The Regulator for Charities in England and Wales
On 21 July 2009, the Charity Commission hosted a discussion which brought together a select group of figures from the charity sector and a number of other regulators. The workshop was designed to examine in more detail the outcome of Lord Turner's review, following the banking crisis in the autumn of 2008, of the way banks are regulated and to explore any implications for the regulation of other non-financial sectors. Speakers included Walter Merricks CBE, the Chief Financial Ombudsman, Geoffrey Podger from the Health & Safety Executive, Julia Unwin of the Joseph Rowntree Foundation and Martin Brookes of New Philanthropy Capital. Our Chief Executive, Andrew Hind, also gave an overview of the Commission’s approach to regulation.
Like all good regulators, the Charity Commission needs to constantly review our approach, so the discussion was an invaluable opportunity to hear some external views on our current approach to regulation. The discussion was also helpful in our assessment of whether there are wholesale (or ‘systemic’) risks to charities which have parallels with those that affected financial services.
Whilst it is clear that the charity sector and the banking sector cannot be directly compared, there are some important lessons that we can take from the banking crisis and the subsequent debate around the regulation of financial services.
Please note that this is a summary of the discussions held on the day and does not necessarily reflect the opinions of the Charity Commission or the wider charity sector, nor is this an exhaustive account of all of the issues which were raised.
A key message from Lord Turner’s review into the way banks are regulated was that there should be a greater focusing on regulating systemic risks, as opposed to focusing on individual, micro issues. The challenge for the Charity Commission is identifying what those systemic risks might be for a sector as diverse and complex as the charity sector.
The banking crisis showed us that there are more links between organisations than anyone had previously thought, with the effect that a failure of one organisation can impact on other parts of a sector. Linkages within the banking sector had grown over the past five years, and at the same time the banks grew to look more alike. It was suggested that, in the charity sector, an analogy could be that the increasing spread of public sector contracts is having the same effect.
A key issue to think about in terms of charity regulation is whether the focus should be on the fiscal benefits of charitable status, or the sustainability of the sector more generally.
It was highlighted that risk is not necessarily a negative thing, and can mean innovation and access to opportunities. Only a very small number of innovations will become failures; innovation should be encouraged, provided charities (and potentially the regulator), find a way to identify earlier what mistakes or problems might occur.
Success in the charity sector is often measured in terms of growth, and not necessarily in terms of how services to beneficiaries have improved. Improvements to services may stem from innovations/risks that involve a financial cost to the charity. There was some discussion around the role of regulation in this area and the sense seemed to be that a ‘light touch’ to regulation is more appropriate in fostering innovation.
Banking regulation is becoming less light touch in the light of the recent crisis and it was noted that there is a move amongst regulators now to so-called right touch regulation – that is, regulation that is proportionate to the risks. This is the approach the Charity Commission takes.
There was some discussion around the challenges for the Commission in carrying out our dual role, which focuses both on ensuring compliance, and enabling the broader sustainability of the sector. It was suggested however that the advice work which the Commission does enables us to have the deep understanding of the sector which is critical for our compliance work.
The Charity Commission has a duty to promote and maintain public trust and confidence in charities. As the regulator of charities, this also includes a focus on how we communicate messages about charities to the public. It was noted that many of the aspects of the banking crisis could be said to have been worsened because of poor communication. It is important for regulators to always consider what the public wants to have communicated to them and to be clear about how those messages are presented and the impact this can have.
It was also noted that key to the Commission’s work is its independence from ministerial intervention, which is clearly set out in the Charities Act.
It was suggested that trust and confidence directly impacts on how much the public donates to charities, and is therefore a key issue for all charities individually and a ‘systemic’ issue for the whole sector.
It was suggested that even, for example, a significant fraud in a small, local charity, could have the same impact on the reputation of the charity ‘brand’ as a whole, as a fraud in a large, national charity. The key factor is how the issue is represented (including by the charity itself, by the regulator, and by the media).
Levels of public trust and confidence in charities have understandably dropped in the light of the banking crisis. It is therefore important to consider what could cause a similar collapse in trust and confidence in charities. Two potential causes were highlighted:
1) a major scandal in a high profile national charity - where there is significant and prolonged media exposure; or
2) a shift in public perception that charities are less independent and more agents of the state (perhaps caused by increasing numbers of charities delivering public sector contracts, and the blurring of lines this could cause). It was highlighted that the perception of a loss of independence as much as the reality is important.
The importance of good governance also emerged as a key issue, a lack of which was said to have contributed to the banking crisis. In particular it was highlighted that non-executives need to feel confident in challenging the executive, and it should not be assumed that ‘experts’ are necessarily always right.
A number of organising principles for regulation were discussed:
It was suggested that the Charity Commission doesn’t neatly fit in to any of these, however, charities can be said to come within all three principles in terms of the work they do.
Following the discussion, a number of additional organising principles were suggested:
The wide-ranging discussion raises a number of issues for the Commission to think about, which will feed into our work on a day to day basis. These issues include: