At the end of March 2019, the Charity Commission published guidance for charities that have a relationship with connected non-charitable entities or organisations.
The guidance has been produced to help trustees understand the risks and challenges that these group relationships can bring. It also sets out what the Commission expects board members to do to deal with them. The principles it sets out are not new. They are reflected in other Commission guidance.
The key message of the guidance is charities must always further their charitable purposes. While it is fine to have a non-charitable organisations in the same RP group as non-charitable entities – the purpose of the connection must be to benefit the charity’s beneficiaries. The guidance does not change the law and should not preclude RP’s current development activities. However, RP group company secretaries should consider whether to carry out a compliance review of their governance framework to make sure they comply with, (or can justify any departure from), what the Commission regards as best practice.
Devonshires previously commented on the consultation draft and issued a note maintaining your charity’s separation and independence – Issues for RP Groups, which can be read on our website.
Why should board members of RPs review it?
The consultation should be required Easter reading for board members of all charitable entities with subsidiaries or with a non-charitable parent. There are those that may argue that the guidance does not apply to exempt charities or, for that matter, to groups of organisations which include an exempt charity. Their view is that exempt charities, such as community benefit societies, are not subject to the Charity Commission’s direct regulatory scrutiny. Nevertheless, RP’s which are exempt charities are still bound by charity law and the Commission’s guidance is influential. If an exempt charity acts contrary to the Charity Commission’s guidance, its officers may run the risk of being held to have acted improperly. Furthermore, complaints made to the Commission about an exempt charity can be investigated by that regulator
While much of the guidance is aimed at other types of charities regulated by the Commission (such as education and campaigning), it raises a number of issues for RP groups – for example:
- managing conflicts of loyalty
- the independence of charitable entities; and
- the provision of services.
The guidance, therefore, as indicated above, provides a useful framework for reviewing existing intra group arrangements for RP groups with one or more charitable entity.
There are 2 key issues for board members. Namely, they should:
- Not allow a charity’s resources or activities to fund or support non-charitable purposes; and
- Identify, properly address, and review any risks which come from the connected entity.
Among the points made:
Compliance with your trustee duties
The guidance makes the point, at some length, that in its arrangements with third parties the charity’s trustees must ensure that the arrangement “only” furthers the charity’s purpose. While there needs to be a balance of risk and reward for both parties in any commercial agreement, the tests in the guidance are useful for boards.
Keep the charity separate – don’t blur the boundaries
In this section the Charity Commission makes a number of points:
- Shared staff/resources: Board members of charitable RP’s must decide what is a proper charge to make, or pay to, the non-charitable organisation when sharing resources such as premises and staff.
- Shared or similar names/branding: There needs to be a clear distinction as far as a third party is concerned as to who it is dealing with (consider, for example, email templates).
- Decision making: keep decision making independent.
Avoid conflicts of interest and conflicts of loyalty – the relationship with other group members
The economic benefits of being part of an RP group are derived largely from the ability of its members to act collectively and to give each other commercial and financial support. This collective approach can sometimes appear, conceptually, to be at odds with the basic legal concept that each member of the group is a separate entity and the board members of each entity owe duties to the individual entity (a point made in the guidance).
The guidance notes that board members have a legal duty to act only in the best interests of the charity. Accordingly, board members must avoid putting themselves in a position where their duty to the charitable entity conflicts with loyalty to any other person or body.
For RP groups, common areas of sensitivity include:
- intra-group trading and shared projects; and
- intra group loans.
Manage the risks, review the relationship
We believe the publication of the guidance provides an opportunity for RPs to audit their intra group arrangements in the light of the guidance, particularly where there is, for example:
- sharing of the charity’s name, logo and branding;
- data sharing;
- sharing staff;
- sharing premises; and
- the provision of specialist services such as IT, building services, HR or accounting.
The guidance highlights that where the arrangements are straightforward a letter agreement will be adequate. However, the terms to be covered would include:
- an exit arrangement;
- no automatic renewal – so there may need to be some form of informal (albeit documented) benchmarking to ensure VFM; and
- equitable pricing for the cost of the services.
Ultimately, however, the key consideration for charitable RPs to note is that the Commission expects charities to regularly assess whether the relationship with any connected non-charity. Therefore, review periods will need to be considered.
The guidance also touches on the issue of investing in a charity’s trading subsidiary. It would have been useful to have more guidance on the duties of the charity’s board on exercising their power of investment.
The Guidance for charities with a connection to a non-charity and two checklists can be read on on the government website.
If you would like to discuss this note or attend a workshop on the implications of the guidance, please call the partner with whom you normally deal or any of the following: