Ever the twain?

“What a really super guy – does a lot of work for charity; doesn't like to talk about it.” Harry Enfield's DJ parodies Smashie & Nicey gave the UK charity sector a comic appeal, but with around a £24bn turnover in 2000, it is anything but a joke. There are now over 185,000 organisations on the charities register, and with an income larger than the many countries' gross national products, UK charities are obviously doing something right.

But whatever it is, it doesn't seem to be enough for the Charity Commission. Only around 65 per cent of applications by new organisations to the charities register are accepted, compared with 90 per cent in the recent past. There is an increasing number of investigations and inquiries into charities each year, and increased bureaucracy and procedures mean that the process of registering is not the administrative formality it once was. According to Julian Smith, a charities partner at Farrer & Co, “it's a far lengthier registration process than in the past.”

The registration process has been one of the main focuses of the commission's tougher stance. It has adopted a “gateway” approach to applications to the register. “The commission's duties include both registration and providing advice and guidance, so as to promote the effective use of charitable funds,” says Richard Carter, director of policy at the commission. “The gateway approach can help secure a sound basis for the future governance of organisations and help to protect the integrity of the charity.” In practice, this entails a more rigorous examination of not just the charitable objective of the applicant, but also the practical aspects of how it proposes to achieve these objectives. “There are good reasons why they should scrutinise things more carefully, especially at the formation stage, because they don't want to be stomping around like a policeman later on. That should be a role they only undertake in extremis,” says the head of Bircham Dyson Bell's charity practice Simon Weil. This careful scrutiny, however, could be seen as legally unjustified. “If an organisation has exclusively charitable objectives and an annual turnover of more that £1000, the Commission has a duty to register it,” says . Once the Commission goes beyond this examination of the organisation's objectives, and begins inquiring into the proposed management and running of the organisation, it steps onto shaky legal ground. “What it really comes down to whether it is legitimate for the Charity Commission to ask the promoters of a charity how, in two or three years time, they might be intending to carry out its activities and then using that explanation to determine whether or not it should be registered,” says Smith. The Commission also requests the organisation's bank account details before it is registered, despite the fact that this falls outside its legal remit. “Being asked to provide copy bank statements showing that you have £1000 because this is a legal requirement, when you know perfectly well that it isn't, can be quite frustrating,” says Anne-Marie Piper a partner at Paisner & Co (Berwin Leighton Paisner as of 1 May).

It isn't just at the registration stage that the Commission is toughening up, it has also greatly expanded its monitoring of accounts. Allegations of mismanagement and misconduct within charities are investigated first of all via an evaluation of the evidence. If this evaluation finds sufficient cause for concern, an inquiry is opened. In 1999/2000 there were 1,312 evaluations, 20 per cent more than the previous year, and 17 per cent of which led to investigations. “They are trying to be stricter all the way along the line,” says barrister Francesca Quint, a charities specialist at 11 Old Square. “There is a more developed monitoring system for looking at charities accounts, for instance, and they have increased vastly the size of the investigations department.” The need for investigations isn't in doubt. “There's a lot of people out there who are trying to do good. But they do trip up, mainly on technicalities, and as a result they make mistakes,” says Smith. Honest mistake or malicious mismanagement, an evaluation can spell disaster for a charity. “The majority of investigations don't find anything wrong with the charity,” says Quint. “The trouble is that once news of an investigation gets out, the reputation of the charity is destroyed even if the trustees are innocent. That's quite a serious problem.” She continues, “There has also been concern at how they deal with their investigations. Sometimes they will launch one without telling the charity, tell the press before they tell the charity or put the report on the website before the charity has seen it.”

An increase in regulations and investigations sounds like the sort of policy to get lawyers running for their time sheets. But it's clear that a certain amount of change was inevitable. “Ten years ago the Commission was a fairly sleepy, lawyer driven organisation. It has turned itself around and the government has spent a lot of money on modernising it. They have become a better regulator, there's no doubt about that,” says Lloyd. A lot of that investment has been in IT to allow for more efficient and effective monitoring of the charities they regulate. “The Woodfield report in the early 90s found that only 25 per cent of charities filed their accounts with the Commission and in any case, there were no accountants at the Commission to look at them,” Lloyd says. Since the Charities Acts of 1992 and 1993 however, the regulatory aspect of the Commission's work has taken on a much larger role and its powers have grown commensurately. “Maybe charities were under-regulated previously. I think there's an argument that the Commission lacked the bite to do the job properly. But it certainly has that now, it's a question of using it appropriately,” says Piper. Lloyd agrees: “It is a tougher regulatory regime, but then many people were calling for tougher regulations and every time there was a scandal the Commission would get it in the neck.”

The Commission is supposed to be much more than a tough regulator though. If the harsh face of regulation has come to the fore recently, it is at the expense of the softer, advisory aspect of the Commission's work. “In the same way as the Police both provide crime prevention advice and also investigate criminal offences, so the Commission both provides advice and support and where necessary will not hesitate to investigate,” says Carter. A worrying comparison perhaps and it does seem that the once clear segregation between regulation and guidance and support is blurring, to the alarm of charities and their legal advisors. “There's been a fundamental change in the character of the Commission in the last ten years,” says Quint. “It's become much more of a regulator than an advisor and supporter for charities…There's a great problem in that they are trying to do two opposing things at the same time. On the one hand, they're trying to be a regulator and be vigorously looking for abuse. On the other, they've got the job of trying to support charities and advise trustees and assist them in making their charities efficient.” It's a dual role that increasing numbers of people in the sector are uncomfortable with. Where once the two roles were clearly segregated and a charity could discuss concerns or issues in confidence with the charity support staff at the Commission, most advisors now counsel against this as they find information passing from one area of the Commission to another. “Some of the powers that used to be associated with the regulatory side like opening investigations and inquiries are now sometimes done by charity support, so there is a blurring of lines even within the Commission,” says Piper.

The apparently inadequate separation of powers at the Commission is a concern shared by Lloyd, “The Commission almost manages to combine the three elements of government in one – the notion of the executive, legislature and judiciary,” he says. “They are legislative in that they set up policy documents which almost have the status of law; they're executive in that they are a registration authority and carry out investigations into charities and monitor the accounts; and they're judicial in that they decide on applications for charitable status, launch investigations and dismiss trustees. All three of Montesqieu's tests of government are combined in the one organisation – and that's pretty strange.”

The Charity Law Association lobbies the Commission, and indeed the government, on the concerns of charities and their advisors but the problem, familiar to anybody with experience of dealing with the civil service, is often one of internal communication, or lack of. “When you're talking to the Chief Legal Commissioner he answers these [concerns] perfectly sensibly, but the problem is that it doesn't always filter down to the people on the desks,” says Judith Hill, head of charities at Farrer & Co. and chairman of the Charity Law Association. Money, of course, plays a significant part, “It's difficult for them,” Hill continues. “They are trying to do the job that they've been asked to do and the government makes it clear that they've got to do it in a certain way. It may not be the way that they themselves think is appropriate, but nonetheless they have no choice. They have to do it that way and they have to do it on a shoestring.”

The government has already promised an increase in funding for the Commission of 20 per cent from 2002 and so the shoestring may be about to get bigger. For the charities and their advisers, the key is not the amount of money, but how it is spent. “A bit more money which enabled them to make lawyers more accessible in circumstances where it was appropriate would be a big help,” says Hill. “You simply can't get to a lawyer when you know that five minutes with one would solve your problem immediately. If it's a legal issue – why not have lawyers discussing it?” she asks. Having already announced its own plans, according to Carter, “to increase our capacity for regulatory enquiries into individual charities by more than 20 per cent,” it seems likely that there will be plenty more discussions to come, but they may not be of the kind the charities are hoping for.

“What a really super guy – does a lot of work for charity; doesn't like to talk about it.” Harry Enfield's DJ parodies Smashie and Nicey gave the UK charity sector a comic appeal, but with around a £24bn turnover in 2000, it is anything but a joke. There are now over 185,000 organisations on the charities register, and with an income larger than many countries' gross national product, UK charities are obviously doing something right.

But whatever it is, it doesn't seem to be enough for the Charity Commission. Only around 65 per cent of applications by new organisations to the charities register are accepted, compared with 90 per cent in the recent past. There is an increasing number of investigations and inquiries into charities each year, and increased bureaucracy and procedures mean that the process of registering is not the administrative formality it once was. According to Julian Smith, a charities partner at Farrer & Co, “it's a far lengthier registration process than in the past.”

The registration process has been one of the main focuses of the commission's tougher stance. It has adopted a “gateway” approach to applications to the register. “The commission's duties include both registration and providing advice and guidance, so as to promote the effective use of charitable funds,” says Richard Carter, director of policy at the commission. “The gateway approach can help secure a sound basis for the future governance of organisations and help to protect the integrity of the charity.” In practice, this entails a more rigorous examination of not just the charitable objective of the applicant, but also the practical aspects of how it proposes to achieve these objectives. “There are good reasons why they should scrutinise things more carefully, especially at the formation stage, because they don't want to be stomping around like a policeman later on,” says the head of Bircham Dyson Bell's charity practice Simon Weil. This scrutiny, however, could be seen as legally unjustified. Bates Wells & Braithwaite's head of charity Stephen Lloyd says: “If an organisation has exclusively charitable objectives and an annual turnover of more that £1,000, the commission has a duty to register it.” Once the commission goes beyond this and begins inquiring into the proposed management, it steps onto shaky legal ground. “It really comes down to whether it's legitimate for the commission to ask the promoters of a charity how, in two or three years time, they might be intending to carry out activities, and then using that explanation to determine whether or not it should be registered,” says Smith. The commission also requests the organisation's bank details before it is registered, despite the fact that this falls outside its legal remit. “Being asked to provide copy bank statements showing that you have £1,000 because this is a legal requirement, when you know perfectly well that it isn't, can be quite frustrating,” says Anne-Marie Piper, a partner at Paisner & Co (Berwin Leighton Paisner as of 1 May).

It is more than just registration that the commission is tightening up – it has also greatly expanded the monitoring of accounts. Allegations of mismanagement and misconduct are initially investigated by evaluating the evidence. If this finds sufficient cause for concern, an inquiry is opened. In 1999-2000, there were 1,312 evaluations, 20 per cent more than the previous 12 months, 17 per cent of which led to investigations. “They're stricter all the way along the line,” says barrister Francesca Quint, a charities specialist at 11 Old Square. “There's a more developed monitoring system for looking at charities' accounts and they've increased vastly the investigations department.” The need for investigations is not in doubt. “There's a lot of people out there trying to do good, but they do trip up, mainly on technicalities, and as a result make mistakes,” says Smith. Whether an honest mistake or malicious mismanagement, an evaluation can spell disaster for a charity. “The majority don't find anything wrong,” says Quint. “The trouble is, once news of it gets out, the charity's reputation is destroyed, even if it's innocent. It's a serious problem. There's also been concern at how they deal with their investigations. Sometimes they'll launch one without telling the charity, tell the press before they tell the charity or put the report on the website before the charity has seen it.”

An increase in regulations and investigations sounds like the sort of policy to get lawyers running for their time sheets, but some change was inevitable. “Ten years ago the commission was fairly sleepy and lawyer-driven. It's turned itself around and the Government has spent a lot of money on modernising it. It's definitely a better regulator,” says Lloyd. IT has seen a lot of investment for more efficient monitoring. “The Woodfield report in the early 1990s found that only 25 per cent of charities filed their accounts with the commission, and there were no accountants there to look at them anyway,” adds Lloyd. Since the 1992 and 1993 Charities Acts, however, regulation is much larger and the commission's powers have grown commensurately. Piper says: “Maybe charities were under-regulated. I think there's an argument that the commission lacked the bite to do the job properly. But it has it now, and it's a question of using it appropriately.” Lloyd agrees. “It's a tougher regime, but many people were calling for tougher regulations, and every time there was a scandal the commission got it in the neck,” he says.

The commission, though, is supposed to be much more than a tough regulator. If the harsh face of regulation has come to the fore recently, it is at the expense of the softer, advisory aspect of the commission's work. “In the same way as the police provide crime prevention advice while also investigating criminal offences, so the commission provides support, and where necessary will not hesitate to investigate,” says Carter. A worrying comparison perhaps, and it seems that the once clear line between regulation and support has become blurry, to the alarm of charities and their legal advisors. “There's been a fundamental change in the character of the commission in the last 10 years,” says Quint. “It's much more a regulator than an adviser. There's a great problem in that they're trying to do two opposing things at the same time: they're trying to be a regulator vigorously looking for abuse, while they've got the job of trying to support charities and advise trustees and assist them in making their charities efficient.” It is a dual role that increasing numbers of people in the sector are uncomfortable with. Where once the two roles were clearly segregated, so that a charity could discuss concerns in confidence with the support staff at the commission, most advisers now counsel against this, as they find information passing from one area of the commission to another. “Some of the powers that used to be associated with the regulatory side are now sometimes done by charity support, so there's a blurring even within the commission,” says Piper.

The apparently inadequate separation of powers at the commission is a concern shared by Lloyd. “The commission almost manages to combine the three elements of government in one – executive, legislature and judiciary,” he says. “They're legislative in that they set up policy documents which almost have the status of law; they're executive in that they're a registration authority, carrying out investigations into charities and monitoring the accounts; and they're judicial in that they decide on applications for charitable status, launch investigations and dismiss trustees. All three of Montesquieu's tests of government are combined in the one organisation – and that's pretty strange.”

The Charity Law Association (CLA) lobbies the commission, and indeed the Government, on the concerns of charities and their advisers; but the problem, familiar to anybody with experience of dealing with the civil service, is often one of internal communication, or lack of. “When you're talking to the chief legal commissioner, he answers these [concerns] perfectly sensibly, but the problem is that it doesn't always filter down to the people on the desks,” says Judith Hill, head of charities at Farrers and chairman of the CLA. Money, of course, plays a significant part. “It's difficult for [the commission],” adds Hill. “They're trying to do the job they've been asked to do and the Government makes it clear that they've got to do it in a certain way. It may not be the way that they themselves think is appropriate, but nonetheless, they have no choice. They have to do it that way and they have to do it on a shoestring.”

The Government has already promised an increase in funding for the commission of 20 per cent from 2002, so the shoestring may be about to get bigger. For the charities and their advisers, the key is not the amount of money, but how it is spent. Hill says: “A bit more money, which would enable them to make lawyers more accessible in circumstances where it was appropriate, would be a big help. You simply can't get to a lawyer when you know that five minutes with one would solve your problem immediately. If it's a legal issue, why not have lawyers discussing it?” Having already announced its own plans, according to Carter, “to increase capacity for regulatory enquiries into individual charities by more than 20 per cent”, it seems likely that there will be plenty more discussions to come. They may not, though, be of the kind that the charities are hoping for. n