05 Oct 2020

September was a month of transition. After months of steadily declining infection rates, increased hopes of a vaccine breakthrough and a growing sense of optimism about reaching some state of (new) normality, it becomes apparent that the world's recovery from COVID will be stilted by local lockdown measures and wider restrictions on social interaction.

The charity sector is working through its own (not unique) challenges; declining income, increased demand for services, a winding down of employment-related support, and changes to corporate insolvency rules to name but a few. Over the last few weeks there have also been several non-pandemic related developments in the sector too.

Please read our overview below, and let us know if you want to speak to us about anything that causes you particular concern. 

Mergers and collaborative working – numbers up since March

The current environment will be pre-empting charities to think about mergers more seriously or more urgently than before.

Mergers in the charities sector have not always been popular as charities tend to like their own cultural identity. Opportunities can be discounted by trustees and senior leadership teams based on culture or values. 

The reality of financial pressures on charities means trustees and charity senior leaders may need to work harder to have meaningful conversations about merger, recognising the efficiences that may be achieved – possibly crucial for organisational survival.

The social sector consultancy Eastside Primers has released a report showing charity mergers up by a third between March and June this year, with some mergers announced over the summer citing the pandemic as a key driver of consolidation. 

Mergers can take different forms, and if structured and executed correctly, can prove successful in terms of enhanced delivery of mission and also in securing financial efficiencies.

Trustees should remain prudent and ensure merger decisions are supported by robust due diligence, so they make informed decisions and protect the assets of their charity, and clearly understand the risks.

Winding down of the furlough scheme

The furlough scheme, on which many in the sector have relied since March, will come to an end on 31 October 2020. In its place is a new, less generous, Job Support Scheme, which forms part of the Chancellor's wider Winter Economy Plan. 

The Job Support Scheme is a means of government support for employees in "viable" jobs on shorter hours, with employers having to contribute more to employee wages than under the furlough scheme and government support capped at £697.92 per month per employee. 

For details on the Job Support Scheme here.

Wrongful trading

Back in April we wrote about the application of "wrongful trading" rules to charitable companies (link here). Under these rules directors had a choice - take advantage of the government's various COVID-related support measures and continue operating (wearing the risk of personal liability if their company subsequently collapses), or put their company into potentially premature insolvency proceedings.

In response to these issues the government announced a temporary suspension of the wrongful trading rules, effective from 1 March 2020 (under the Corporate Insolvency and Governance Act 2020 (CIGA)). The suspension was to extend until 30 September 2020, with the possibility of extension beyond this date.

The suspension of the wrongful trading regime has not been extended (although several other measures in the legislation have been) and so from 1 October 2020 the rules on wrongful trading will be re-instated, with directors facing a renewed risk of personal liability. See WBD's briefing of 24 September.

Financial consequences of the pandemic

The above makes it no surprise that charities are worried about their finances.

Pro Bono Economics, a registered charity which helps charities and social enterprises understand and improve the impact and value of their work, has published its September COVID Charity Tracker Survey. The Survey demonstrates that the social restrictions and associated recession continue to have an impact on confidence within the sector, with many charities worried about their continuing ability to deliver for beneficiaries.

In particular:

  • 94% of charities are worried about the impact of the recession on their finances
  • 55% may not be able to meet demand for their services over winter
  • 52% have seen public donations fall as a result of the pandemic
  • 47% have revised down their financial forecasts since July
  • 43% are cutting jobs, with the biggest cuts falling in service delivery roles

A link to the full report is here.

Relaxation on the holding of members' meetings

One measure in the CIGA which has been extended is the relaxation of rules around the holding of general meetings. These provisions allow charitable companies, CIOs and a range of mutual organisations (but not organisations established by Act of Parliament or Royal Charter) to hold general meetings (including AGMs) virtually, even where their governing document does not allow for it. The government confirmed last week that these provisions will apply until 30 December 2020, allowing members to examine papers and vote on issues remotely until that date. 

Interim Manager appointment quashed by First-tier Tribunal

On 31 July 2020 the Commission's decision to appoint an Interim Manager at the Sikh Channel Community Broadcasting Company Limited (charity number 1136163) was quashed by the First-tier Tribunal, following an appeal lodged by the charity.

The Tribunal's full decision can be found here. The decision is an interesting analysis of the Commission's use of its powers to appoint Interim Managers under section 76 of the Charities Act 2011 in cases where it considers that there has been misconduct or mismanagement in the administration of a charity, or if it is necessary or desirable to protect the charity’s property.

The Sikh Channel Community Broadcasting Company Limited was established to advance the religious and charitable work of the Sikh religion and community. In January 2020 the Commission opened an inquiry into the charity after citing a number of regulatory concerns about the charity’s governance, including conflicts of interest, and concerns over the charity’s financial management.

At the same time as opening its inquiry, the Commission reported that the charity had appointed new trustees who were looking to make improvements. Other trustees of the charity in place before the inquiry was announced resigned.

The Tribunal looked at whether the appointment of an Interim Manager was necessary. The Tribunal considered that the new trustees had demonstrated a genuine desire to act in the interest of the charity, and that they would have responded positively to being asked to agree an action plan with the Commission about matters of regulatory concern.

The Tribunal quashed the Commission's decision to appoint an Interim Manager and concluded that they themselves would not have exercised discretion to appoint an Interim Manager.

This is an interesting decision and highlights the test of proportionality that is applied to the Commission's exercise of its regulatory powers.

The Commission announced on 24 September 2020 that it is now seeking to appoint new trustees to the charity.

Commission registers news foundation (for journalism) as a charity

On 22 September 2020 the Commission registered Public Interest News Foundation (PINF) as a charity, concluding that the organisation was established for exclusively charitable purposes.

Prior to this decision the Commission recognised that a news organisation might use journalism as a way to further other charitable purposes, such as the advancement of education, citizenship or community development, the arts, culture, heritage or science, or human rights. In these examples, the Commission highlighted that there needed to be a clear link between the journalism and the particular charitable purposes.

The Commission's recent decision in the PINF case is the first time that journalism itself has been recognised as charitable, and seen to be within the broad descriptions of charitable purposes in the Charities Act 2011.

The Commission's full decision can be read here.

Charity governance code refresh

The Charity Governance Code is a well-established practical tool to help charities and trustees establish and develop high standards of governance. The most recent version of the Code was published in Summer 2017, and we wrote in our RNIB briefing last month (available here) of a possible refresh during the course of 2020.

The summary of consultation responses has now been published, and can be found here.

Almost 800 people responded to the consultation, representing charities, social enterprises, legal professionals and other advisers. 85% of those agreed with the proposition that the 2020 update should take a "refresh only" approach, rather than adopting wholesale change. Some key takeaways:

  • Responses to questions about the Integrity Principle noted that the Code as currently drafted is quite inward-looking, considering the issue of integrity from the perspective of managing the reputation of the charity. There was strong support amongst respondents for re-framing the Integrity Principle to focus on safeguarding (the "right to feel safe") and other ethical responsibilities of the charity, particularly in light of recent high profile safeguarding failures
  • Respondents were broadly in favour of expanding the Diversity Principle to bring in more contemporary issues of equality and inclusion
  • Smaller charities tend to be less likely to comply with the principles of the Code as they are considered in some cases to be "too aspirational". The Steering Group responsible for keeping the Code up to date has confirmed it will address the varying needs of different sized charities in its more wide ranging review scheduled for 2023. 

"Find a charity" online register

The Charity Commission's online register of charities is the first place many people look to find out about a charity.

On 3 September 2020 the Commission launched a new version of the online register of charities.

It is a modernised version of the register and makes more information about charities readily available. In the Commission's words it "widens the public's window" into how charities are run.

Trustees and those working in charities should review their charity's records on the new register in order to see what information about them has been made more readily available online.

The previous version of the register provided information about trustees and access to a copy of the charity's annual report and accounts. However, the new version of the register now makes it easier to see at a glance:

  • the number of employees with salaries of £60,000 and over
  •  if any trustees are remunerated for their work
  • whether a charity works with professional fundraisers or commercial participators
  • whether the charity has been subject to regulatory action or is of ongoing concern.

Fundraising: majority of charities do not report on all requirements under fundraising legislation

On 14 September 2020 the Fundraising Regulator (FR) published its results of a sample review into charities' compliance with the fundraising reporting requirements contained in The Charities (Protection and Social Investment) Act 2016. The review can be found here.

Charities with gross income over £1 million must provide statements across six specific areas of their fundraising activity in their annual report submitted to the Charity Commission.

The FR found that "there is still work to do to improve reporting" by charities.

The FR is particularly concerned about the reporting of the monitoring of fundraising activities carried out on behalf of charities, the numbers of complaints received about fundraising and what charities are doing to protect vulnerable people and other members of the public while fundraising.

The FR has now published guidance to help charities comply with the reporting requirements in their annual report.

Please do get in touch if you would like any advice in relation to any of the areas discussed above. We also continue to be keen to hear from you about what you would like us to cover in future briefings.