The government should not ask charities to pay for their own regulation, and should accept that the Charity Commission is value for money, says Andrew O'Brien of the CFG.

Last week in his blog on a review of the Charity Commission’s governance, David Ainsworth touched on the sensitive issue of its future funding.

There has been a lot of discussion in recent months about whether charities should pay for their own regulation.

Good regulation costs money; that is certainly true. It is also true that the government has not showed the willingness to put forward additional funding for the Commission over the long term. During the last Parliament, the budget for the Commission fell by half in real terms, and although a short term injection of £8m was welcome, soon that funding will be gone. The significant cuts of the Charity Commission’s budgets have certainly reduced its capacity to achieve its objectives.

Charity Finance Group called on the next government to increase, and put on a long term footing, the budget of the Charity Commission so that it can both ensure compliance and carry out investigations as well as continue to provide the guidance and support that hundreds of thousands of trustees and charities rely on.

But where is this money to come from?

One suggestion, from several senior sector figures, is that in the absence of proper government funding, charities should pay for their own regulation.

Some sectors do pay for all or part of their own regulation - for example, financial services, energy and advertising. However unlike charities, organisations in these sectors are meant to be profit making organisations. As a consequence, the funding for regulation can be taken from the profit (private benefit) that is generated through their activities. But for charities, there is no profit or private benefit through which regulation can be funded. There is only money for public benefit.

So if funding for regulation is shifted from the government to the charity sector, it is only going to come from funding that would otherwise be used for public benefit. While government money is also used for public benefit, collecting it from charities would be inefficient compared to the current arrangement.

Instead of collecting it from one source (the government) the Commission would have to institute a new collection regime, at significant cost, either taking money away from the Commission or increasing the amount that would need to be taken from charities in order to pay for the regime’s administration. This doesn’t seem very efficient, and it isn’t going to change however you design the payment system.

What we need is for the government to recognise that providing a regulatory framework for the sector is not a cost, it is an investment.

Thanks to the regulatory system that we have, charities are able to raise billions for good causes, deliver high quality public services and generate indirect benefits through social action and creating stronger communities. Without an effective system of regulation charities would not be able to do this and so government has much to lose from underfunding the regulation of the sector.

Some may argue that charity regulation is full of waste and that we can get more for less. But if anything, I’d argue that our regulation is pretty good value for money.

If we take a really narrow view of the benefits – just the value to the economy, for example – we can see that the sector’s regulation doesn’t look like a poor return. The gross value added of the financial services sector was £126.9bn in 2014. But the cost of regulation was around £425m. So for every £1 of cost of regulation, the financial services industry generated £298 of gross value added.

According to the last year that we have data for in 2011/12, the voluntary sector generated £11.8bn of gross value added (although this includes a few more organisations than just charities, it is a useful proxy). The Commission’s budget in that year was around £27.6m. So for every £1 of cost of regulation, the voluntary sector (mainly charities) generated £428 of gross value added.

Although there are lots of differences and levels of complexity between different types of regulators, it looks like the government is getting a pretty good bang for its buck from charity regulation.

Even if we increased the Commission’s budget to where it was before the coalition government, then that figure would still look very healthy.

Regulation should be seen like infrastructure, providing a framework for growth, rather than a cost for which there is no return. And as charities operate for public benefit, there is no danger of private individuals making a profit on the back of public investment.

Cuts in regulation are not ‘easy’ spending cuts, and will have long term consequences, potentially reducing the capacity of the charity sector.

The central issue isn’t whether charities should pay for their regulation. It is rather whether the Commission has the funding that it needs to effectively regulate the sector. What we need to do is make the case for more investment in the Charity Commission, and demonstrate how this is a sound use of public spending.

Andrew O’Brien is head of policy and public affairs at the Charity Finance Group