.

Oral Evidence

Taken before the Joint Committee

on Tuesday 2 December 2014

Members present:

Lord Hope of Craighead (Chairman)

Baroness Barker

Lord Hodgson of Astley Abbotts

Baroness Warwick of Undercliffe

Lord Watson of Invergowrie

Viscount Younger of Leckie

Mr Bernard Jenkin

Mark Menzies

Sarah Teather

Chris Williamson

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Examination of Witnesses

Witnesses: Jo Coleman, IBB Solicitors, Nicola Evans, Bircham Dyson Bell LLP, and Julian Smith, Farrer & Co LLP, examined.

Q152 Chairman: Good afternoon to you all and thank you very much for coming to see us. Before we begin, can I explain that the proceedings are being videoed and webcast? There is also a written transcript being prepared of your evidence; you will be shown it in due course as a draft. Please look at it carefully and see that it accurately records what you recall saying. If there is anything that you are unhappy about, please let us know and we will try to attend to it.

I will begin with a fairly general question which I will put to you as a panel and leave it to you to decide who answers first. Looking at the main legal issues that we have to address, would you think that the main issue is the effectiveness of the regulator, or is it a broader canvas than that? Should we be looking at other issues as well as purely the effectiveness of the present arrangement?

Nicola Evans: Certainly the effectiveness of the regulator is a main legal issue that affects the sector. Of course the draft Bill is aimed at one aspect of that, which is that certain deficiencies have been identified in the powers available to the Charity Commission, in respect of its compliance and enforcement powers. The Bill is very much driven towards that.

Obviously as practitioners in the sector, we see all the other aspects of what we would regard as the effectiveness of the regulator as well. Those are the aspects that the vast majority of the 160,000-plus charities that the Commission regulates would see, and look to the Commission to provide—such as being able to access guidance from the Charity Commission’s website, for example, and the Commission using its facilitation powers. Those are what we would see as every bit as an important part of the effectiveness of the regulator as the compliance and enforcement aspects, though of course the draft Bill’s remit is narrow. As I understand it, it is only seeking to address the enforcement aspects. Whether it is something to go wider than that would be quite a major task.

Q153 Chairman: We are of course looking at legislation. There may be things that are capable of being done without legislative intervention. The thing that we would be interested in is whether there are gaps in the legislative scheme that we ought to be looking at, as well as what is in the draft Bill. Can we leave it with you for the moment and come across the panel?

Jo Coleman: You will obviously be aware that the Law Commission is currently looking at a number of issues that have arisen from Lord Hodgson’s report into the Charities Act and its effectiveness during the five-year review. We would support and welcome the Law Commission’s review of those particular aspects of law.

From our perspective as a working party, we very strongly felt that what is needed in the sector more than anything at the moment is a period of certainty. There has been a lot of change in the sector. The 950,000-odd charity trustees are expected to be on top of the law and the regulations as they go through their daily lives trying to do their very best for their charities. They are, of course, volunteers and there is a lot of regulation for them to get on top of. As far as we are concerned, we think that there are a number of deficiencies in the Commission’s powers which this Bill will address. Apart from that, we think that the sector is broadly reasonably well set up.

Julian Smith: I do not have anything particular to add to that.

Q154 Viscount Younger of Leckie: On the same subject line, the recent reports by the National Audit Office, the PAC and the PASC focused on the Commission’s effectiveness as a regulator, which you alluded to earlier. Do you think this is right, or do you think it should be extended in terms of its role focusing as a registrar—that is, as a provider of guidance, enabling information and acting as a resource? To what extent do you think it should carry out this role?

Jo Coleman: We think the reports were right to focus on the aspects at which they looked at a particular time, but they were born of a particular set of circumstances. As the Committee will remember, they came at a very difficult time in the life of the Commission. There had been a change of leadership; there had been a number of very long-running and complex public benefit cases that it was in the middle of; there was the Cup Trust scandal; there was concern around charity fundraising practices; and it was then faced with the biggest cut in its budget for a very long time. Those were, of course, issues that needed to be addressed.

For the working party, the answer to your question is twofold. From the public perspective, we can see that it is important to be able to have confidence in a strong charities regulator, which works effectively to tackle abuse in charities. When a scandal such as the Cup Trust breaks, it can, and does, damage the reputation of the sector as a whole. A strong regulator can help to restore that confidence. However, as Nicola said, the way in which the majority of charities judge the effectiveness of the regulator is through the way in which they interact with the regulator on a daily basis. How it fulfils its other functions is just as important: registration and the use of its enabling powers—the making of orders and schemes; when it has a question about how to complete an annual return, the ability simply to pick up the phone and speak to the Commission is important; and in the issuing of best practice and other very helpful guidance which the Charity Commission issues from time to time.

As the focus of those reports has, for good reason, been on tackling abuse, it has obviously had a very profound impact on the resource which is now available to the Commission to do its other work. We appreciate that it is much harder to demonstrate the impact of this other work, but, in our view and in the view of the working party, good and clear guidance from the Commission has just as much impact in preventing problems from arising in the first place. The supportive function of the Charity Commission is really important to the sector. We would not want to see that function wither away. For example, the Charity Commission’s website, which was a really helpful, useful and easily accessible website, has now moved on to the gov.uk provision. Unfortunately, it is now incredibly difficult for charities to find the guidance that we know is available.

Q155 Baroness Warwick of Undercliffe: I think generally you supported the provisions of the Bill. In its foreword to the draft, the Cabinet Office referred to its consultation document as relating to a “range of new measures that would strengthen the Commission and bolster public trust and confidence in charities”. Do you think, quite specifically now, that the measures in the draft Bill will have that effect? If they won’t, how should we be thinking of looking at amendments to secure that?

Nicola Evans: As I mentioned, the draft Bill is essentially layering on top of an existing regime of powers, particularly focusing on the enforcement and compliance side. That is because deficiencies have been identified there, so it seems perfectly proper to address those.

If I can put it in terms of looking at the likelihood of the success of the changes, it will come down in part to the perception of those changes both within the sector and for the public in terms of how they see the regulator. In turn, that will be dependent upon how those changes are implemented by the Commission. In that respect there is potentially a risk, in that we know from the Commission’s estimate of how often they expect to use these powers that they are not expected to be used very often. These are powers, by and large, for extreme circumstances. There is a risk that, in giving the powers to the Commission, there might be heightened expectations that they will be used—and used often. What I would be concerned about is that the success of the changes was judged on the number of times the powers were used. That would be quite a wrong way to judge it.

Q156 Baroness Warwick of Undercliffe: It is very difficult to appreciate down the line how it is going to be interpreted. How would you expect it to be interpreted based on the current resources of the Charity Commission?

Nicola Evans: It is difficult to know at this stage, to be honest. As you say, there is an element of crystal ball gazing involved in that. In part, it is down to explaining what the changes are and what they are intended to do. By and large, these provisions are looking at the deficiencies which have been identified, and the Commission will not expect to use them very often. If the message is brought across that this is just looking at making the regulator more robust in terms of the powers it has available to it when necessary, that would be helpful.

Q157 Baroness Warwick of Undercliffe: Do you think that that in itself will be sufficient to increase public trust and confidence?

Nicola Evans: It is quite difficult to tell. We use the phrase “public trust and confidence”, but I am not sure that I would be able to judge what in itself is going to have that effect.

Baroness Warwick of Undercliffe: We have had a similar discussion.

Q158 Sarah Teather: What changes, if any, do you consider would be required to the draft Bill to ensure that the Commission is better placed to meet the statutory objectives laid down in section 14 of the 2011 Act—the Commission’s objectives and functions?

Julian Smith: We have to start from the perspective of understanding that the section 14 objectives are fairly wide-ranging, and the provisions in the Bill only address some of those objectives. For example, increasing understanding of the meaning of public benefit will not be served by this Bill. If we look at provisions that are more relevant, such as accountability and compliance, I do not think the Bill needs to do more. The exercise that was gone through during the consultation was very healthy in terms of refining the Bill down to the things that were necessary to help the Commission in its task. If anything, I would say that the risk in their reaching those objectives isin the perception on the part of trustees of the Commission becoming all stick and no carrot. If they become fire and brimstone on the back of these, it could have a retrograde effect on confidence in them as a regulator, and indeed the confidence of people wishing to participate in volunteering generally.

Jo Coleman: It would be a dreadful unintended consequence if it prevented people or put people off from serving as a trustee in a voluntary capacity.

Q159 Mr Jenkin: As we have raised the vexed issue of public benefit, could I ask this of Julian Smith, and indeed the others? The noble Lord, Lord Hodgson, described having to produce guidance on this subject as a hospital pass to the Charity Commission. The Public Administration Select Committee recommended that the obligation on the Charity Commission to produce guidance should be dropped and that it should be left to the courts to determine. Do any of you have a view on this matter?

Julian Smith: I certainly think it is the case that by some means or another charity trustees have to understand the concept of public benefit. It is absolutely central to the principle of charity. There is, certainly in my experience, a significant amount of misunderstanding in different contexts as to what “public benefit” genuinely means. For example, there is a common misinterpretation of “public benefit” as meaning “public interest”, and that is not necessarily the same thing. I entirely endorse the idea that the guidance has to come from somewhere. I would also say that, whilst the tribunal is working a lot better in terms of producing decisions that are accessible and comprehendible, if I were a layman I would still have difficulty picking up a judgment of the tribunal and understanding the concept of public benefit.

It is absolutely right; the Commission were given an almost impossible task. They have clearly worked quite hard to ensure that the tribunal was given the opportunity to consider issues of public benefit, and to produce guidance where they feel able to do so beyond the specific question that has been put in front of them. It is an important task. What I am saying is that I am not sure that anybody would necessarily be better placed to perform that task than the Commission. I would prefer them to make the best of the job than not have the job at all.

Jo Coleman: I agree with that. Our sector is full of voluntary trustees who need to be able to access clear guidance in a very clear and easy to read manner. Public benefit is a difficult issue. The Commission made the best job of it.

Q160 Lord Hodgson of Astley Abbotts: Perhaps we could persuade the tribunal to follow one of the recommendations we made, which was that there should be a layman’s summary at the front of every judgment, as I think the Supreme Court provides, so that people can understand. Then you can dig into the detail if you wish.

My question is about whether the provisions, as presently drafted, are sufficiently clear and can be readily interpreted; and whether the CLA itself will find difficulty with this and, if so, where. Could I draw you a bit wider? Your 50-page submission to the consultation had a section with six themes. Nearly every one of them is negative: either “No” or “If you must, with this”. It seemed to me that you did not see any real need to move the law forward at all.

Nicola Evans: I might take this opportunity, first of all, to say that I have a little prop here; it is the version of the Act as it would be amended, which the Cabinet Office produced. It is tremendously helpful and I encourage this as a development going forward.

In terms of whether we think this is useful to do at all—if that is essentially what you are asking—certain deficiencies have been identified, so to that extent it seems appropriate to take steps to amend them. Given that the Commission has identified them as actions they would have liked to use, there is something to be said for acting on it sooner rather than later. It has taken aspects away from what the Law Commission was going to look at, for example - there is an element of speed here. The focus of the draft Bill, for that reason, is necessarily narrow. Generally, we support the provisions that have been put forward. We have comments on some aspects, but we are generally supportive of those the Cabinet Office has decided to take forward.

You asked about clarity. There are some aspects where I would have concerns about advising as they stand at the moment. We are very happy to offer detailed comments on the draft, but I can give you just a couple of examples if that would be helpful. One of those would be that I would find it difficult to advise, for example, on the nature and effect of an official warning under clause 1 as it is currently drafted. Another example relates to the discretionary power to disqualify, which is currently in clause 9 of the draft Bill. We would have concerns about how to advise on the test there. For example the second limb of the test relates to unfitness, if I can put it that way, which is currently completely undefined. We would be in something of a vacuum with the draft Bill as it stands.

Jo Coleman: I would answer the question in a slightly different way. As a working party we want to be as helpful as we possibly can. We do not intend to be negative, but when, as a working party, we sit round the table and look at the powers that are already available to the Charity Commission, they seem to us to be fairly wide-ranging. As soon as the Charity Commission opens a statutory inquiry it has seven, eight or maybe even nine different powers that it can then use to go in and investigate abuse, mismanagement or misconduct in a charity. That is a suite of powers that have already been given to the Charity Commission by Parliament.

We reflected on and took account of the very detailed consideration that the Charity Commission have given to the defects, as they see it, in their powers. Where we agree that there is an issue we have supported those proposals, and most of those proposals have come forward into the Bill, but, broadly speaking, we are very conscious of the fact that the Charity Commission by statute is not allowed to interfere in the administration of a charity. That is for the charity trustees to administer. Therefore, if the Charity Commission is to become involved, it needs to be very clear to the trustees, to the charity and to the world at large when that red line has been crossed and when we are in territory where the Charity Commission is going to begin to make directions to the charity trustees as to what they should or should not be doing.

For us, the statutory inquiry is a very good mechanism which already exists and in which everybody knows where they are. In the scale of sanctions, if you like, you know that when you have crossed over the red line you are in inquiry territory, and then there are a very broad range of powers that are available to the Charity Commission to investigate abuse. For example, they have the power, with a magistrate’s sanction, to go in and search and seize papers in a trustee’s home. That caused quite some consternation when it was introduced back in 2006, but it is an example of the range of powers that are already available. One thing that we feel has not been properly explained to us is why it is quite so administratively burdensome for the Charity Commission to open an inquiry. The legal test is not very high.

Chairman: I am going to ask Bernard Jenkin to put his question on this very topic.

Q161 Mr Jenkin: The Bill introduces statutory warnings. I note in your submission that you say, “Yeah, okay, if you really want to.” Do you see no utility in having a statutory warning system? I think the Charity Commission would tell us that their informal warning system does not seem to have the wake-up effect that it should have.

Jo Coleman: From the perspective of most charity trustees and most of our clients, a warning from the Charity Commission is official, whether or not it says “Official Warning” on the top. Most charity trustees, again in their voluntary capacity trying to do the best they possibly can for their charity, would regard that as a significant moment in the life of their charity.

We are broadly supportive, however, of an official warning power—we have thought about it long and hard—but subject to four things. We express them as the four “Ps”. They are purpose, process, perception and publicity. In terms of purpose, the power as it is currently drafted on the face of the Bill is very bald. It gives no indication at all as to what a warning is to be used for. Is it for all breaches of law or fiduciary duty? As a working party we can well see how, if a charity has not filed its accounts, it is perfectly proper for a warning to be issued requiring the charity to file its accounts. We are more troubled by the idea that the Charity Commission might use this warning power if it does not agree, for example, with the interpretation that a charity has taken of a particularly difficult or contentious piece of guidance. For example, take political campaigning—CC9; if the Charity Commission took a different view from a charity over a nuanced point of law over political campaigning, it would seem to us wrong for a warning to be able to be used in those circumstances.

If I can move on to the second “P”—

Q162 Chairman: May I stop you there? It is rather important to think how your point might be expressed in legislation. Are you suggesting that something should be on the face of the Bill by way of guidance as to when it would be given, and safeguards?

Jo Coleman: Yes. That brings me to the second “P”, which is process. We understand that the Charity Commission looked to the CQC. I think you are taking evidence later this afternoon from the CQC. Our very quick look at the warning power that the CQC has shows that it has certain additional safeguards built in on the face of the Bill. They are required, for example, to say how it is going to be issued. At the moment we have no idea whether an official warning could be issued to one trustee by telephone.

Q163 Chairman: Might I suggest, since time is fairly short for oral evidence, that you might like to express yourself in writing on this point? If you would like to write to us with some kind of a recommendation it might assist us all, and then we could look at it. We are on a fairly tight limit, so if you could do that within 14 days we would be very grateful.

Jo Coleman: Yes.

Julian Smith: We would be very happy to.

Mr Jenkin: Preferably expressed in terms of the amendment you would like to see put down.

Chairman: Exactly; yes. Thank you.

Q164 Baroness Barker: Returning to the discussion you were having with Baroness Warwick, clause 3 includes the phrase “conduct…damaging or likely to be damaging to public trust and confidence in charities generally or particular charities or classes of charity”. Do you think that is sufficiently precise and could be clearly understood by lawyers such as yourself, charity trustees and the public at large?

Nicola Evans: It is very wide wording. This is in the context of conduct the Charity Commission could take into account, once certain powers had been triggered, in deciding whether and, if so, how to exercise that power. We also identified that the wording there is very wide, which could give rise to concerns. On the face of it, almost any conduct could be taken into account.

Our concerns boil down to two issues. One is the relevance of the conduct to the exercise of the power. The second is the potential for people to make allegations or accusations against the Commission that they must have taken into account such-and-such conduct which is completely irrelevant. We think both of those really come down to a question of transparency. The solution that we would suggest is an added provision on the face of the Bill: a requirement that, where the Commission takes into account conduct under this provision, it states the conduct it has taken into account. Then we will have transparency. The Commission will have done the exercise of working out the relevance of the conduct to whether it is going to exercise the power and, if so, how; and it would make it much harder for someone to make an accusation that other conduct had been taken into account. That is what we would suggest. If that requirement was put in, I think we would be happy with the wider wording, because it would necessarily be contained by the requirement to be transparent about the conduct that had been considered.

Baroness Barker: And you would assume that, as cases built up, the common understanding of the phrase would become clearer. Thank you very much.

Q165 Lord Watson of Invergowrie: I would like to pick up on clause 6 in the draft Bill. In paragraph 1 of your response you say, “A new power will not achieve the result the Commission seeks in being able to direct charities to wind up.” When we had the Charity Commission here two weeks ago, the Director of Legal Services was clear that it was a useful tool in his armoury. He actually said it would be the “ultimate power that the Commission could…deploy” and that it would be used very rarely, which I am sure everyone would accept. I want to press you a little bit on what you say in your response on that point. I am not clear. At paragraph 185 you say, in the only example you give, “In some cases trustees will be unwilling to wind up the charity and they are likely to ignore an order of the Commission.” First, is there is a remedy for that? If they just ignore it, surely the Commission have powers to deal with that. Then you go on to say that there is no one power that will fit the legal structure of all charities, which I accept. If we accept that there is to be such a clause in the Bill, or such a power given to the Charity Commission, how could you devise a means—or could you devise a means—to ensure that all charities were covered by that, and nobody could say, “This doesn’t apply to me and I am not willing to carry out the Charity Commission’s direction”? Is there a way out of that?

Jo Coleman: The response you are talking about is the response to the original consultation. We will give you some written evidence in relation to the current proposed wording of the draft Bill. Broadly, we are persuaded by the Charity Commission’s arguments that they need to be able to give this direction now. We think it is sensible, but we have a helpful suggestion as far as safeguards are concerned. We think this is the type of order that ought to be publicised, so that if the Charity Commission had to give public notice of its intention to order a charity to wind up with, say, the same publication scheme as exists for schemes of the Charity Commission, where a month’s notice has to be given and any member of the public who has any objection or question to raise is able to write in, that would ensure, to the extent that it was a controversial winding-up, that those representations would then have to be taken into account. It would hopefully also mean that it was only being used by the Charity Commission in very difficult cases where the trustees have moved on and just simply will not engage.

Q166 Lord Watson of Invergowrie: In a sense, you have changed your joint position on that. It is a useful thing to have in the Bill, but it is a question of how you make it effective.

Jo Coleman: Yes. We would like to detach the power to wind up from the power to direct that funds go elsewhere. We believe that the Charity Commission already has power to direct that any residual funds go elsewhere under the existing section 84 of the Act. We do not think that section 84A needs to include that additional power. We think 84A can simply be a mechanistic power whereby, if section 84 has been used to redirect funds elsewhere, 84A would come into play to enable the Commission to issue an order to wind up, but only if notice is given so that we can catch circumstances where it is controversial.

Q167 Lord Watson of Invergowrie: Because even if the funds had been redirected the charity would still be a legal entity.

Jo Coleman: Yes.

Q168 Mark Menzies: Clauses 8 and 9 of the draft Bill deal with the disqualification of trustees. Is the range of offences and other criteria which apply for automatic and discretionary disqualification appropriate? Should any offences or criteria which are currently included be removed, and should any additional offences or criteria which are not in the draft Bill be included?

Jo Coleman: We are going to split the answer to that, because clause 8 and clause 9 are very different. Clause 8 deals with automatic disqualification, in particular extending the list of offences which give rise to that automatic disqualification. As you would expect, as a working party we sat and considered those offences long and hard to make sure that they are appropriate offences. You will remember that in the original consultation there was a much broader range of offences that the Commission was talking about introducing. Broadly speaking, we support the list. I think you will be aware of some serious concerns as to the breadth of the underlying legislation and the risk of someone being caught inadvertently when they are engaged in humanitarian work so far as the counter-terrorism legislation is concerned. From our perspective, with the caveat about the breadth of that legislation, if somebody is convicted of an offence of terrorism, it would seem appropriate that they should be automatically disqualified.

Q169 Mark Menzies: As a supplementary, do you have any other suggestions or comments regarding the clause? For example, do you think that it will increase the Commission’s focus on terrorist activities? And if that became a focus, do you consider that would be appropriate for a civil regulator of charities?

Jo Coleman: This is a list of offences for which trustees will be automatically disqualified. I would hope that the Charity Commission is not going to put that list at the front of its work, ever. In any event the Charity Commission is already taking quite a lot of other measures in relation to counter-terrorism. For example, it has alerts in relation to giving money to Syria. It is working hard on those issues. I do not see clause 8 as trailblazing the way for charities and counter-terrorism issues.

Q170 Chairman: A moment ago you pointed out that 8 and 9 are quite different. A feature of clause 9 is that the power is available where somebody has simply been cautioned. The Charity Commission does not have the protection of a conviction. Do you have any position on clause 9 as a quite distinct chapter from clause 8?

Nicola Evans: We do, yes. We are in favour of the Commission having a discretionary power to disqualify. Our concerns on clause 9 arise in terms of whether what is there at present in the drafting is quite appropriate. That is both in terms of the conditions that are in the first limb of the test, and the second point, which I have already raised, which is that the second limb of the test at the moment is entirely undefined. We also have some concerns about the procedure that is proposed. I appreciate that you mentioned we are short of time, and I know it is a very long clause. Clause 9 covers four new proposed sections in the Bill. I am quite happy to give you a brief overview of that, if it would be helpful

Q171 Chairman: That would be very helpful.

Nicola Evans: A number of the conditions that are being proposed are either the same as or a version of what was proposed at consultation level. We did raise concerns at that stage. You mentioned the cautions condition. We have a concern about that because, as you said, it would not give the Commission protection, but we are aware that there are many circumstances in which someone may accept a caution where, if it went to trial, they would not be convicted. We have a concern if that is raised as a condition. Of course, that then raises the question about the second stage of the test and whether that would somehow rescue it. We have raised that as a concern and I would be happy to give more detail in writing.

Another example is in relation to condition F in the first section. At consultation stage we commented that it was very broad. It seems to us that the provision that has come into the draft Bill is broader again. Essentially, it seems to say that any conduct could be taken into account, so it seems to make the field incredibly wide. We think that charity trustees should know what the conditions are. We think they should be clear. At present we do not think they are sufficiently clear.

Turning to unfitness, at the moment the test is simply that the Commission is satisfied that the person is unfit to be a charity trustee. That is all it says. We have looked at some other regimes. The obvious comparable regime to us seems to be the company directors disqualification regime, which uses the same word—unfit. In that regime there are statutory criteria to which, in that case, the court has to have regard in determining whether the director in that case is unfit. We think there should be similar criteria set out on the face of the Bill so that people are clear as to how it will be judged whether they are unfit.

Q172 Chairman: If you are writing to us, as I was suggesting earlier, it would be very helpful, if you have particular formulations of wording in mind, if you could let us know and we can look at that.

Nicola Evans: The final point is about procedure. In this case, what is proposed is that the Commission would decide to exercise its power. The person would be disqualified and would then have the ability to appeal to the tribunal. Again, we looked at what we see as comparable regimes, and again an obvious one would seem to be the company directors disqualification regime, where it is really turned around. In that case, it is the Secretary of State who has to apply to court. There is an external body that applies the criteria of unfitness. At the same time, because it was noted that that could lead to more court cases, the Secretary of State has the ability to offer the opportunity to take a disqualification undertaking. We can see the benefit of having an external review of the criteria. It is envisaged from the estimates that the power would be used eight to 10 times a year. It seems to us not disproportionate to expect the Commission to make the case, but also to have the opportunity to offer an undertaking proposal so that, if the charity trustee accepts that, there is no tribunal hearing.

Q173 Lord Hodgson of Astley Abbotts: Presumably, if you are unhappy about the disqualification, you can appeal to the tribunal to have the thing reversed. In those circumstances, presumably the law will have its way. Indeed, those of us who are arguing that we should have the Social Action, Responsibility and Heroism Bill are told we do not need it because the law is perfect and will look after people who do sensible things perfectly, and we are therefore okay because we have the law to go to. Why do we need to trammel the Charity Commission still more in circumstances where it is going to be on the edge? Public trust and confidence is moving around and things need to be done quite quickly, otherwise you are left with some very long period of time during which things may deteriorate considerably.

Jo Coleman: We do not see this as trammelling the Charity Commission in any way. If a charity trustee has unwittingly breached the law, or wittingly breached the law, and finds themselves in a situation where they are going to be disqualified, it is just a question of having a fair hearing in front of an independent third party.

Julian Smith: You also have to recognise the potentially devastating consequences for an individual of such a finding. It is a question of fairness in that sense as well.

Q174 Mr Jenkin: How concerned are you that the provisions of the Bill that are meant to make it easier to regulate charities in respect of supporting, aiding and abetting terrorism are actually going to have unintended consequences, and limit what charities necessarily need to do, particularly in the international field, to carry out their charitable purposes?

Jo Coleman: We are not experts in terrorism legislation. You are hearing from one of those this afternoon. In our view, the terrorism legislation is widely drawn and there are a number of significant parts of the charity sector that have concerns about the impact that legislation will have.

Q175 Mr Jenkin: Will it therefore depend upon the self-restraining ordinance of the Charity Commission itself for those powers to be exercised fairly?

Jo Coleman: I think the self-restraint comes before. If there is an offence against terrorist legislation abroad, the Attorney-General in those circumstances is already there as a check and balance to determine whether or not it is in the public interest to bring a prosecution. By the time you get to a finding of guilty on a terrorist offence, you have already been through quite a significant number of safeguards.

Q176 Mr Jenkin: In my hypothetical situation, which I gather is not very hypothetical, an aid organisation has to pay money to checkpoints run by known terrorist organisations in order to be able to move around its area of operations. In your view, does that not in itself create a problem for that charity, in respect of the Charity Commission?

Jo Coleman: It may or may not, but in our view that is not a question that will be addressed by this Bill.

Q177 Chris Williamson: Are you satisfied with the workings of the Charity Commission’s appeals processes and the Charity Tribunal? Do you think any of the powers contained in the draft Bill would necessitate some changes to those processes—for example, to secure a correct balance between the powers of the Commission and those of the tribunal or the court in relation to disqualification of trustees?

Julian Smith: Generally speaking, we think the Charity Tribunal system has bedded in and is operating better than it did to start with. Over time and with more use, that will continue to improve. We made a specific suggestion in relation to the role that the tribunal might play in some of the provisions within the Bill in order to provide a degree of independent oversight of some of the decisions of the Commission. If that were to find favour, clearly it would involve some change to the functions of the tribunal as currently set out in order to facilitate that. So, yes, around the edges, but I do not think we are suggesting that there needs to be any root and branch review of those processes in order to enable some oversight.

Q178 Chris Williamson: You feel that there will be some, but fairly limited.

Julian Smith: We think that there is possibly a useful role for the tribunal and the principal judge to play in relation to some of the functions within the Bill. We are not sitting here today thinking, “Gosh, it is going to be a disaster if you have to appeal any of this.” There has been quite a lot of hard work in the previous few years to ensure that there is at least a relatively easy facility for appeal from decisions. Of course, we have to accept that, when you have a client who is facing an appeal on a Charity Commission decision to the tribunal, it is going to look, sound and feel like litigation to them, however friendly or easy you try to make that process. I am not pretending that the tribunal has in that sense made things an awful lot more comfortable or cheaper for people that necessarily feel the need to appeal a decision; but I prefer to have the tribunal and that system than not.

Q179 Chairman: Is there anything that the others would like to add on that topic?

Jo Coleman: No.

Nicola Evans: No; thank you.

Chairman: Thank you very much. We will end the session there. We express our thanks to all three of you for coming and giving us such helpful evidence.

Examination of Witnesses

Witnesses: David Anderson QC, Independent Reviewer of Terrorism Legislation, and Alex Baylis, Head of Acute Sector Policy, Care Quality Commission, examined.

Q180 Chairman: Good afternoon. We have two witnesses speaking on quite different things, so I am going to suggest that we divide this panel into two halves and take Mr Anderson first for about 15 or 20 minutes until about quarter-past three, and then Mr Baylis separately at the end until about half-past three. Is that satisfactory? Before we put any questions, I remind you that the proceedings are being webcast and a transcript is being prepared and will be circulated. I invite you both to look very carefully at it. If there are inaccuracies, please let us know and they will be corrected.

I will start with a very general question, addressing our minds to the function of this particular inquiry in relation to terrorism. Could you give us a general overview as to how the current provisions about terrorism impact on the work of charities, in particular the work of the Commission?

David Anderson: Charities and terrorism are linked in a number of contexts. Last year, for example, 11 people were convicted of a rucksack bomb plot in Birmingham. They tried to finance that by using a bogus charity to raise money. As far as the terrorism legislation is concerned, it really focuses on one aspect of charitable endeavour and that is the diversion of charitable funds for terrorist purposes. There is a great variety of statutory provision directed to that mischief. Very unfortunately, in my view, it is spread over quite a number of statutes.

The core of it is in the Terrorism Act 2000 part 3, which regulates fundraising, the use of money or property for the purposes of terrorism, money-laundering and, perhaps a little more controversially, under section 19, non-disclosure of a suspicion that another person has done any of those things. Then there is the Anti-terrorism, Crime and Security Act 2001 and the Counter-Terrorism Act 2008, which supplement the 2000 Act with provision for forfeiture, freezing, account monitoring and so on. There are some specifically charitable aspects to those; for example, the 2008 Act provides that even voluntary workers are subject to the section 19 duty of disclosure. It is not just officers, trustees or paid employees. Finally, there is the provision for asset-freezing in the Terrorist Asset-Freezing Act 2010 and the Al-Qaida and Taliban (Asset-Freezing) Regulations, giving effect to international obligations but also, in the case of the Act, perpetuating a domestic regime not previously in statute, in order to freeze assets and also to criminalise people who transfer money or resources to designated persons.

Q181 Chairman: Am I right in thinking that the definition in the 2000 Act still applies? I think you are on record as having said that it was complex and extremely wide. I think your words were “notable for its breadth…remarkably broad—absurdly so in some cases”.

David Anderson: Yes; it is monstrously wide. I was probably being polite. Like so many of these very wide powers, of course it is more difficult to find instances of its being abusively exercised. It is a typical combination in the field of terrorism law, where you have very wide powers and, on the whole, very sensible people exercising them. It is certainly not ideal but that is the way things seem to be.

Q182 Chairman: But a function of the breadth of the definition is that it leaves room for a difference of view between people quite genuinely trying to do the best for society as to whether or not they are within or outside the definition. Is that part of the problem that we face?

David Anderson: Yes. In that sense I could answer your question, Chairman, by saying that these laws also have an impact on charities who have not the slightest intention of going near assisting terrorism. You could point to a number of impacts. The first is from the confusing nature of the legislation itself. I have spent some time over the last 24 hours with a charity that was genuinely mystified as to which provisions of these Acts, for example, have extra-territorial effect and which do not. Having looked at them, I am not in the slightest bit surprised that they were mystified. These things are not easy. And of course, many of the phrases are very broad. You have concepts such as “indirect support”, for example, which is not defined.

You touched on it in the last session, but certainly there is an impact on humanitarian charities, particularly when working abroad and when working in areas that are under the de facto control of a proscribed or designated group. It can be difficult to interact with those groups, or indeed to get aid to people under the control of those groups. The counter-terrorism legislation certainly has an impact there.

The last thing I would mention is the secondary impact via the banking industry. Of course, banks are risk averse. They are particularly risk averse when they see that they can be fined hundreds of millions or even billions of dollars in the United States for participating in or facilitating a breach of sanctions. There has also been some regulatory activity in the UK and other countries. That feeds into, for example, de-banking or de-risking—dreadful words—which are buzz words at the moment in the sector. One has seen quite a few examples of that. For example, this year HSBC withdrew banking from a number of Muslim charities. That is not good for anybody. Certainly it is not good for the charity, but it is not good for the authorities either. As long as banking facilities are being offered, if that charity is under suspicion, it is possible to get the appropriate orders and monitor what is going in and out of the accounts. If they are thrown into an informal system of money transfer, you lose that visibility.

Chairman: We will come on to some questions to see how we can relate your remarks to what is in the Bill. I pass first to Bernard Jenkin.

Q183 Mr Jenkin: I think you have answered my main concern, which is how much you think the charities themselves should be concerned about the effect of anti-terrorism legislation on their work, particularly overseas aid charities working in war zones.

David Anderson: I think they are concerned about it, and it is difficult to say that they are wrong to be concerned about it. What you have to separate out—and it is not always easy—is their concern about the application of US law, because they too have this very broad concept of material support. In my experience of charitable circles, this is often known as the material support problem. There was a case, which you may know of, called The Holy Land Foundation in the US, in which I think sentences of up to 65 years were handed down for abusing charitable status to fund terrorism. That has made people very nervous.

I came across the problem—I was not looking for it at all—when I was on a visit to Israel and the occupied Palestinian territories. I had a meeting with various charities there, who were telling me about the enormous difficulties they were having in getting aid of any kind into Gaza. This was before Operation Protective Edge. It was not a war zone at the time, but Hamas, or at least its military wing, is a proscribed organisation. Therefore, even something like getting water purification tablets into Gaza was considered a difficult and legally risky operation.

Q184 Mr Jenkin: You mentioned extra-territoriality, or the ambiguity of extra-territorial jurisdiction in some of the terrorism Acts. Could we use this Act to define the scope of those Acts in terms of extra-territorial effect in respect of charities by providing more clarity?

David Anderson: To a lawyer with a bit of time on his hands it is clear. One could certainly consolidate the terrorism legislation. That would be a wonderful thing to do.

Q185 Mr Jenkin: We are not here to rewrite the terrorism legislation, but inasmuch as it applies to charities is it something that we could write into the Act to help clarify the matter for charities?

David Anderson: It is absolutely something the Charity Commission could write into guidance. In fact, that might be the sensible way to do it.

Q186 Mr Jenkin: It would require the Charity Commission to provide that guidance.

David Anderson: I would have thought they should anyway as a good regulator. Extraterritorial application changes from time to time.

Q187 Mr Jenkin: Could we deal with the de-banking question in the same way?

David Anderson: I would love to know the answer to the de-banking question. I have touched on this in a couple of my reports; it seems to me an area where really no one feels any responsibility. The banks, perfectly rationally, do not want regulatory risk; they do not want reputational risk, and therefore they withdraw facilities because no one forces them to offer facilities. The Government are happy to tell you that this is a matter for the banks and not a matter for them. As I understand it, there is no universal service obligation, as there is, for example, for telecommunications or water or something like that. People can and do fall through the net.

There are other solutions you could envisage. I believe that in France, for example, the Government have the power to direct a bank to offer services. Whether they are quite so eager to offer an indemnity should the bank then be fined $2 billion—

Q188 Mr Jenkin: But it seems to me to go to the heart of what the Charity Commission is for. Surely if the Charity Commission registers a charity, it puts upon it a certificate of okayness. It certifies it to be all right. Is there some way we can indemnify banks for supporting charities that have been registered by the Charity Commission? Maybe the bank requires the Charity Commission to provide such an indemnity against any unreasonable suspicion. Is there some way we could write that into the Bill in order to protect the banking facilities of a legitimate charity?

David Anderson: I am sure that you could, and I am sure the Charity Commission has got its act together very commendably in recent years. But one does not have to look back very far to see, for example, the Finsbury park mosque charity, one of whose trustees was Abu Hamza; or a charity called the Iqra bookstore in Beeston in Leeds, two of whose trustees were 7/7 bombers. Certainly in the past, charitable status has been no guarantee. I imagine the Charity Commission would want an indemnity.

Q189 Mr Jenkin: But it is not the job of the banks to regulate the charity sector by withholding banking facilities.

David Anderson: No.

Q190 Mr Jenkin: That should be the job of the Charity Commission.

David Anderson: No.

Q191 Mr Jenkin: If the Charity Commission registers a charity, surely that should be a defence available to any bank that is going to be prosecuted under other aspects of terrorism legislation.

David Anderson: You could do it that way. I would just make two comments on that idea. One is that under clause 9, the discretionary disqualification, the Charity Commission has, as I understand it, a very wide discretion. I forget the exact form of words; it is “likely to be damaging to public trust and confidence” or something of that kind. I suppose it might make them very defensive in relation to that.

The second point is that, even if the Bill did this, it would not solve the whole problem. The problem comes up, for example, when individuals have been designated under the Terrorist Asset-Freezing Act 2010. During the time they are designated, their banking facilities are retained, because the bank is not allowed to transfer resources to the individual by closing the account. What invariably happens when the designation comes to an end is that the account is closed, because what rational bank would deal with the person? The family’s finances are thrown into chaos and all sorts of unfortunate results take place, not least of which is that one no longer has visibility of the person’s transactions. It might help in one corner of the field, but the problem seems to me a deeper one than that. It perhaps requires the development either of some broader legislative intervention, possibly along the French model or possibly the Treasury itself offering banking facilities, or it needs some action by the banks.

Q192 Mr Jenkin: That is the French model, is it?

David Anderson: The French model, as I understand it, is that the Government may direct a bank to offer facilities to a particular person. What the position is on indemnity, I am afraid I do not know.

Q193 Mark Menzies: You have already touched on my initial question, so perhaps I can build on that. What in particular, in your view, is the impact on charities of the provision of asset-freezing measures such as the Terrorist Asset-Freezing Act 2010 and the Al-Qaida (Asset-Freezing) Regulations 2011?

David Anderson: I think it is sections 12 to 15 of the Terrorist Asset-Freezing Act and the equivalent provisions in the regulations. The concern is that the legislator is criminalising dealings that are necessary for humanitarian purposes, or to ensure the safety and security of staff and assets. What charities tell me—they may be telling you the same things—is that that comes up in a number of contexts. There is the whole context of payments for registration and payments for visas that are made to Governments. The Government may be under the control of a proscribed organisation. Query: is that a payment for the benefit of the proscribed organisation? It is not tested in law. A lot of charity trustees, one would think, are reluctant to take that risk.

Secondly, there is the provision of infrastructure or service delivery through local government or state-controlled mechanisms. The question there is whether they are economic resources. Are water purification tablets economic resources within the meaning of section 39 of the Act? Finally, there are payments to non-state armed actors to secure access, and again to protect assets and staff. The classic example there is the Somalia famine of 2010 to 2012 in which more than quarter of a million people died of starvation, half of them under the age of five, and many of them in areas controlled by al-Shabaab. I cannot vouch for this first-hand, but my information is that payments were required which charities did not feel able to make because of the very understandable sense that they might be giving succour to a terrorist organisation.

Other countries have tried to address this. In the US they had a thing called the Humanitarian Assistance Facilitation Bill introduced to Congress in November 2013, which would have permitted humanitarian assistance of civilian populations in areas of conflict or disaster when carried out in good faith and with certain safeguards against aid diversion, which of course is always the great problem in this area. I understand, although I am afraid I do not have chapter and verse, that the counter-terrorism legislation in Australia and New Zealand has exceptions for humanitarian work.

Finally, there is the question of delivery of aid to large populations. What if one member of that large population is a designated person; are you thereby transferring resources to a designated person?

These are not the sort of things in respect of which one would hope prosecutions are very likely, although certainly if one is looking at an area like Gaza or east Africa one can understand the other side of the argument, that in no circumstances should people be allowed to make payments to those groups. But they undoubtedly have a chilling effect and an impact on the way aid organisations go about their business.

The last point I would mention on that is about peace-building organisations. I have spoken several times to a group called Conciliation Resources, which is an admirable group that tries to make peace in difficult areas of the world. There is a quite separate provision of the Terrorism Act 2000, section 12, which prohibits arranging a meeting at which it is envisaged that somebody will attend to further the agenda of a proscribed organisation. That is not a section that has extra-territorial effect, but none the less I am told that these meetings are arranged, for example, in London. If the LTTE or one of its representatives is invited, despite the fact that there has been relative peace in Sri Lanka for quite a long time, that remains a proscribed organisation. They cannot sit round the table if the arranger of the meeting suspects that they might advance the aims of that organisation, which one would assume they would be likely to do. They too, albeit not with the acuteness of the extra-territorial effect, would say that their activities are frustrated by the operation of these Acts.

Q194 Baroness Warwick of Undercliffe: I want to move to the provisions of this Bill. You have already mentioned clause 9. Could you tell us whether you consider that the proposals in clauses 8 and 9, recognising that they have different effects, are likely to have a significant impact on certain types of charities, leading to a number of trustees being disqualified?

David Anderson: The truthful answer is that I do not know the sector well enough to have a worthwhile opinion. I do not know how many charities have trustees who have been convicted of terrorism offences, or who might fall foul of clause 9, in that the Charity Commission might consider that their past or continuing conduct is damaging or likely to be damaging to public trust and confidence.

I would make two points. One is that the very concept of “damaging to public trust and confidence” seems a very broad one. A lot would depend on how it was interpreted by the Charity Commission. The other point I would bear in mind is that we tend to think very much of international terrorism when we think about terrorism. But one would also want to have a good look at how this might apply in Northern Ireland. I simply have no idea, but a considerable number of proscribed organisations are Northern Irish organisations, still. In fact, the list has not changed since the last century. One would certainly want to look at that before trying to answer that question.

Q195 Baroness Barker: I will roll my two questions into one. Mr Anderson, to what extent do you think that the provisions of this draft Bill will enable the Charity Commission to act as an ally in the PREVENT agenda—the prevention of terrorism agenda—and do you think that the Commission has the correct skills, or will they need training in order to fulfil the role that you would foresee for them?

David Anderson: Again, I would not want to assert knowledge of the Charity Commission or its current state of play. I have read the slightly depressing sequence of reports from Lord Hodgson, Lord Carlile, the National Audit Office, the Public Accounts Committee and the Home Affairs Select Committee. My understanding is that things are getting better and that these are powers—I have spoken to Mr Shawcross about it—which they obviously consider useful. Whether they are the key to the problem however, I rather doubt. I think one of your witnesses described the Bill as tinkering around the edges. That may be a little unfair, but these powers do not appear central to the whole question of how the Commission is organised, how it is oriented and whether it has ceased being principally an enabler of charities and sees itself now as a regulator, even an own-initiative regulator of charities. I do not know, but I suspect that those, almost more than the precise nature of its legal powers, are the key to how effective it will be as part of the PREVENT agenda.

Q196 Baroness Barker: I would suggest that it is important to your work, as well as others, that people from communities who wish to work for charities for the benefit of their beneficiaries should feel free to be able to do that without forever coming under the suspicion of a tough regulator.

David Anderson: Yes, it is a difficult balance to strike. Looking back, one could only conclude that the balance was not very well struck over the last 10 or 15 years; it is a question of getting it right.

Chairman: Thank you very much. We will now move to Mr Baylis. I am going to ask Viscount Younger to put his first question.

Q197 Viscount Younger of Leckie: I have been looking forward to having you here. I just want to go straight into talking about the warning powers and how effective the CQC find the use of their warning powers for encouraging improvement. To what extent does it actually achieve the desired impact?

Alex Baylis: You do have two rather different witnesses today. Our general view is that, as a regulator that wants to promote improvement as well as acting on shortcomings, the more powers the better, in terms of being able to be proportionate and having options available to us. We have been very clear with the warning notice that we do not interpret it as just issuing a formal notice. It is a warning that there can and will be escalation, if needed, beyond that level. Partly because of that, we see a very prompt and full response from providers to warning notices. We obviously regulate in health and social care services. Many of our services are for people who are vulnerable and depend upon those services, so it is very important to us to be able to give a warning—clearly that will also apply to many charities—rather than rushing into enforcement, which could destabilise an organisation.

What we do not find useful is that in our current legislative framework there is interdependency; we are not able to prosecute unless we have first issued a warning notice. That effectively stops us prosecuting, because the specific instances that we would use to build up a case of systemic failure can be discharged through the warning notice, and we cannot then reuse them to prosecute. We would encourage caution about any interdependency between powers, but, having said that, the warning notice is a particularly useful piece of our regulatory armour.

Q198 Sarah Teather: I want to ask you about the effect of publishing the notice. What do you think the impact has been of publishing your warning notices as opposed to just giving them directly?

Alex Baylis: It is very much our approach to publish all of our enforcement activity. We think that is an important part of the regulatory relationship in terms of driving improvement and holding to account. The problem we have with warning notices is that we are unable to publish until the representations process has concluded. It sometimes happens that the media or someone on the internet will publish information about what they believe we are doing with a warning notice, but we are unable to be as transparent as we would like to be, because we have to wait for the representations to conclude.

Q199 Sarah Teather: Do you often get representations from providers contesting the publication?

Alex Baylis: They make representations against the warning notice, full stop, as it were.

Q200 Sarah Teather: Being issued, but not about publication.

Alex Baylis: It is not just about publication.

Q201 Mr Jenkin: How concerned are you that your warnings actually have disproportionate reputational effect on the warnee, if I can put it in that way? How do you mitigate that? What difference does it make having an informal warning process, which you could publish if necessary, and having a statutory warning process?

Alex Baylis: In terms of reputational damage, I do not think we are too concerned about that because we always publish reports of our inspections, so we give the full context. It is clear from that whether it is a very serious concern and how it is justified. The other thing is that, when we have issued a warning notice, we always set a date by which compliance must be achieved. Our policy is that we go back to re-inspect within three months of that date, or if the provider notifies us that they have achieved a warning notice. We act quite quickly to lift a warning notice and to recognise where there has been improvement. That is how we try to mitigate the reputational impact of them. Sorry, what was the last part of your question?

Q202 Mr Jenkin: Can I press you on that before I come back to the other one? Being a Member of Parliament for a hospital in special measures, I can tell you that the activities of CQC have an enormous impact on the public perception of the hospital, the morale of the staff in the hospital and the ability to recruit and retain people. Why aren’t you more concerned about the reputational effect of your activities, including warnings? I think this is relevant to the Charity Commission. They could issue a statutory warning that would have a very detrimental effect on the perception of the charity. Just to say that you are not really very worried about that, which is what you said, I am rather surprised about.

Alex Baylis: I should maybe differentiate between a hospital that goes into special measures, which is at the strongest end of the action we would take on a hospital, and a warning notice which can be for relatively minor breaches of regulations, but none the less breaches that have risk and need to be corrected. Warning notices are typically used for relatively minor offences that can usually readily be corrected. When we are talking about taking urgent action to close a service or to put a service into special measures, it is in quite a separate category.

Q203 Mr Jenkin: That would reinforce the second question. Why isn’t an informal warning sufficient, even if you make it public? Why do you need a statutory warning power?

Alex Baylis: In our legislation it is partly tied to our ability to prosecute.

Q204 Mr Jenkin: But you said it should not be. If it was not tied, why would you need it?

Alex Baylis: It is largely because it gives it more weight. It places a responsibility on us to go through a specific process to satisfy what regulations require for how we should be presenting information about breaches so that they are in the public domain. It could be done through an informal procedure but it is a more prescribed way that has more weight.

Q205 Chairman: Before we leave this topic, can we come back to the issue about publication? Do you get representations from people about whom you are going to make some kind of public announcement that the information you are going to put out into the public domain is inaccurate? Do you get challenges to the factual accuracy of what you want to say?

Alex Baylis: Yes. Accuracy is the crucial element of this for the regulator. We have to be absolutely sure that we are going to publish information that is correct and not misleading. Accuracy is the key ground for representation. That is the safety net, if you like, to make sure the regulator does not publish misleading information.

Q206 Chairman: Do you give a specific opportunity, and ask people to check the accuracy of what you are proposing to publish?

Alex Baylis: Yes. In this financial year we are running at the rate of 38% of warning notices which result in a representation to check their accuracy.

Q207 Chairman: Do you achieve satisfaction in the end? If there is an error, do you correct it and let them see what you are proposing to put out in a corrected version?

Alex Baylis: Of the 250 representations that we have had this year, 8% have been upheld, so it is a noticeable but relatively small number that have inaccuracies.

Q208 Mr Jenkin: How many representations do you get, not about the factual accuracy of what you are about to warn about or the action you are going to take, but expressing disquiet about the disproportionate effect that publication will have on the reputation or perception of what the activity is actually carrying out? Particularly in a pre-election period, for example, where the NHS is such a big issue, how do you mitigate that? Do you accept representations on that basis?

Alex Baylis: No. The representations are on the basis of accuracy—the fact that we have the correct evidence.

Q209 Chris Williamson: How does the CQC measure its performance against the objectives set for it in the Health and Social Care Act 2008? In particular, how does it incorporate the views of the public within its assessment?

Alex Baylis: We have an independent and internal evaluation programme to look at our performance. We have evaluation of our impact, our outcomes, the quality and effectiveness of our processes, our internal capabilities and our costing and value for money. We have commissioned evaluation from universities for each of the sectors where we have introduced new regulatory methods in the last year. That is our main way. It is built into our management information and our reports to our board rather than being tied specifically to the section of the Act that sets out the statutory objectives.

In terms of public views, we have moved from a system of generic inspectors doing all the regulation to having teams of specialists doing regulation. They always include experts by experience—people who have experience of the type of service that we are inspecting. We always make sure they are included in our inspections of hospitals, for example, and in the process of an inspection we have events to make sure that local citizens can tell us about their experience, good or bad. We have a number of ways of engaging people to try to make sure that it is built into the inspection process.

Q210 Chris Williamson: Do you think it is possible to reasonably assess public trust or public confidence in a care sector as a whole, as the Charity Commission is required to do in relation to charities?

Alex Baylis: We are not required to do that, and we have never explored how to do that specific task. It sounds like quite a difficult task.

Q211 Chris Williamson: Do you think it is possible?

Alex Baylis: I think it would be difficult in our sector, which is quite diverse across different types of services. We are very conscious of the impact that we have on public trust in a service, and our approach to that is very much about putting out as much information as we can in a transparent way.

Q212 Mark Menzies: Part of the challenge for any regulator is in providing good guidance and communicating it effectively. How have you assessed the quality of the guidance materials that you provide, and your efforts to ensure that they are widely used? What lessons have you identified?

Alex Baylis: You may know that the CQC has been through a difficult history, and previously our guidance was generic and quite generalised. We have moved very much from that to an approach that is sector specific. For us, maybe the key difference is that our new approach is very much driven by a clear articulation of our purpose and role—what we are trying to achieve, how we will go about achieving it, what role the guidance plays in that and the expectations of our staff in that. It is very much about the linkage from the strategic purpose to the tools to deliver it, which was not clear enough in the past. That has certainly been the key lesson for us. Those would be the two key things that I would particularly highlight: clarity of purpose and the relationship of the guidance to support it; and being tailored to the different types of services and sectors that are regulated.

Q213 Chairman: Finally, could you give us, or at least the Charity Commission, the benefit of your guidance? In common with so many other bodies, you have had some reduction in your funding, which must mean that you have to adjust your priorities in the carrying out of your work. Do you have any hint of advice you might give to the Charity Commission as to how it adapts to its own problems of that kind?

Alex Baylis: We are in a slightly unusual situation this year because our budget has actually increased, but it is only a transitional thing. It is not going to last, so we are very much thinking about those concerns. One of the things that is very difficult but necessary is to measure and be open about costs. The way that the Care Quality Commission will bring down its reliance on grant in aid is by increasing the proportion of income that comes from fees. In order to justify those fees, we have to be completely transparent about our cost model and what benefit is coming alongside that.

The other thing is that there is a tension between our desire to inspect and rate every service but also keep capacity to respond for enforcement as and when cases arise. That is an issue that I am not sure any regulator in that situation has fully cracked, but it definitely needs to be built into the planning of how resources will be allocated and prioritised.

Chairman: Thank you very much. I thank both of you for coming and spending time with us this afternoon.

Examination of Witnesses

Witnesses: Simon Hebditch, Chair, Small Charities Coalition, and Pauline Broomhead, Chief Executive Officer, Foundation for Social Improvement, examined.

Q214 Chairman: Good afternoon to you both. You may have heard me say to the previous witnesses that these proceedings are being webcast. A transcript is also being prepared which I invite you to look at when it is circulated to check that what is attributed to you is accurate.

Can I begin with a general question? I am not quite sure who would answer first. The question is a general one about the main regulatory issues within the charity sector that you think we should be considering, and, related to that, how widespread those issues are throughout the sector.

Simon Hebditch: Thank you very much for the opportunity to come and speak this afternoon. It seems an odd thing to say but regulation is extremely important to charities, or it certainly ought to be. The lifeblood of charities comes from individual donations and from contributions from others. They have to be able, therefore, to ensure that they have public trust and confidence, otherwise that just disappears. It is important. There was an earlier discussion about the regulation that the Charity Commission undertakes being rather like an accreditation scheme. People like a tick against their charity because that helps whenever they go to funders to try to raise funds for their activity. In fact, not long ago when the Charity Commission undertook a different sort of consultation around whether to knock off the register those at the very small end—those with turnovers of £10,000 or £5,000 and no staff—they were surprised to find that it was those organisations who said, “Hold on a second, we’re not sure that we want to be knocked off the list, despite the attractions of not so much bureaucracy.” The implied accreditation system is important to them, with donors and public support generally.

For those reasons, the issues that we face on occasions are still relatively few and far between. If you think about the 186,000-plus charities that are there and on the register, what happens is very important, but it is still only a small minority who get themselves into trouble for all sorts of reasons. Rather like the different discussion you have just been having, once things start going wrong, it has an effect on the public as a whole, fairly or unfairly, and on other charities. Everybody is affected by that, so it is very important to ensure that regulation is effective, and that the Charity Commission is increasingly efficient and effective. I know you have discussed in previous sessions that it has always had an advice and support role for charities and a regulation role. It is important, now that they are, in a sense, rebalancing that, to put some extra resources into their regulation regime and how they need to move, whether on investigations or other things, in addition to their normal support and helping people set up charities or getting them established.

Q215 Chairman: In that aspect of the matter, you are talking about additional statutory powers. A certain amount can be done without statutory powers at all, but you are suggesting that, in addition to what already exists, some further legislation is needed. That leads to the question, since you have seen the list of what was originally being proposed, whether there are things missed out which are not in the Bill at the moment and which you would urge us to recommend be put into the Bill.

Simon Hebditch: I would not, no. As you said, I have seen the issues that were not taken forward from the previous consultation. I am afraid I am one of those boring people who believe implicitly in balance in just about everything. How do you balance this activity against that activity? It is what I was just referring to; how do you balance support against having to take action on occasion? The other attractive word around that, but an important one, is what is proportionate? What activity takes place on the regulation side, which is right and needed and proportionate, taking account of the impact that that has?

One example, which you have just been discussing as a Committee as a new power that is there, is the formal warning. For charities, especially those that I am reflecting the interests of, hopefully, at the smaller end of that market, ambiguity is awful—not being clear about what your role is, or not being clear about what the rules are. Ambiguity is the enemy, it seems to me. Whatever your rules and regulations are, as long as they are absolutely clear, charities know whether they are approaching going over that line. At the more serious end, which is clearly misconduct, mismanagement, fraud or the terrorism issues that you were discussing earlier, those have to be dealt with in a serious way and in a statutory way. I think the balance in what has come forward is just about right.

Q216 Chairman: Ms Broomhead, do you have a different view, or do you share that view?

Pauline Broomhead: I don’t suppose I have a different view on the majority of things. After speaking to our membership, I think they felt that the current Bill had quite a number of loopholes. Therefore, they also feel that the new amendments to it will go some way to addressing that. Their opinion was that there is quite a big gap between the day-to-day workings of a charity and the Charity Commission. They were more interested in how misconduct and mismanagement might be alerted to the Commission rather than when they actually hear about it: how would you bridge that gap?

They felt more confident that if something criminal was happening the police would be alerted but that perhaps there was not clear enough guidance on how you alert the Commission, especially as the ability to alert would come through the management of the charity—the paid staff. They might feel that that would jeopardise their employment, so how would the whistle-blowing process work for them? Overall, they felt that the powers needed to be stronger and that they needed to be robust. They felt that the new additions would make that stronger.

They also felt the additions would give charity trustees, chairmen and the management of charities the ability to have a more in-depth conversation with new trustees, so that they were able to have good conversations about what they might and might not have to declare when they were being sought as trustees. I think they felt that, overall, it was good for the whole process to be more robust; they came up with words like “appropriate” and that it needed to be “considered”. They were concerned about making sure that there was no disproportionate publication of one type of offence, because they believe that the vast majority of things that go wrong in charities are around misapplication of funds and financial abuse, but all around misunderstanding rather than deliberate acts. It could be a misunderstanding of what a funder wanted rather than them misappropriating funds. They felt that a lot of that might come down to managerial controls. Charity trustees often only meet six times a year; therefore, what information are they getting? Are they getting the best information in order to be able to make some of the decisions? They felt that the trustees needed to be dealt with proportionately and appropriately, and good information sought in order to make the decisions about moving forward with any investigations.

Q217 Sarah Teather: Mr Hebditch, you began to answer our next question. The Charity Commission has responded to recent criticism of its regulatory work by making much greater use of its existing powers. We wondered whether or not you supported that more proactive approach. You were indicating that you did. Have I understood you correctly?

Simon Hebditch: Yes; I think what I said earlier is absolutely right. Charities value not only the support role but the proper use of a framework of regulation. It is clearly important that the Charity Commission uses its existing powers. Some people, as you probably know, have put forward the argument that you do not necessarily need to introduce many new laws because if only they used all the powers that they had maybe those were adequate. Going through the process up to now there are some examples, which is why you have some things taken from the consultation and others not, that indicate where you could strengthen the understanding of people about when it will and will not intervene. I have always called for a precise line between acceptable and unacceptable activity. It must be absolutely clear to new trustees and to existing trustees in their inductions and so on about what is and is not acceptable.

An example was just discussed about whistle-blowing, or the equivalent of whistle-blowing. It may not even be whistle-blowing, but a trustee, especially a new trustee, who is not quite sure, or who is feeling uncomfortable and thinks there is something wrong on the board they are on but is not quite sure what they should do about it. Do they raise it with the chair? Do they raise it in the group? Is there a problem or not? They should be able to get on the phone to the Charity Commission and say, “We are feeling a bit awkward about this. We think something needs to be looked at. We don’t know whether it is actually important or not, or whether I’ve got the wrong end of the stick.” The Charity Commission needs to be able to respond to that. A lot of people in the past have not made those approaches because they were worried that the whole organisation would be hit on the head with a club as a result of doing so; they have hung back and things have got worse. That is why I go on re-emphasising how the Commission should balance its activity.

If you go to formal warnings or any of the other powers that are there, I am making the assumption that that comes after or at the end, which is where the word “proportionate” comes in. It is a last resort to get to a formal warning. You have hopefully been raising issues with the charity that you are concerned about in all sorts of ways before you ever get to the formal. It is only if you see that that is not working and that they are not taking any notice, that the trustees are not obeying any orders or instructions that they have had, that you might want to take it on to the next stage.

Q218 Chairman: Ms Broomhead, from your experience do you share that view or do you have a different view?

Pauline Broomhead: It is a good thing that the Commission is making appropriate use of its powers. That is what they are there for and that is what our charities think. Charities depend an awful lot on their reputation; it is one of the assets that they have. If things are going wrong in the local community, the local community will know about it. To have a Charity Commission that is being robust in its regulation is a good thing, but, again, as Simon said, we need to make sure that the process for how people do things is very clear, and that the way it is dealt with is very clear, so that a charity will know what steps are going to be taken. They can reflect on that and they can decide how to manage that process themselves within their charity, their donor group, their funder group or beneficiary group so that they make sure that all the people who need to be communicated with are communicated with as the process goes on. It may or may not come to the point of going to a more formal way of dealing with it. They want to be very careful about their reputations within the community at that time. But it is good to have a robust regulatory process, because that engenders trust within the local communities of the charities that we deal with. Our charities are probably slightly larger. We deal with charities of £1.5 million and below.

Q219 Mr Jenkin: You are already on the territory of my question. Basically, why do we need new powers? Why isn’t better communication and better use of existing guidance sufficient, given that so many of the mistakes that most charities make are just honest mistakes?

Pauline Broomhead: Many of them are, but there are those that are not. If there are powers in place to be able to deal with that now, we need to use those powers. But in a changing society things change. When you look at the very small powers that are available in the Charities Bill, if a trustee was going to that to look at what they may or may not do, I do not think it is explicit enough. It needs to be more explicit so that we can be very clear about what we are going to—what is going wrong and what is not going wrong. If powers are there, you need to use them, but they may need explaining. Things change and these things need revising.

Simon Hebditch: It is very tempting to feel, as I said earlier, that there is a whole range of powers that could be used in the existing sense. Where it is very important is in relation to two things. First, the Charity Commission is constantly reviewing its guidance, because that is where it ought to be clear to everybody. People may not necessarily understand the ins and outs of legislation and so on, but they should be able to understand everything that is said to them in terms of guidance from the Charity Commission. That is one important thing.

I am probably not using it rightly procedurally, but I therefore see these formal powers and adding to the powers they have as reserve powers. They are ones that they can use, but should only use rarely. They should exhaust virtually every other process, which we can call informal or whatever, to try to resolve a problem. They need to be clear about the impact on the individual charity, or maybe even individuals within a charity, rather than the charity as a whole.

Q220 Mr Jenkin: How worried are you that we are on a slippery slope and that the more powers we give the Charity Commission, the more expectation there is that they are going to crack the whip and use those powers?

Simon Hebditch: I hope that we are not on a slippery slope to that, but it is always a danger. Using an example, one of the proposals is that it could wind up a charity. Not only does it say it could go through the process of getting rid of three or four trustees for very good reason but that it could take action to wind up the charity. That is other people’s money which has been donated and on which the Commission takes the decision to do that. I think you have to be very careful about that. I would use the last resort argument.

Say, out of interest, that you have a board of 10 people; eight of them are the ones who go at the end of the whole investigation and there are only two people left. You may very well come to the view that the charity cannot really continue and you should be identifying other ways of using the resources. There will be committed people in the charity who want to get the charity right, so having got rid of the problem the Commission arguably ought to be spending their time trying to revive and refresh the charity so that it is following the rules correctly rather than simply saying, “We will close it down.”

Q221 Mr Jenkin: On the question of other means that could be used, does the Charity Commission use technology sufficiently, or co-operation with other bodies?

Pauline Broomhead: It tends to use the written word quite a lot. We all know that in today’s society there are many ways of getting your messages across. It could use its technology more. It could use more webinars; it could have more short films. These could then be used in training videos for charitable trustees who are coming in. Being a trustee is quite a big role and not everybody who takes on that role fully understands it. There are lots of different ways that they could use technology to get the correct messages out. Trustees, by and large, want to be there to do a good job. They want to do the right thing. My organisation takes governance training out across the country to trustees so I know the range of questions that come in from trustees. Some of them are very simple questions that you would think had been dealt with in induction. They are not always, because induction is not always that robust, so having those means there would be really good.

Q222 Baroness Barker: I think we can guess from your previous comments how you are going to answer this one. Clause 8 sets out a list of terms under which people would automatically be disqualified from being trustees. Do you think that is going to present a difficulty to charities as it stands?

Pauline Broomhead: For small charities it might have more of an impact, simply because the vast proportion of small charities draw their trustees from local communities, and they have a greater propensity to include trustees who have previously been service users. If the situation occurred that they were not able to be trustees, for whatever reason, that would be an issue. I know there is a waiver whereby you can get dispensation, but smaller charities tend to go down that route; they are not looking for the massively influential people. They are looking for local people to do a very hard job and they will often draw from their service users. It could have a small impact on them, but as long as the waiver is used proportionately—I’m sorry. The waiver can be used and I think the trustees can ask for dispensation, can’t they? Am I talking about the wrong thing? You are looking at me a bit strangely.

Q223 Baroness Barker: I am not sure.

Pauline Broomhead: I am talking about the powers to disqualify on past offences.

Baroness Barker: Yes.

Pauline Broomhead: When we surveyed our members they came back with the fact that as small charities they often want people who may have had a past offence as part of their trustee group. It would not disqualify them from working for the charity, but they certainly want them involved in the charity. Whilst I do not think it is a big thing, it is more of a thing for smaller organisations.

Q224 Baroness Barker: If there were to be a dispensation to make a judgment, who should exercise that judgment?

Pauline Broomhead: When I asked the charities, they said there should be an independent body to look at it. If the Charity Commission is saying that these people are not able to serve as trustees, there might be an independent body that would look at it, but the trustees themselves should make representations because they are the people who know them and what has happened to them. They are more in tune with the everyday lives that these people are living today, not what they did in the past.

Q225 Chairman: When you used the phrase about people being involved in the charity, you were thinking of people involved not only as trustees but in some other capacity as advisers or helpers or something. Would that be right?

Pauline Broomhead: Yes. With anybody who is involved in a charity, there needs to be a certain amount of checking to see whether the work that they are going to do for the charity is the right sort of work for them and that they are not being put in a difficult situation themselves. For most trustee roles, the charity trustees need to have a certain amount of, “Well, we know this person. We know that things have changed. They have turned their lives around. We really want them on our Board of Trustees,” and then they can go to somebody to make that representation. I think that is more for smaller organisations, simply because they are drawing more from the local community and their service users.

Q226 Viscount Younger of Leckie: We have had quite a discussion already on powers, but I just want to press you a bit further on process, if I may. The draft Bill would give the Charity Commission the formal power to issue public warnings. I wondered what your view would be on this proposal. In your view, what would be the appropriate way for the power to be exercised by the Charity Commission?

Simon Hebditch: As we discussed earlier, the ability to have more public/formal warnings will be there, and I think that is right. It is also right that in one sense—if I can put it this way—people should know: what is the point of everything being conducted privately? That is the other side of the coin. People must know that there is a question mark. This also assumes what I said earlier: all sorts of less formal approaches have already been made and the Commission is convinced that, first, something is going on and, secondly, no one is taking it seriously within the charity concerned as to where you start to make it public. Once you have begun to make it public and it is being discussed in other contexts as well, it leads to the problem that Mr Jenkin referred to, which is the collateral damage around either the sector or the charity while the investigations are going on.

To take another element just as an example, if you suspend a trustee while investigations are going on, fine. At the moment it is for one year. The proposal is that it should be for two years. How long does it take to investigate? How long does it take to come to a decision? I know that in some cases the police will be involved and therefore the process may appear to be longer, but the more unsureness—if that’s a word—or the more ambiguity there remains about things, the more difficult it is for charities.

Pauline Broomhead: I think there has to be a clear distinction between what is an honest mistake and an appropriate level of inquiry into that, and what may turn out in the future to be a malicious or direct fraudulent act. Other powers need to come in at that point.

Q227 Baroness Warwick of Undercliffe: Could you tell us your view of the current appeals process and the work of the Charity Tribunal? Do you think the new powers proposed in the Bill require any additional safeguards?

Simon Hebditch: As other people have said, the Charity Tribunal process is now working much better than it was initially. In one sense, understandably, once it was originally set up it took time to get into it. Now it works well. In relation to a formal warning, if I have interpreted it correctly, I am concerned that people will not be able to appeal to the Charity Tribunal. It has certainly been expressed to me that what they have been told is that the alternative is to go for a judicial review. We know the difficulty of doing that and the costs involved. A judicial review, even if you went through, will simply say whether the procedure has been followed, rather than whether it was a justifiable action to take. In that sort of balancing sense, I would ask that we look again at whether there should be an appeal allowed to the Charity Tribunal when a formal warning is first issued.

Pauline Broomhead: I would agree. I have nothing to add to that.

Chairman: That completes our chapter of questions for you. Thank you both very much indeed for coming. We are extremely grateful.