Scottish charity law: consultation analysis

Section 5

Removal of charities from the Scottish Charity register that are persistently failing to submit annual reports and accounts and may no longer exist

Context

All charities in Scotland are under a legal duty to prepare annual reports and accounts, and submit these to OSCR.  Failure to do so can be regarded as misconduct in the administration of a charity.  There are currently a number of charities on the Scottish Charity Register for which OSCR does not have up to date reports and accounts - some of which have never submitted accounts.  It is thought that some charities no longer exist but have failed to notify OSCR to be removed from the Register.  

OSCR endeavours to understand and pursue defaulting charities, but with limited return.  While OSCR has a legal power to appoint someone to prepare accounts for a charity, and has the power to make inquiries into charities, it can only use these powers if it has current information on where the charity trustees or principal office is.

Table 18: Question 13

Should OSCR be able to remove charities from the Scottish Charity Register if they have persistently failed to submit annual reports and accounts?  

	Yes	No	Not Answered	Total
Individuals	92%	3%	5%	127
Charity Sector	84%	2%	13%	164
Other	81%	0%	19%	16
Total	87%	3%	10%	307

Note: Percentages have been rounded therefore percentage totals may not equal 100%.

The vast majority of respondents reported that OSCR SHOULD be able to remove charities from the Scottish Charity Register if they have persistently failed to submit annual reports and accounts (87%).

Only 3% felt this SHOULD NOT be able to remove charities from the Scottish Charity Register if they have persistently failed to submit annual reports and accounts. 

Table 19: Question 14

Should OSCR be given a positive power of direction to direct a charity to prepare annual reports and accounts?

	Yes	No	Not Answered	Total
Individuals	90%	6%	4%	127
Charity Sector	79%	7%	14%	164
Other	75%	0%	25%	16
Total	83%	7%	10%	307

Note: Percentages have been rounded therefore percentage totals may not equal 100%.

Similarly, the vast majority of respondents reported that OSCR SHOULD be given power to direct a charity to prepare annual reports and accounts (83%). 

Only 7% felt OSCR SHOULD NOT be given power to direct a charity to prepare annual reports and accounts. 

Table 20: Question 15

If a charity failed to comply with a positive direction to prepare annual reports and accounts, do you think this should be classed as trustee misconduct?

	Yes	No	Not Answered	Total
Individuals	80%	13%	6%	127
Charity Sector	68%	13%	20%	164
Other	81%	0%	19%	16
Total	74%	12%	14%	307

Almost three-quarters of respondents reported that if a charity failed to comply with a positive direction to prepare annual reports and accounts, that this SHOULD be classed as trustee misconduct.

Some 12% reported that it SHOULD NOT be classed as trustee misconduct.

Question 16 

This question captured explanations provided for responses to questions in Section 5 (i.e. Question 13 to Question 15). 

Note: The feedback was not specific to any question, and as such, the following presents our overall analysis of the comments provided.

There was strong support (74%+) for OSCR to be granted certain powers to respond in instances where charities have persistently failed to submit annual reports and accounts.  Much of the commentary echoed themes identified throughout the report, including that the publication/submission of annual reports and accounts were vitally important to improve the overall transparency and accountability of the charity sector, and to safeguard and build public/donor/ stakeholder trust and confidence in charities and in charity regulation.  

The importance of both reassuring the public that charities who appeared on the Scottish Charity Register complied with basic legal requirements, and protecting charitable assets were also emphasised in a few cases - “Failing to submit accounts suggests either there is something to hide or bad management”.  

While not mentioned by many, where charities have never submitted accounts or for which no updated reports or accounts have been submitted, this was considered to affect OSCR's ability to carry out its regulatory role/function effectively (i.e. monitoring and compliance, etc.).

Some mentioned that if OSCR was granted the power to create an internal database of charity trustees and their contact details (Section 2), that this would support the organisation to fulfil its regulatory functions more effectively - “Where there is contact information OSCR should be able to engage with the charity, and where necessary to issue a positive direction to prepare annual reports and accounts, providing support and advice where necessary”. 

It was reported that OSCR needed to be able to exhaust all possibilities of identifying and locating trustees of such charities to remind them of their responsibilities regarding the submission of annual reports and accounts, prior to removal from the Scottish Charity Register (i.e. it should be a last resort).  If it was confirmed that a charity had either ceased to exist or was no longer operating, removal from the Scottish Charity Register was considered appropriate.  Some reported that consideration would need to be given to what would happen to any significant charitable assets held by charities removed from the Scottish Charity Register (e.g. money, investments, land, properties), and that provisions were in place to safeguard charitable assets.

Action taken by OSCR to drive up levels of compliance in the submission of annual reports and accounts was supported.  Here, the importance of charities’ demonstrating where charitable funds came from, how chartable funds were spent, activities undertaken, and public benefit provided were emphasised.

The general consensus was that there should be consequences for charities who persistently failed to submit annual reports and accounts.  It was considered reasonable for OSCR to have a range of appropriate powers to carry out investigations and to implement sanctions/enforcement actions for charities who ignored their legal duty.  Some felt strongly that such charities should not be able to continue to claim the benefits associated with having charitable status.

A common view provided was that “persistent” would, however, need to be defined. Further detail was also deemed necessary as to when OSCR would take enforcement action, and the nature of enforcement action(s) OSCR could take in situations where deadlines for filing annual reports and accounts were missed.

While not reported by many, it was suggested that one instance of failure should act “as a signal to OSCR” that the charity might be in need of assistance and/or warrant attention from OSCR.  A handful proposed that two or three or three or five consecutive years of failing to submit annual reports and accounts should lead to charities being removed from the Scottish Charity Register.  Others queried whether intermittent or inconsistent submission of the documents would be treated as a persistent failure.

Here, it was further mentioned that OSCR would require to “prove such failure to comply if challenged, and if the charity’s defence can show otherwise OSCR must reinstate that charity and pay the legal costs incurred by the charity’s defence”.  

Wider points raised included:

• The importance of OSCR having up-to-date trustee contact details was considered vital otherwise issuing a positive direction to prepare accounts would be of limited effectiveness.
• That the power to remove charities might encourage defaulters to submit their annual reports and accounts to OSCR.
• Consideration would need to be given to how the power would apply to SCIOs because removal from the Scottish Charity Register equals dissolution.
• Any power to remove a charity from the Scottish Charity Register would need to be accompanied by powers to restore them to the Register should that subsequently be appropriate (i.e. similar to the power to restore companies that have been struck off from Companies House).  
• OSCR should publish a list of charities that have been removed from the Scottish Charity Register (along with the reason).  
• The ability to remove charities who might no longer exist from the Scottish Charity Register would provide a more accurate picture of the charity sector landscape.  Streamlining the Scottish Charity Register in such a way would also improve public confidence in the sector if no defunct organisations, or organisations that failed to comply with accounting and reporting regulations, were still registered as charities.
• That the positive power to direct the preparation of accounts might come prior to removal from the Register for persistent non-submission.
• On a practical level it was felt that such changes would likely require an increase in resource required by OSCR.
• The proposed changes highlight the importance of continued information sharing, including between OSCR and the Charity Commission for England and Wales to minimise the risk of confusion for cross-border charities and trustees (e.g. removal of a charity from the Scottish Charity Register does not automatically mean it would be removed from the Charity Commission for England and Wales register).

Much of the feedback regarding whether failure to comply with a positive direction to prepare annual reports and accounts should be classed as trustee misconduct echoed responses to Question 12 (Section 4) - “It is imperative that OSCR can flex its enforcement powers when needed.  There would be no point in OSCR issuing a positive direction without the Regulator being prepared to take further enforcement action in the event that it is not followed by a charity or trustees”.

Even though the majority of respondents agreed that if a charity failed to comply with a positive direction to prepare annual reports and accounts, that this should be classed as trustee misconduct - most of the wider feedback was that non-compliance should not be ASSUMED to be trustee misconduct.  It was reported that trustees should not be immediately penalised, and that attempts should be made to resolve the issue in the first instance.  

The following points were often raised to explain this position further:

• The importance of a supportive and preventive regularity approach was emphasised.  Charities should be given sufficient support to get back on track and time to comply with a positive direction where difficulties had been reported (e.g. charities who were “struggling rather than deliberately flouting the rules”).  Here, the importance of avoiding creating an undue burden for small charities with limited resources was also emphasised - “The light hand that OSCR was founded with should not become a heavy hand killing off good work. That is a danger too”.
• It was felt that trustees would need to be informed and given “due warning”
  of any such positive direction, a timetable for providing the requested documents, and be made aware of the consequences for not doing so. 
  The ability to issue a positive power of direction to direct a charity to prepare annual reports and accounts would enable OSCR to step in and advise a charity before a problem escalated and became a misconduct issue (i.e. providing support and/or signposting to other agencies to provide support).
• Any non-compliance would need to be investigated before being classed as trustee misconduct.  There might be reasonable explanations, extenuating circumstances and/or mitigating factors (e.g. lack of ability/capacity, financial constraints for small charities, change of auditor, change of administrative staff or illness, etc.).  The main feedback was that each case should be assessed on its own merits and any action taken by OSCR should be appropriate and proportionate.
• A positive direction should be accompanied by the publication of a full inquiry report, and a timetabled process that gave trustees the ability to discuss the direction with OSCR.
• There must be a fair and effective rights to appeal process.

A few respondents raised some concerns/risks regarding the proposals outlined in Section 5, namely:

• The potential impact that severe sanctions would have on small charities, and on their ability to ensure continuity of service delivery to vulnerable clients.
• The ability of OSCR to enforce a positive direction might be difficult.  In particular this was mentioned for charities who faced financial difficulties in the preparation of annual reports and accounts.  Reference was also made to the fact that most charities in Scotland were small (with a turnover of less than £25,000), and that the administrative burden of compliance with such proposals was disproportionate to the size of the charity. 
• Some raised a concern that all trustees of a charity were seen as acting improperly when this might not be the case.