Reflections on the charity sector and the Charity Commission

In April 2024, Helen Stephenson CBE, the outgoing CEO of the Charity Commission, gave a talk at Trustee Exchange, reflecting on her time there and sharing her thoughts on the charity sector.

This got us thinking about how much the landscape has changed and what it all means for charities and those of us supporting them.

We work closely with charities and other social purpose vehicles to ensure we stay on top of developments for our clients. We wanted to see how the changes we've seen in the sector might have been viewed from the Charity Commission's perspective.

As you'd expect, Helen Stephenson's talk was fascinating, and her enthusiasm for the sector – and the Charity Commission itself – was evident. She covered the areas below, and we have been thinking about each in turn and seeing how they compare with our experiences:

• The role of charity in society
• There is no right number of charities
• The Charity Commission's resources versus expectation creep
• The balance of regulation
• Scrutiny of charity leaders
• Volunteer trusteeship must remain an attractive proposition
• Purpose-ride or die.

A key point from Helen's introduction was the crucial role of trustees in every charity - we couldn't agree more. We see the hard work undertaken by trustees (and employees, too) every day. We know it's a rewarding sector, but we also see that the difficult economic conditions and strict regulation make it incredibly challenging.

The role of charity in society

Helen emphasised the value and importance of charities to society and how this is rising. It was great that she saw a general agreement in society that charities are central to providing support and benefit across a huge scope of activity. We've also seen the wide range of activities carried out by charities.

When considering charities' societal role, we must remember the importance of public trust. Helen mentioned how trust is hard-earned and easily lost, but now, happily, public trust in the sector seems to have recovered after the damage caused by the high-profile scandals that took centre stage a few years ago. The Charity Commission's research on public trust in charities has more information.

Historically, charities focused on poverty, religion, and education (relieving and promoting as appropriate!), but the scope of potentially charitable activity is now much wider than just those areas.

We have seen charities working across the full range of charitable purposes, and there have been interesting changes in how they operate. Charities are looking at innovative ways in which they can provide benefit to individuals and society, not just through their well-thumbed cheque books. We have seen increased collaboration between charities and other organisations that harness charities' benefits to provide a wider public good. We have seen local authorities ‘hiving off' activities into new charitable entities to provide a particular focus and open up funding opportunities and complex joint ventures between organisations to provide community spaces. We've helped charities looking to operate across various available charitable activities, and exciting opportunities are available.

Charitable structures can provide tremendous benefits, but they are not the only mechanism available to support others, and sometimes others might even be better. For example, Community Interest Companies (CICs) (which are now a much more established part of the environment than they were in their first few years of operation), and Community and Amateur Sports Clubs (CASCs). It continues to be really important to check that organisations use the most appropriate structure for their activities.

No right number of charities

Helen's second point was to address the question of whether there are 'too many charities'. This is a well-debated question, so let us consider for a minute whether there is or is not a "right number of charities."

Context is important here.

Recently, the Charity Commission published its quarterly statistics for October 2023 to December 2023, which showed that during that period, 1,342 new charities registered (as against 2,141 registration applications received), and around 940 charities were removed from the register.

Around 165,000 charities are estimated to be registered with the Charity Commission in England and Wales. There is a separate regulation system in Scotland, where the regulator is the Office of the Scottish Charity Regulator (OSCR). In Northern Ireland, the Charity Commission of Northern Ireland deals with registrations.

The number of registered charities does not reflect the complete position.

Small charities (not charitable incorporated organisations and whose income is less than £5,000 per annum) are estimated to number 100,000. Exempt charities (those registered with another regulator as their principal regulator but still subject to charity law) are estimated to number 80,000, and excepted charities 10,000).

The number of charities in England and Wales could be closer to 355,000 (and in Scotland and Northern Ireland, the numbers are estimated to be around 45,000 and around 8,000, respectively).

By comparison, the UK has nearly 30 times as many companies (although arguably that is not a useful comparator).

In the diverse landscape of charities in England and Wales, a fundamental principle emerges: there is and can never be a "right" number of charities. Instead, the vibrancy and richness of the sector lies in its diversity, reflecting the myriad of causes, perspectives, and approaches to addressing social changes. The evolving nature of society demands a dynamic and adaptive response, where new charities emerge to address emerging issues or fill gaps in existing services.

For example, if you fall off your boat in the Severn Estuary, with luck, the Severn Area Rescue Association (registered charity number 505504) will rescue you. It was founded because the Royal National Lifeboat Institution only operates at sea (it doesn't cover rivers except the tidal part of the River Thames), and the Severn Estuary is a river. And so, if you ever have a reason to call on SARA, you will undoubtedly be glad that the charity rose to meet that need.

The UK boasts a vast array of charities spanning various sectors. From large, well-established organisations to small grassroots initiatives, each charity brings its unique mission, vision, and methods to the table, contributing to the collective effort of making a positive difference in society.

Arguably, a diverse array of charities fosters healthy competition, innovation, and collaboration within the sector. Rather than viewing other charities as competitors, organisations often collaborate and share resources to maximise their collective impact. This spirit of collaboration enables charities to leverage their respective strengths, pool their expertise and amplify their reach, ultimately benefitting the communities they serve.

That said, while diversity within the sector is celebrated, it also presents challenges such as duplication of efforts, fragmentation of resources, and potential inefficiencies. There is an argument that consolidating charities or a more coordinated approach to service delivery could lead to greater efficiency and impact.

Any such efforts must be balanced with the pluralistic nature of society and the need to preserve the autonomy, diversity, and grasp through its nature of charitable organisations.

Government, policymakers, and regulatory bodies such as the Charity Commission are responsible for ensuring the sector's effectiveness, accountability, and transparency.

For one of these reasons, the Charity Commission's approach to registration is ever more stringent. Generally, registrations are successful in around 50-60% of applications received (we are proud to have a 100% success rate on registration applications!).

As Helen Stephenson pointed out, the Charity Commission can prompt charities to consider whether what they are doing is the best way of achieving their stated aims, its role is to assess whether a charity meets the legal test to qualify for registration. It cannot and must not have any role in rationing the number of charities. As she pointed out, doing so would be "setting a cap on goodwill."

That said, all charities and their trustees should consider whether the needs of their beneficiaries could be better served by collaborating with other charitable organisations. A merger is one way of doing so, but other innovative ways of collaborating should be considered, including joint service delivery, joint project delivery and joint funding applications. This is key, not least, because whilst demand for service is rising, the available funding is falling. Hence, charities risk operating in a marketplace crowded at best and saturated at worst, particularly from a fundraising point of view.

Interestingly, there are around 620 cancer charities in the UK and more than 200 charities working with homeless people in London alone. Arguments against having an open sector are that the public is confused by the sheer number of charities, and where there is confusion, mistrust is bred, and the sector can only function because of trust (and confidence).

Undoubtedly, the Charity Commission's approach to registering charities (as a gateway instead of a rubber stamp) has reduced the number of successful applications to around 50-60% from around 90% a couple of years ago. Establishing a distinct position in a crowded not-for-profit space is essential for charities to succeed. Trustees must, therefore, embrace brand messaging, harness technology, and embrace innovation to meet some of the immense challenges related to financial uncertainty over the past few years.

However, limiting or capping the number of charities is the wrong approach. The question is and always has been one of need, and as long as there is a need, charities will adapt and evolve to make a meaningful difference. And that can only be a good thing.

Charity Commission's resources vs expectation creep

Helen also shared her concern about the Charity Commission's resources when compared with the size of the sector and growing expectations as to its activities. Interestingly, her concern does not seem to be so much about expectations from within the sector regarding how the Charity Commission will operate, but instead expectations from outside the sector about the Charity Commission's role as an ombudsman or an inspectorate visiting charities and auditing processes and impact.

Helen refers particularly to the current enforcement powers, how it is a "last resort enforcement regulator" at present, and how additional responsibilities would be unrealistic and unmanageable under the current framework.

In addition to this question of the structure of the Charity Commission and its role in enforcement, financial pressures are no doubt relevant and impact the sector. It seems this pressure has more of an impact on charities' day-to-day operations. This includes the need to receive timely responses to enquiries and applications, for example, for registration or section 105 orders, and this is undoubtedly harder when the Commission is being asked to do more. More structurally, the suggestion has been mooted for some time as to whether the Commission's funding could be provided through a levy on charities. Discussion has suggested that charges could be set at varying rates depending on the charity's size, in much the same way as the Fundraising Regulator is funded.

The recent consultation on the Charity Governance Code also asked for comment on the possibility that the code's continued development could be funded by those using it, so perhaps a theme is developing.

Would a levy on registered charities be a reasonable and proportionate way of ensuring that the Charity Commission could carry out its functions effectively? We wonder whether, if the Commission had an alternative funding source, any reductions in central government funding would continue, increasing the burden on the sector over time. Another concern that has been raised is that it might undermine the willingness of the public to donate for general operational reasons because they might not want to fund the regulator.

The Charity Commission's responsibilities include a wide range of functions:

• Registering charities at the outset
• Providing guidance and support to trustees throughout
• Investigating misconduct or mismanagement

Of course, the Charity Commission is also responsible for creating public trust and confidence in the sector. Changes in the Charity Commission's operation, such as through the My Charity Commission Account and an increasing reliance on online forms rather than other methods of communication, suggest that it is working hard to improve its efficiency.

Interestingly, the annual budget for 2022 to 2023 was £32.35 million. It seems like quite a lot, but with this, the Charity Commission regulated total charity income of £88bn and £85bn of charity spending. It considered 8,583 applications to register a charity and acted as a regulator for the 168,893 charities on the register. During that year, 4,146 charities were removed from the register, and the Charity Commission's contact centre answered 68,497 calls. It certainly is a busy place!

The balance of regulation

Helen's fourth reflection in her talk at Treasury Exchange was the balance between the Charity Commission's role in regulation and enforcement on the one hand and advisory and supportive services on the other. Here, Helen's view is that the Charity Commission should consider its support and enforcement functions as necessary sections of work that should attract equal amounts of energy and investment.

The Charity Commission used to refer to itself as being a friend of the sector. While it is certainly keen to provide guidance and support for trustees (the quick guides being particularly approachable for new trustees and those looking for a refresher), it seems to us that the Charity Commission seems less willing to work with a charity to achieve the charity's objective. One example of this is registration. Clients have come to us where previous registrations have been unsuccessful, and their application was returned without the opportunity to work with the Commission to complete the registration as we might have expected a decade ago. In this case, the Charity Commission did give guidance on improvements to make, and it doesn't happen every time there are queries, but it does seem to be more of a pattern.

We have also seen pressure on the Charity Commission due to what some could see as an increased politicisation and criticism of the charitable sector from outside the sector. Examples might be seen in the criticism of the National Trust for pursuing a "woke" agenda, the statements made by the Commission's Chair, Orlando Fraser, setting a high bar for the return of donations, and the criticism of the recent decision by the Charity Commission not to investigate a think tank following a complaint around the nature of its activities, in particular, around political campaigning.

The Charity Commission's five-year plan refers to its statutory objective of increasing public trust and confidence in charities. It made us wonder whether the Charity Commission is struggling with the criticisms levied against the sector by the media and other outside organisations. Might this objective focus on altering the balance between regulation and guidance?

Scrutiny of charity leaders

The fifth reflection at the recent Treasury Exchange speech, touched on what she called the 'disproportionately intense, unpleasant, and unfair personal scrutiny' that charity leaders increasingly face, both within their charities and externally.

Charity is engrained in the very fabric of our society, weaving together a tapestry of compassion, generosity, humanity, and social impact. Particular causes, challenges, projects, individuals, and communities spark a passion in all of us which is personal to our background, circumstances, and beliefs.

Central to the sector's success is that the public, donors, and stakeholders continue to trust and have confidence in charities, what they stand for, what they do, and what they achieve.

When people give, they expect their time, money, or other resources to be used responsibly, effectively, and ethically to achieve a positive outcome. Similarly, charity beneficiaries place their trust and confidence in charities to provide support and assistance and to impact their lives and their communities.

Sometimes, this passion for what we believe in can be directed negatively and vociferously at charity leaders if we feel the charity is not meeting the high standards we expect of it. Whilst Helen Stephenson was right to point out that, as a regulator, the Commission's position is not to spare charity leaders scrutiny for the decisions they make or the way they work, the spotlight on them has, as we have all seen, intensified in recent years, particularly with the explosion of social media as a means for communicating without barriers. At times, this has, arguably, stretched beyond legitimate scrutiny and strayed into the very personal or become overcharged and divisive.

When we talk about charity leaders, we mean not only paid employees, particularly those in a senior management role, but also charity trustees.

We should remember that charity trustees generally act voluntarily. They give their time, skills, expertise, and experience for free.

Whilst not detracting from the need to hold charity leaders accountable, we cannot risk deterring candidates from putting themselves forward for leadership of charities, not only in a management role but also in a trustee role.

Most charity leaders (including trustees) are, without question, driven by purely altruistic motives. However, with a decrease in public trust and confidence in charities, they have seen an ever-increasing focus on what they do and how they do it.

Concerns around "excessive" pay of CEOs of charities is the source of endless debate (and not one for today), but the role of the CEO of a large charity is far from straightforward and involves:

• Overseeing complex operations.
• Sensitive work.
• Supporting some of the most disadvantaged people in our society.
• Operating in challenging environments here and around the world.

For (generally) volunteer trustees, the greater focus on their duties and responsibilities, the ever-increasing and complex regulatory burden not just from the Charity Commission but other regulators, the potential risk of personal liability, and a perceived change in approach from the Commission, which can sometimes feel as though the focus is on regulation rather than advice and support, means that now more than ever, the role is not one for the faint-hearted.

Trustees need ever more to call on professional advice and support to enable them to operate effectively and efficiently and to ensure they continue to meet the expectations of the public and the regulator. Some of our clients believe that the 'voluntary' world they operate in no longer looks or feels the same, and being a trustee has had to become ever more "professional". This means trustees come to us regularly as specialist charity lawyers to seek guidance on the increasingly complex regulatory and legal framework within which they operate, and we're delighted to provide that support.

However, there is already a crisis in trustee recruitment, particularly for smaller or local organisations, with many boards struggling to recruit, and this increased negative scrutiny risks exacerbating this problem further.

And so, whilst charity continues to ignite a passionate response in society, and with charity leaders rightly being held to account where things go wrong, what we need to ensure we do not do is, as Helen Stephenson comments, make charity leaders feel that they are "on trial, just for doing their job". And therein lies the inherent tension.

Volunteer trusteeship must remain an attractive proposition.

Another part of Helen's speech focused on the debate around the role of volunteer trustees in the UK and why that must remain, in her words, "an attractive proposition."

The principle of volunteer trusteeship has long been the cornerstone of the charity sector in the UK. It embodies the spirit of civic engagement, stewardship, and community leadership. Trustees are crucial in guiding charities' strategic direction, governance, and stewardship, ensuring they fulfil their missions effectively and responsibly.

One must not forget the extent to which the sector is supported to an incredible degree by extraordinary people who serve as volunteers (but not Trustees) of charities and not-for-profit organisations and who give of their time for nothing.

However, Helen's reflection goes to the ongoing debate about whether Trustees should be paid and how, as a sector, we can continue to recognise and preserve the attractiveness of volunteer trusteeship.

So why do Trustees give up their time, generally for no financial reward?

The argument is that it is quite simple because the act of doing something good for others without reward is a reward in itself. Somewhat glib, perhaps?

However, there are several benefits which we see (and no doubt others will think of more), including:

• giving you a sense of achievement and purpose;
• helping you feel part of a community;
• helping you feel better about yourself by improving your self-esteem and confidence;
• helping you share your talent, learn new skills, and create a better work-life balance;
• helping combat stress, loneliness, and depression;
• helping you meet more people, which can help you feel connected and valued;
• allowing you to create positive change and leave a lasting impact on society.

By serving as trustees, individuals can leverage their skills, experience, expertise, and passion to contribute to causes they care about, whether it is advancing education, promoting social justice, or supporting environmental conservation, for example. Trusteeship fosters a culture of engagement and participation, encouraging individuals from diverse backgrounds to become actively involved in shaping the future of their communities and creating a lasting impact on society. By serving as trustees, individuals develop leadership skills, gain valuable experience, and expand their networks, enriching their personal and professional lives.

Undoubtedly, volunteer trusteeship is essential for the sector's sustainability and resilience. The contribution that trustees make in terms of their time on a voluntary basis, their experience, and their expertise enables charities to maximise their impact and effectiveness.

Despite the many benefits of volunteer trusteeship, the role faces various challenges that threaten its attractiveness and viability. These include the increasing legal and regulatory burden, the often significant time commitment, and the demand for specialist skills and expertise.

In recent years, there has been a focus on ensuring that Boards of Trustees adequately reflect the beneficiaries, the communities, and the society they serve. Diversity, equality, and inclusion are concepts discussed every day, and good governance encourages boards to recruit trustees from a wide range of backgrounds, with different life experiences and personal perspectives to encourage that.

However, as we have already discussed, charities often struggle to fill gaps in their boards. Some argue that the concept of volunteer trusteeship is one reason why the role is less attractive. By its very nature, it attracts those who have the time and financial resources to take on a voluntary role. And it is true that older white men still dominate the boards of charities (no judgment here).

Research in 2017 showed that 92% of trustees were white, more than half were retired, the average age of trustees was between 55 and 64, and most were from families with above-average earnings.

"Pale, male and stale" read the headlines and arguably, too little has changed with women, young people and those from ethnic minorities remaining under-represented on boards of trustees.

Advocates in favour of paying trustees argue that for the sector to flourish (diversity, equality, and inclusion being key to this) and to be truly reflective of society, with a diverse talent pipeline in play, the role of trustee must be accessible and inclusive to all, with a wide range of talents, experiences, and passions being brought to bear to meet a wide range of social needs and challenges.

Arguments in favour of paying trustees, therefore, include (but are not limited to):

• attracting and retaining talent;
• promoting diversity, equality, and inclusion;
• recognising the value of the contribution made by Trustees;
• enhancing the professionalism of the role;
• making Trustees accountable;
• addressing financial constraints;
• reducing barriers to access and
• mitigating conflicts of interest.

The concept of paying trustees is controversial and the subject of much debate.

However, it is worth remembering that while the general principle is that Trustees' roles are voluntary, there are mechanisms for remuneration.

The simplest of these is, of course, the ability to remunerate trustees for reasonable out-of-pocket expenses. Whilst the perception is that this is generally petrol costs, parking, stationery, etc, the concept is actually wider than you might imagine, and so trustees may wish to consider, for example, whether that could include the cost of a carer to enable a trustee to attend a trustees meeting; the cost of translating documents into braille to enable a trustee with a sensory impairment to access papers; the cost of accommodation to allow a trustee with a disability to attend a meeting the night before if travel on the day is physically impossible for them.

In addition, the Charities Act 2022 has extended the circumstances in which trustees can be paid for providing goods or services. Whilst these provisions need to be properly understood, and we would always recommend taking legal advice before you do on the extent and scope of the statutory provisions, this does expand the ability of boards to remunerate trustees where they provide goods or services to their charity.

Of course, there is always the ability to approach the Charity Commission to seek consent to pay a trustee, employ a trustee, or remove any restriction in the governing document that precludes trustees from benefitting. Specialist legal advice should always be sought on this, and it is worth remembering that any consent from the Charity Commission will not be applied retrospectively.

The Charity Commission is developing research into trustees and trusteeship. It hopes the findings will help the sector focus and refine its work and encourage new talent to join charity boards.

Key to those discussions and the ongoing debate is the capacity to which the sector might move towards a system where trustees are paid or remunerated to an extent other than that allowed for under the statutory provisions. This controversial debate will no doubt continue for some time, so watch this space. Importantly, make sure you contribute to the research to ensure your voice and that of your charity are heard in that debate.

Purpose-ride or die

The last of Helen Stephenson's reflections focused on the fundamental importance of charities being led by their charitable purposes only. It's not difficult to see how external factors and changes in the environment in which a charity operates will affect the work that is being undertaken and the manner in which it may be done. However, a key role of the trustees (another one!) is to ensure that all activities are working towards fulfilling the charity's purposes.

Trustees need to review their charity's activities regularly to ensure that they remain focused on its purposes.

Anyone familiar with a set of charity accounts will likely see the terms “restricted” and “unrestricted” regarding funds on the balance sheet. Where funds are unrestricted, this means that they can be used by the trustees however they wish, provided that this is in furtherance of the charity’s purposes. However, where funds are restricted, this means that they were given for a specific purpose which is narrower than the charity’s purposes, and they can only be used for that limited use.

Not only is it important for charity trustees to make sure that they are fully aware of the purposes for which funds were given to respect those limitations, but it is essential too that funds are only recorded as restricted where they are truly restricted. For example, sometimes, trustees might choose to earmark funds for a particular purpose. While those funds might be known as “designated”, they are not restricted, and it’s an important distinction. The trustees can remove a designation if they decide to use funds for other purposes. A restriction generally cannot be removed.

In some circumstances, charity trustees can seek Charity Commission consent to change the purposes for which it is established, and the same can apply in relation to "restricted funds". The Charity Commission's guidance CC36 on making amendments to a charity's purposes explains that it will only give authority for a change to a charity's purposes where it is satisfied that the new purposes are in the charity's best interests. An applicant will need to explain:

• the charity's original purposes;
• how the new purposes are similar to current purposes, and if not, why;
• how the new purposes are suitable and effective in current social and economic circumstances;
• the factors considered when the trustees decided that changes would be preferable;
• how the change to the purposes is in the best interest of the charity;
• how the change will affect the charity's current beneficiaries;
• how the charity will further the new purposes, including the activities which will be undertaken and whether funding has been secured;
• whether the change may be controversial or of public interest;
• how the charity has consulted (for example, with beneficiaries) about the change and taken into account any feedback received;
• how the charity has managed any conflicts of interest.

It's only right that we finish this article by reiterating Helen Stephenson's thanks to all trustees and those who work in charities to support them for the work they do for charities, communities, and society as a whole. We're very grateful!