Governance of NHS endowment funds: review report

Chapter 5: Operational Recommendations

5.1 Introduction

A wide range of accounting, operational and practical consequences flow from the governance changes set out in chapter 4.

5.2 Consolidated financial statements today

At the current time, although a separate set of annual accounts is produced for an NHS-linked charity, an additional step is required – namely, that they are consolidated within the related Health Board accounts. This step is required by International Finance Reporting Standards (IFRS) 10 as interpreted by HM Treasury's Financial Reporting Manual and applied by public bodies, including the NHS. In effect, the financial statements for the Health Board and the NHS-linked charity are presented as a single group, on the basis that the test is met which says that the Health Board is able to "control" the NHS-linked charity.

5.3 Ending consolidated financial statements in the future

It is intended that at a future point, full accounts consolidation should no longer be required. This is on the basis that, if the governance and operational changes are implemented as set out in this Report, the test of "control" would no longer be met when looking at the relationship between an NHS-linked charity and the related Health Board.

Looking at the detail of this in terms of the definition of "control" within IFRS10, the test below applies. In the language used, the "investor" is the Health Board and the "investee" is the NHS-linked charity:

An investor [Health Board] controls an investee [NHS-linked charity] if and only if the investor [Health Board] has all of the following elements:

• power over the NHS-linked charity i.e. the Health Board has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the NHS-linked charity's returns)
• exposure, or rights, to variable returns from its investment with the NHS-linked charity
• the ability to use its power over the NHS-linked charity to affect the amount of the Health Board's returns.

Note that all three criteria must be met, to arrive at the conclusion that a Health Board "controls" an NHS-linked charity, from an accounting perspective. With a particular focus on the first of the criteria, the "power over the investee" is likely to end when all of the following steps are taken:

• the Health Board is no longer the trustee of the NHS-linked charity;
• there is a minority of Health Board-appointed trustees on the new NHS-linked charity board;
• the statutory governing rules for the NHS-linked charity are updated to include quorum provisions, to deal with the scenario where a meeting is attended by a majority of Health Board-appointed trustees and a minority of non-Health Board appointed trustees – such a meeting would not be quorate. Appendix 3 includes provision for quorum arrangements.
• other changes set out in chapters 4 and 5 are implemented, to remove the risk of the Health Board holding operational control over the NHS-linked charity. The content of new contractual arrangements between the bodies would be an important contributor to placing the relationship between the Health Board and NHS-linked charity on a new footing, to help evidence this.

Recommendation

We recommend that NHS-linked charities implement the governance and operational recommendations in this report which will contribute to a finding that a Health Board is not able to control an NHS-linked charity. This would underline the independence of the NHS-linked charity and separately lead to an end to the requirement to fully consolidate the financial statements of the NHS-linked charity within the Health Board accounts.

5.4 Transition period for financial statements

It is anticipated that there is likely to be a transition period where accounts consolidation still occurs, on the basis that accounting rules would still conclude that the Health Board is able to "control" the NHS-linked charity. This is likely to be the period immediately after the new NHS-linked charity board is in place, but before all operational matters have been updated and settled in new contractual arrangements. While this transition period may last for a year or two, it would not be a positive result for this to be an extended period, given that the need to consolidate accounts reflects a conclusion which says 'the Health Board is able to control the NHS-linked charity', which is the precise point this Review seeks to address.

5.5 Group accounting standards

Sections 4.8 – 4.10 look at the range of possible decisions by a Health Board, in terms of the number of appointments to make to the NHS-linked charity.

One of the potential factors in this decision could be the applicability, or not, of International Auditing Standards (IAS) 28. This has a focus on investments in associates and joint ventures and may be relevant when considering whether group accounting is required. In summary, this would look at whether the Health Board had "significant influence" over the NHS-linked charity. In interpreting this standard, whilst 20% of voting entitlement is one trigger for group accounting, it is not the only trigger and other factors need to be considered including whether the NHS Health Board is an investor in the relationship. Detailed analysis of IAS28 may be part of future work in a national shared forum to consider this technical point further, with the outcome built into the NHS Manual of Accounts to clarify consideration of this standard.

5.6 Access to resources

At the current time, NHS-linked charities have access to a wide range of resources provided by the NHS, as covered in existing Service Level Agreements between an NHS-linked charity and the Health Board. Each NHS-linked charity makes its own arrangements with the relevant Health Board around re-charge and costs borne by the NHS-linked charity in respect of these, which can include premises and office space, accounting services, human resources, payroll, procurement, insurance, equipment etc.

5.7 As set out in section 4.27, this Review anticipates that future arrangements around access to resources would be discussed and documented in new contractual arrangements between an NHS-linked charity and the relevant Health Board. This supports a flexible outcome in relation to matters of practical operational detail, where preferences may vary from charity to charity.

5.8 To take one example of the range of potential future choices, consider human resources. At the current time, staff who focus some or all of their time on NHS-linked charity matters are employed by the NHS. In future:

• an NHS-linked charity may choose to have contractual arrangements in place with the relevant Health Board to enable such arrangements to continue, and re-charged as required.
• Secondment arrangements from the Health Board to the NHS-linked charity may be preferred.
• A TUPE route may be preferred to fully transfer existing NHS staff to the NHS-linked charity. Pension considerations would arise here.
• Future new hires may be made by the Health Board or the NHS-linked charity, as the case may be, reflecting the preferred approach.

It will be a matter for each NHS-linked charity to come to a view on its preferred approach, in the context of the broader operational decisions ahead. It may be helpful to further explore these issues in a national shared forum.

5.9 It is also noted that, at the current time, some of the NHS-linked charities collaborate on certain operational arrangements, such as investment management, to benefit from shared access to expertise or external services. Such arrangements can continue in future, should the trustees of those NHS-linked charities wish to continue the arrangements.

5.10 Procurement

NHS-linked charities could have more flexibility in how they choose services in future.

At the current time, NHS-linked charities follow public procurement rules when going through a process to identify a provider of goods or services. This Review has taken independent legal advice to consider whether public procurement rules might still apply to NHS-linked charities at a future point. This legal advice is based on the premise that all the recommendations in this report are implemented.

5.11 The Review has been advised that "following implementation in full of the proposals, as set out below, each NHS charity would no longer be regarded as a 'Contracting Authority' under procurement regulations and therefore would not be subject to public procurement regulations. This is on the basis that, as a change to the current position, no NHS body will have control over appointments exceeding 50% of board positions."

5.12 The Review has been advised that there is an important interaction between the end of accounts consolidation and the start of flexible procurement. "It is important to note that through the anticipated 'transition phase', those NHS charities that continue to consolidate their accounts with the relevant NHS boards should continue to follow the NHS procurement procedures." The rationale for this is found in section 5.2, since accounts consolidation reflects the conclusion that the Health Board is able to control the NHS charity, and a Health Board is subject to public procurement rules.

5.13 It should be noted that this procurement legal advice is addressed to the Chair of the Review only, for the purposes of this Report. This is an area an NHS-linked charity may want to explore at the appropriate future time, and may be an area for a national shared forum to further consider during the transition phase.

5.14 VAT

At the current time, NHS-linked charities do not have their own VAT registration. With the implementation of the recommendation that an NHS Health Board should no longer be a corporate trustee, it is anticipated that this position would change in future. This brings with it the possibility of a change in the VAT liabilities for an NHS-linked charity. NHS-linked charities will want to explore this further to understand local impacts through independent advice, which may be an area they wish to co-ordinate via a national shared forum.

5.15 Naming and brand

Throughout this report, the phrase "NHS-linked charities" has been used deliberately instead of "NHS Endowment Funds". There are several reasons for this. Firstly, an "endowment" is a technical accounting term which has a specific meaning. It is somewhat misleading to use it in connection with these NHS-linked charities since not all funds held are classified and restricted as an "endowment". Secondly, as a technical term, it may be viewed as rather off-putting and not user-friendly.

5.16 It is not unusual for charities to go through a re-branding exercise. The selection of a charity's name plays a vital communications role. In this regard, it is interesting to note that some of the sixteen NHS-linked charities already adopt different working names, as shown on the OSCR Register, although none has formally changed its registered name as yet:

• Borders Health Board Endowment Funds is known as "the difference"
• Lothian Health Board Endowment Fund is known as "Edinburgh and Lothians Health Foundation"

5.17 As mentioned in section 4.29, some of the NHS-linked charities have moved towards developing their own brand/logo, enabling the charity to present itself in a more distinct form online and in printed materials. Branding and logos should be areas for further work in due course, to ensure that, for example:

• any trade mark considerations are taken into account e.g. whether to apply to register a trade mark.
• A branding licence agreement between the NHS-linked charity and the Health Board is considered, to permit the Health Board to use the NHS-linked charity's branding in certain circumstances - something which may be mutually beneficial.
• If the NHS-linked charity is to continue to use the Health Board's name, straplines or branding, a licence agreement should be granted by the Health Board to the NHS-linked charity to permit such use.

Branding issues and the templates for the licence agreements are matters which could be explored further by a national shared forum in due course.

Recommendation

Each NHS-linked charity should consider updating its registered name, in line with OSCR processes for doing so.

Each NHS-linked charity should consider its brand and any consequences in terms of a licence agreement with the relevant Health Board.

5.18 Fundraising

A range of views have been expressed about the scope of fundraising activity of NHS-linked charities. On the one hand, there is a view that NHS-linked charities should not actively promote fundraising, that they should primarily operate on a reactive basis to receive funds and distribute funds. Such a view was expressed five years ago, as evidenced in the Minutes from Tayside NHS Endowments Fund in January 2014: "She [Communications Manager] further advised that in terms of publicity for endowments, communications tended to more reactive than proactive." That view was also heard during certain discussions in this Review.

5.19 On the other hand, through conversations with donors and evidence from the newsletters, websites, and annual reports and accounts of some of the NHS-linked charities, an active and energetic picture of fundraising emerges (as can be seen on the front cover of this Report). One example is the Shetland MRI scanner appeal.^[15]

5.20 The voice of the donor

The Endowment Network was very helpful in enabling contact to be made with donors who were happy to talk about their experience, motivations and intentions.

The Chair spoke to Kerry Falconer, who has spent several years holding fundraising events for the Jamie King Fund, an individual fund within one of the NHS-linked charities:

"Our motivation for fundraising for this particular fund was due to my husband and two of his friends having been treated by [name of doctor] for prostate cancer. We were keen to 'give something back' to the 'Doc' and are delighted that he has been able to put the £80k+ to practical use and has demonstrated to us and our guests at the events exactly what he has used the funds for. Neither we, nor our donors, felt we were fundraising for the NHS Charity. It would appear that there is little or no marketing of the existence of these funds and I wonder if there is duplication and therefore economies and efficiencies that aren't being taken advantage of. Also – my observation is that many beneficiaries of the outputs of these funds (in our case, improvements in the delivery of prostate cancer treatment) are completely unaware that such improvements have been made possible due to charitable donations. Are we missing opportunities to 'ask' for donations at point of delivery, doctors' surgeries etc?"

This offers trustees interesting future food for thought, around how NHS-linked charities communicate with potential donors, and how the use of the funds is communicated to those who may be benefitting from them.

5.21 NHS charities as conduits for donations

A consistent theme which emerged in all conversations with donors was the targeted nature of donations. None of the conversations revealed donors who simply wanted to donate to the NHS-linked charity in general terms. Particular funds were the focus in each case, be that a fund relating to one specific ward or area of clinical research or, as seen in section 5.20, a restricted fund named after a loved one.

This has important implications for the scope of decision-making for the NHS-linked charity trustees. It is an important reason why it is felt valuable to retain a link between the Health Board and the NHS-linked charity, given that a significant number of the restricted funds can only be spent in particular ways involving specific wards/hospitals/groups etc. Unrestricted funds offer flexibility and discretion over how monies are used: here, the NHS-linked charity trustees will have wide scope to consider the strategy and priorities for the charity, to then use their resources to deliver on those strategic goals. For the many restricted funds in their care, the charity trustees are in effect carrying out the wishes of the donor.

5.22 Another conversation with a donor involved the example of a grant-making charity which itself donates to one of the NHS-linked charities. This donation was not general in nature in terms of its intended use: it was specifically to benefit community nurses in the area local to the grant-making charity. Annual donations from this grant-making charity to support community nursing (via the NHS-linked charity) were reported as having been made at least as far back as 1995.

The donor preference for supporting local healthcare services came through loud and clear.

5.23 Restricted funds

As was clear from the conversations with donors, it is a feature across the NHS-linked charities that they hold a high number of restricted funds. A restricted fund is one where the donor has set narrower conditions around how it must be spent; for example, in a particular ward or to further research into a particular medical condition. A 2019 review of the accounts of the NHS-linked charities in Scotland showed that 53.5% of the assets on their balance sheet are categorised as held in restricted funds or permanent funds, which shows the high degree to which donors wish to direct the end use of their donations.

5.24 It is noted that, in one example in Scotland, over 2,000 individual funds are held within one NHS-linked charity^[16]. In another example shared with the Review's Chair, in 2013 an NHS-linked charity ran an audit on 800 individual funds which had historically been classified as restricted. The audit found that the majority had been misclassified and should have been recorded as unrestricted funds (with the result that greater flexibility would in future apply to how they could be spent, noting such spending would of course still need to be in line with the charity's purposes). It should be emphasised here that no funds were misspent, since the narrower spending criteria would logically have been valid within the broader unrestricted classification. From an administrative perspective, the end result was that fewer than 400 of the original 800 individual funds are now treated as "restricted funds" in that charity. The audit led to the creation of a new flowchart to support the classification of funds.

Given the long history of the NHS-linked charities, it is not surprising that so many individual funds have built-up over time.

Recommendation

It would be beneficial for each NHS-linked charity to review its classification of funds, in particular to re-validate restricted funds. A framework to support classification may be usefully explored in a national shared forum

5.25 Delegated authority

A practical consequence of the high number of these restricted funds is the process which governs how they are spent. It would not be feasible for the trustees to be involved in every individual decision on how a particular restricted fund is spent, in particular where the sums involved are small. The practice has therefore evolved that authority to make certain spending decisions is delegated to certain NHS employees, e.g. a senior NHS staff member on the relevant ward named in the restricted fund. The term "steward" or "fund holder" is sometimes used to describe those NHS employees who hold that delegated decision-making power.

5.26 As one might expect, financial thresholds tend to apply, such that high value spending proposals must be escalated for further scrutiny and approval. The levels of these financial thresholds vary across the NHS-linked charities, in line with decisions made locally in each of the charities.

5.27 Delegation is a matter covered in the OSCR Guidance 'Who's in Charge'. Page 5 states: "If charity trustees are delegating authority to others to run part of a charity's affairs………..the charity trustees should set out in writing the limits and terms of this delegation of powers and communicate these clearly."

5.28 Page 21 states "Sometimes charity trustees choose to create a new committee or group for a specific purpose…….Charity trustees may delegate responsibilities to that group, but must ensure that there is a well-defined mechanism for retaining control over its affairs."

5.29 Page 23 states "If a charity is delegating authority to others to run part of its affairs, the charity trustees should set out in writing the limits and terms of this delegation of powers, communicate these clearly to all those involved, and observe these in practice." It goes on to state: "Charity trustees should review their constitution and delegated powers regularly to ensure that these remain up to date and in line with the accepted working practices. If this does not happen it can become unclear over time who is entitled to run a charity's affairs."

5.30 At the current time, there is no legally binding written constitution for the NHS-linked charities and recommendation 2.11 addresses this gap. This new governing document will bring clarity to trustee powers and places the power to delegate decision-making on a clearer and more transparent footing.

5.31 Some evidence points to certain process delays and difficulties which can arise with delegated decision-making. In one example considered by the Review Chair, in conversation with an NHS consultant who held a Delegated Authority, the consultant said no training had been given in how to exercise the Delegated Authority to spend up to certain limits. The consultant felt a clearer document would have helped to set the scope around that, as it was not immediately apparent to them how NHS-linked charity money was to be accessed. In one particular case of proposed spend of NHS-linked charity funds, this consultant had been waiting for over a year to hear if the proposal was accepted or rejected, during which time process delays emerged over the content of a terms of reference around the process for approving such proposals. The consultant commented "These are big sums and you need oversight, but the current process makes it impossible to make progress. It's cumbersome."

5.32 A second example which points to delay is found in the Minute of the NHS Tayside Endowment Fund Board from 24^th January 2014. One of the trustees: "pointed out that the use of aged funds has often been discussed at EAG [Endowment Advisory Group], and how funds have not been used as quickly as they should be."

5.33 For context, it is noted that these are just two examples. They do however point to the opportunity for process improvements to be made, to ensure timely use of restricted funds.

Recommendations

1. It is helpful for NHS-linked charities to continue to delegate certain decisions and to have a clear power to do so, to facilitate the smooth running of the charity and to bring in the valuable insight and expertise of others, within a defined framework. It is recommended that the new governing document for each NHS-linked charity makes specific reference to the power to delegate, to bring additional clarity and transparency to this area of decision-making. The power to delegate is therefore included in the illustrative governing document in Appendix 3.

2. In light of this Review, it is recommended that all existing Delegated Authorities are reviewed and updated, to reflect the outcome of this Review and the new operating practices which will emerge. In that context, the process for timely decision-making should be considered, as part of the updating of Delegated Authorities.

3. Each NHS-linked charity should deliver Induction Training to all those holding a Delegated Authority, to ensure they have a good understanding of the scope and limits of their authority, and the processes for escalating decisions involving financial amounts above the threshold set in the Delegated Authority.

5.34 Fundraising regulations and policies

The regulatory backdrop to fundraising has undergone change in recent times. Each of the NHS-linked charities should consider taking the steps which will result in the charity being in a position to sign-up to use the Fundraising Guarantee logo. This will ensure that the relevant policies and procedures are in place to self-certify, and is a positive signal to donors.

5.35 Each of the NHS-linked charities will require to prepare their own policies and procedures for fundraising practices, including a vulnerable persons policy, fundraising complaints policy and complaints procedure for communication to the public. A national shared forum could co-ordinate work on templates for these, for local adaptation.

5.36 The NHS-linked charities will require to review the supporter database collected by the Health Board and shared/transferred to the charity to understand whether individuals can lawfully be contacted by the NHS-linked charity under the law of data protection and PECR (Privacy and Electronic Communications Regulations) and the new ePrivacy Regulations.

Recommendation

Each NHS-linked charity should review its fundraising policies and procedures, and consider signing-up to the Fundraising Guarantee to commit to best practice fundraising.

5.37 Other compliance matters

The Review sought legal advice on the range of compliance steps an NHS-linked charity may need to consider. This pointed to a need to prepare website terms and conditions, a website privacy policy and the need to consider compliance matters surrounding cookies and collection of consents to direct marketing/fundraising communications. It was also noted that anti-bribery policies and procedures would need to be updated and related training for staff would be required.

5.38 Data protection and information governance considerations

Once the governance changes in chapter 4 are implemented, such that the Health Board is no longer the corporate trustee of the NHS-linked charity, a new set of trustees are deemed an independent "controller" under data protection laws and will have a range of legal obligations.

A number of steps will be required in readiness for this change. Data processing agreements may be required with processors/service providers, where this is not organised via the Health Board, for example. Data sharing contracts may be needed between the Health Board and the NHS-linked charity. It will be helpful for this to be considered in a national shared forum.

Recommendation

Prior to the implementation of the recommendations in this Report, NHS-linked charities should identify and consider the range of future compliance actions arising, to support smooth handover to the incoming trustees. These compliance matters should be explored further in a national shared forum.

5.39 Characterising 'core' and 'non-core' expenditure in NHS charities

As mentioned in 1.10, whether a proposed item of expenditure represents something which mainstream NHS funds should pay for, or whether it is an add-on or enhancement such that it is something an NHS-linked charity might suitably fund, is something of a false distinction as a matter of charity law, since charity law requires no such boundary to exist.

In reality, it may reflect the self-awareness of the Health Board as corporate trustee in full realisation that, for many given items of expenditure, such items could be funded through one, or other, or both of its roles.

In a future scenario where the majority of decision-makers in the NHS-linked charity no longer wear dual hats, it may prove to be the case that the need to classify potential expenditure as core or non-core becomes less of an issue, in the absence of the conflict of interest. This is because the Health Board could no longer be said to be spending NHS-linked charity funds since it no longer controls the charity: it is the intent of this Review that this risk is removed.

If the recommendations of this Review are implemented, in the period ahead, the new board of each NHS-linked charity will have the opportunity to shape and create its new strategy. The public health priorities of the local area and strategic priorities of the Health Board form a relevant backdrop to the strategy of the NHS-linked charity, but the NHS-linked charity will ultimately shape and own its strategy. As is the case now, the many restricted funds will continue to be carefully applied in line with the conditions set by the donor, which offers particular reassurance to donors over how their donations are used.