CFG condemns Commission for lack of consultation on updated reserves guidance

29 Jan 2016 News

The Charity Commission has updated its trustee guidance on reserves, CC19, but the Charity Finance Group has objected to its failure to consult on it first and expressed concerns that it could make the sector less resilient.

The Charity Commission has updated its trustee guidance on reserves, CC19, but the Charity Finance Group has objected to its failure to consult on it first and expressed concerns that it could make the sector less resilient.

The Commission is calling on trustees to “engage with and use” finance guidance from the regulator to run their charities effectively. It is to show that “trustees are ultimately responsible for their charities’ finances, and respond to the need to make sure its guidance reflects the most current challenges facing thousands of charities”.

The three sets of updated guidance are CC12 on Managing a charity’s finances: planning, managing difficulties and insolvency; CC19 on Charity reserves: building resilience; and its Charity governance, finance and resilience: 15 questions trustees should ask.

The CFG has criticised the updates for the “excessive emphasis placed on views of external stakeholders and unplanned closures” calling them “unhelpful”. It has also raised concerns over the risk that trustees will “misunderstand the role of reserves and not develop effective policies”.

It also said it was concerned that the guidance does not focus “on the need to build a reserves policy from a position of understanding of both the risks and opportunities facing a charity”, and that the guidance does not “emphasis the need for trustees to create a reserves policy based on a balance of needs for current and future beneficiaries”.

Update ‘unhelpful’

Caron Bradshaw, chief executive of the CFG, said that although she agrees with the Commission that trustees should think carefully about reserves and that the guidance should be refreshed, the updated guidance is “unhelpful”.

She said: “Trustees should decide on a reserves policy and target range based on the risks and opportunities facing their organisation as well as a balance between the current and future needs of beneficiaries. By focusing on the risk of unplanned closure, for example, the guidance does not encourage charities to take a holistic view of the needs of their charity.

“The reversal in position on reserves could have an unintended consequence of making the sector less resilient as charities focus on building more reserves and missing opportunities to grow and deliver their charitable objectives. There is also a danger that it could encourage charities to breach their duty to have the right level of reserves for their organisation in an effort to appease stakeholders.”

In response to criticism from the CFG, a Commission spokeswoman said: “We have shared our draft with CFG and are aware of their views through the helpful discussion we have had. We have clarified that we intend to review the guidance more generally later in the year.”

The CFG said it welcomes the full review and looks forward to improving the guidance in due course.

Updates a ‘knee-jerk reaction’

Kate Sayer, a partner at Sayer Vincent, said that the updated guidance is a “knee-jerk reaction” to the upcoming publication of the PACAC report into Kids Company, which will be released on Monday. She also criticised the lack of consultation.

She noted that the Commission has introduced a lot of references to unplanned closures, which she said is a “major change”. She said this may encourage trustees to calculate a reserves policy on the cost of redundancies and of closure, which is “not an appropriate way to think about reserves” as it is not a survival strategy for a charity. She referred to this as an “appalling way to communicate, and one that doesn’t make sense”.

She said this is because the definition of reserves and way of calculating them doesn’t reference occupied property, which would be of value again if a charity closed.

Sayer also said a consequence of the updated CC9 is that it encourages charities to keep large reserves, which won’t encourage donors who may believe that their donation is going to cover a charity’s cost of closure.

Changes to content

Changes to the guidance have included a focus on the role of a reserves policy in maintaining confidence of funders and external stakeholders, as well as the role of a reserves policy in avoiding unplanned closure of the charity. It also includes a change in emphasis from having to justify holding reserves towards being asked to justify not holding reserves.

The changes will mean that larger charities will be required to publish their assessment of the risks that the charity faces and how to manage them in their annual report. And that the reserves policy will need to reflect the risks of unplanned closure associated with the charity’s business model, spending commitments, potential liabilities and financial forecasts.

On unplanned closures, the Commission said that where a charity has to close, it expects trustees to have planned for an orderly shutdown. The guidance covers what is meant by insolvency, and what steps trustees should take if they believe they are insolvent, including getting good professional advice.  

The reserves guidance does confirm that there is no single level or even a range of reserves that is right for all charities. It says that any target set by trustees for the level of reserves to be held, or decision that there is no need for reserves, should reflect the particular circumstances of the individual charity. However “trustees should not simply monitor their level of reserves annually, but keep them under review throughout the year”.

Sarah Atkinson, director of policy and research at the Charity Commission, said: “We recognise that charities operate in a very challenging environment, with some charities heavily reliant on single sources of funding. So it is all the more important that trustees are in control of their charity’s finances. This means actively taking steps to manage their charity’s finances through regular monitoring, asking the right questions and getting professional help where needed. Donors and beneficiaries rightly ask questions about issues such as reserves, and want to understand why charities do or don’t have them. Reserves policies help tell that story clearly and demonstrate that trustees are aware of the real risks.

“These guidance updates are designed to help trustees make the right call and support them, not to overburden them. That’s why there are also guides on how to set a good reserves policy for small and large charities. As regulator there is a limit on how much we can do as these are individual decisions for trustees to make. But these tools will help them manage any difficulties properly and with confidence.”

 

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