Warnings to Trustees

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05th December 2018

The Charity Commission is Using its Power to Issue Official Warnings to Trustees

Paul Ridout and Jelena Serbic analyse a high-profile case with tips for best practice.

In August 2018 the Charity Commission issued an official warning to the RSPCA in relation to an alleged ‘breach of trust or duty or misconduct or mismanagement in the administration of the charity’. According to its single-page warning (see www.legalease.co.uk/rspcawarning), the Commission took the view that the charity’s chairman, vice-chairman, treasurer and deputy treasurer had failed to ensure they were sufficiently informed before making a decision on a substantial pay-off to the former acting chief executive, Michael Ward, and also that they had failed to act with reasonable care and skill in relation to the negotiations with Mr Ward. 

This is only the sixth warning issued by the Commission since the power to issue official warnings was introduced by the Charities (Protection and Social Investment) Act 2016. It is of particular interest to practitioners not just because it is directed at specific individuals within an exceptionally high profile charity that has arguably experienced more than its fair share of controversy and criticism, but also because the challenge of negotiating the exit of senior staff is something that increasing numbers of charities are having to face. It is also significant that governance within the RSPCA has been the subject of regulatory scrutiny by the Charity Commission for some time, and this official warning represents a clear escalation of the Commission’s engagement.

It had been reported that Mr Ward left the charity following a row over age discrimination and, although officially undisclosed, the sum is understood to be substantially  in excess of his annual salary of £150,000. The Commission examined the decision-making process that the trustees undertook and was critical of the processes, concluding that the failings amounted to mismanagement in the administration of the charity. The Commission’s warning directs that the charity’s council adhere to the charity’s code of conduct and receive formal training to ensure they are fully aware of their responsibilities as charity trustees.

It also directs the charity to implement the recommendations of the independent governance report prepared in 2017 (see www.legalease.co.uk/rspca-governance). The charity has confirmed that it is working through the recommendations of governance review and that nearly 90% of the recommendations have now been implemented.

It seems that the RSPCA has not been particularly successful at keeping chief executives in recent years, with Mr Ward acting as the fourth chief executive in five years. David Holdsworth, registrar of charities for England and Wales and deputy executive of the Commission, said that:

"… the charity’s governance has fallen short which has led to people asking legitimate questions about the pay-out to the former executive". 

What is an official warning and under what circumstances can it be issued?

The Commission’s official warning power was introduced to supplement the Commission’s existing powers to deal with wrongdoing in charities. It was born out of a turbulent period in the charities sector where scandals such as The Cup Trust were hitting the headlines and attracting the attention of the National Audit Office and Parliamentary committees. (In relation to the Cup Trust, see also the Commission’s use of its new discretionary disqualification power: www.legalease.co.uk/cup-trust.) The thinking behind the power was that it could be used to tackle problems that do not necessarily justify the opening of a formal inquiry (which is a necessary first step before taking any of the more substantial interventions that form part of the Commission’s regulatory armoury, such as the removal of trustees). At the time, the introduction of official warnings was viewed with some alarm because charities have been given no right to appeal the use of this power by the Commission through the First-tier Tribunal (Charity), leaving judicial review as the only real way to mount a legal challenge.

The Commission can issue a warning to a charity or trustee that it considers has committed a breach of trust or duty or other misconduct or mismanagement in that capacity, or to a charity in connection with a breach of trust or duty or other misconduct or mismanagement that has been committed. The purpose of an official warning is to ensure that the charity trustees know that a breach, misconduct or mismanagement has taken place and that they are aware it is a serious matter. It is not in itself a statutory direction and therefore the Commission cannot force any action upon the trustees of a charity, but the warning will specify the action the Commission considers the trustees should take to correct the breach.

Since the power was introduced, the Commission has issued warnings for a variety of issues. Its first warning was issued to the National Hereditary Breast Cancer Helpline after that charity found itself in financial difficulties and failed to comply with the Commission’s action plan. A warning was issued to the Islamic Trust in Maidenhead after the Commission found that the trustees had failed to keep records of their decision-making, following a failure to file statutory returns. Another warning, issued to the Gurdwara Guru Nanak Parkash (a Sikh temple in Coventry), warned the charity over exposing its members and beneficiaries to an undue risk of harm due to repeated disruption which resulted in a police presence at the temple on a regular basis.

Charities should be mindful that there are further powers the Commission can use, and the Commission has not been shy about letting charities know this. When commenting on the RSPCA warning, Mr Holdsworth said that: 

"… if the trustees are not able to satisfy us that they have responded meaningfully and promptly to our official warning, we will not hesitate to take further regulatory action". 

Further regulatory action could mean a number of different things, including the Commission deciding to open an inquiry. If the trustees fail to rectify the breach specified in the  warning and therefore fail to remedy

the misconduct or mismanagement, the Commission may consider using its protective and remedial powers, such as suspending or removing trustees or appointing an interim manager for the charity. So the warning mechanism does have real teeth, despite the Commission’s efforts to portray it as a measure to be taken where more formal regulatory intervention would not be a proportionate response.

What can charities learn from the RSPCA official warning and how can charities avoid an official warning?

The latest warning demonstrates the importance that the Commission attaches to sound governance in charities. As with recent controversies over fundraising practices and safeguarding, the Commission is concerned to see that charity trustees take responsibility for major operational matters and that they base their decisions on adequate information and advice. In the Commission’s Q&A guidance (see www.legalease. co.uk/charity-guidance) on its use of the power to issue warnings, the Commission acknowledges that it may issue a warning as a means of communicating with the wider public and promoting public trust and confidence in the charity sector.

Bearing in mind:

  • the high public profile of the RSPCA;
  • that the RSPCA seemed already to be making good progress with implementing the recommendations of its recent governance review; and 
  • that the particular decision on Mr Ward’s settlement agreement was (one hopes) a one-off matter, 

it does look rather as though the Commission has used the RSPCA’s situation as a platform to communicate with a wider audience, sending out a message to charities that they need to think seriously about how they approach decisions of this sort and also to the wider public that the Commission is taking robust regulatory action to ensure that trustees fulfil their duties. Charities should remember that the Commission can only issue an official warning where there has been a breach of duty, misconduct or mismanagement and that an official warning is intended to encourage trustees to take action where they may previously have been reluctant to act. It follows that, to avoid being at the receiving end of an official warning, charity trustees should ensure that they are familiar with the Commission’s guidance on their duties. The Commission’s guidance recognises that if something does go wrong, as it does in almost all charities, keeping the Commission informed and, where necessary, seeking the Commission’s help and then following any advice given to resolve it, will minimise any need for the Commission to issue an official warning. 

What should a charity do when issued with a warning?

Charities should consider the following stages of the warning system:

  • Initially the Commission will give statutory notice of its intention to issue a warning directly to the charity. In doing so the Commission will state the action it is planning to take and what actions the trustees need to take to fix the misconduct, mismanagement or breach.
  • The charity or trustee will have a period of, usually, 28 days to respond to the warning and make representations to the Commission. At this stage, the charity should take and consider legal advice. The Commission will use these representations to decide on a case-by-case basis whether it will be publishing the warning.
  • Once the official warning has been issued, the charity should take all steps necessary and appropriate to rectify the breach, misconduct or mismanagement specified in the warning in order to avoid further regulatory action.
  • The Commission may then consider varying or withdrawing the warning. However this will not be done automatically, and the Commission will need to consider the facts on a case-by-case basis. The content of warnings will generally remain on the public record for no more than 12 months, but there will still be a record of a warning having been issued.

Concluding thoughts

When issuing the RSPCA warning, the Commission said: 

"… good governance in charities is not an optional extra, or a bureaucratic detail. Good governance is what underpins the delivery of a charity’s purposes to the high standards expected by the public". 

In times when public confidence in the sector is already shaken, an official warning is likely to have negative ramifications for any charity, particularly if it is seen by the general public as a ‘household name’ charity that would normally be expected to demonstrate the very highest standards of conduct and propriety.

However, this particular episode shows that there is a real risk of a problem within a charity being used by the Commission to get a message out to all trustees, even if the charity in question is already addressing the problem and is (as appears to be the case with the RSPCA) 90% of the way towards full compliance.

This is perhaps an inevitable side effect of the Commission having the statutory objectives (from s14, Charities Act 2011, c25) of:

  • increasing public trust and confidence in charities; and 
  • promoting compliance by charity trustees with their legal obligations in exercising control and management of the administration of their charities,

then recognising that, with limited resources, one of the most effective ways it can pursue that objective is by using examples of its regulatory casework to show the rest of the sector how not to get it wrong. It calls to mind Voltaire’s reference in Candide to the execution of Admiral Byng following the defeat at the Battle of Minorca as something that it is good to do from time to time, ‘in order to encourage the others’.

(This article was first published in Trusts and Estates Law & Tax Journal (December 2018) and is also available at lawjournals.co.uk)

Needs Dev Paul Ridout

Contact

paul.ridout@ibblaw.co.uk
01895 207862