Small charities needing more time to adjust to new laws as legal advice costs soar

While smaller charities struggle to adapt to new legislation, more money is being spent on legal advice than desired activities ...

The Scotsman reports :

Fears grow that smaller charities may take time to adjust to new legislation

CHRIS PURDEY

FOR Scottish law firms, accountancy firms and investment managers, charity work is big business: there are 31 charities per 10,000 people in Scotland and law firms are required to advise them, particularly in relation to the Charities and Trustee Investment (Scotland) Act 2005. The amount of legal advice required has significantly increased against that backdrop.

Scots are, despite contrary views held in some quarters, very charitable; 10 per cent of the average £2 billion going into charity coffers each year comes directly from the Scottish public dipping into their pockets.

Among all this goodwill, there will inevitably be a few bad apples rolling round the bottom of the barrel; that was, in fact, the impetus for the new Act and the Office of the Scottish Charity Regulator (OSCR) assuming a more powerful watchdog position. At the core of the problem lay a judgment in May 2005 that saw Breast Cancer Research (Scotland) have its bank account frozen after just £1.5m of £13.2m raised had gone to good causes. In what was a bad year for charities, five Scottish directors were suspended amid allegations that, of £3m raised by Moonbeams UK, only £70,000 was paid to charitable causes.

Legislation brought in to prevent these problems has already dealt with many of these issues but a recent seminar, staged by Cornelian Asset Managers, revealed new concerns among law practitioners operating in the charity arena. June Jessop, a director of Cornelian and a specialist in the charities sector, says: "As a matter of course, we host seminars for law firms and trustees involved in the charity sector and often ask for feedback by way of questionnaire. Obviously our own focus is on the careful investment of charities' funds but, at our recent seminar, the legal fraternity expressed concerns about smaller charities and how they will be able to handle the administration required under the new act."

The problem for many small charities is they lack the resources to meet the simplified version of accounting and legal advice designed to cut some admin slack to smaller entities. Also, these charities may call on advice from local solicitors, who may have limited knowledge of a specialist sector.

For example, directors and charities can be held negligent in the performance of their duties or be held to account if OSCR is not satisfied, creating a need for indemnity insurance - unlikely to be cheap! Also, EU requirements stemming from money-laundering concerns means a full audit trail is required.

Fiona Hutchison, a partner at Fyfe Ireland, says: "OSCR has created many positives, but has also created a 'them and us' syndrome. Major charities with legal advisers can cope with legislation, but I fear for smaller charities who don't have access to the right advice."

History has highlighted the need for this new legislation and most feel that, while the situation has improved, it may take time to evolve into the finished article. Lynn Beaumont, a partner at Tods Murray, says: "Small charities have been disadvantaged as many of them don't have access to expert legal advice and it has been difficult for them to get up to speed on the new regime. However, as OSCR's procedures bed down and they produce further guidance notes, smaller charities should hopefully be able to cope."

The Charities and Trustee Investment (Scotland) Act is the first legislation specifically created for a better corporate governance of the charity sector and, though it has achieved much in ensuring clear and consistent standards of reporting, it may need more work.

There could be other difficulties on the horizon. Anna Greig, an associate at Morton Fraser, says: "The public benefit test may still be seen as a barrier to entering the sector by some. The potential difficulty of the interaction of trustees' duties with the new statutory duties of directors adds another layer of legislation for trustees to be familiar with."

The charities themselves also need to address issues of public confidence in relation to "where does my donation actually go?" syndrome. June Jessop of Cornelian concludes: "OSCR has made a really positive impact and I am sure the vast majority of charities are operating efficiently and in line with legislation.

"However, to find top law firms operating in the sector raising concerns about how small charities may experience difficulty in meeting legislative requirements and sourcing the right legal advice highlights something that may need further examination."