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."

Charities reform set for the now typical crisis affecting Scottish institutions

To the outsider it must appear we can't arrange anything properly these days in Scotland - with the subject of reform & regulation of Charities set to be the latest issue proving a thorn in the side to the law, and public confidence ...

Reports the Scotsman :

Charities must get their houses in order to avoid 'constitutional crisis'

ALAN ECCLES

SINCE the Office of the Scottish Charity Regulator (OSCR) published the pilot report for its ten-year "rolling review" (under which every one of Scotland's 23,500 charities will have to demonstrate its public benefit), the sector has been poring over its findings for clues into the approach OSCR will take.

While the report is to be welcomed, the failure of one of the pilot participants, because of a technical issue in the wording of its constitution, is an early sign of a potential "constitutional crisis" for many of its peers.

The litmus test of whether or not the pilot was a success is to consider whether OSCR was the proportionate regulator it is obliged to be. There seems no doubt that OSCR approached this review in an enlightened and engaged manner. It is clear that constructive dialogue and learning by experience underpinned its approach, and that it should be congratulated on what appears to be a good example of regulatory practice.

OSCR is not seeking to prosecute charities, but to engender good practice by being a comprehensive regulator. This is crucial both to the confidence of charities in OSCR and, ultimately, public faith in charities.

The public would not thank OSCR for "striking off" charities that, with appropriate regulatory guidance, might still offer real public benefit. In this respect, it is heartening to read that bodies in need of change are, indeed, being guided in good faith by OSCR, and being given proper time and encouragement to make alterations.

It is not, however, good news for all charities. It appears all constitutions that do not refer to the Charities and Trustee Investment (Scotland) Act 2005's formulation of "charitable purposes" - including those of the vast majority of charities formed before 2005 when the 2005 Act, of course, did not exist - will require amendment if they wish to retain their charitable status.

This is the potential "constitutional crisis" for charities that provide public benefit, but whose constitutions may require time-consuming and costly constitutional amendment due to a technical flaw.

OSCR has issued guidance in response to initial fears regarding this "constitutional crisis". But while its key message to keep constitutions under review is correct, the implication that altering a constitution is straightforward is, perhaps, worrying.

For some charities, the new "reorganisation provisions", which can streamline the process of bringing their charitable purposes into line with the 2005 Act, may not be available.

Charities established by Act of Parliament, for example, are restricted in their use of this streamlined route. Further specific legislation for some charities may be required, involving a potentially lengthy, expensive and unpredictable parliamentary process.

As well as congratulating OSCR for the publication of the report, the charity sector must also pay tribute to the charities that participated in the pilot.

It has created both a much clearer image of Scottish charity law and a springboard for the sector to flourish. Only 17 years ago, there was little that could be truly called Scottish charity law. As OSCR beds in, problems will be encountered, but the ingenuity of those working in, and with, charities will enable these challenges to be converted into greater public confidence in charity.

The rolling review will examine every charity in Scotland in the next ten years. Well-run charities are already taking steps to ensure they are prepared. Others must take the publication of the report as a call to action.

There are potentially serious - in some cases criminal - consequences in a failure to operate a charity effectively. The report should be welcomed on the whole and its message is clear: now is the time to show OSCR and, more importantly, the public and benefactors, how valuable your charity is.

• Alan Eccles is a charity lawyer in the private client team at Maclay Murray & Spens.