Power to direct specified action not to be taken

Charities (Protection and Social Investment) Bill [Lords] – in a Public Bill Committee am 2:00 pm ar 15 Rhagfyr 2015.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Anna Turley Anna Turley Shadow Minister (Cabinet Office) 2:00, 15 Rhagfyr 2015

I beg to move amendment 4, in clause 6, page 5, line 2, at end insert—

‘(4) An order under this section will automatically be discharged on the closure of the inquiry under section 46 which is referred to in subsection (1).’

To restrict the power to ensure that if a tribunal appeal is successful, a direction by the Commission as a result of the warning is no longer relevant.

I welcome the clause, which inserts a new provision into the Charities Act 2011 to enable the Charity Commission, after it has instituted an inquiry, to make an order directing a charity not to take or to continue certain actions that the commission considers constitute misconduct or mismanagement in the administration of the charity. The order has to specify the action that must not be made or continued, and has to set out the commission’s reason for making it. The commission will have to review any order at intervals of not more than six months and there will be a right of appeal against the order.

When the Joint Committee on the Draft Protection of Charities Bill suggested that it would be helpful if the Government chose to revisit proposal 13, it set out that the provision must be tightly drawn to clarify the circumstances in which the power can be used and the safeguards that apply, in particular the right of appeal. The previous Government accepted the Joint Committee’s recommendation and said that they would revisit proposal 13 for inclusion in the Bill—that is now clause 6. I look forward to the Minister setting out some examples of the circumstances in which the power may be used and any safeguards. I am pleased to see the right of appeal.

The new power in the clause is broadly similar to a power that the Office of the Scottish Charity Regulator has to direct that specific action is not taken. However, the OSCR’s power may take effect for a maximum of six months. There is no such limit under clause 6, although the Charity Commission must review the order at intervals of not more than six months.

The crucial issue, to which my amendment speaks, is that it is not clear whether the order may remain in place once a section 46 inquiry has been closed, so it could extend beyond the period of the inquiry. The amendment seeks to prevent that. The Charity Commission states:

“The purpose of an inquiry is to examine the issues in greater detail and investigate and establish the facts of the case so that the commission can ascertain the extent of any misconduct or mismanagement, establish the extent of the risk to the charity, its work, property, or beneficiaries, and decide what action is needed to resolve the concerns. If the allegations are not substantiated, the inquiry will say so. The ultimate aim is to stop abuse, ensure compliance and put a charity back on a secure footing. Where this is possible it may include restoring its reputation, protecting beneficiaries or assets and protecting and enhancing the reputation and public confidence in the charitable sector generally.”

That is all right and proper, and we agree with the Charity Commission’s view on the purpose of an inquiry. Once the inquiry has concluded, an order made under clause 6 should no longer be relevant and the findings of the inquiry, whether allegations are substantiated or not, should take precedence. Directions that have been given during the process of an inquiry, but which are not in keeping with the outcomes, should not be pursued.

The commission has recently clarified the fact that it has no power to require trustees to fetter the future exercise of their fiduciary powers under its general power to give advice and guidance, which appears in section 15 of the Charities Act 2011. That clarification followed judicial review proceedings in the High Court, where it was alleged that the commission had attempted to do exactly that. This is one of the concerns that we expressed earlier in the debate, and it could apply in particular to the commission’s powers to specify action that should be taken to rectify misconduct or mismanagement under clause 2.

There are situations in which the commission may direct trustees to act or not to act—clauses 6 and 7 introduce more such situations—but they are always carefully circumscribed. It is therefore extremely important that we are satisfied that the definition of such powers is carefully discussed, that their gravity is understood and that they do not continue beyond an exhaustive inquiry. That is why I moved the amendment.

Photo of Rob Wilson Rob Wilson The Parliamentary Secretary, Cabinet Office

The clause is a sensible extension of the existing powers of the Charity Commission that are available to it when it is conducting a statutory inquiry under section 46 of the Charities Act 2011. At the moment, when a statutory inquiry is under way and the commission is satisfied that there has been either misconduct or mismanagement, or that there is risk to charity property, it may direct a charity to undertake certain actions under section 84 of the Act. The purpose of the existing section 84 power is to allow the commission to direct any action to be taken that it

“considers to be expedient in the interests of the charity.”

Legal precedent confirms that “expedient” in that context means advantageous or beneficial, so the action that the commission proposes will be of advantage or benefit to the charity’s interests, which in effect means the charity’s beneficiaries. However, the advantage or benefit must be viewed only in the context of the issues raised through the inquiry and not in the belief that it would be good for the charity in general terms. Specific examples of where the commission already uses that power include ordering a charity to undertake a governance review in a defined period; review a legal agreement; provide specified documentation by a certain date; ensure that a named individual is monitored on charity premises at all times; draw up a risk management procedure in a certain timeframe and implement that procedure; and take legal advice in connection with a matter concerning the charity and its funds.

Published figures in “Tackling abuse and mis- management: 2013-14” show that the commission used that power to direct charities on 38 occasions. As we have discussed, the commission has been exercising its power more often and more effectively, so we may well see that figure increase in the report for 2014-15, which will be published in the coming weeks.

The power to direct a charity to do something is long held and the commission has well-established procedures and policies in its armoury. The commission also has the power under section 76(3)(f) of the Charities Act 2011 to restrict a charity from undertaking certain financial transactions. That existing power can be exercised in a number of ways, including freezing a charity’s bank account; requiring the charity’s trustees to seek commission approval before entering certain transactions; and preventing specific transactions. That was used on 15 occasions in 2013-14.

The commission does not have the power to prevent a charity from undertaking actions or activities that would amount to misconduct or mismanagement during the course of a statutory inquiry. That is a loophole and the clause is a common-sense addition that will give it that power.

Some people have expressed concern that the commission could use that power to undermine freedom of association or freedom of speech, in particular for charities with religious purposes, but it is important to point out that it would be available to the commission only to prevent activities that would constitute misconduct or mismanagement were they to go ahead or continue. Therefore, if a charity engaged in unlawful political activity such as supporting a political party and holding partisan events, the Charity Commission could act to prevent further such activity from taking place.

It is worth pointing out, as the hon. Member for Redcar did, that the commission’s equivalent in Scotland, the Office of the Scottish Charity Regulator, has a similar power. Section 28 of the Charities and Trustee Investment (Scotland) Act 2005 enables the OSCR to

“direct any charity, body or person with regard to which it is making inquiries…not to undertake” specific activities for a period of six months. The OSCR may seek a court order for longer restrictions.

The Joint Committee supported the inclusion of such a power, provided that it was tightly drawn to clarify the circumstances in which it could be used, along with the safeguards that applied, particularly the right of appeal. The new power in the clause will enable the Charity Commission to intervene to prevent misconduct or mismanagement from taking place rather than having to watch powerlessly, then take remedial action once the damage has been done.

The bar for exercising the power will be high and there will be six specific protections. First, the power can be used only in the context of a statutory inquiry. Secondly, the commission will have to be satisfied of the need to prevent misconduct, mismanagement or risk to charity property. Thirdly, the commission must set out a statement of reasons for exercising the power and review any order regularly—at least every six months. Fourthly, the making and every review of the order will be subject to a right of appeal to the Charity Tribunal and, like all its other protective and remedial powers, this power is subject to the commission’s duty to act proportionately under section 16 of the Charities Act 2011.

Let me give the Committee two examples of cases in which the powers might be used. In recent years, there have been several cases of charities involved in the abuse of charitable business rates relief. In such cases, the so-called charity enters into multiple tenancy agreements with commercial property owners at reduced rents without any real evidence that the tenancies are in the best interests of the charity or are used meaningfully for charitable purposes. Once occupied by the charity, the property benefits from a reduction of at least 80% in business rates relief, which can be a substantial sum. The saving is often shared between the charity and the property owner. Local councils and honest taxpayers end up losing out. The commission has taken action in such cases, but it can do so only after the event. The new power would enable the commission to direct the charity not to enter into, renew or continue any further tenancies, in effect preventing the misconduct from continuing.

Another example in which the power could be used would arise if a charity had made significant loans to companies connected to the trustees. The trustees would seek to become insolvent and to wind up the charity, writing off the loans and resulting in significant financial benefit to the companies connected to the trustees. In that case, the commission would be able to use the new power to direct the trustees not to wind up the charity, buying time to sort things out by, for example, removing the trustees, or appointing new trustees or even an interim manager to act in the charity’s best interests, which could involve calling in the loans.

Photo of Jeremy Lefroy Jeremy Lefroy Ceidwadwyr, Stafford

It is a pleasure to serve under your chairmanship, Mrs Main. I am interested in the Minister’s example of charity shops having 80% or more discount on their business rates. I came across an instance recently of a thriving and popular business effectively being told by the landlord to move because they wanted to put in a charity shop which was offering a higher rent than that popular business. Part of me thinks that that might be the result of a charity being able to pay a higher rent because it does not pay any rates. How would the amendment affect that?

Photo of Rob Wilson Rob Wilson The Parliamentary Secretary, Cabinet Office

I take the point made by my hon. Friend, but I really do not think it is a matter for the Bill. He may want to raise it with the Chancellor or the Secretary of State for Business, Innovation and Skills. I do not think it is for me to deal with it today.

Some people have argued that it should not be possible for the power to extend beyond the life of a statutory inquiry, and I think that is what the amendment of the hon. Member for Redcar seeks to prevent. However, the hon. Lady may be seeking to do something slightly different, as her explanatory statement for the amendment suggests that she wants a direction to cease following a successful tribunal appeal. I can assure her that if such a direction were appealed it would be for the tribunal to decide what would happen—for example, whether the direction would be quashed, remain in place or remitted to the Charity Commission to be reconsidered. If the hon. Lady is concerned that the commission could exercise the power following an official warning, let me remind her that it could be exercised only when a statutory inquiry had been opened, which itself could be appealed to the Charity Commission.

Let me explain why I think that it should be possible for a direction to remain in place beyond the life of a statutory inquiry, although not indefinitely. The power to direct action not to be taken is a temporary protective power for the Charity Commission. That is why it is subject to review at least every six months, so that the commission can confirm whether it considers it necessary for it to remain in force. That process would be subject every time to the commission’s duty to act proportionately and to the right of appeal to the Charity Tribunal.

The power is not a permanent, remedial one designed to address the underlying issues, which may need to be addressed by the exercise of other commission powers, including removal of trustees. It is designed to prevent specific further misconduct or mismanagement from taking place once a statutory inquiry has been opened, but those individuals need to know that the power can remain in place for sufficient time so that they do not simply decide to wait for six months before attempting the misconduct again or allowing the mismanagement to occur again.

Let me explain by way of another example. The commission opens an inquiry into a charity due to serious governance concerns and “founder’s syndrome”, as it is known, of the oldest trustee. It identifies a number of connected party transactions that have resulted in private benefit. The commission engages with the charity and issues an action plan that will take 12 months to complete and will regularise the charity’s governance issues. The commission would want to close the inquiry after issuing the action plan, in order to ensure that the matter is dealt with proportionately and so that an inquiry report can be produced in good time. There are no further issues in the charity that would be resolved by keeping the inquiry open, but the commission will follow up in a year’s time on the action plan.

Finally, before closing the inquiry, the commission would want to direct the charity’s trustees under the new power not to enter into certain specified connected party transactions, which was a key issue in the inquiry. That would protect the charitable assets beyond the duration of the inquiry and might also act to protect other trustees on the board who felt unable to speak out against the founder trustee in relation to various proposed financial transactions. The order would be reviewed after six months and could be discharged once the charity put in place the necessary governance changes to ensure that any further connected party transactions that were not in the charity’s best interests could not take place.

It is clear that sufficient protections and safeguards already exist for the use of the power. The amendment would lead to some statutory inquiries remaining open for longer while an order made under the clause remained in force. That would not be right or necessary, given the existing safeguards that apply to the exercise of the power.

Photo of Anna Turley Anna Turley Shadow Minister (Cabinet Office) 2:15, 15 Rhagfyr 2015

I thank the Minister for his helpful response. It was extremely important to hear his clarifications, particularly about the six protections that will be in place before the power is used, and the clear and helpful examples he gave of instances in which the power will be used.

The amendment relates not to the warnings and the tribunal dealt with in clause 1, but to whether the power will continue if it is used in the course of a formal inquiry, subject to the inquiry’s final outcome. I was reassured to hear that the inquiry’s outcome and the report’s findings will take precedence in the action going forward. It is extremely important that if allegations made in the course of the inquiry are unfounded, they are quashed and no further action is taken. We also wanted to know whether, if the inquiry report showed structural issues and there was a remedy that affected those issues, that would overrule the temporary protective amendments. The Minister clarified that issue, for which I am grateful. I am reassured by his response, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.

Clause 7