UK charity law reform: implications for universities

One of the main changes proposed by the Bill is the introduction of a statutory power to make social investments, which gives legal effect to something that guidance from the Charity Commission already recognises as a legitimate approach. Although many universities have, of course, been approaching investments on a 'mixed motive' basis for some time now, this clarification is welcome.

The other aspect of the Bill worth paying attention to is the Charity Commission's strengthened powers to protect charities and their assets against trustees in breach of trust or duty. Although this will, hopefully, not be of immediate relevance to most universities, the majority of these provisions will apply equally to them and to other 'exempt' charities that do not have to be registered with the Charity Commission.

Power to make social investments

The new statutory power to make social investments follows the September 2014 recommendations of the Law Commission, which is the law reform body for England and Wales. It is primarily intended to allow the making of 'mixed motive' investments, which are those not justified entirely on a financial basis or in pursuance of the charity's primary purposes but rather by a combination of the two. Although Charity Commission guidance already recognises the legitimacy of mixed motive investments, the legal basis for these had previously been in some doubt and so the proposed new power is welcome.

However, it is also important to note what the new power does not do. In particular, universities should be aware that the justification for social and ethical investments must still be by reference to impact on achievement of the university's charitable objects. This means that it will still be necessary to justify both positive and negative screening on that basis, and not by reference to wider social or ethical considerations.

Additionally, the new powers do not apply to charities which are established by Royal Charter - instead, the specific entities to which they apply are listed in the legislation. It is not clear from the commentary why this should be, although the question was raised in responses to the government's consultation on its proposals. However, in the absence of clarification, it would seem reasonable to conclude that this was considered unnecessary in light of the wide powers which such charities already have.

Protection of charities

The Bill also gives the Charity Commission new powers to protect charities and their assets where it is considered that the trustees are responsible for "a breach of trust or duty, or other misconduct or mismanagement". Most of these provisions will also apply to exempt charities such as universities, with the exception of the requirement to include a statement in the annual accounts regarding the charity's approach to fundraising.

The most notable and controversial of these new powers will allow the Commission to issue a 'statutory warning', apparently intended as a halfway house between issuing regulatory advice and opening an inquiry. It has, however, attracted significant criticism, particularly because the public nature of the warning may not necessarily be proportionate to the level of wrongdoing. There are also concerns around the absence of any appeal process.

Given the potential damaging consequences of receiving such a warning, and the fact that it may potentially be issued for relatively minor indiscretions, universities will want to keep this development under close review and consider strengthening their governance processes to minimise the risk of misconduct or mismanagement arising.

In addition to the new statutory warning powers, the Bill also:

• extends the time for which the Commission may suspend a trustee or officer of a charity;
• permits the Commission to take account of conduct in relation to another charity, or in relation to charities generally, when making interim orders following the establishment of an inquiry;
• extends the circumstances in which the Commission can remove a trustee or officer in the context of an inquiry, and can remove a trustee who is disqualified;
• extends the power to give directions in the context of an inquiry to include a direction not to take, or continue with, a specified action;
• enables the Commission to direct that a charity be wound up or to transfer its property to another charity; and
• extends the circumstances in which a person is disqualified from being a trustee of a charity to include conviction for offences involving terrorism, bribery or perjury, or the making of a specific disqualification order by the Commission itself - for example, where the person concerned has committed an offence against a charity in another country.

Additional legislation

Some of the measures included in the 2015 Small Business, Enterprise and Employment Act will also be of relevance to charities, although should not be controversial in a universities context.

Chief among these are a prohibition on corporate directors, and a new requirement for companies to keep a register of persons with 'significant control' which will be available at Companies House. Both of these measures take effect from April 2016.

Janet Hoskin and Chris Thomas are tax experts specialising in universities, charities and trust arrangements at Pinsent Masons, the law firm behind Out-Law.com.