Mark Spofforth: Challenges for the regulator

11 Feb 2019 Expert insight

What are the challenges facing the Charity Commission’s new management team, ponders Mark Spofforth.

There is little doubt that whatever action the Charity Commission wants to take, there is a real constraint as a result of limited financial resource – some creativity needs to be brought to bear here if the charity sector is to play its part in building social cohesion and helping the unfortunate.

While resourcing is the major focus, our regulator must be at the forefront of regaining trust in the sector and improving accountability – recently we have not demonstrated that we are meeting public expectations, and without public support the sector become unsustainable.

At the same time, commentators are asking how we can increase the number, diversity and competence of trustees, and how these trustees can better explain the impact of their charity’s efforts.

Outputs are all important – activity itself is no measure of the success of the sector – but the Commission also needs to be looking internally at how it can benefit from the rapid advance of artificial intelligence and digital analysis tools to increase the efficiency of its regulatory processes at the same time as increasing support for those it regulates.

Regulatory bodies all struggle to deal with the variation in the structures of those they regulate. Smart regulation requires a proportionate and balanced approach, and one set of guidance may never be able to be appropriate for both large and small entities (particularly as big entities get increasingly complex). Nowhere is that more true than in the UK’s charity sector.

The Commission’s brief covers an extraordinarily heterogeneous group. There are enormous charities and tiny ones – 97 per cent of charities have an income of less than £1m, and 40 per cent have an income of under £10,000. There are charities that are volunteer driven and those that are staffed by paid employees; this engenders very different motives and cultures. There are those that effectively substitute for social services that could be supplied by government – and maybe were when the money supply was looser – and those that have been set up simply to respond to specific crises or weakness in the social fabric which no government could ever fix. There are international bodies and local neighbourhood bodies, those that look after heritage assets and those that look after people.

A difficult role, then. The consequence is that setting detailed rules or legislation to protect donors and beneficiaries is impossible and guidance is the only possible route, albeit firm guidance, which trustees must really sit down and think about in order to apply it successfully in their specific instance. This in turn requires good communication and competent trustees.

Resourcing

The 2017/18 income of the Commission was £22.4m. Ten years ago it was more like £30m. There is little left for project work, and so talk has started about a levy on charities in the same way that corporate Britain pays for Companies House. But is this right? Donors require a regulated sector but they also want their donation to go to beneficiaries, not civil servants’ wages. How could we devise a fair charging system, given the wide diversity of entities being regulated?

A sensible alternative has already presented itself. George Osborne in his 2012 Budget committed to giving some charities the regulatory fines on banks charged as a result of the LIBOR-fixing scandal. Why not avoid any levy by using such fines in the future? Building a fund from fines to help both support and regulate charities across the spectrum would avoid charges of favouritism and protect sustainable support for the smallest. This must be the prime concern.

Some of that potential finance could also be recovered in the medium term from efficiencies produced by adroit use of investment in digital tools. The Commission dealt with 94,000 customer contacts last year, and many corporate businesses are using artificial intelligencedriven enquiry systems to deal with such contacts more efficiently. They learn as they go along from previous questions being answered satisfactorily – but they do take substantial investment of time and money to get right. The Commission must be at the forefront of digital adoption.

The information that the Commission receives from those regulated currently comes in the form of financial accounts and the annual return. The Charity SORP-making body struggles with setting a standard appropriate to such a wide sector, not helped by itself being accountable to the Financial Reporting Council (FRC), a body used to dealing with reporting by directors to shareholders about financial activity. The charity sector needs to report about a wide range of impacts and the use of voluntary resources, not something that the FRC readily understands or of which it has experience.

So what if we developed the current modular design of the SORP in such a way that charities input specific information to a Commission-designed website (such as whether they employ staff, have local authority contracts, deal with heritage assets, have international dealings, or receive donated goods and services, etc) and in return receive a template and a checklist tailored to their more targeted needs?

It is highly likely that the annual return could then be abolished, because all that information would be incorporated in the template, but more interestingly the data about individual charities thus collected could then be analysed to expose risk areas, to target guidance, to deal with specific public concerns. Trustees would love to be able to avoid having to report redundant or useless information, just because others in the sector might need to do so.

Trusteeship

Digital advance will, however never replace the need for trustee judgement and input. The recent House of Lords report focused on the need to increase the competence of trustees, asking for a review of training opportunities, better induction for new trustees, and trying to get more senior business leaders involved.

In some respects maybe we’re pushing at an open door. It is apparent that younger generations see volunteering as a great addition to their CVs, a clever way to build networks, and a sensible part of a career framework that is so much more fluid than that of previous generations. So the question becomes about how we make it easy for them to find charities for which they have a passion, and not discourage them by over-emphasising the duties and responsibilities that come with the role of trustee. An appreciation of the need for common sense and integrity is critical, of course, but harping on about potential personal liability may not be the best advertising.

The House of Lords report also wanted more diversity in the trustee group – but that can only come when there is sufficient quantity from which to choose and many small charities say that they will simply take anyone willing to volunteer at the moment.

Recruiting and training trustees is substantially assisted by the Charity Commission website, which is generally regarded as being one the best designed resources available on the web – or it was until it was subsumed into the gov.uk framework – but resource is needed to maintain that quality of content.

Trust and confidence

None of these structural challenges to the Commission will be relevant unless the sector can maintain trust with the public, and at no time in history have there been so many questions asked about the value to society of the charity sector. Those of us who are passionate about the place of philanthropy and volunteering in building a cohesive society watch with concern the difficulties that face the sector. Reputations are challenged by headlines and social media rants, with little expertise or opportunity to tell the real story of how much good is being achieved.

Luckily it seems that the volume of donation income has not yet declined, but we have seen a polarisation of the donor population which means that at the smaller end, the overall volume of money given has been reducing, replaced by larger donations to bigger charities.

The development of local Community Foundations with expertise to advertise to potential local donors and to carry out due diligence on how their money helps those in need, as well as being able to take the burden of regulation and administration away from significant philanthropists, needs to be encouraged in order to redress this balance.

Trust and accountability can be substantially increased by better impact reporting – and that is different to financial reporting, and an immature science at the moment. The Commission needs to better identify the prompts to donations and the expectations of donors, and to pass that knowledge to the smallest charities. Public expectations can be unreal, so there is a role to change and influence those expectations, and charities need to be able to tell a compelling story.

The public seem to equate size with effectiveness, so they are giving the majority of their £10bn donations to larger well-known names. Research shows that 54 per cent of potential donors can’t name a local charity.

The Department for Digital, Culture, Media & Sport (DCMS) wants a more connected society, and engaging local charity and volunteer groups must lie at the heart of such a vision. More publicity needs to be given to show that small charities do a good job and that neighbourliness can be encouraged by the kind of culture that helps people to engage with local charity. One of the Charity Commission’s key performance indicators needs to be the percentage of its casework that has an impact on public trust in the sector.

The Commission does not have an easy job, but it is a critical one for society as a whole. It needs to be better funded, more focused and digitally driven. Good luck to the new team.

Mark Spofforth is a partner at Kreston Reeves

Charity Finance wishes to thank Kreston Reeves for its support with this article

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