Review of the Charities Act 2005 - my thoughts

On the 12th of March I went to the DIA led public meeting on the review of the Charities Act 2005 in Wellington. As an ex staff member of Charities Services, I was keen to head a long and see what issues members of the sector wanted to discuss and whether the discussion document prepared by DIA Policy had captured those concerns. Having worked under the Act, I’m well aware that it isn’t perfect and there are several things that could be done to improve it.

Consultation with the sector is a very important and integral part of the policy process because the Act imposes obligations on charities and they need to have their say on those obligations. However, I feel that the Act also needs to protect the public interest and therefore what the public outside of the sector want and need from a charities regulatory regime is also important. Unfortunately, the public tend to be the most vocal on social media when they are whipped into a frenzy by a cleverly worded headline. For example, when a church spends lavishly, or a charity spokesperson speaks out of turn. They are less likely to get involved in the shaping of the law, which we should be cognisant of.

To me, the purpose of the Act is to protect the public and the charities – so in my mind it’s important to take a balanced approach. A regulatory regime that only takes into account charities wants, and not the wider public is not fit for purpose.

I read through the discussion document prepared by DIA, and I was pleased to see that all of the issues that I think need looking at appeared in the document, and were explained really well in my opinion. However, when I tried to answer the submission questions, I didn’t feel like they were always asking the right thing. Therefore, in my comments below, I’ve gone a bit off piste and have discussed the top 4 issues that I think need the most attention plus a few other thoughts on the review.

1)     The most important thing that needs addressing is the appeal mechanism. At the moment charities can appeal decisions of the Charities Registration Board to the High Court. This is costly and time consuming. Charities law is deeply complex, and as an accountant at Charities Services, I did understand a fair amount of it but sometimes the subtleties were lost on me. What I did observe, however, was a team of dedicated lawyers who were extremely thorough in all decisions relying heavily on case law. Because appeals are not as accessible as they could be, the case law does not develop very fast, and new definitions of charitable purpose do not arise easily.

I think that a tribunal format where decisions of Charities Service can be easily appealed would be a simple but effective way to remedy this problem. I think that the Charities Registration Board could be replaced by the tribunal. I also believe that oral submissions should be allowed, perhaps to this tribunal, as this would allow the organisations to explain clearly what they are trying to achieve.

I think that the issue of advocacy could be resolved a lot quicker if there was an effective appeal process. And that’s all I’m going to say about that.

2)     I was deeply disturbed when working at Charities Services to find out that if a person had been convicted of a crime such as child abuse, that this was insufficient grounds to disqualify them from being an officer of a charity. Therefore, there would be nothing to stop such a person setting up a charity with children as the beneficiaries. I understand the reason for this was to allow people who had criminal pasts to be able to help others e.g. rehabilitation after prison, however this current situation is pretty absurd and surely not in the contemplation of the original drafting.

3)     Charities and business is an area that definitely needs to change but is also very complex. In theory, there is nothing wrong with a charity owning a business which pays its profits to the charity. However, in reality, there are several examples where the business pays no profits to the charity, or worse still the charity ends up bailing out the business with charitable funds which may end up down the toilet. This puts Charities Services in the really awkward position of trying to protect the charitable dollar by assessing whether the business is capable of making a profit. This particularly happens when a charity is investing in a start-up business that is also trying to register as a charity. It is true that many start-ups will make a loss in their first few years, but what if they never make a profit? Is that a prudent use of charitable funds? Charities should use the same due diligence investing in a start-up that they would in any other business.

I think that there need to be some legislated requirements for charities and businesses to transact on an arms-length basis. For example, loans from charities to related business need to have interest charged on them, and I agree that there should be an accumulations or dividends policy that it adhered to. I am concerned that charity owned business are free to accumulate funds, not pay tax and not contribute to a charity. My main issue with that is that in the process, the money could be frittered away and there will be nothing left for the charity in the end.

I think there is a difference as well between a charity that starts up a business to fund itself, and an established business that sells its shares to a charity. There are risks in both scenarios and there should be some requirements in place to minimise those risks.

4)     This opinion may be controversial, but I have gone around and around and around, and finally come to the conclusion that very small charities (say with revenue/expenses less than $10k) shouldn’t have to follow the PBE reporting requirements. The reason being, that the effort that goes in to getting some of those very small charities compliant, way outweighs the benefit.

I would suggest that those very small charities have to complete the Tier 4 annual return as it stands, but do not need to provide a supporting set of PBE compliant accounts. I think they should have the option of submitting an accompanying report and that may or may not be the Tier 4 PBE accounts.

One of the questions in the discussion document is “Is more support required for charities to meet their obligations?”. In the financial reporting space, the only thing that can be done is to provide free one on one support for very small charities, year after year after year. It’s simply impracticable. My first year at Charities Services, it was my job to help charities to get to grips with the reporting standards and I spent hours upon hours helping people one on one. Hopefully this helped them, although personnel change regularly in charities, so the support will need to be significant and ongoing if the requirements remain as they are.

5)     Charities Services is very limited in its powers. This causes all sorts of problems including not being able to freeze the accounts of fraudulent charities and having very few tools to sanction charities who have committed serious wrong doing. Deregistration is one of the most serious consequences, which can result in a tax bill, however it doesn’t stop a charity from existing. I think serious consideration needs to be given to extra powers for Charities Services in the interest of public trust and confidence.

Some other observations on the review

The review is not a first principles review. A first principles review would mean throwing everything out and starting again. I do not believe that this is necessary. I strongly believe that the purpose of the Act is to promote public trust and confidence. I believe that the current framework serves this purpose, however if the areas above (amongst others) are addressed, the Act will be fit for purpose.

I believe that a “regulator” is the correct terminology for Charities Services, and I believe that is what the public want. The last Public Trust and Confidence survey showed that people’s Trust and Confidence increased when they knew that there was a regulator of charities. A “monitor” of charities doesn’t have the same emphasis in my mind.

I would encourage anyone who is going to make a submission to carefully read the discussion document. The issues are clearly and accurately explained. As a person who has worked inside Charities Services, I have found some of the additional commentary around the review surprising, and to be honest, somewhat misleading. I urge people to take what they hear with a grain of salt and remember that the Charities Act is there for the sector and the public who support that sector. A balanced, and measured approach is required.