Charity Commission consults on new power to issue official warnings

On 1 July 2016, the Charity Commission launched a consultation on how it proposes to use its new power in section 1 of the Charities (Protection and Social Investment) Act 2016 to issue official warnings to charities and charity trustees, as set out in draft guidance.

The Charities (Protection and Social Investment) Act 2016 (C(P&SI)A 2016) provides the Charity Commission with a new power to issue a formal official warning to either:

  • A charity trustee or trustee for a charity who it considers has committed a breach of trust or duty or other misconduct or mismanagement in that capacity.
  • A charity in connection with which it considers a breach of trust or duty or other misconduct or mismanagement has been committed.

Before issuing an official warning, the Commission must give notice to the charity, and each charity trustee or trustee for the charity, except any who cannot be found or who has no known address in the UK. The notice must:

  • Include details of any action the Commission considers should be taken, or that the Commission is considering taking, to rectify the misconduct or mismanagement.
  • State whether and, if so, how the Commission proposes to publish the official warning.
  • Specify a period within which representations may be made to the Commission about the content of the proposed official warning.

(Section 1, C(P&SI)A 2016, inserting a new section 75A in the Charities Act 2011 (ChA 2011).)

The Cabinet Office's timetable for implementing C(P&SI)A 2016 indicates that the Commission's new power to issue official warnings should come into force in October 2016

The Commission is also consulting on its new power to disqualify individuals from acting as charity trustees and holding senior management positions in charities.


Consultation on Commission's official warning power

On 1 July 2016, the Commission launched a three month consultation on its proposed approach to exercising its new power to issue an official warning to charities and charity trustees, as set out in its draft guidance.

The deadline for responses is 5.00 pm on Friday 23 September 2016.


Draft guidance on official warnings

In the draft guidance, the Commission says that it will use official warnings either as a sanction in its own right or as a means of securing compliance with legal or regulatory requirements.

The Commission intends to use its new power where it needs to take stronger action than giving regulatory advice, but pursuing litigation or using its inquiry powers might be disproportionate. However, it may also issue a warning in conjunction with using its other regulatory powers (such as, where charity trustees have already failed to act on regulatory advice).


What is a breach of trust or duty, mismanagement or misconduct?

The guidance interprets a "breach of trust or duty" widely to include acting inconsistently with:

  • A charity trustees' duties.
  • A charity's governing document.
  • Any other legal duty that applies to the charity or its charity trustees.

Similarly, the guidance says that "mismanagement" includes any act (or failure to act) that might result in:

  • Charitable resources being lost or misused.
  • A charity's reputation being harmed.
  • Beneficiaries being put at risk.

"Misconduct" includes any act (or failure to act) that the person knew (or ought to have known) was criminal, unlawful or improper.


Examples of when an official warning might be issued

The Commission has given the following examples of when it might issue an official warning:

  • Unauthorised benefits to charity trustees where the amounts involved are small and other sanctions may be disproportionate .
  • Poor decision making (such as, where the charity trustees should have considered advice) where the financial loss to the charity is too small for stronger sanctions to be proportionate .
  • Repeated or persistent failure to comply with statutory accounting and reporting requirements, including non-submission and late submission of documents. The Commission warns that it may issue warnings automatically in these circumstances.
  • Repeated breaches of a charity's governing document that cause governance problems (such as, failing to follow the correct procedures for appointing charity trustees).

However, the Commission has said that it is unlikely to issue an official warning for a minor technical breach or minor misconduct or mismanagement where the loss or risk to the charity, or to public trust and confidence in the charity, is minimal.


Official warnings are not directive

The guidance makes it clear that official warnings are different from statutory directions, which it can only issue after it has opened a statutory inquiry. It goes on to state that there "are only specific circumstances in which the Commission can direct trustees to take (or refrain from) particular action".

This therefore confirms that the regulator cannot use an official warning to direct charity trustees to take, or refrain from taking, particular action. However, if charity trustees fail to remedy any breach specified in an official warning, the Commission will be able to treat this as evidence of misconduct or mismanagement which may justify use of its protective powers under a statutory inquiry (section 2(1)-(2), C(P&SI)A 2016, amending section 76 of ChA 2011).


Notice and representations

Before issuing an official warning, the Commission will:

  • Normally give 14 days' notice, although there may be exceptional circumstances where the warning relates to a time specific activity so that shorter notice is necessary. If short notice is given, the Commission will explain why it considers this necessary, and allow "sufficient opportunity" for representations.
  • Consider any representations made to it during the notice period and before issuing the warning (provided such representations are received by it within the specified deadline). The Commission will assess whether it is still legitimate and justifiable within the facts and circumstances of the case to proceed with the warning, in light of the representations made to it. It may then decide, without further notice:
    • to issue the warning;
    • to issue a modified warning; or
    • not to proceed with issuing the warning.

Once it has considered representations, the Commission will not normally conduct a further review of the content of an official warning under its decision review process. Official warnings are not appealable to the First-tier Tribunal (Charity) .


Variation or withdraw of official warning

An official warning can be varied or withdrawn if circumstances have changed and the Commission considers it would be in the charity's interest or the public interest to do so. However, the Commission will not automatically withdraw a warning just because the specified misconduct or mismanagement has been remedied.

The Commission must give notice of a variation of a warning and consider any further representations. It does not need to give notice before it withdraws a warning.


Publishing an official warning

The draft guidance makes it clear that the Commission will usually publish an official warning unless it considers publication would:

  • Be detrimental to a particular individual or group of individuals (such as, a risk to someone's personal safety).
  • Contravene or prejudice requirements for confidentiality or commercial sensitivity, or risk national security.
  • Cause severe prejudice to the charity or its beneficiaries.
  • Contravene the Commission's duty to use its resources in the most efficient, effective and economic way.
  • Not be in the public interest for any other reason.

The Commission has made it clear that potential adverse publicity or embarrassment will not be sufficient reason to suppress publication.

Official warnings will be published on the Commission's website alongside its other published reports, decision, alerts and statements.

Current official warnings will also be highlighted on a charity's entry in the register of charities. Published official warnings will remain on the website for up to two years after they were first published (unless withdrawn). They will then be archived and the "flag" on the charity's register entry removed.

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